Nigeria's Fintech Industry Faces Expensive Know Your Customer (KYC) Requirements

 

The Central Bank of Nigeria (CBN) has recently introduced new Know Your Customer (KYC) processes that require fintech startups to physically verify the addresses of POS agents and all other customers. This move aims to increase transparency and reduce the lack of visibility that bad actors exploit, particularly in the context of POS fraud. However, the process comes with significant costs for these fintechs, which could impact their financial performance and overall operations.

The Cost of Address Verification

To physically verify POS agents, fintechs could pay up to ₦1000 ($0.40) for each agent verified. This cost could balloon quickly for prominent startups that boast hundreds of thousands of agents. For instance, OPay could pay at least ₦563 million ($376,000), while PalmPay’s bill could be in the region of ₦500 million ($333,883), and Moniepoint would have to fork out ₦304 million ($196,000).

The Total Bill for Fintechs

The total bill for the fintech industry to verify 1.5 million POS agents could be as high as ₦1.5 billion ($1 million). However, this figure could eventually be higher considering that several fintech executives declined to specify the amounts they pay the verifiers. Additionally, as many PoS agents work for several fintech startups, there’s also the possibility that the total bill could be a lot lower.

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The Cost of Verifying Retail Customers

The cost of verifying retail customers would eclipse the cost for POS agents as self-reported numbers for these fintechs exceed ten million. Fintechs like Moniepoint, Opay, and Palmpay, with an extensive network of agents, could use agent managers to verify the addresses of retail customers. While this approach might be cost-effective as the managers—scattered all over Nigeria—are already on these fintech books, they would still need to be paid extra.

The Importance of Address Verification

Physical address verification is an important part of increasing transparency and reducing the lack of visibility that bad actors exploit. POS fraud contributed 8.8% to the total amount lost to fraud in the fourth quarter of 2023, according to the Financial Institutions Training Centre (FITC).

The Role of Identity Management Startups

Fintechs like Kuda and Paga that do not run extensive cash-in and cash-out operations could use identity management startups to help with address verification. While it is difficult to verify the prices of these services due to confidentiality, it would still represent a significant burden for these fintechs.

The Impact on Financial Inclusion

The regulators will point to NIBSS’ Q1 2024 fraud report which showed a decline in incidents and amounts lost, but it’s still early days. Beyond the monetary cost of address verification, Nigeria has also missed a six-week window to increase financial inclusion as these fintechs have become synonymous with introducing banking to areas with low bank and ATM penetration. According to an industry report, technology contributed heavily to an 8% jump in formal inclusion in three years.

Conclusion

The new KYC requirements introduced by the CBN come with significant costs for fintech startups in Nigeria. While the move aims to increase transparency and reduce POS fraud, it could impact the financial performance and overall operations of these fintechs. The total bill for the fintech industry to verify 1.5 million POS agents could be as high as ₦1.5 billion ($1 million), and the cost of verifying retail customers would eclipse this figure. The importance of address verification cannot be overstated, but the financial burden it poses must be carefully managed.

How do you think the fintech industry in Nigeria will adapt to these new KYC requirements, and what impact do you think they will have on financial inclusion in the country? Share your thoughts in the comments below.

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Citations:

CBN Stops OPay, Moniepoint, Others From Onboarding New Customers

OPay, Kuda resume onboarding of new customers as CBN lifts restriction

CBN stops Opay, Palmpay, others from onboarding new customers

KYC: Opay to commence physical address verification for merchants