Following significant changes to Know Your Customer (KYC) processes mandated by the Central Bank of Nigeria, fintech startups are now required to physically verify the addresses of POS agents offering agency banking services, as well as all other customers. This new requirement was a condition for lifting a six-week freeze on new customer onboarding, and while startups are complying, executives have expressed concerns over the high costs involved.
For instance, physically verifying each POS agent could cost up to ₦1000 ($0.40). This cost can quickly escalate for large startups with extensive networks of agents.
Based on publicly available data on registered agents:
OPay: Estimated cost of at least ₦563 million ($376,000)
PalmPay: Estimated cost around ₦500 million ($333,883)
Moniepoint: Estimated cost of ₦304 million ($196,000)
Overall, the fintech industry could spend around ₦1.5 billion ($1 million) to verify 1.5 million POS agents. However, these figures might be lower as some agents work for multiple fintech startups, potentially reducing the total verification bill.
The costs for verifying retail customers are expected to be even higher, as these fintechs report having over ten million customers. Startups with large agent networks, like Moniepoint, OPay, and PalmPay, may use agent managers for these verifications. Although this method could be more cost-effective, as managers are already employed by the fintechs, it would still require additional payments.
Physical address verification is crucial for enhancing transparency and reducing fraud, which bad actors often exploit. According to the Financial Institutions Training Centre (FITC), POS fraud accounted for 8.8% of the total fraud losses in the fourth quarter of 2023.
Fintechs such as Kuda and Paga, which do not operate extensive cash-in and cash-out services, may rely on identity management startups for address verification. While the costs of these services are confidential, they are still expected to be substantial.
The Central Bank of Nigeria imposed a freeze on new customer onboarding on April 29, due to concerns over inadequate KYC measures. Physical address verification is also intended to improve oversight of peer-to-peer crypto transactions, which are believed to contribute to currency manipulation. Although early reports, like NIBSS’ Q1 2024 fraud report, show a decline in fraud incidents and losses, it is still too early to gauge the full impact.
The six-week freeze has also affected efforts to increase financial inclusion in Nigeria. Fintechs have been pivotal in introducing banking services to regions with low bank and ATM penetration, significantly contributing to an 8% increase in formal financial inclusion over three years. For instance, OPay started 2023 with 19 million accounts and reported quadrupling its user base to 76 million by the end of the year. The onboarding freeze likely cost OPay around 6 million new users. Moniepoint and PalmPay are also experiencing rapid growth, closely trailing OPay.
The new KYC requirements represent a substantial financial and operational burden for fintech startups but are seen as necessary steps to enhance the security and integrity of Nigeria’s financial ecosystem.
Picture Cred: The Economic Times