Recent changes to Know Your Customer (KYC) rules by the Central Bank of Nigeria have introduced mandatory physical address verification for fintech startups.
This applies to POS agents (for those offering agency banking) and all customers. While startups understand the need for enhanced security, the financial burden of compliance is significant.
High Costs for Agent Verification
Verifying each POS agent could cost fintechs up to ₦1000 ($0.40). For startups with hundreds of thousands of agents, these costs add up quickly. Based on public figures, OPay could face a bill of at least ₦563 million ($376,000), PalmPay around ₦500 million ($333,883), and Moniepoint ₦304 million ($196,000).
Industry-wide, the cost of verifying 1.5 million POS agents could reach ₦1.5 billion ($1 million). However, the actual figure may differ as some executives have not disclosed their verification costs, and some agents work for multiple fintechs.
Verifying Retail Customers: An Even Bigger Challenge
The costs for verifying retail customers, which number in the tens of millions for these fintechs, will dwarf those for POS agents. Some fintechs, like Moniepoint, Opay, and Palmpay, might utilize their agent managers for this task, but it will still involve additional expenses.
Why Address Verification Matters
Physical address verification is crucial for increasing transparency and combating fraud. POS fraud accounted for 8.8% of total fraud losses in Q4 2023, according to the Financial Institutions Training Centre (FITC). For fintechs like Kuda and Paga, which don’t handle extensive cash transactions, identity management startups will likely assist with verification, though the costs remain substantial.
The Central Bank’s Crackdown
The Central Bank imposed the onboarding freeze on April 29th due to concerns about lax KYC practices enabling bad actors. Address verification will also aid authorities in monitoring peer-to-peer crypto transactions, which they believe contribute to currency manipulation.
The Cost of Compliance: Beyond Money
Nigeria has missed a six-week window to boost financial inclusion due to the freeze. Fintechs have been instrumental in bringing banking services to underserved areas, and technology has played a key role in increasing formal financial inclusion by 8% in three years. OPay, a market leader, reportedly had 19 million accounts at the start of 2023 and quadrupled its user base to 76 million. The freeze could have cost the company at least 6 million new users. Moniepoint and Palmpay are also experiencing rapid growth.
Balancing Growth and Security
The challenge for Nigerian fintechs is to find a balance between growth and security. While the new KYC rules aim to protect the financial system, they also present a significant financial hurdle for startups. The industry will need to adapt to these changes while continuing to drive financial inclusion in the country.