In a January 2024 letter, the CEO of one among Nigeria’s most outstanding fintech startups instructed staff the corporate’s focus for the yr can be ‘development and compliance.’ For an trade centered on hypergrowth within the final 5 years, it marked a serious shift in response to regulatory scrutiny and rising fraud issues. 

After an April ban on onboarding new clients, the central financial institution elevated the frequency of impromptu inspections on the workplaces of fintech corporations. “They only present up and undergo our books in search of any anomaly,” one individual aware of the matter instructed TechCabal. 

“We all know that they’ve elevated the frequency [of the inspections] as a result of [the greylist] is a transparent and current hazard for the monetary house. The one method you get off the gray record is to make sure regulated entities fulfil their compliance obligations,” Tunde Ibidapo-Obe, the CEO of Regfyl, a Nigerian fraud detection firm, instructed TechCabal. 

These inspections led to the Central Financial institution fining no less than six fintech startups within the second quarter of 2024 after audits revealed compliance points, with Moniepoint and OPay being hit the toughest. 

The heightened give attention to fintechs is partly as a consequence of Nigeria’s aim of getting delisted from the Monetary Motion Process Drive (FATF) greylist—an inventory of nations with weak anti-money laundering and counter-terrorism financing measures—by January 2025. 

Being on the FATF greylist indicators to international buyers {that a} nation’s monetary methods are weak to cash laundering and terrorist financing, and might impair a rustic’s fame, hinder entry to worldwide capital, and improve enterprise prices. 

The regulators tightened their grip on fintechs after a 2023 report from Nigeria’s Monetary Intelligence Unit (NFIU), the monetary crime intelligence company, confirmed that over 90% of fintechs didn’t report suspicious transactions and weren’t compliant with anti-money laundering practices, making them possible conduits for cash laundering.

The regulators are additionally responding to the rise in fraud within the banking sector, with fraud through digital channels turning into a major problem. Within the first half of 2024, 96% of financial institution fraud occurred via net, cellular, and POS methods. 

As fintechs function largely via digital channels, they’ve discovered themselves within the thick of the struggle towards fraud, as banks typically blame fintechs for these fraud makes an attempt. It reached its tipping level in October 2023, when Constancy Financial institution, a Nigerian industrial financial institution, blocked transfers to a number of fintechs over issues that their weak KYC processes made them a conduit for fraudulently obtained funds. 

That block legitimised the notion that fintechs assist unhealthy actors get away with fraud and the criticism for the fintech’s lax KYC measures. It additionally put a highlight on fintechs that regulators have adopted as they attempt to scale back fraud in Nigeria and forestall fintechs from turning into a weak hyperlink exploited by unhealthy actors.

The evolution of KYC and Compliance in Nigeria’s fintech trade 

In 2013, Nigeria’s central financial institution launched a three-tiered Know Your Buyer (KYC) system, decreasing the limitations to onboarding clients. Backed by this round, fintechs helped reduce monetary exclusion by 20% and introduced thousands and thousands into the monetary system.

Regardless of the relaxed onboarding necessities, fintech startups are mandated by regulation to substantiate clients’ identities, bodily addresses, and threat profiles. They can not onboard politically uncovered individuals, people on sanctions lists, or these below investigation for fraud or going through authorized proceedings. 

Nonetheless, because the fintechs scaled quickly, many prioritised development over compliance, making tradeoffs in areas like threat profiling, transaction monitoring, anti-money laundering, and KYC, leaving some restrictions unimplemented. In some excessive instances, Nigerians may open accounts with details about widespread celebrities and random cellphone numbers. 

“Many fintechs didn’t have processes in place to do [the necessary checks]. In the event you’re onboarding tens of hundreds of shoppers and you’ve got a small compliance workforce, they’ll’t sustain,” Ibidapo-Obe stated.

The loopholes created secure havens for unhealthy actors, and with little data on the unhealthy actors, the fintechs rapidly misplaced billions to fraud. Earlier than the April 2024 ban was lifted, fintechs had been requested to satisfy strict situations, together with limiting peer-to-peer crypto transactions and mandating ID verification and bodily tackle verification for all account tiers. 

“Compliance is not only a backroom factor. A number of fintechs are actually taking compliance very critically. Prior to now, massive fintechs would have one younger graduate out of college with simply two years of expertise heading their compliance workforce—however that’s shifting. Now you’re having extra senior folks, and there’s much more scrutiny as nicely,” Oyindolapo Olusesi, a tech-focused lawyer, instructed TechCabal. 

The Central Financial institution didn’t instantly reply to a request for feedback.

The fee and challenges of compliance

In response to the elevated scrutiny, fintech corporations have elevated the hiring of compliance employees, carried out intensive KYC checks on clients, and blocked crypto transactions the place doable. They’ve additionally created inner guardrails that flag and report giant and suspicious transactions, however some have balked on the worth of extra stringent KYC necessities. 

Deal with verification for POS brokers alone may price the trade $1 million, whereas full KYC checks now vary from ₦1500 to ₦2000 per buyer—a steep improve from the ₦400 to ₦700 prices earlier than the April ban. The price of compliance software program, which prices per person and transaction, together with the bills of hiring skilled compliance employees from banks, additionally will increase operational prices for fintechs.

For fintechs with thousands and thousands of shoppers, these prices rapidly improve and divert scarce sources. Some fintechs analysed the cost-benefit of full compliance and determined to function in sure gray areas, however that call negatively affected fintechs once they reached a sure scale, as they turned focused by unhealthy actors. “Startups are conscious when they’re making infractions, however they make trade-offs when it doesn’t price them an excessive amount of,” Olusesi stated.

Nonetheless, after the situations of the April ban had been met, the fintechs have improved their compliance processes, which has happy regulators who’re “completely satisfied” that fintechs are actually “taking steps in the appropriate course,” a coverage skilled instructed TechCabal.

It’s not been all gloom for Nigerian startups, as fintechs have turned to startups like Regfyl, SmileID, Dojah, Youverify, and Seamfix for compliance and buyer identification administration options that enable the fintechs to correctly onboard and handle buyer information. 

This has created a marketplace for these startups, as they’ve raised over $8 million previously yr and onboarded over 100 million digital identities mixed. “They’re gaining extra traction rapidly than they’d have two years in the past,” Olusesi stated concerning the compliance startups. 

Nigerian fintechs have responded to the elevated regulatory scrutiny with improved compliance efforts, however for the fintechs, the measure of success is for regulators to ease their scrutiny, which has diverted sources and a focus because the January 2025 deadline to exit the greylist approaches.