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Recent updates to Know Your Customer (KYC) processes mandated by the Central Bank of Nigeria now require fintech startups to physically verify the addresses of POS agents and other customers. This regulation, a condition for lifting a six-week freeze on new customer onboarding, has significant financial implications for these startups.
To verify POS agents’ addresses, startups may need to spend up to ₦1000 ($0.40) per agent. For companies with extensive agent networks, such as OPay, PalmPay, and Moniepoint, the costs can escalate rapidly. Public data suggests that OPay might incur costs of at least ₦563 million ($376,000), PalmPay around ₦500 million ($333,883), and Moniepoint approximately ₦304 million ($196,000).
Overall, the fintech industry could collectively spend around ₦1.5 billion ($1 million) to verify 1.5 million POS agents. These estimates could rise since many fintech executives did not disclose specific verification costs. Additionally, because many POS agents work with multiple fintech firms, there could be some overlap, potentially reducing the total expenditure.
The final costs for address verification will also include retail customers, which could be even higher given that some fintechs report having over ten million users. Fintechs like Moniepoint, Opay, and PalmPay, with their extensive agent networks, might use agent managers for customer verifications. Although this strategy could be cost-effective, as these managers are already employed by the fintechs, additional payments will be necessary.
Physical address verification is crucial for enhancing transparency and reducing the visibility gaps that fraudsters 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.
For fintechs such as Kuda and Paga that do not engage heavily in cash-in and cash-out operations, partnering with identity management startups for address verification seems likely. Although the costs of these services are confidential, they will still impose a significant financial burden.
On April 29, the Central Bank of Nigeria imposed a freeze on new customer onboarding due to concerns about lax KYC practices. Physical address verification will also enable authorities to monitor peer-to-peer crypto transactions more effectively, a crucial aspect of curbing currency manipulation.
Regulators point to the Nigeria Inter-Bank Settlement System (NIBSS) Q1 2024 fraud report, which indicated a decline in fraud incidents and losses. However, it’s still too early to draw definitive conclusions.
Beyond the financial costs, Nigeria missed a six-week window to improve financial inclusion, as fintechs play a pivotal role in providing banking services to underbanked areas. Technology has significantly contributed to an 8% increase in formal financial inclusion over three years, according to industry reports.
POS agents have quickly become the backbone of financial inclusion in Nigeria. In 2023, OPay reported starting the year with 19 million accounts, and according to a regulatory filing by Opera, an early OPay investor, the fintech quadrupled its user base to 76 million. Based on these figures, the onboarding freeze potentially cost OPay at least six million new users. While OPay leads the market, Moniepoint and PalmPay are rapidly expanding, according to an industry expert.
The costs and operational challenges of complying with the new KYC requirements are significant, but they are crucial steps toward ensuring a secure and transparent financial ecosystem in Nigeria.
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