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In light of recent changes mandated by the Central Bank of Nigeria (CBN), fintech startups are now required to physically verify the addresses of their POS agents and all other customers, adding a significant compliance burden.
While these companies have agreed to the new requirements as a condition for lifting a six-week freeze on new customer onboarding, several executives have expressed concerns about the high costs involved. For instance, physically verifying the addresses of POS agents could cost fintech startups up to ₦1000 ($0.40) per agent. This expense can quickly accumulate for leading startups with hundreds of thousands of agents. Based on publicly available data on registered agents, OPay might face 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 spend ₦1.5 billion ($1 million) to verify 1.5 million POS agents. These figures could be even higher since some fintech executives have not disclosed the exact amounts they pay to verification service providers. Additionally, since many POS agents work for multiple fintech startups, the actual total might be somewhat lower.
Moreover, these expenses do not account for the costs of verifying retail customers, which are likely to surpass the costs for POS agents, given that the combined retail customer base of these fintech companies exceeds ten million. To manage these costs, fintechs like Moniepoint, OPay, and PalmPay, which have extensive networks of agents, could leverage their agent managers to verify retail customers’ addresses. This strategy might be more economical, as the managers—spread across Nigeria—are already on the fintechs’ payrolls, though they would still require additional compensation for the extra work.
Physical address verification is a crucial measure to increase transparency and reduce the opportunities for fraud. According to the Financial Institutions Training Centre (FITC), POS fraud accounted for 8.8% of the total amount lost to fraud in the fourth quarter of 2023. This underscores the importance of robust KYC processes in safeguarding the financial system.
For fintechs like Kuda and Paga, which do not operate extensive cash-in and cash-out networks, collaborating with identity management startups may be a viable solution for address verification. Although the exact costs of these services are confidential, they are expected to impose a significant financial burden on these companies.
The CBN’s decision on April 29 to halt new customer onboarding was driven by concerns over lax KYC practices that could be exploited by bad actors. Physical address verification will also provide authorities with greater oversight of peer-to-peer cryptocurrency transactions, which are seen as a significant factor in currency manipulation.
Regulators might point to the Nigeria Inter-Bank Settlement System’s (NIBSS) Q1 2024 fraud report, which indicated a decline in fraud incidents and amounts lost. However, the long-term effectiveness of these measures remains to be seen.
Beyond the financial burden of address verification, the six-week freeze has resulted in a missed opportunity to enhance financial inclusion in Nigeria. Fintech startups have been instrumental in bringing banking services to underserved areas with limited bank and ATM access. The new KYC requirements, while necessary for security, have temporarily slowed this progress.
In conclusion, while the CBN’s physical address verification mandate aims to enhance the security and transparency of Nigeria’s financial system, it presents significant cost and operational challenges for fintech startups. Balancing these new requirements with their mission to expand financial inclusion will be crucial for these companies moving forward.
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