Fintech Startups Face Costly Compliance with New KYC Regulations in Nigeria

In response to recent changes mandated by the Central Bank of Nigeria (CBN), fintech startups must now physically verify the addresses of their POS agents (if they offer agency banking services) and all other customers.

While these companies have accepted the new requirements as a condition for lifting a six-week freeze on new customer onboarding, several executives have voiced concerns about the significant costs involved.

For instance, to physically verify the addresses of POS agents, fintech startups could incur costs up to ₦1000 ($0.40) per agent. This expense could quickly add up for leading startups that have hundreds of thousands of agents. Based on publicly available data on registered agents, OPay could 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 potentially be higher since several 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 would likely 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 that bad actors exploit. 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, according to an industry report. The new KYC requirements, while necessary for security, have temporarily slowed this progress.

In conclusion, while the physical address verification mandate by the CBN 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.