The Central Bank of Nigeria has updated its Know Your Customer (KYC) rules, requiring fintech startups to physically verify the addresses of POS agents and all other customers. This change comes as a condition for lifting a six-week freeze on new customer registrations. Though necessary, fintech executives are concerned about the high costs of this verification process.
Verifying each POS agent could cost startups up to ₦1000 ($0.40). For large companies with vast networks of agents, these expenses add up quickly. For example, OPay could spend at least ₦563 million ($376,000), PalmPay around ₦500 million ($333,883), and Moniepoint about ₦304 million ($196,000).
Overall, the fintech sector may face costs of up to ₦1.5 billion ($1 million) to verify 1.5 million POS agents. These figures might be higher since some fintech executives didn’t disclose their verification expenses. However, the total cost might also be lower because many agents work for multiple fintech firms.
Besides agents, verifying retail customers will be an even bigger challenge as fintech companies have over ten million users. Companies like Moniepoint, OPay, and PalmPay may use their agent managers, who are already spread across Nigeria, to verify retail customers’ addresses. While this method could save money, these managers would still need extra pay.
Physical address verification is vital for increasing transparency and reducing fraud. In the last quarter of 2023, POS fraud accounted for 8.8% of total fraud losses, according to the Financial Institutions Training Centre (FITC).
For fintechs like Kuda and Paga, which don’t have extensive cash-in and cash-out operations, identity management firms might handle the verification process. Although the cost of these services is confidential, it will still be a significant expense.
The Central Bank’s freeze on new customer onboarding, imposed on April 29, aimed to tackle lax KYC practices that allowed fraudulent activities. Physical address verification will also help authorities monitor peer-to-peer crypto transactions, which are seen as a factor in currency manipulation. Despite a recent decline in fraud incidents, it’s still too early to judge the full impact of these measures.
While address verification is costly, the six-week onboarding freeze also halted the growth of financial inclusion in Nigeria. Fintech companies have played a key role in bringing banking services to underserved areas. An industry report highlighted an 8% increase in formal financial inclusion over three years, driven largely by technology.
In 2023, OPay reported starting the year with 19 million accounts and later quadrupling its user base to 76 million. With an average of 1.1 million new users weekly, the onboarding freeze likely cost OPay at least six million new customers. Though OPay leads the market, Moniepoint and PalmPay are also expanding rapidly.
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