Due to recent changes in Know Your Customer (KYC) procedures mandated by the Central Bank of Nigeria (CBN), fintech startups are now required to physically verify the addresses of their POS agents and customers. Although these startups accept the necessity of these requirements—they were a precondition for lifting a six-week freeze on new customer onboarding—executives are highlighting the significant costs involved.
Verifying the addresses of POS agents could cost up to ₦1000 ($0.40) per agent. For fintech companies with large networks, these costs can quickly escalate. For instance, OPay might spend approximately ₦563 million ($376,000), PalmPay around ₦500 million ($333,883), and Moniepoint about ₦304 million ($196,000) based on their registered agent numbers.
Overall, the fintech industry might face costs of up to ₦1.5 billion ($1 million) to verify 1.5 million POS agents. However, the final cost could vary as some agents work for multiple fintech companies, potentially reducing the total verification expenses.
These costs do not account for the verification of retail customers, which would likely exceed the costs for POS agents given that these fintech companies have millions of customers. For fintechs like Moniepoint, OPay, and PalmPay, agent managers could verify retail customers' addresses, leveraging their extensive networks across Nigeria. While this could be more cost-effective, these managers would still require additional compensation.
Physical address verification is crucial for enhancing transparency and minimizing the exploitation of the system by fraudulent actors. 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 fintech companies like Kuda and Paga, which do not operate extensive cash-in and cash-out services, address verification might be managed by identity management startups. Although the exact costs of these services are confidential, they still represent a considerable expense.
The CBN's freeze on new customer onboarding, initiated on April 29, was a response to concerns over lax KYC measures that were enabling fraudulent activities. Enhanced physical address verification is also expected to improve oversight of peer-to-peer cryptocurrency transactions, a significant area of concern for currency manipulation.
The first quarter of 2024 saw a reduction in fraud incidents and amounts lost, according to the Nigerian Inter-Bank Settlement System (NIBSS) fraud report, but it's still early to gauge long-term impacts.
Besides the financial burden, Nigeria lost a valuable six-week period for increasing financial inclusion during the onboarding freeze. Fintech startups have played a pivotal role in extending banking services to underserved areas, significantly contributing to an 8% rise in formal financial inclusion over three years, according to an industry report.
POS agents have become essential to financial inclusion in Nigeria. In 2023, OPay reported starting the year with 19 million accounts, and according to Opera, an early investor, the user base quadrupled to 76 million by the year's end. OPay averaged 1.1 million new users weekly, meaning the onboarding freeze likely prevented the addition of 6 million new users. Although OPay leads the market, Moniepoint and PalmPay are rapidly growing competitors.
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