Fintechs Face High Costs Due to New KYC Requirements by CBN

Fintech startups in Nigeria are facing significant expenses due to new Know Your Customer (KYC) requirements mandated by the Central Bank of Nigeria (CBN). As of April 29, these startups must physically verify the addresses of their Point-of-Sale (POS) agents and all other customers. This mandate followed a six-week freeze on new customer onboarding, aimed at addressing lax KYC procedures that facilitated fraudulent activities.

The cost implications are substantial. For instance, verifying each POS agent can cost up to $0.40. For large fintech companies with extensive agent networks, such as OPay, PalmPay, and Moniepoint, this translates into significant expenditures. OPay, with its 563,000 registered agents, could face costs around $376,000. PalmPay might incur expenses of $333,883, while Moniepoint’s verification costs could reach $196,000. 

Overall, the fintech industry may need to spend approximately $1 million to verify 1.5 million POS agents. These figures could be higher as many executives did not disclose their verification expenses. Moreover, since many agents work for multiple startups, the actual total may be lower.

In addition to agent verification, the cost of verifying retail customers—whose numbers exceed ten million—could significantly surpass that of POS agents. Companies like Moniepoint, OPay, and PalmPay might leverage their agent managers to verify retail customers’ addresses, potentially reducing costs. However, this method still incurs additional payments to the managers.

Address verification is crucial for enhancing transparency and curbing fraud. According to the Financial Institutions Training Centre (FITC), POS fraud accounted for 8.8% of the total fraud losses in Q4 2023. The new KYC measures aim to address these vulnerabilities.

Fintechs without extensive cash-in and cash-out operations, such as Kuda and Paga, may rely on identity management startups for address verification. Although the costs for these services remain confidential, they still represent a significant financial burden.

The CBN’s directive to halt new customer onboarding until stringent KYC measures were in place stemmed from concerns over inadequate verification processes. These measures also aim to increase oversight of peer-to-peer crypto transactions, which the authorities believe contribute to currency manipulation.

While early data from the Nigeria Inter-Bank Settlement System (NIBSS) Q1 2024 fraud report shows a decline in fraud incidents and losses, the full impact of these new KYC measures remains to be seen.

The six-week freeze on customer onboarding has also affected financial inclusion efforts. Fintech companies have been instrumental in expanding banking services to underserved areas with low bank and ATM penetration. A recent industry report highlighted an 8% increase in formal financial inclusion over three years, largely driven by technology.

In 2023, OPay reported starting the year with 19 million accounts and, according to a regulatory filing by Opera, an early investor, it quadrupled 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 users. Moniepoint and PalmPay, while trailing OPay, are also experiencing rapid growth, according to industry experts.

The new KYC requirements, while costly, are seen as necessary to bolster the integrity of Nigeria’s financial ecosystem and protect against fraud. However, the financial and operational burden on fintech startups remains a significant challenge.