The significant roles of fintech companies in the financial sector cannot be overemphasized. FESTUS OKOROMADU, in this report, reviews recent developments in the subsector amid the challenges it faced during the year.
The President of the Fintech Association of Nigeria (FintechNGR), Stanley Jacob, in a recent interview with national television emphasized the pivotal roles of the fintech sector in propelling Nigeria toward its ambition of becoming a $1 trillion economy.
He stressed the transformative power of fintech in driving financial inclusion and revolutionizing various industries.
While underscoring the significance of the sector despite the country’s current macroeconomic challenges, he stated that, “We cannot achieve the $1 trillion economy without fintechs.”
Commenting on the industry’s expansion, he said it has been driven by factors such as increased mobile penetration, a youthful population, and the sector’s capacity to innovate across industries like payments, healthcare, agriculture, and insurance.
He added that Nigeria’s fintech industry has maintained remarkable growth, with the number of startups surging from 74 in 2017 to over 217 by 2023.
Highlighting the sector’s role in creating new opportunities within “micro-markets” and fostering greater financial inclusion, he said, “Fintech has gone beyond just naira and kobo. It has now gone into medicine, healthcare, agriculture, and elsewhere.”
He noted that despite the high poverty levels and economic hurdles, the country’s youthful population remains a unique asset, crediting the fintech’s ability to deliver digital financial services as a key factor in expanding accessibility and inclusion across the country.
“The total amount lost due to fraud surged by 8,993.04 percent, rising from N468.49 million in Q1 2024 to N42.6 billion in Q2 2024”
“Our youthful population also presents a unique opportunity for us, for fintechs, and for investors in this space,” he said.
However, Jacob acknowledged several challenges that could hinder the industry’s progress which includes; governance, insisting that sustenance of growth in the industry depend on robust governance structure; Foreign exchange risk, he stated that funding in foreign currencies while earning revenue in Naira exposes fintechs to FX volatility; Profitability, according to him, many fintechs prioritize social good over financial sustainability, which he warned could threaten their long-term viability; and Cybersecurity, he noted that the increasing digitization of services, requires strong data protection measures and compliance with regulations like the Nigeria Data Protection Regulation.
The newly elected President of FintechNGR, called for greater collaboration between fintech companies and the government to address these challenges and ensure sustainable growth.
Looking ahead, he expressed optimism about the sector’s potential to expand into new areas, including health tech, property tech, and agric tech.
“The future of fintech is quite bright,” he concluded, urging resilience and adaptability to overcome the hurdles posed by the current economic climate.
CBN optimistic of Nigeria’s Fintech industry
On its part, the financial industry regulator, the Central Bank of Nigeria which had earlier in the year tackled fintech operators with some stringent regulatory terms has also acknowledged the importance of the industry in boosting economic growth.
Speaking at the CIBN Conference 2024 in Lagos recently, the CBN Governor, Olayemi Cardoso applauded the role fintech operators have played in the payments ecosystem and in the expansion of the financial inclusive network in the country.
“The Nigerian payments ecosystem has been ahead of many advanced economies, yet has not always received the recognition it deserves. Many innovations that other countries are only now experiencing have been part of our system for years,” he stated.
Commenting further, he said, “We must celebrate these successes, as they contribute to building our global reputation. Nigeria’s dynamic fintech ecosystem has driven financial inclusion and positioned the country as a hub of innovation in Africa.”
Cardoso noted that, “Despite a challenging external environment, Nigerian Fintech continues to shine; attracting significant foreign investment and several has achieved global unicom status this year.
Their innovations, alongside other financial service providers, have fueled growth in transactions and made financial services more affordable and accessible for many more Nigerians.
“We must continue to leverage this channel to enhance access to finance and credit, particularly for under-served populations.”
“I think the ecosystem is ripe for a central repository where everybody can share data. Just the way the banks themselves came up with BVN before the regulator stepped in. The entire financial industry needs something similar to tackle fraud”
While charging the sector operators to play by the rules and guard against fraudulent activities, the CBN boss said, “I urge fintech companies and banks to ensure their platforms are not exploited for fraudulent activities.
“Strengthening the KYC onboarding process is essential to prevent malicious actors from exploiting our financial system. Additionally, these institutions must prioritize improving transaction monitoring and bolstering consumer protection measures to ensure that digital channels remain safe, especially for the most vulnerable segments of our population.”
Cardoso also expressed concern over delays in some payment gateways in settling financial transactions, insisting that the success of the industry is based on trust hence operators must act in ways that assures they possess this important element.
“Trust is fundamental to fostering digital transactions, and we must take every necessary step to preserve that trust in our payment systems. These delays often disproportionately affect vulnerable segments of our population. To address this, we will impose strict penalties on non-compliant institutions to safeguard consumer trust and ensure swift redress mechanisms are in place,” he said.
SEC commit to protection of investors in Fintech companies
In order to boost investors’ confidence in supporting the growth of the sector, the Securities and Exchange Commission says it’s committed to safeguarding investors as the country’s fintech landscape continues to expand.
To this end, the regulator has announced plans to tighten its oversight of digital finance platforms, ensuring compliance with capital market rules and curbing fund mismanagement.
The SEC Director General, Emomotimi Agama, made this commitment while speaking during one-day training for financial journalists in Abuja.
He emphasized the importance of a robust regulatory framework that balances innovation with investor protection.
“It is time for fintech operators to be held accountable to the rules of the capital market, particularly when raising funds,” Agama said, adding that the Commission would act decisively to enforce regulations and maintain market integrity.
Highlighting the challenges posed by emerging digital platforms, cryptocurrencies, and startups, Hasfat Rufai, Director of the Registration, Exchanges, and Market Infrastructure Department at SEC, affirmed the Commission’s focus on protecting investors amidst these disruptions.
“While these trends bring new opportunities, they also come with challenges, particularly around regulation and investor protection,” Rufai said during a panel discussion.
She further remarked on the transformative impact of technology on the investment sector, noting that it has introduced greater accessibility and opportunity but requires investors to stay informed and exercise caution.
“The digital age has transformed the investment landscape.
Investors must adapt by embracing technology, seeking knowledge, and making responsible investment choices,” Rufai added.
In its ongoing efforts to ensure market transparency, the SEC recently issued a warning against Marino FX Ltd, a platform falsely claiming to be a licensed cryptocurrency exchange.
The regulator cautioned investors and the general public to avoid engaging with the firm.
The SEC’s actions underscore the government’s determination to position Nigeria as a leading fintech hub while prioritising investor’s security in an era of rapid digital transformation.
Fraud as a course for concern
As noted by the CBN governor, the success of the fintech sector as well as other players in the financial industry is anchored on trust, hence increase in fraudulent activities in the sector is a course for worries.
According to the Financial Institutions Training Centre’s reports on fraud and forgeries in the Nigerian financial sector for the second quarter (Q2) 2024, a total of 11,532 cases of fraud were reported during the period, reflecting 0.52 percent increase compared to the 11,472 cases recorded in Q1 2024.
According to FITC, the Q2 2024 data reveals that computer/web fraud, mobile fraud, and POS related fraud were the three most prevent types, continuing the trend observed throughout 2023 and into the first quarter of 2024.
“An analysis of the data reveals a staggering 1,784.94 percent increase in the total amount involved in fraud cases from Q1 to Q2 2024, with the sum escalating from N2.9 billion to approximately N56.3 billion. Additionally, the total amount lost due to fraud surged by 8,993.04 percent, rising from N468.49 million in Q1 2024 to N42.6 billion in Q2 2024.
“With regards to the involvement between staff and outsiders, outsider involvement in fraud cases rose by 5.20 percent compared to the previous quarter, increasing from 10,397 cases in Q1 to 10,939 cases in Q2. Furthermore, staff involvement also increased by 23.40 percent, rising from 47 cases in Q1 2024 to 58 in Q2 2024,” the FITC report stated.
CBN’s bid to curb rising fraud cases
Faced with the growing cases of fraudulent cases the CBN had no option but to rise up to the challenge of curbing its spread before it gets out of hand. Bearing in mind that the majority of the POS operates under the umbrella of fintech firm; the CBN invoked its existing regulations on customers’ verification.
Fintech companies were also accused of being involved in forex transactions without adequate background of their customers as well as cryptocurrency transactions. To this end the CBN in collaboration with the National Security Adviser and the Economic and Financial Crime Commission ordered a pause in opening of accounts by fintech companies earlier in the year.
In April this year, Paga, Kudu Bank, Moniepoint, OPay and Palmpay were ordered by the CBN to stop opening new customers accounts after EFCC with the approval of NSA and CBN blocked 1,146 bank accounts involved in unauthorised forex dealings.
“We’ve temporarily paused new signups on our platform. This means that you’ll be unable to open a new account at the moment. We apologise for any inconvenience this may cause,” one prominent fintech startup wrote on its website then.
Prior to this development, precisely in October 2023, Fidelity Bank had blocked transfers to OPay, Palmpay, Kuda and Moniepoint over concerns of lax know your customers (KYC) processes which was alleged to have led to increase in fraud incidents.
Furthermore, on May 20, 2024 CBN gave fintech several conditions for the onboarding freeze to be lifted including asking them to block P2P crypto transfers and mandating physical address verification for all tiers of accounts, in addition to the updating the facial verification of their customers.
However, some industry analysts saw the criticism and sanctions against fintechs as disproportionate, stressing that the battle against fraudulent activities in the sector cuts across board as it is an industry-wide issue.
This is confirmed by a 2022 KPMG Nigeria study which shows that only 30 percent of local banks have fully implemented KYC and anti-fraud measures.
“The CBN must take its audit and on the spot checks more seriously to ensure that the Information Security Management System (ISMS) is being adhered to in all financial institutions to curb fraud,” a fraud security expert who wishes to remain anonymous said.
Self-cleansing initiatives
Historically, traditional banks and fintechs have fought fraud through internal controls, strengthening security infrastructure, and having adequate information on customers (KYC processes).
Banks also share information among themselves, helping them identify and restrict the accounts of bad actors pending investigation. Fintechs have tried to replicate this information sharing but have failed.
In March 2023, fintechs, led by Flutterwave, began talks to create a fraud database, codenamed Project Radar, to share data on individuals and groups that had attempted or made fraudulent transactions. But the fintechs, hawkish about their data and ultracompetitive, did not make much progress with those talks.
Another industry collaboration to fight POS fraud, a popular channel for bad actors is still in its early days.
However, a decision mandating mobile banking agents to register with the Corporate Affairs Commission is expected to increase transparency.
If financial institutions are learning to fly without perching, bad actors are learning to shoot without missing. The consensus is that an industry-wide response is required.
According to Adedeji Olowe, founder of Lendsqr, a lending-as-a-service startup, “It goes back to KYC and customer due diligence. There is literally nothing new anyone is supposed to do.”
He advised banks and fintechs to sheathe their swords and collaborate if they intend to win in the fight against fraud.
He stated that data sharing is paramount in the fight against fraud.
“I think the ecosystem is ripe for a central repository where everybody can share data. Just the way the banks themselves came up with BVN before the regulator stepped in. The entire financial industry needs something similar to tackle fraud,” he pointed out.
Data sharing has been discussed since at least 2018, possibly earlier, with little to show for it. The growing complexity of fraud has made it more important than ever.
Amid these challenges, the fintech industry has proven to be an industry that is set to play a dominant role in the local and global stage.
This is evident in the recent announcement of Visa, the world’s second-largest card payment processor’s decision to invest in Orda, a Nigerian restaurant fintech startup.