What Nigerian fintech founders can learn from fraudsters

October 10, 2023
7 min read

Let's get one thing straight, fraudsters are not daft. If you think they are, you're sorely mistaken. These individuals are some of the most effective penetration testers for fintech security. They're constantly probing, adapting, and sharing information at a pace that leaves many of us in the fintech space scrambling to keep up. 

A few weeks ago, I saw people dragging Chipper Cash and I tweeted about the urgent need for fintech founders to openly discuss the challenges we face, especially regarding fraud. The global financial economy doesn't see Africa as a big enough market to focus on, and that's a problem we need to address.

What problems? Oya, let me start. 

Let's start with something as basic as making a payment on Amazon. You might think it's a straightforward process, but it's far from it. Your payment goes through multiple layers: your bank, a major card provider like MasterCard or Visa, a routing channel, and a processor like Stripe. If you're using a virtual card provided by a fintech, the complexity increases.

The transaction fee you see on Amazon is shared across all these entities. And if you're using a virtual card, the number of partners can increase from four or five to maybe seven. Each one takes a cut, in USD. This brings me to my next point.

Nigeria’s risk premium is not worth it

Once Africans have a mindset about something, it costs a lot of money to change. Changing people's mindset, not just Africans, costs money, millions of dollars to be exact. Whether it's agent banking like Moniepoint or investment platforms like Piggyvest, companies have to spend heavily to incentivise people to adopt new ways of doing things.

However, issues of fraud now mean Nigeria has a high-risk premium. Companies like TransferWISE have stopped dealing with Nigerians. We all know what happens with PayPal. The issue of fraud has led to extra scrutiny for Nigerians, but it’s no longer worth it. The cost-benefit analysis just doesn't add up. We make up maybe 20% of their cash flow, but the risk and extra costs involved in KYC mean it’s not worth their while. And you can’t blame them.

The whole African payments economy is maybe $13 billion a year. To put that into perspective, the UK’s alone is about five times more than that. We're simply not a market that global entities want to pay close attention to. Most of our payments are going within Western Africa, and even intra-Africa payments have to go from Nigeria to the USA before maybe going to Ghana.

So, let’s talk about why we’re where we are, the elephant in the room that few people want to address.

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This issue is not one-dimensional. Take regulation, for example; the blockchain could have been a game-changer for restructuring the African payment gateway. We could be circumventing many middlemen in the payment process and go direct.

But what's the public perception? That it's for Yahoo Boys. We in the crypto space have been so engrossed in the technology that we've forgotten it's all about the product and user experience.

Regulation in Africa is decades behind innovation. Globally, regulation might lag by four or five years, but here, it's a different story. Regulators are often disconnected from the realities of the tech space. This "us versus them" mentality still leads to a lot of confusion. This needs to change. 

In my jurisdiction with GetEquity, I needed to have conversations with the Securities and Exchange Commission (SEC). Though they have evolved from the days of issuing circulars, there's still a long way to go.

We need a coalition of fintech founders and investors to bridge this gap. Easy, right? Wrong again. 

Underestimating fraudsters and not talking to each other

Yahoo Boys or fraudsters don’t do things the way we do in fintech. Everybody in fintech knows that Yahoo Boys are the best kinds of people to pen-test our security. They know your fintech is about to launch before it does and are already testing your system using stolen cards to try and move money. 

Meanwhile, we in African fintech, because we see ourselves more as competitors. We’re like, “Oh, this person is doing what I’m doing. I cannot share how I solve my problems with them.” But do the Yahoo boys care? No. They’re collaborating in the craziest of ways. 

I’ve seen situations where someone is trying to test a vulnerability on GetEquity and they’re able to exploit it. Within three to four hours, you’re seeing patterns of like five, six other people that are doing the same thing. So it means they’re speaking to each other.

I remember one vulnerability after one of our payment partners had changed the way we received confirmation on transfers. Then when you made a payment, you got credited with an extra zero. Within the three hours it took us to fix that vulnerability, we saw five to six people try that vulnerability multiple times. 

If we hadn’t caught that on time, we would have been over $15,000 in the hole. This same thing has led to the death of fintechs that I can’t mention now. People say fraudsters are daft, but not with what I’ve seen. 

We're so caught up in competition that we forget the ecosystem suffers when we don't share information. But founders are not the only people with this issue. 

The problem with VCs — pump money and go and figure things out

Money pouring on someone's hand like rain. Used to depict a naira float, following the country's announcement

Most investors are professionals at investing, not at understanding the intricacies of fintech. You'd think that pumping $500k into a startup would come with some level of guidance, right? Wrong. More often than not, all you get is a pat on the back and a "figure it out." 

Do they have people within the company that are knowledgeable in certain levels of finance? Not really. 

Have many of them worked in fintech before? Again, not exactly. 

Would they be able to connect you with those who have this experience? From what I’ve seen, not really. 

The best I’ve seen most times is, “Maybe we’ll introduce you to somebody” and that’s about it. If you say you’re an early-stage investor, you should be doing a lot more hand-holding. If I invest in a founder with little fintech experience, I would personally introduce them to people who have experience in fintech. Maybe a fintech engineer and say, “Hey I think you guys should contract or consult this guy to help you build internal security and processes.” 

This is what I think should be happening, but it’s not. I might be wrong, though. 

Now there are some positive signs. Microtraction, for example, is trying to get its founders to meet with older founders they invested in; sort of like a big brother thing. 

But that's just the bare minimum. If you're an early-stage VC, consider hiring a product consultant to guide your portfolio companies. It might not even be full-time; it can be a consultancy or a partnership. The person dedicates time to your portfolio companies say once a month or two hours every week. 

That’s what we try to do at GetEquity, mostly because I’m a product person. You can also approach it from a marketing standpoint like what we are trying to do at Zedi. This is common practice in the US, and I remember attending an accelerator where this was in place, but I don’t think I’ve seen it in this part of the world. 

So where to from here? 

I’d be lying if I said I had all the answers. But what I can say is we need to talk more, not just with founders but also with investors and stakeholders. There's a glimmer of hope as engineering managers and top-ups in various companies are starting to collaborate informally. But we need more of that, and we need it to be official.

There are so many things on the regulatory front that we can’t out-innovate. Take the FX issues, for example, many companies have lost money in the past few months. One thing that can help with transaction costs though is a payment rail for Africa, like an NIBSS kind of thing. 

Companies like Zone are exploring blockchain rails, which could be a step in the right direction. The current rails are not sustainable, and we need innovative solutions to address this. Whether it’s one company that builds it or a consortium of companies, several companies still need to be involved to make it work. 

Interswitch did something like that when they had their switching service and got all the banks involved. I was thinking that’s what Thepeer was going to be, but I guess they’re still trying to figure out how to be that. 

Finally, I’ll leave a message for all stakeholders. To customers, bear with us. We're trying to change the status quo, and we’re learning the hard way that changing it is not cheap.

To founders, remember why you started this journey. And to investors, act like you're investing in an early market because you are. Roll up your sleeves and get involved. More investors need to behave like venture studios and not US-level investments. 

Jude Dike
Democratising access to private capital via GetEquity
Jude Dike
Democratising access to private capital via GetEquity
Jude Dike
Democratising access to private capital via GetEquity

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