As fraud threatens Nigeria's fintech boom, collaboration and stricter compliance could save the day 

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March 27, 2024
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4 min read
Toyeeb Ibrahim is the CEO of Leatherback

In 2022, several Nigerian fintech startups temporarily paused their virtual card services due to problems at Union54, a YC-backed startup that provided card issuing services.

A few months later, Union54 Founder and CEO, Perseus Mlambo, confirmed that the startup had battled chargeback fraud since its inception.

While it prevented losses that could have exceeded $1 billion, it also incurred up to $500,000 in chargeback fees. It ultimately elected to shut down the product.

New fintechs are not the only victims of fraud. Interswitch reportedly lost ₦30 billion to chargeback fraud. Fortunately, it recovered part of that sum.

The past decade has seen Nigeria make huge strides in digital financial services. But that growth has presented a different challenge for industry practitioners with fraud perpetrated through digital channels on the rise.

Chart: In the past ten years, Nigerian bank clients have lost ₦45 billion due to fraud and forgery
Find more insights at Intelpoint.

Fintech fraud hurts everyone 

Although the effects of fintech fraud are often viewed from the lens of service providers, Leatherback CEO, Toyeeb Ibrahim argues that everyone ultimately loses. Where financial institutions lose money and customer trust, individuals are often locked out of the global financial system.

Ibrahim argues that despite the progress recorded by fintechs in Africa, the volumes out of Africa still represent a negligible portion of global fintech numbers.

Consequently, financial institutions in Europe and North America will not hesitate to stop providing services to Africans, hurting not just fintechs, but the businesses that depend on them for trade.

Cooperation among fintechs to create a fraud blacklist has been suggested as a means to mitigate fraud in the fintech space, but the few initiatives that have been started for this purpose have so far yielded no results.

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He acknowledges the need for African fintechs to collaborate in the fight against fraud and called for the creation of a fraud blacklist. Kenya took a similar approach for its lending industry when more than three million Kenyans were blacklisted, hurting their ability to access loans.

Ibirahim's recommendation isn't new as many industry experts have advocated for the creation of an independent body to tackle cases of fraud. However, most startups that have launched solutions for it have closed shop or pivoted to new solutions.

In a chat with Techpoint Africa, Babatunde Akin-Moses, Sycamore CEO, explained that such solutions fail to gain mainstream acceptance because fintechs view them with distrust while pointing out that an independent body backed by financial institutions in the country would have better luck, a sentiment that Ibrahim agrees with.

"Regulators are the ones that should lead this generally because, in the end, they're the ones regulating us. Whether we like it or not, there are limited ways to how a fintech can coordinate other fintechs."

Regulatory compliance needs to be reimagined

Successful fraud prevention strategies are built on strict compliance and identity verification measures.

Without the ability to verify the identities of businesses or individuals easily and quickly, financial institutions refuse to offer these services or make the process tedious.

African governments have increased investments into digital identity systems in the past five years but there remain significant challenges for anyone in need of this data. For example, verifying a company's ownership structure in Nigeria is still a wearying process and while the BVN and NIN have seen widespread adoption, there are hitches in accessing and using them.

Naturally, these challenges have inspired the launch of compliance and identity verification startups such as Youverify, Smile ID, and Dojah. However, Ibrahim argues that the sector still holds much potential in Africa and advocates for stricter compliance practices.

"Providing compliance services goes beyond identity verification or proof of address verification. We need to start moving a step further to even start whitelisting mobile devices. There are firms that do that for you in Europe."

With data sets like the BVN and NIN owned and controlled by the government, Ibrahim argues that making them hard to access limits the abilities of fintechs to effectively verify customer's identities.

"We need to rethink how we approach regulatory compliance from the point of the regulators and from the point of those who are trying to provide regulatory compliance solutions. I don't think we're scratching the surface there at all."

Balancing speed and regulatory compliance 

In startup circles, it is taken for granted that regulation catches up with innovation. Consequently, it is common to find startups offering services that they do not have regulatory clearance for, but Ibrahim explains that Leatherback operates within tight regulatory confines.

While competitors may opt to start providing services before obtaining regulatory approval, Leatherback insists on obtaining regulatory approval before it begins to offer any service.

This stance is equally influenced by regulatory structures in the countries where it operates and its ambitions. With operations spanning more than six countries, including the UK, Canada, India, Pakistan, and Nigeria, much of its success depends on a good relationship with regulators.

In the UK, for example, where it holds an electronic money institution (EMI) licence, its long-term plans include getting a banking licence, and regulatory compliance is crucial to that.

While rigorous adherence to regulatory structures can often mean it does not move as fast as competitors, Ibrahim believes it provides a significant advantage to the five-year-old startup.

"Sometimes, growth at firms like Leatherback might be slow but what it means is that we can weather any storm that comes."

Accidental writer, covering Africa's startup landscape and its heroes. Find me on Twitter @chigo_nwokoma.
Accidental writer, covering Africa's startup landscape and its heroes. Find me on Twitter @chigo_nwokoma.
Accidental writer, covering Africa's startup landscape and its heroes. Find me on Twitter @chigo_nwokoma.

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