Nigeria's financial services sector has a fraud problem. According to the Financial Institutions Training Centre (FITC), 11,532 fraud cases were reported in Q2 2024, up from 11,472 in Q1.
That negligible increase is, however, deceptive. Although the number of fraud cases only increased slightly, the amount involved in these cases increased astronomically; ₦2.9 billion was lost in the first quarter of the year, rising to ₦56.3 billion in the second quarter.
Meanwhile, the amount lost to fraud rose from ₦468.49 million in Q1 2024 to ₦42.6 billion in Q2 2024.
Nigeria's fintech sector has experienced rapid growth in recent years, driven by an increasing demand for digital financial services. However, this boom has also attracted the attention of fraudsters seeking to exploit vulnerabilities within the system.
The risk of fraud has become a significant concern, not just for fintech companies but for the entire financial services industry in the country.
Payments startup, Flutterwave lost ₦11 billion to a security breach earlier in 2024. Last year, the fintech lost $24 million to unauthorised PoS transactions. Similarly, Interswitch incurred losses of ₦30 billion after a glitch allowed merchants to file and receive chargebacks.
Beyond the financial losses suffered by fintechs and customers, the increase in fintech fraud has also affected business relationships.
Fidelity Bank once restricted transfers to neobanks such as Moniepoint, OPay, and PalmPay due to concerns about their KYC processes. Wema Bank also removed seven fintechs from its payment gateway because of fraudulent activity. It had earlier lost ₦685 million in 2023 to fraud and forgery.
The role of regulation
Regulation plays a crucial role in fraud prevention in Nigeria's fintech sector. If a permanent solution to Nigeria’s problem must be found, the government must get onboard.
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The Central Bank of Nigeria (CBN) has become increasingly committed to combating fraud. In December 2023, it released new Know Your Customer (KYC) regulations, mandating that Tier-1 accounts must have BVN and NIN attached to them. The CBN has also mandated the registration of PoS agents in a bid to plug one of the holes typically used by fraudsters.
While not a regulatory body, the Nigeria Inter-Bank Settlement System (NIBSS) plays a significant role in fraud detection.
It operates a central switch for financial institutions, allowing real-time monitoring of digital transactions. Additionally, it operates fraud monitoring systems that aid financial institutions in their fight against fraud.
Despite these regulations, enforcement remains a challenge, with loopholes being exploited due to inconsistent application of regulations across the industry.
Early warning signs of fraud
Detecting early warning signs of fintech fraud is essential for both companies and consumers to prevent losses and protect sensitive information.
Olwasegun Ojumola, Senior Fraud and Investigation Analyst at PiggyVest, identifies a few signs that fintechs can look out for to ensure they do not fall victim to fraudsters.
A sudden increase in the number or size of transactions conducted by a customer is often something to watch for. Similarly, transactions coming from fraud hotspots should also be checked without delay.
Frequent failed transactions, particularly due to reasons like exceeding PIN attempts or using incorrect PINs, can also indicate potential fraudulent activity. Meanwhile, an increase in the number of customer complaints about unauthorised transactions could signify an underlying fraud problem.
For individuals, he identifies three major things to watch out for. The first is suspicious communication. This could look like supposed staff of their financial institution requesting sensitive information such as passwords via email or social media. Financial institutions will typically not request sensitive information, and any such request should be a red flag.
Notifications of transactions that were not authorised by the user could also indicate that their account has been compromised. Consequently, it's important to monitor account activity regularly and report any suspicious transactions immediately. Unfamiliar login attempts could also be an indication that someone is attempting to gain access to a customer’s account.
Collaborations are crucial
As fraud continues to pose a significant challenge to Nigeria’s fintech sector, addressing it can no longer be left to individual companies.
“By collaborating, fintechs can pool data together and share insights about emerging fraud trends and new threats, and effectively put measures in place to mitigate the risk of fraud. This collective effort can help in identifying and addressing fraud more effectively than isolated efforts,” Ojumola argues.
Fraudsters are becoming increasingly sophisticated, exploiting gaps in security systems and taking advantage of the rapid adoption of digital financial services. In response, fintech companies are realising that a unified approach is the most effective way to combat this growing threat.
Flutterwave recently partnered with the Economic and Financial Crimes Commission (EFCC) to establish a cybercrime research centre. Both parties will work together to combat financial crimes through advanced fraud detection and protection, technological advancement and resource enablement, collaborative research and policy development, and youth empowerment and capacity building.
Discussions are underway about a fraud registry managed by leading fintechs in the country. Although progress has been slow, this suggests that a collaborative approach is essential for tackling fraud in Nigeria.
Consumer education is key to defeat fraud
Providing a seamless user experience and ensuring strong fraud prevention might seem like conflicting goals, but Ojumola emphasises that they can work together.
One way to achieve this balance is by implementing a risk management system that categorises and prioritises threats. This approach enables companies to concentrate on high-risk transactions while avoiding unnecessary obstacles for regular users.
Regularly updating and evaluating these rules can help reduce false positives, which can otherwise lead to genuine transactions being flagged and interrupting the user experience.
Consumer education is also key in the fight against fraud as educated users are less likely to be victims of scams. This education can be done through social media content, newsletters, webinars, and in-app resources.
By combining strong fraud prevention practices and consumer education, fintechs not only mitigate the risk of fraud but also build trust and loyalty among their users. As fintechs evolve their services and technology gets more sophisticated, Ojumola predicts that fraudsters will leverage technologies such as artificial intelligence to mimic legitimate user behaviour. But fintechs can stay ahead by investing in advanced fraud detection techniques and keeping them updated.
