Banks, fintech join forces to tackle soaring fraud, seek CBN approval

In response to growing fraud incidents that have caused billions in losses, Nigerian banks and fintech companies are in talks for an industry collaboration to fight fraud, one high-ranking executive at a Nigerian bank told TechCabal. The proposed solution from those talks is expected to be presented to the Central Bank of Nigeria for approval by the end of Q1 2024, the same person said.

Two fintech founders said they were aware of the conversations but said there’s still some way to go in finding common ground for the banks and fintechs.

The industry-wide collaboration will create a solution that holds all financial institutions accountable for fraud, TechCabal learned. Two areas that may receive special focus include Bureau de Change operators and banking agents whom fraudsters usually turn to after successfully withdrawing the stolen funds, said one person close to those discussions. 

Deposit banks lost ₦9.75 billion to fraud in Q2 2023, a staggering 276% increase compared to the same period in 2022, according to data from the Financial Institutions Training Centre (FITC). The total losses from incidents of fraud amounted to ₦5.79 billion in Q2 2023. 

The CBN goes hard on fraud

As fraud rises, the Central Bank of Nigeria is scrambling for solutions. In 2015, the regulator mandated all deposit money banks, mobile money operators, switches and all payment service providers to establish a fraud desk. The CBN argued that the fraud desk was an effective mechanism for receiving and responding promptly to fraud alerts. The apex bank has also slammed fines on banks and fintech companies found to have relaxed KYC rules. 

Since October 2023, licenced entities have paid hundreds of millions in fines,” said a fintech founder with first-hand knowledge of the companies which were fined. 

Some financial industry stakeholders have commended the apex bank for mandating that all Tier-1 bank accounts and wallets for individuals be linked to either the Bank Verification Number (BVN) or National Identity Number (NIN) or both by 1 March 2024. Others have argued that these measures are not enough.

Collaboration hasn’t always worked

Two banking executives said the CBN’s efforts have not translated into policies that bring circuit breakers into the system and lead to shared responsibility.

They also pointed out that banks and fintech companies have attempted to solve the problem collaboratively in the past. A low-trust environment and a preference for building in silos have led to little or no results. There have also been efforts made by CBN, CeBIH, NFIU, and NSA to unite the operators, but the solutions have not been implemented.

Financial institutions may continue to solve the problem individually

Last year, Fidelity blocked Opay and other neobanks to mitigate exposure from fraud. Complaints from customers over the opening of accounts in their names without their consent also caused a stir.

For the banks, one of the concerns is that when fraud is committed and it involves a fintech, it is impossible to get a refund. On the other hand, banks tend to make refunds to avoid public embarrassment and a loss of reputation.

Ironically, even Nigeria’s big banks have also been accused of lax KYC and compliance measures. Last year, MTN Nigeria sued 18 banks after their customers received money from a breach of MoMo, the telco’s mobile money service.

“Whenever fraudulent money enters your bank, money that is not consistent with a particular customer’s behaviour, the receiving bank will be the one to pause the check and not allow them to withdraw the money,” said one banking industry leader.

A solution stakeholders recommend is to have a layered system where older customers with proven identities and a history of transactions get instant value while customers who have just opened their accounts or been around for less than a year get delayed value.

The new customers would be allowed to see their money but cannot withdraw it until after a couple of hours or even a day. The delay gives the customer who has been defrauded enough time to make a complaint and for action to be taken by the third party or recipient bank. 

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