Stricter compliance measures are needed to stem the rise of fintech fraud

In 2022, several Nigerian fintech startups temporarily suspended 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 been battling chargeback fraud since its inception.

While he avoided losses that could exceed $1 billion, he also incurred up to $500,000 in chargeback fees. In the end, she decided to close the product.

New fintechs are not the only victims of fraud. Interswitch reportedly lost €30 billion to chargeback fraud. Fortunately, she recovered part of this amount.

In the last decade, Nigeria has seen tremendous progress in digital financial services. However, this growth presents a different challenge to industry professionals as there is an increase in fraud committed through digital channels.

Fintech fraud hurts everyone

Although the impact of fintech fraud is often viewed from the perspective of service providers, Leatherback CEO Toyeeb Ibrahim says everyone loses in the end. When financial institutions lose the money and trust of their customers, individuals are often excluded from the global financial system.

Ibrahim says that despite the progress that fintechs have made in Africa, volumes originating in Africa still represent a negligible part of global fintech numbers.

As a result, financial institutions in Europe and North America will not hesitate to stop serving Africans, which will hurt not only fintechs but also the companies that trade with them.

Collaboration among fintechs to create a fraud blacklist has been proposed as a way to mitigate fintech fraud, but several initiatives launched to do so have so far yielded no results.

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It recognizes the need for African fintechs to work together to fight fraud and calls for a fraud blacklist. Kenya took a similar approach to its lending sector when more than three million Kenyans were blacklisted, damaging their ability to access loans.

Ibirahim’s recommendation is not new, as many industry experts have advocated the creation of an independent body to combat fraud cases. However, most of the startups that launched the solution have since closed shop or focused on new solutions.

In the chat with Techpoint AfricaBabatunde Akin-Moses, CEO of Sycamore, explained that such solutions fail to gain mainstream acceptance because they are viewed with suspicion by fintechs, while stressing that an independent body backed by the country’s financial institutions would have better luck, with which Ibrahim agrees.

“That should generally be led by regulators because they are the ones who regulate us. Like it or not, there are limits to the ways in which one fintech can coordinate with other fintechs.”

Compliance needs to be reassessed

Effective fraud prevention strategies rely on strong compliance and identity verification measures.

Without the ability to quickly and easily verify the identity of businesses or individuals, financial institutions refuse to offer these services or make the whole process more difficult.

African governments have increased their investment in digital identity systems over the past five years, but significant challenges remain for anyone who needs this data. For example, verifying the ownership structure of a company in Nigeria is still a lengthy process and although BVN and NIN have been widely adopted, there are challenges in accessing and using them.

Naturally, these challenges inspired the launch of compliance and identity verification startups such as Youverify, Smile ID and Dojah. However, Ibrahim says the industry still has great potential in Africa and calls for stricter compliance procedures.

“Providing compliance services goes beyond identity verification or proof of address verification. We need to go further and even start whitelisting mobile devices. Some companies do it for you in Europe.”

With data files such as BVNs and NINs owned and controlled by the government, Ibrahim says making them more difficult to access limits fintechs’ ability to effectively verify customer identities.

“We need to rethink how we approach compliance from the perspective of regulators and those trying to provide compliance solutions. I don’t think we’re scratching the surface.”

Balancing speed and compliance

In the startup world, it goes without saying that regulation catches up with innovation. That’s why it’s common to find startups offering services that don’t have regulatory clearance, but Ibrahim explains that Leatherback operates within strict regulatory boundaries.

While competitors may decide to begin providing services before obtaining regulatory approval, Leatherback insists on obtaining regulatory approval before offering the service.

This position is also influenced by the regulatory structures of the countries where it operates and its ambitions. With operations in more than six countries, including the UK, Canada, India, Pakistan and Nigeria, its success depends largely on good relationships with regulators.

For example, in the UK, where the company holds an Electronic Money Institution (EMI) license, its long-term plans include obtaining a banking license, with regulatory compliance being key.

While the strict adherence to regulatory structures can often mean it doesn’t scale as quickly as its competitors, Ibrahim believes this provides a significant advantage for the five-year-old startup.

“Sometimes growth can be slow for companies like Leatherback, but that means we can weather any storm that comes our way.”

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