Corporate Governance rules regarding Nigeria’s digital financial ecosystems are based on various guidelines and regulations provided by the CBN and other regulatory bodies. The CBN is the primary regulatory authority responsible for overseeing money transfer activities in Nigeria. It sets the regulatory framework, issues licenses, and enforces compliance with AML and KYC regulations. The digital financial ecosystem in Nigeria has witnessed significant growth over the past decade, driven by technological advancements and regulatory interventions. However, there are various challenges affecting the digital ecosystem and money transfer activities in Nigeria:
1. Cybersecurity Risks: The digital financial ecosystem in Nigeria faces ongoing cybersecurity threats, including fraud, data breaches, and identity theft. These risks can undermine trust in digital financial services.
2. Inadequate Infrastructure and capacity management: Many parts of Nigeria still lack reliable internet connectivity and electricity, hindering access to digital financial services for millions of potential users. Another major concern relates to the ability on the part of the financial services providers to meet the service demand occasioned by the use of the various platforms and service continuity challenges which may be linked to inadequate business continuity management.
3. Limited Financial Literacy: A significant portion of the population lacks the necessary financial literacy to effectively navigate digital financial platforms, potentially exposing them to financial risks.
4. Regulatory Compliance: There is a need to strike a balance between robust regulatory oversight and the ease of conducting financial transactions, especially for smaller players in the digital financial space.
5. Cumbersome Account Opening and Customer onboarding process:
- Documentation Requirements: The current Know Your Customer (KYC) requirements for account opening are often perceived as cumbersome, deterring potential users from accessing digital financial services including money transfers.
- Biometric Verification: The need for biometric verification, while essential for security, can be challenging for individuals without access to biometric registration centers. Infrastructure challenges also heighten this concern.
- Access Barriers: The geographical location of bank branches and agency banking services can pose significant access barriers for many Nigerians, particularly those in remote areas.
- Lengthy Verification Times: Delays in verifying customer information during onboarding can deter individuals from using digital financial services.
6. Challenges Posed by Tiered Accounts
In the CBN’s 3-tiered KYC framework, there is a provision to encourage financial inclusion through the use of minimal identification requirements for tier 1 accounts/ wallets. Albeit a good initiative, this has become an albatross in the digital financial environment as individuals with nefarious intents take advantage of such accounts to perpetrate fraud.
For most FinTechs and digital banks in Nigeria, the basic onboarding process relies on the provision of user information, Biometric Verification Number (BVN) and one-time-password (OTP) which is delivered to a phone number provided by the prospect in order to validate the user. As we have severally seen over the years, this method has become compromised due to the fact that the BVN is usually only validated and not verified while OTP is delivered to a phone number provided by the user and not a phone number tied to the user’s BVN. As such, an impostor with stolen BVN records can easily create fictitious wallets/ accounts and operate the same seamlessly.
7. Two-Factor Authentication Conundrum
- A financial organization should be able to exercise confidence in its system and processes such that transactions initiated through its accounts/wallets are done by the rightful owners. This is the role of transaction authentication. Although the Central Bank of Nigeria made it compulsory for entities utilizing the NIP instant transfer mechanism (or similar ones) to adopt the use of two-factor authentication (2-FA), implementation has been somehow selective. For the sake of customer convenience, 2-FA may not be utilized for all transactions or may even be totally waived based on unique business models adopted by most organizations. As a result of this, genuine users stand the risk of their accounts being compromised and funds transferred from accounts (or cards) to unknown beneficiaries.
Addressing Challenges Without Disrupting Financial Inclusion
We must first accept that these issues pose significant problems, should we not stem them quickly. If we are living in denial, the periodic NIBSS Fraud Report frequently show rising fraud volumes from Mobile Banking, Web and Agency Banking fraud is a clear indicator that we cannot play the ostrich for long.
1. Strengthen Cybersecurity: Collaborate with cybersecurity experts to develop and implement robust security measures while educating customers about online security best practices.
2. Infrastructure Investment: Work with telecommunications companies to expand network coverage and improve electricity supply, especially in underserved areas. Shared infrastructure can also help reduce excessive investment in infrastructure.
3. Financial Literacy Programs: Collaborate with educational institutions and non-governmental organizations to promote financial literacy and digital literacy among the population.
4. Regulatory Flexibility: The CBN should consider streamlining and modernizing the KYC process, by further improving the strategy of tiered KYC requirements based on transaction limits and risk profiles.
5. Digital ID Solutions: Invest in innovative digital identity solutions that reduce reliance on physical biometric verification and enable easier onboarding.
6. Agency Banking Expansion: Encourage the expansion of agency banking services, especially in underserved areas, to increase access to digital financial services.
7. Streamline Verification: Implement real-time verification processes to expedite account onboarding, minimizing delays and enhancing user experience.
8. We must harness the advantages of big data by leveraging machine learning and Artificial Intelligence (AI) and innovate our existing customer document verification services to help us profile our genuine customers accurately. This can also help in customer behavioural analyses for fraud prevention and credit/ loan reviews.
9. Blockchain technology has a role to play in the future of KYC, so much so that some International Banks have gone into partnership with IBM to develop services to share KYC information using blockchain.
10. Open Banking is another rough diamond that can be a game changer. By collaborating to share customer information across the industry, financial service providers would in the future be able to sift fraudsters who exploit the current silo of information to replicate their numerous suspicious wallets/accounts in various banks and FinTechs.
11. Biometrics and facial recognition technologies must become mainstream in transaction authentication.
Rethinking corporate governance rules on money transfers in Nigeria is vital to address the identified gaps in the digital financial ecosystem and the account opening onboarding process. It is essential to strike a balance between robust regulations and the need to foster financial inclusion. By strengthening cybersecurity, improving infrastructure, enhancing financial literacy, and streamlining onboarding processes, we can ensure that Nigeria’s digital financial ecosystem continues to thrive while serving all segments of the population, in alignment with the CBN’s financial inclusion strategy.