Nigeria’s financial industry is suffering from rising rates of fraud, with institutions, fintechs and businesses losing income and suffering reputational damage at the hands of fraudulent activity. In Q2 2022 alone, a 174 percent increase in fraud attempts was recorded in Nigeria, compelling banks and the wider financial industry to act.
This fundamental challenge is not just an opportunity but a necessity for Nigerian institutions and organisations—it compels them to adopt innovative solutions to stay relevant, safe and effective. Financial service providers are stepping up to the task, integrating with payment gateways to gain a holistic view of transaction flows and utilising abundant transaction data to bring rules-based fraud prevention measures, bolstering defences against bad actors and identifying suspicious activities that may be missed by traditional methods.
Finding the right partner is crucial, however, as a misalignment with a technology provider can cause more harm than good.
Nigeria’s adoption of digital payments
In 2007, the Central Bank of Nigeria launched Payments System Vision 2025 (PSV2025) to promote sustainable economic development by strengthening the nation’s domestic financial market. PSV2025 set out to increase the usage of electronic payment methods, adopting the latest advancements in payment technology to boost financial inclusion.
This strategy has been remarkably successful, with the value of card transactions in Nigeria increasing to $ 22 billion in 2022, with an annual growth rate of more than 25% expected until 2026. However, Nigeria’s rapid adoption of digital payments has not been matched by the implementation of advanced enterprise fraud management systems.
The root cause of Nigeria’s fraud problem is the low standards for identity verification and fraud monitoring enforced by local legislation and regulators. Industry standards, brought into force in 2014, require bank accounts to be linked to a customer’s Bank Verification Number (BVN) in order to access open banking features. This regulation, and the more recent introduction of the National Identification Number (NIN), provided a baseline for payment security, boosting digital verification of consumers’ identity and hampering fraudulent transactions. However, fraudsters are now taking advantage of the constant access to consumer funds provided by BVNs/NINs and other exploits. It’s now evident that there is room for improvement in Nigeria’s banking regulations, requiring further strengthening of fraud monitoring and regulation enforcement. A report from industry regulator FITC stated that fraud cases increased in Q4 2023 by 2.8 percent when compared to the previous quarter, demonstrating that fraud prevention is a key issue for Nigeria’s financial sector.
A handful of traditional financial institutions have taken steps to address this shortfall, implementing stronger transaction rules and verification procedures, and reducing the rate of fraudulent activity originating from their account holders. However, these institutions are now growing frustrated with the inaction of others in the industry, in some cases temporarily refusing to approve transactions to banks with low customer verification and transaction monitoring processes in an attempt to further limit fraudulent activity.
How banking industry can better combat fraud
Nigeria’s financial industry is beginning to acknowledge its shortcomings in limiting fraudulent activity and is turning to fintech providers to help plug the gaps. Enterprise fraud management platforms are particularly advanced technology, requiring large investments and multi-year development projects for banks to build the infrastructure in-house. Therefore, institutions are joining forces with third-party fraud management solution providers to integrate off-the-shelf platforms to comprehensively tackle fraudulent activity. Integrated via API interfaces or legacy methods, institutions are able to launch stronger processes within months at a significantly lower cost than in-house development.
In addition, fraudsters don’t sit still and are creative in devising new methods to disrupt financial institutions. It’s costly for each bank to routinely update its in-house fraud management platform to address new methods of deceit; fintechs keep on top of emerging threats, maintaining and updating enterprise fraud management systems to keep fraudulent activity at bay without additional costs. Collaborations with third-party technology partners, both regional players and global leaders, reduce the barriers for Nigerian banks to bolster their defences against fraudulent activity.
Selecting the right technology partner
Nigeria’s fintech market has boomed since the introduction of digital payments and card payment infrastructure and is expected to grow by 10percent per annum over the next decade. Institutions are now spoilt for choice when procuring enterprise fraud management technology, but must be selective when selecting their fintech partner; a misaligned collaboration can lead to months, if not years, wasted in development.
It’s also important to analyse the merits of global and local fintech providers. Home-grown fintechs in Nigeria have their finger on the pulse of local fraud patterns and offer market-specific education and an ecosystem of like-minded businesses. However, global fintechs providers are able to pre-empt new fraudulent activity by monitoring international trends and often provide a broader range of enterprise fraud management services in one package.
The adoption of advanced payment technology has spurred the development of an exciting revelation and a rich tapestry of financial service providers. Underinvestment in enterprise fraud management technology and outdated regulations have enabled a recent increase in fraudulent activity, but banks have the tools to solve the problem. Partnerships with the right fraud management solution providers offer a fast and cost-efficient route to comprehensive enterprise fraud management.
This latest comprehensive report by BPC, “The Anatomy of the New Fraudster” is the complete guide to understanding and combatting modern fraud threats by shedding light on the latest trends, emerging technologies, and real-world case studies to fortify defences and protect businesses.
https://www.bpcbt.com/en/guide/the-anatomy-of-the-new-fraudster-2024
Obinne is the head of growth and partnerships in West Africa at BPC.
