The Central Bank of Nigeria (CBN), in collaboration with the Securities and Exchange Commission (SEC) and the Economic Financial Crimes Commission (EFCC), recently banned four fintech giants: Kuda, MoniePoint, Palmpay, and Opay—Africa’s newest unicorn, recently valuated at $3 billion.
The Full Picture
Understanding why requires seeing the full picture, and it starts with the Naira falling to new lows against the dollar since the start of the year. The market closed on Friday, January 26th, with the naira trading hands at N891.90/$ before hitting a record low of N1348.63/$ four days later on Tuesday, January 30th — a 52% bump. And like that, a trend was born as it continued to crash, N1574.62 in early February, N1712/$ in the middle of the month, and N1851 to the dollar much later. There was a gaping hole needing to be plugged, and the Nigerian government was hot on the hunt, having already invested $300 million in total interventions.
The SEC and the EFCC's investigations concluded that some individuals and commercial bodies were influencing and negatively disrupting the financial market for personal gain. Quick to action, 1,146 bank accounts believed to be culpable and involved in illegal foreign transactions were blocked, with the funds in the accounts suspended pending review. This far-reaching investigation also saw Binance executives Tigran Gambaryan and Nadeem Anjarwalla charged with laundering an excess of $35 million and carrying out financial activities detrimental to the naira without proper licensing.
So what does this have to do with Opay and friends?
The problem is that the investigating agencies need help to narrow down their search and catch these bad apples manipulating the FX market because of the reportedly inadequate KYC processes of these fintech companies.
KYC is short for Know Your Customer. If you have registered with any company in the banking sector, chances are that they asked for your name, email address, ID number (where applicable), and a snapshot of your ID (where applicable). This information is usually requested for regulatory compliance, risk assessments, customer identification, and automated verification, to name a few. While KYC has shown its use over the years, there is now an alternative in cryptography and blockchain technology, commonly used in the crypto casino industry. Together, they ensure user security, rendering the need for KYC somewhat unnecessary and improving user experience with a unique onboarding setup. Kane Pepi shares that no KYC sites typically accept a variety of coins, like Bitcoin, Ethereum, Litecoin, and Binance Coin (source: https://www.techopedia.com/cryptocurrency/no-kyc-casinos).
While some sites, like crypto casinos, are able to bypass KYC checks by registering in countries with lenient rules, companies within Nigeria must typically comply with KYC regulations in order to meet government requirements.
If you’re the Nigerian government wondering what’s causing your legal tender to plummet, you need all the information of the active players, and that’s precisely what you get with KYC and precisely what these investigative agencies are saying these fintech giants do not have or have not done correctly.
Backing the decision of the CBN, Uju Ogubunka, the President of the Bank Customers Association of Nigeria, had this to say:
“Anything that can disrupt the system should not be permitted. If the platforms are being used for things that are against the regulations, I think the CBN decision is OK. I don’t see anything wrong with that. It behooves on the companies now to get their KYC right.”
“Let them do what they are supposed to do. KYC applies to banks and other financial institutions that deposit money. It should also apply to them so that the regulators can understand what is going on and hold them accountable.”
This sentiment is shared by other Nigerians, with Emmanuel Odunsi voicing his solidarity with Uju and the CBN in a tweet that read:
“Good one.
Their KYC isn't that great.
Lots of scammers are using their apps to defraud people.”
What have the fintech giants had to say?
Firstly, and perhaps most important to them and their customers, is the reassurance that this is only a temporary situation, customer funds are safe, and that they are complying with the directives of the government. One of the firms announced this after the directive hit the airways:
“We’ve temporarily paused new signups on our platform. This means that you’ll be unable to open a new account at the moment. We apologize for any inconvenience this may cause.”
Regarding the KYC issue, although anonymous, sources close to these fintech companies believe that there’s more to the ban than “inadequate” KYC practices; they are convinced that it is a crypto witchhunt and that they are just being scapegoated. One such source had this to say:
“I can confirm that 90% of the (1,146 bank) accounts implicated in the illicit forex transactions are with commercial banks, and only 10% are with fintechs. Why then has the CBN not extended this directive to the commercial banks? We face a widespread issue here, and targeting fintechs seems like an unfair focus on the more vulnerable targets.”
The general sentiment among these fintech companies is that the government favors the traditional banking system. Nothing about the naira crashing, Binance’s alleged fraud, or anything else illegal directly ties these companies. They, being relatively new, are easy to throw under the bus, and that’s what’s been happening with unfavorable rulings even beyond their current inability to register new customers. Another source had this to say:
“In terms of KYC, the fintechs are doing better than the banks, but all eyes seem to be on the fintechs whenever the issue of KYC occurs.”
“On the issue of payment fraud, fintechs are also often seen as the platforms where frauds happen, but this is an industry-wide problem. In fact, if you see the amount of money the banks are losing to fraud, you will marvel. No fintech can lose that amount of money and remain in business.”
Conclusion
Clearly, there are mixed feelings about the directive to ban these companies from registering new accounts. Many Nigerians who use these services consider it an inconvenience, while some others consider it to be a necessary evil. The companies themselves believe the issue of financial fraud is well beyond the KYC concerns but have shown they are willing to comply and put this behind them as soon as possible.
It is important to note that people who already have accounts on these platforms have nothing to worry about and can proceed with their everyday banking activity.
