In a significant shift, Nigeria's fintech industry is undergoing a regulatory overhaul, with the central bank increasing its scrutiny of fintech startups amid concerns over fraud and money laundering. The move comes as the country strives to exit the Financial Action Task Force (FATF) greylist, a list of countries with weak anti-money laundering and counter-terrorism financing measures, by January 2025.

The heightened focus on fintechs is partly due to Nigeria's goal of getting delisted from the FATF greylist, which signals to global investors that a country's financial systems are vulnerable to money laundering and terrorist financing. Being on the greylist can impair a country's reputation, hinder access to international capital, and increase business costs.

In April 2024, the central bank banned fintech startups from onboarding new customers, citing concerns over weak Know Your Customer (KYC) processes and the risk of fraudulently obtained funds. The ban was lifted after fintechs fulfilled strict conditions, including restricting peer-to-peer crypto transactions and mandating ID verification and physical address verification for all account tiers.

The regulators' tightened grip on fintechs is also a response to the rise in fraud in the banking sector, with fraud via digital channels becoming a significant challenge. In the first half of 2024, 96% of bank fraud occurred through web, mobile, and POS systems. Fintechs, which operate mostly through digital channels, have found themselves in the thick of the fight against fraud, with banks often blaming them for these fraud attempts.

In 2013, Nigeria's central bank introduced a three-tiered KYC system, lowering the barriers to onboarding customers. However, as fintechs scaled rapidly, many prioritized growth over compliance, making trade-offs in areas like risk profiling, transaction monitoring, anti-money laundering, and KYC. This created loopholes that bad actors exploited, leading to significant fraud losses.

In response to the increased scrutiny, fintech companies have increased the hiring of compliance staff, conducted extensive KYC checks on customers, and blocked crypto transactions where possible. They have also created internal guardrails that flag and report large and suspicious transactions. However, the cost of compliance software, hiring experienced compliance staff, and conducting full KYC checks has increased operational costs for fintechs.

Despite the challenges, Nigerian startups have turned to startups like Regfyl, SmileID, Dojah, Youverify, and Seamfix for compliance and customer identity management solutions. These startups have raised over $8 million in the past year and onboarded over 100 million digital identities combined, creating a market for compliance solutions.

While Nigerian fintechs have improved their compliance processes, the measure of success is for regulators to ease their scrutiny, which has diverted resources and attention as the January 2025 deadline to exit the greylist approaches. The industry is holding its breath, hoping that the regulators will acknowledge the progress made and relax their grip, allowing fintechs to focus on growth and innovation once again.