The need for new financial technology startups to invest in compliance cannot be overemphasized. This is the position of a Nigerian fintech leader, Ajetomobi Oluwaferanmi who broke it down in a post on X (formerly Twitter).
According to Feranmi who is the Country Lead at Cenoa, compliance is ever more important for these new fintech platforms because their first adopters and users will be made up of fraudsters looking to manipulate the young technology for their criminal gains.
“The early adopters (of new fintech companies) are usually made up of fraudsters looking for loopholes probably blocked by the alternatives. Hence, benchmarking is great but can be misleading in this scenario,” Oluwaferanmi said.
While the rush from the early adoption by fraudsters might appear like rapid growth, especially in a competitive market, he warned that new startups would do well to expunge them from their platforms through strong and robust compliance checks. This is especially so as they are trying to convince customers who have an existing alternative most time.
As such, these startups can expect to witness slow early-stage growth for three to six months as a result. While growth might be slow at the beginning, keeping the platform clean would prove beneficial in the long race.
The former Lead for Organic Growth at Flutterwave went on to advise new fintech startups to benchmark to guide themselves on what is possible and what they seek to surpass. He also advised them to identify what their strengths are earlier on and remain true to them.
“Unless you want a floodgate of fraud money in your early stages, I suggest you do the following. Accept that early-stage growth will be slow but set a timeline to clearly define your early-stage. Identify your advantage and stay persistent. Finally, although this doesn’t strictly apply to a market where you are like the first mover, fraud cells will always try to take advantage of a new solution,” he said.
Fintechs are constant targets of fraudsters
African fintechs have constantly been a target for fraudsters looking to manipulate their technology for personal gains. New African fintechs are even more in peril because their inexperience is also manipulated by these fraudsters. One startup which suffered an onslaught by fraudsters was Risevest, an investment technology platform.
In 2023, a number of its customers thronged to social media to accuse the fintech company of seizing their funds and restricting their accounts on a whim. This came in the wake of what Risevest Co-Founder and Head of Operations and Data Analytics, Anthony Odiba described to Technext as an “increase in unusual funding and withdrawal patterns among some accounts.”
A user who spoke to Technext about his situation said his Kenya-based brother sent him 1,000 dollars through the platform for his school clearance which would in turn enable him to go for National Youth Service. However, the money never entered his account. Risevest was, as of then, an investment platform, not a money transfer platform.
Speaking with Technext, Rise Co-Founder/ Head of Operations and Data Analytics, Anthony Odiba provided some clarifications. According to him, there were a lot of account restrictions because many users were attempting to cheat the system using the card funding and withdrawal options. While noting that users can either use the Naira or USD card funding options, he said:
“Some users noticed that they could use their Naira card on the USD card funding option, get their wallets funded at a lower rate, and then request for a withdrawal at Rise’s sell rate, which was higher than their funding rate at the time. I guess those users told their friends, who told their friends and in a short while we had a couple of users attempting to take advantage of this roundtripping avenue. We do not encourage roundtripping and we wouldn’t otherwise flag or restrict users’ accounts for normal behaviour,” Anthony said.
He explained that the platform’s Terms of Use clearly state that Rise should be used strictly for the purpose of investing in options available on the platform and not as a means to roundtrip FX rates. Rise would go on to disable a handful of accounts in the wake of the issue.
The trend of fraudsters operating in financial technology companies has led to distrust from traditional banks. In 2023, a leading Nigerian business platform reported an exclusive story of a N72 billion fraud that is currently impacting the Nigerian payment space. According to the report, fintech companies were allegedly at the heart of the fraud epidemic due to poor user verification and the lack of a rigorous internal control operation process.
The call by Ajetomobi Oluwaferanmi for young fintech startups to learn from Risevest and not wait until the onslaught by fraudsters constitutes a significant problem before acting is apt.
