In the fast growing landscape of Nigerian fintech, a troubling narrative is emerging – one characterized by a surge in fraudulent activities that pose a serious threat to companies and consumers alike. Over the past year, an unsettling number of reports have surfaced, revealing that even industry giants are not immune to the perils of cybercrime.

The Financial Institutions Training Centre (FITC), a financial research and advocacy organization operated by the Central Bank of Nigeria, has disclosed that Nigerian financial institutions collectively lost a staggering N159 billion ($201.5 million) to fraud incidents since 2020.

In 2022, Nigeria’s telecoms giant MTN faced a daunting challenge as unauthorized transfers totaling over N10.5 billion ($13.3 million) occurred due to a glitch in its mobile money service. This incident raised eyebrows, shedding light on the vulnerabilities that can plague even well-established players in the financial technology sector.

 Shortly thereafter, Africa’s largest unicorn, Flutterwave, found itself embroiled in controversy. In March 2023, reports surfaced that the fintech giant had allegedly lost N2.9 billion to hackers in over 60 transactions. Flutterwave swiftly denied the hack, attributing the situation to an “unusual trend of transactions on some users’ profiles” that triggered a system review. However, court documents unveiled a different story – Flutterwave filed a lawsuit in Lagos against 27 commercial banks to freeze over 100 accounts suspected of receiving proceeds from the reported hack.

The stage then shifted to Patricia, a renowned crypto trading platform, which grappled with a more concerning controversy. The company reportedly fell victim to fraud involving both hackers and insiders, resulting in the loss of around $2 million belonging to customers. As customers anxiously await restitution, Patricia faces the daunting task of navigating through a crisis that threatens not only its financial standing but also its reputation.

Adding to the litany of woes, Interswitch, a household name in African payments and fintech infrastructure, experienced a seismic event. Fraud-related losses, accumulating to a staggering N30 billion (~$40 million), shook the company to its core. The losses were attributed to a system glitch that allowed merchants to exploit loopholes and illicitly file and receive chargebacks. A report by TechCabal further implicated some of Interswitch’s former and current employees in these fraudulent activities, underscoring a troubling trend where insiders collude with external actors to compromise the financial integrity of fintech companies.

Beyond the immediate financial losses and operational disruptions, the growing fraud problem is casting a long shadow over the trust ecosystem within the fintech sector. Fidelity Bank, a leading Tier-2 bank, took a preemptive step to temporarily restrict fund transfers to neobanks like PalmPay, OPay, and Moniepoint. The bank’s decision was rooted in its own losses of about N2 billion in three separate attacks. The move, while sparking controversy, highlights the palpable fear among traditional financial institutions regarding the potential exploitation of neobanks with relatively laid-back Know Your Customer (KYC) methods.

According to the FITC, fraud-related losses in the fintech sector are not solely a result of external threats. A concerning revelation emerges as insiders within companies are alleged to collude with hackers, creating a formidable challenge for fintech entities striving to protect their financial assets. Commercial banks, too, have found themselves ensnared in the web of fraudulent activities. Court documents reveal that Access Bank, the largest bank in Nigeria by customer deposits, took legal action in June to retrieve N30 billion ($3.8 million) fraudulently withdrawn. Subsequently, in July, another lawsuit was filed to recover N5 billion ($6.3 million) allegedly transferred from its accounts by fraudsters.

Data from the Nigeria Inter-Bank Settlement System (NIBSS), the payments switch, paints a bleak picture of the escalating fraud attempts in Nigeria. Between the first three quarters of 2019 and the same period in 2020, fraud attempts increased by a staggering 186% across mobile and web channels. Disturbingly, fraudsters achieved success in 91% of over 46,000 attempts, resulting in the pilfering of 5 billion naira ($10.9 million). Most of these attempts involved manipulating victims to divulge sensitive personal information.

Recognizing the urgent need to address the rampant fraud, several major fintech startups have embarked on a collaborative initiative called Project Radar. This ambitious project aims to create a shared registry where companies can pool details, including banking and government identity data, of individuals and groups involved in fraudulent transactions. Representatives from more than a dozen companies, including Flutterwave, Kuda, Branch, and Cowrywise, are actively engaged in shaping this initiative. Flutterwave’s CEO, Olugbenga Agboola, reportedly played a leading role in orchestrating these efforts.

Executives from fintech companies participating in Project Radar voiced their concerns about the increasing success of fraudsters exploiting weaknesses in the financial system. The absence of data sharing among companies has been identified as a major impediment in identifying and mitigating fraudulent actors. As a response, a demo of a blacklist registry is currently in development, aiming to provide a practical tool for the industry to combat fraud effectively.

Despite the urgency to fortify the sector against fraudulent activities, the regulatory framework in Nigeria faces challenges in keeping pace with the rapid evolution of the fintech landscape. Nigeria, as Africa’s largest fintech market, grapples with the need for regulatory catch-up.

Amidst this turmoil, investor concerns come to the forefront. Venture capitalists have poured a substantial $2.5 billion into Nigerian fintech startups between January 2019 and February 2023, according to data from The Big Deal. The surge in digital payments, triggered by a cash scarcity resulting from a fumbled banknote redesign by Nigeria’s central bank, underscores the critical need for robust measures against fraud.

As the specter of fraud continues to loom over the Nigerian fintech landscape, the industry faces a pivotal moment. The collaborative efforts of major fintech startups through initiatives like Project Radar offer a glimmer of hope in the battle against fraudulent activities. The success of these endeavors will not only determine the financial resilience of individual companies but will also shape the broader narrative of trust and integrity within the fintech ecosystem.

The stakes are undeniably high – a failure to address the growing instances of fraud may erode the hard-earned trust of customers and undermine the prospects of future growth for the industry.