Nigeria: Alarming growth in online fraud threatens digital banking success

Nigeria: Alarming growth in online fraud threatens digital banking success

  • Latest data show surge in online banking fraud in Nigeria
  • Amount lost to fraud is relatively small, but alarming growth poses cyber security risks for customers and businesses
  • Online fraud threatens the success of banks’ digital products enabled by the Covid-led shift to digital payments

A recent report from the Nigeria Inter-Bank Settlement System (NIBSS) show that the number of fraud attempts in digital banking in 9M 20 grew by 186% yoy, to 46,126 cases. This was driven mainly by increased attempts via mobile (330% yoy), online (173% yoy) and Point of Sale (POS) machines (215% yoy). The Central Bank of Nigeria (CBN) has been rolling out several directives since 2012 to promote the adoption of digital banking and improve financial inclusion — the latest fraud data highlights the risk associated with this move.

Digital banking fraud volumes per channel (%)

The total amount lost to online fraud during the period was NGN5.2bn, with a 93% success rate. The alarming rise in fraud attempts coincides with the Covid-induced shift to digital banking in Nigeria as lockdown measures disabled physical banking operations.

The report noted that 56% of all reported fraud attempts were carried out using "social engineering" techniques — the psychological manipulation of people to gain confidential information. A common example of this in Nigeria is receiving emails from fraudsters pretending to be banking personnel. Bank customers who did not have two-factor authentication systems set up were the next big target at 19%.

Classification of banking fraud techniques in Nigeria

Growing online fraud activities threaten success of banks’ digital products

While the total NGN5.2bn lost to fraud is relatively small, making up just 1% of total 9M 20 net profit for commercial banks and 0.03% of customer deposits, the worry lies in the cyber security risk it poses to banks as more customers adopt their digital banking platforms and the long-term consequences for earnings.

In terms of the growing adoption of e-payment channels, in 2020 the banking industry witnessed a 303% yoy expansion in the volume of transfers using mobile phones, a 50% yoy growth in POS transactions and 77% increase in the volume of online transactions done through the NIBSS instant payment platform. Excluding the impact of reduced e-banking charges by the CBN in 2020, these growing metrics have been positive for banks. Among those banks that provided disclosures on their e-banking operations in 9M 20, Access Bank recorded an average growth of 41% in transaction volumes from its e-banking channels (USSD, ATM, Mobile and Web), FBNH recorded a 29% yoy growth (Mobile and USSD), while transactions grew by 82% yoy (mobile, Web and USSD) for FCMB.

Growth in transaction volumes of select payment channels (yoy)

As Nigeria's rate of financial inclusion grows and more customers embrace digital payments, the growing incidence of fraud poses a great risk to the growth numbers our coverage banks are currently recording as well as customers faith in the integrity of their digital products. With scammers pretending to be bank officials the major means of carrying out fraud, banks will no doubt need to ramp up security to protect customer's confidence in their digital products as well as raise awareness.

In addition to the risk on volumes, revenues from digital channels for Nigeria banks are also at risk, if the rapid growth in fraud is not curtailed. This is particularly important for banks that are focused on boosting retail transactions and growing fee income to support earnings, as they navigate a lower yield environment that has pressured net interest margins.

E-banking income as a % of fee income for select Nigeria banks

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