In the ever-evolving landscape of Africa’s digital economy, identity verification has emerged as a pivotal pillar in driving financial inclusion and secure digital transactions. However, the World Bank estimates that nearly 500 million Africans lack legal identity documentation as of 2020 highlighting the pressing need for robust identity verification solutions.
The African Development Bank on the other hand projects that Africa’s digital economy could be valued at $180 billion by 2025, with secure digital identities forming the bedrock of this growth. McKinsey’s forecast of unlocking 3-13% of GDP value for African economies by 2030 through digital identification further underscores the transformative power of KYC measures, especially in the finance, agriculture, and healthcare sectors.
Smile ID, Africa’s leading identity verification and digital Know Your Customer (KYC) provider, has recently unveiled its highly anticipated half-year 2023 KYC Report, offering invaluable insights drawn from over 75 million KYC checks across diverse industries.The report offers valuable insights and trends into the current state of identity verification practices in various African countries.
Insights from the report show the power of biometric verification in combating fraud, remarkably reducing fraudulent users by 50%. Of notable concern are face mismatches and selfie spoofs, which accounted for 43% and 41% of ID frauds in 2023, respectively. As textual verification alone proves insufficient to identify fraudsters, the report highlights the significance of biometric checks, with facial recognition being the most accessible and preferred method worldwide. Additionally, local ID databases serve as a robust source of truth for real-time verification, but their frequent downtime poses challenges.
Africa’s adoption of digital identity is gaining momentum, evident in the progressive efforts of countries like Ethiopia, Kenya, and Uganda in implementing foundational ID systems.
The report reveals a significant increase in gender inclusion, with female ID verification checks rising from 10% to 35% since Q3 2021, showcasing positive progress in addressing gender disparities. BNPL companies lead with an average of 30% of verified IDs belonging to female users, while banking and lending companies have improved gender inclusion, increasing onboarded female users from 9% to 36%.
Correlation Between Startup Funding and Fraud
The latest figures indicate a decline in fraudulent onboarding attempts across the continent in the first half of 2023, with the total number decreasing to 23% from 28% in the previous year. The drop corresponds with a decline in startup funding on the continent, leading to reduced marketing spend and incentive-based acquisition, which has a high correlation with increased fraud attempt rates. Businesses are advised to stay vigilant and adopt multi-factor authentication, including biometrics, to combat evolving fraudster tactics. National IDs have become the most prevalent form of identity document, but they are frequently targeted by scammers using forged or stolen IDs to gain fraudulent access to financial services.
The report also shows that the cryptocurrency sector continues to grapple with high fraud rates, while the payments and remittances industries observe a marked increase in fraud compared to last year.
Businesses must recognize that collecting documents alone is not enough; effective verification measures are critical in safeguarding against identity fraud.
Kenya, South Africa, Nigeria
In the first half of 2023, Kenya witnessed a concerning rise in fraud attempts, increasing from 10% in January to 17% in June. While this represents a significant increase, the numbers are still below those recorded in H1 2022. This recent surge makes Kenya the highest-risk country for ID fraud among the analyzed nations. Conversely, South Africa experienced a remarkable drop in ID fraud rates, plummeting from 17% in January to 8% in June, making it the lowest-ranking country for onboarding fraud and the only one with single-digit fraud attempt percentages.
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11 African Countries Now on FATF Grey List
In the first half of 2023, the Financial Action Task Force (FATF) added South Africa, Nigeria, and Cameroon to its Grey List, identifying them as countries with strategic deficiencies in their anti-money laundering (AML) and counter-terrorism financing (CTF) regimes. This brought the total number of African countries on the list to 11, including Burkina Faso, the Democratic Republic of Congo, Mali, Mozambique, Senegal, South Sudan, Tanzania, and Uganda. While on the greylist, these countries may face additional compliance requirements and international trade restrictions. The FATF’s assessment found that Nigeria had made progress in addressing some deficiencies but still had work to do in areas such as customer due diligence, suspicious activity reporting, and regulating non-profit organizations.
Several countries have taken significant strides to strengthen their Know Your Customer (KYC) compliance regulations and data protection frameworks. Countries like Nigeria and South Africa have foundational ID documents, such as the National Identification Number (NIN) and Smart ID card, respectively, that serve as the basis for identity verification. Both nations require businesses to collect and verify user identity information to comply with KYC regulations. Additionally, Egypt, Zambia, Senegal, Cameroon, and Côte d’Ivoire have their unique KYC compliance requirements and data processing rules in place.
Kenya, Ghana, Ethiopia, Tanzania, Rwanda, and Uganda have stringent KYC compliance requirements for businesses, necessitating the collection and verification of identity information, including names, addresses, and government-issued identity documents. Each country also has its data protection laws and regulatory bodies to oversee data processing activities.
Impact of AI
The rise of Artificial Intelligence (AI)presents exciting opportunities for increased efficiency and improved customer experiences in the regtech industry, but it also comes with growing concerns about its potential misuse for fraudulent activities.
The report notes that the surge in AI adoption has raised alarms within the KYC/AML and fraud-prevention communities, as it enables fraudsters to create highly realistic forged documents and make more sophisticated attempts at identity impersonation. Deepfakes, in particular, pose a significant challenge to the integrity of digital media, and text-to-image algorithms allow fraudsters to generate synthetic images of non-existent individuals.
Smile ID advises businesses operating in Africa to be diligent in implementing robust identity verification and fraud prevention solutions. Leveraging advanced technologies such as Biometric KYC, Liveness Checks, Face Deduplication, and AML Checks can help detect and deter fraudulent activities effectively. Additionally, incorporating document verification solutions that scrutinize the authenticity of government-issued documents, coupled with liveness checks to ensure a live interaction, can provide an extra layer of protection against synthetic fraud.
