Financial Security (FinSec) Series with Dr Philip Takyi: Embedded Finance and the New Age of Cybercrime in Africa: Navigating third-party risks in a glocal ecosystem

The rapid proliferation of mobile technology and the ingenuity of African fintech startups have catalyzed a transformative wave of financial inclusion across the continent.

One of the most significant developments in this landscape is the rise of embedded finance, where financial services are seamlessly integrated into non-financial platforms, creating convenient and accessible solutions for a wider population (Manyika et al., 2016).

From e-commerce platforms offering instant credit at checkout to agricultural apps providing embedded insurance, and ride-hailing services facilitating in-app payments, embedded finance is reshaping how Africans interact with financial services.

However, this interconnected ecosystem, while offering unprecedented convenience, introduces a new and complex frontier for cybercrime in Africa. The very nature of embedded finance, relying heavily on partnerships between fintechs and a diverse array of third-party platforms, creates novel security vulnerabilities.

This article delves into the specific cybersecurity challenges arising from the rapid adoption of embedded finance in Africa, focusing on the escalating risks associated with third-party integrations, the tactics employed by cybercriminals to exploit these interconnected systems, and the unique hurdles of securing a “glocal” payment ecosystem operating across varied regulatory landscapes and digital literacy levels.

The Expanding Attack Surface: The Rise of Third-Party Risks

The beauty of embedded finance lies in its seamless integration. Yet, this integration inherently expands the attack surface for cybercriminals. Each third-party platform involved in delivering an embedded financial service becomes a potential entry point for malicious actors. Unlike traditional financial institutions that maintain tighter control over their infrastructure, embedded finance models distribute risk and responsibility across multiple entities (Accenture, 2020).

Consider a scenario where a small agricultural technology (agritech) startup integrates mobile payment capabilities into its platform through a partnership with a fintech. While the fintech may have robust security measures in place, the agritech platform might possess weaker cybersecurity protocols due to limited resources or expertise.

This disparity creates a vulnerability that cybercriminals can exploit to gain access to sensitive financial data or payment systems. A breach in the agritech platform could potentially compromise the payment credentials of numerous users or even provide a backdoor into the fintech’s infrastructure.

This third-party risk is amplified by the sheer diversity of partners involved in the embedded finance ecosystem in Africa. These partners range from large e-commerce giants to small-scale startups with varying levels of cybersecurity maturity. The lack of standardized security protocols and audit frameworks across these diverse entities makes it challenging to ensure a consistent level of protection throughout the embedded finance value chain (Financial Stability Board, 2019).

Cybercriminal Tactics in the Age of Embedded Finance

Cybercriminals are rapidly adapting their tactics to exploit the vulnerabilities inherent in embedded finance ecosystems in Africa. Several key attack vectors are emerging as significant threats:

• Phishing and Social Engineering Attacks: These remain potent weapons in the cybercriminal’s arsenal. In the context of embedded finance, phishing attacks can become more sophisticated, mimicking the interfaces and communication styles of the integrated platforms. For instance, a user might receive a seemingly legitimate SMS message purporting to be from their ride-hailing app, requesting payment details for a “failed transaction.” Clicking on a malicious link could lead to the theft of their payment credentials, which are then used within the embedded finance environment. The relatively lower levels of digital literacy in some parts of Africa make users more susceptible to these social engineering tactics (GSMA, 2019).
• Ransomware Attacks on Third-Party Providers: Ransomware, where malicious software encrypts data and demands a ransom for its release, poses a significant threat to third-party providers in the embedded finance chain. An attack on an agritech platform or a logistics company that processes payments could disrupt the entire embedded financial service, causing significant financial losses and reputational damage. The interconnected nature of these systems means that an attack on one less-secured partner can have cascading effects across the entire ecosystem.
• API Vulnerabilities and Data Breaches: Application Programming Interfaces (APIs) are the technological glue that binds different platforms together in embedded finance. Vulnerabilities in these APIs can be exploited by cybercriminals to gain unauthorized access to sensitive data, including financial transactions and personal information. A poorly secured API in a partner platform could provide a direct pathway for attackers to siphon off user data or manipulate financial flows. The increasing reliance on APIs necessitates robust API security measures, including secure authentication, authorization, and encryption protocols, which may not be consistently implemented across all partners.
• Supply Chain Attacks: These attacks target the software, hardware, or services used by organizations within the embedded finance ecosystem. By compromising a common vendor or service provider used by multiple fintechs and their partners, cybercriminals can gain widespread access to numerous systems simultaneously. This type of attack can be particularly devastating as it exploits trust relationships within the supply chain and can be difficult to detect.

The “Glocal” Challenge: Security in Diverse Ecosystems

Securing embedded finance in Africa presents unique challenges stemming from the “glocal” nature of the ecosystem. This refers to the intricate interplay of global technological trends with local contexts, including:

• Varying Regulatory Landscapes: Each African nation possesses its own set of financial regulations, data privacy laws, and cybersecurity frameworks. Fintechs operating across multiple countries must navigate a complex web of compliance requirements. This fragmentation can make it challenging to implement consistent security standards and practices across all their operations and partnerships. Furthermore, the level of enforcement and regulatory oversight can vary significantly, creating loopholes that cybercriminals can exploit.
• Diverse Levels of Digital Literacy: Digital literacy rates vary considerably across different regions and demographics in Africa. While mobile penetration is high, the understanding of online security risks and best practices may be limited among a significant portion of the population. This disparity makes users more vulnerable to social engineering attacks and less likely to recognize and report suspicious activity. Cybersecurity awareness training and education tailored to local contexts are crucial but often lag behind the rapid adoption of digital financial services.
• Infrastructure Limitations: In some parts of Africa, infrastructure limitations such as unreliable internet connectivity and limited access to secure computing devices can pose security challenges. Users with intermittent internet access might be more likely to conduct transactions on public Wi-Fi networks, increasing their vulnerability to eavesdropping and data theft. Similarly, using older or unpatched devices can expose users to known security vulnerabilities.

Strengthening the Defenses: A Multi-Layered Approach

Addressing the cybersecurity challenges posed by embedded finance in Africa requires a comprehensive and multi-layered approach involving fintechs, their partners, regulatory bodies, and consumers:

• Enhanced Due Diligence and Risk Assessment: Fintechs must implement rigorous due diligence processes when onboarding third-party partners. This should include thorough assessments of their cybersecurity posture, data protection practices, and compliance with relevant regulations. Ongoing monitoring and risk assessments of partner security are also crucial to identify and mitigate emerging threats.
• Standardized Security Frameworks and Protocols: The development and adoption of industry-wide security standards and protocols for embedded finance partnerships in Africa are essential. These frameworks should address areas such as API security, data encryption, access controls, and incident response. Collaboration among fintech associations, regulatory bodies, and cybersecurity experts is needed to establish these standards.
• Robust API Security Measures: Given the critical role of APIs in embedded finance, implementing robust API security measures is paramount. This includes secure authentication and authorization mechanisms, rate limiting to prevent abuse, input validation to prevent injection attacks, and regular security audits of API endpoints.
• Proactive Threat Detection and Intelligence Sharing: Fintechs and their partners should invest in proactive threat detection capabilities, including intrusion detection systems and security information and event management (SIEM) platforms. Sharing threat intelligence within the embedded finance ecosystem can help organizations stay ahead of emerging attack trends and proactively defend against them.
• Strengthened Data Governance and Privacy Measures: Clear data governance policies and robust data privacy measures are crucial in the interconnected world of embedded finance. Organizations must ensure compliance with applicable data protection regulations and implement appropriate safeguards to protect sensitive user data throughout its lifecycle, including during transmission and storage across different partner platforms.
• Comprehensive Cybersecurity Awareness and Education: Investing in cybersecurity awareness and education programs for both users and employees of partner organizations is vital. These programs should be tailored to the local context and address common threats such as phishing, social engineering, and the importance of strong passwords and secure online behavior. Leveraging mobile channels and local languages can enhance the reach and effectiveness of these initiatives.
• Regulatory Harmonization and Collaboration: Governments and regulatory bodies across Africa need to work towards greater harmonization of financial regulations, data privacy laws, and cybersecurity frameworks. Enhanced cross-border collaboration and information sharing among regulatory authorities are also crucial for effectively addressing transnational cybercrime in the embedded finance space.
• Promoting Cyber Resilience: Beyond prevention, organizations need to build cyber resilience – the ability to withstand and recover from cyberattacks. This includes developing comprehensive incident response plans, conducting regular disaster recovery drills, and ensuring business continuity in the event of a security breach.

Conclusion

Embedded finance holds immense potential to drive financial inclusion and economic growth across Africa. However, realizing this potential safely and securely requires a concerted effort to address the emerging cybersecurity challenges, particularly those related to third-party risks.

By adopting a multi-layered approach that encompasses enhanced due diligence, standardized security frameworks, robust technological safeguards, comprehensive awareness programs, and greater regulatory collaboration, stakeholders can build a more secure and resilient embedded finance ecosystem in Africa.

Failing to proactively address these cybersecurity vulnerabilities could undermine the progress made in financial inclusion and erode the trust of users in these innovative digital financial services. As embedded finance continues to evolve and integrate deeper into the fabric of African economies, prioritizing cybersecurity will be paramount to ensuring its sustainable and equitable growth.

References

Accenture. (2020). Securing the future of embedded finance. Accenture.

Financial Stability Board. (2019). Third-party risk management in the financial sector. FSB.

GSMA. (2019). Mobile money: Driving financial inclusion? GSMA.

Manyika, J., Lund, S., Singer, M., White, O., & Zemmel, R. (2016). Digital finance for all: Powering inclusive growth in emerging economies. McKinsey Global Institute.

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