Entrepreneurship Zone: 28 June 2023 :: Nigeria: Profiting from cashless bus rides in Lagos

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Entrepreneurship Zone: 28 June 2023 ::  Nigeria: Profiting from cashless
bus rides in Lagos

 

	
 


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 <https://www.hyundai.co.zw/> 


During the annual conference of the African Private Capital Association in
Cairo this past May, venture capital investor Idris Ayodeji Bello was asked
in a panel discussion to single out a startup from his portfolio that
excites him the most. Bello highlighted a Nigerian company named Touch and
Pay (TAP).

As the managing partner of LoftyInc Capital Management, Bello has made some
shrewd bets in the past, including stakes in Andela, a job placement network
for software developers, and payments company Flutterwave, both now valued
at over a billion dollars. Bello’s nod to TAP sparked my curiosity to learn
more about this company.

To get an inside view, I arranged an interview with the co-founder and CEO
of TAP, Olamide Afolabi. I connected with Afolabi over the phone while he
was in the US meeting investors to raise $10 million for his company. Here
are the key takeaways from our conversation.

The business model in brief: TAP has developed a product called the Cowry
card. This contactless solution simplifies commuting in Lagos and several
other Nigerian states by enabling seamless payment for bus fares. Commuters
merely tap the card on entering the bus, and the fare is automatically
deducted, no internet connection needed. Top-up points for the card are
placed at bus stations. Additionally, those with stable internet access can
opt to use the company’s app for their payments. TAP takes a 3% commission
on each processed transaction.

Early days: During their university years, Afolabi and his techie friends
have been “obsessed with solving problems”. They took a stab at various
startups, from enhancing life for those with cardiovascular disease to
developing a system to manage hospital appointments. However, these ventures
eventually ran out of money.

In 2013, during their final year at university, Afolabi, alongside future
co-founders Michael Oluwole (now chief growth officer), and Kabiru Yabo
(chief operations officer), stumbled upon an idea. They spotted an
opportunity in the cash-only bus fare system of Lagos, where fights over
change were a daily drama. With bus fares usually at 50 or 100 naira, and
cash machines only dispensing larger denominations like 500 or 1,000, the
problem was clear. The young entrepreneurs believed that a contactless card,
similar to those used for hotel doors, could do the trick. “This technology
must work offline,” Afolabi insisted. “It mustn’t require the internet.”

But even after their light bulb moment, they discovered the bus industry
wasn’t quite ready to hop on board. “Sometimes the technology is ready but
the market is not ready,” Afolabi muses. So, they decided to field test
their tech on their own turf – in shops catering to students on the campus
of Obafemi Awolowo University (OAU), located in Osun State. This closed-loop
environment gave the team a chance to fine-tune their technology. From
there, they branched out to other areas like providing payment solutions for
hospitals and helping several state governments with cash-based tax
collection, which was often a target for theft.

However, juggling all these standalone projects with a team of just eight
started to overwhelm the founders. Thus, in 2019, they decided to hone in on
a sector they had identified years before: transportation, with its market
potential in the millions. Consequently, all other uses of their tech took a
backseat as they steered towards a new, singular focus.



Afolabi eyes Lagos’ numerous informal buses as a potential growth avenue.

 

Big break: The turning point for the business came in 2020 with the
outbreak of the Covid-19 pandemic. The Lagos State Government, aiming to
combat the virus, sought a contactless payment method for its bus rapid
transit (BRT) system to reduce contagion risks linked to cash and ticket
exchanges. A selection of European firms threw their hats in the ring, but
it was TAP’s Cowry card system that secured the deal. Afolabi credits their
win to an understanding of local market nuances, such as inconsistent
internet access.

Since then, TAP has extended its bus transport solutions beyond Lagos,
branching out into Kano, Ogun, and Oyo states. Afolabi suggests a key to the
company’s growth has been the absence of upfront costs for stakeholders. TAP
takes care of the top-up points and card readers at terminals and on buses,
eliminating most financial risk for potential partners. “If it doesn’t work,
they don’t lose anything,” he explains.

Informal buses – a seven million opportunity: Afolabi sees a significant
growth opportunity in signing up the multitude of informal buses in Lagos,
known as danfos. While government buses serve around 300,000 daily riders,
danfos dwarf this number, catering to an estimated seven million passengers
each day. These yellow buses are typically owned by individuals with small
fleets of five to 10. Owners usually rely on bank loans to buy these
vehicles, and the Cowry card system could give banks reassurance about loan
repayments. The system allows for an automatic repayment process: part of
the fare from each trip goes straight to the banks. For example, out of a
100 naira fare, 20 naira might be directly transferred to the bank.

These informal buses, however, can’t use the same fixed card scanning
device installed on the BRT buses. Afolabi says the company is currently
busy developing a cheap handheld device that could be used to collect fares
on danfos.

Money matters: TAP’s initial funding came from the founders’ wallets, and a
network of family and friends. However, when the user count hit the one
million mark, they sought to raise money from outside investors.

When the founders initially reached out for funding, they met reluctance
from several venture capitalists, primarily due to TAP’s dependence on the
state government. “Oh, this is government business. We don’t want to touch
it,” Afolabi mimics initial investor concern.

But as the user base catapulted to three million, the sceptics started to
rethink their position. In 2022, TAP’s fortunes turned further when it was
accepted into Y Combinator, the US-based entrepreneurship bootcamp famed for
moulding companies such as Dropbox, Airbnb, Stripe, and Reddit. According to
Afolabi, this eased the fundraising process significantly.

Despite the recent global downturn in VC funding, primarily attributed to a
surge in interest rates, Afolabi claims TAP remains largely unaffected: “VCs
are still very open to profitable businesses. And luckily for us we are one
of those profitable businesses.”

The micropayments frontier: Afolabi identifies a host of sectors where
TAP’s micropayments could be utilised. The initial plan? Zeroing in on
stores adjacent to bus terminals. “While people are waiting for the bus to
come, they can use the card to buy a cup of coffee,” he explains. The CEO
underscores the limitations of conventional payment systems in handling
microtransactions due to steep fixed fees. Using a regular bank card for a
purchase as low as 100 naira simply doesn’t make sense, he argues, when the
transaction fee accounts for 20% of the entire cost.



A commuter using Touch and Pay’s Cowry card to pay for her bus fare

 

 


 


 


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