The bank of tomorrow is being invented… in Africa
It is rumored that Amazon and Alibaba wish to develop a payment technology that uses facial recognition. Mastercard and La Banque Postale are reported to be working, respectively, on heart rate authentication and on a solution leveraging voice recognition. Which one of these competing technologies will prevail? It is hard to predict, but one thing is for sure—the chip card, which was invented in 1974 by Roland Moreno, is in serious jeopardy. Starting in 2005, Yves Eonnet began to foresee the decline of this invention. He was convinced that the future would lie in the mobile phone, which could represent a powerful tool for financial inclusion in developing countries. TagPay, the mobile-centric digital banking platform he co-developed in France with his partner Hervé Manceron, builds on the recognition of a sound signature to authenticate transactions. This system is currently used by one million people in about twenty countries, in Africa for the most part. What if this continent became the birthplace of tomorrow’s banking services and technologies? Société Générale, which has just acquired an 8% stake in the capital of TagPay, seems to think so.
TagPay: pioneer in using mobile phones as banking tools
There is a real need for bancarization (i.e. the ability to access financial services) in emerging countries. Yves Eonnet explains, “For example, in Congo, in the absence of banking infrastructures, many civil servants get paid in cash. This involves complex, expensive and risky logistics, with armored cars being protected by the army. And on payday, citizens carry the equivalent of one month’s earnings in small bills and are not able to save–unless they keep money under their mattresses. When money does not flow easily and savings cannot be used to finance the economy, the country’s development is hindered.” To address the financial inclusion issue, which currently affects more than two billion people worldwide, Yves Eonnet and Hervé Manceron thought about relying on mobile phone democratization. “The banking model we are familiar with in developed countries consists of establishing a network of local branches on a national scale. This model may struggle in Europe, but it is clearly inadequate in emerging countries— it would take too long and would be too expensive to implement. Hence the idea of turning the mobile phone into a banking tool that would make it possible to receive one’s wages, transfer money to a close friend, make a purchase at a store or pay an invoice.” The problem is that the stock of mobile phones in emerging countries is mainly made up of first-generation devices—a number of them actually come from recycling the phones of Europeans which they change, on average, every 2 to 3 years (when mobile phone lifespan sometimes exceeds 10 years or so with a battery replacement). In other words, resorting to an application and technologies such as NFC or Bluetooth to secure transactions was out of the question. It was necessary to make do with the basic functions of the forerunner of the smartphone. Yves Eonnet and Hervé Manceron built on more than twenty years of experience in the chip card and telecommunication sectors and after 7 years of R&D, they filed 35 international patents to protect their breakthrough Near Sound Data Transfer™ technology.
Hervé Manceron, COO of TagPay, explains: “Thanks to NSDT™, we are able to turn any phone into a secure authentication and payment tool. In practice, the merchant inputs the amount to be paid on his terminal while the user enters his phone number and a 4-digit PIN. The TagPay platform then establishes communication with the phone. The user answers the call and then holds the mobile phone close to the terminal. At that point, a single-use sound is exchanged between the two devices and the transaction takes place.” There is no longer a need for handling cash nor traditional bank branches. For the merchant—and therein lies the secret of TagPay’s model—acts as a banking agent.
“Thanks to his/her payment terminal and our technology for transaction validation, the merchant is able to perform many operations upon the request of the user: whether it is transferring funds, paying an invoice... or even depositing or withdrawing cash. Although, when it comes to cash management, banks which use TagPay usually choose to rely on the people whose job it is, such as Western Union agents.” These commissioned agents, who act as banking intermediaries, make up the local network of these next-generation banks. “This branchless model makes it possible to set up a bank in three months in a country. In comparison, Société Générale required 15 months to start operating in Togo with a more traditional model.” As for the cost, it is ridiculously low: “Up to now, the merchant had to be equipped with a payment terminal that was compatible. But it is now possible to set up a terminal with a smartphone and TagPay’s agent-dedicated app. The cost for deploying a new point of contact with users is roughly 80 euros (i.e. the price of the first smartphones running Android).”
Bancarization of emerging countries: mobile operators on the lookout
In the bancarization field, once an all-bank preserve, mobile phone operators began emerging in the late 2000’s. The success of M’Pesa, a digital wallet service offered by the Kenyan operator Safaricom (Vodafone’s subsidiary), is often used as an example with its 17 million users and its 2 million daily transactions, accounting for 30% of the country’s yearly GDP. It should be noted that Africa, with a population exceeding one billion people and a mobile phone penetration rate fluctuating between 9 and 124% from one country to another, represents a huge market for telcos. This is why both the local and international operators that set up there have an appetite similar to that of Big Oil and compete ferociously against one another. “Faced with fierce competition and fickle customers, the telecommunications operators saw mobile money as a way of creating customer loyalty while leveraging an area of growth that is rather natural after all, as it consists in expanding the services offered by operators to their customers.” This model may allow users to transfer money more easily and mobile phone operators to increase their margins, but it is no panacea. According to Yves Eonnet, “Mobile money, backed up by a mobile operator, is not sufficient for satisfactory bancarization. Very often, for instance, money transfers are only possible between subscribers of the same operator. And some banking services are not provided. What about the bank loan? We do not think that telcos will replace banks. This is why we developed an independent core banking as a service platform that is Cloud-hosted and allows banks, mobile operators or even fintech start-ups to provide more banking services.”
A SaaS banking model or how TagPay hosts African banks… in Roubaix
In addition to its mobile-based authentication technology, TagPay offers its customers (around twenty banks, mobile operators and fintech players worldwide) a cloud-hosted banking core, which happens to use OVH.com’s Private Cloud. Hervé Manceron explains, “From the outset, we thought about an infrastructure that would be affordable (to lower the cost of banking services availability), flexible (to make continuous innovation easier) and scalable (to support the exponential growth of the number of users). Moreover, choosing OVH.com’s Private Cloud made it possible to address the growing issue of intervention by regulatory agencies in the mobile banking sector. Regulators (such as the Central Bank of West African States) obviously want to monitor this activity and especially the IT infrastructure that hosts the banking services. As OVH.com’s Private Cloud is certified according to the international ISO27001 standard, our customers obtain their banking license faster.” At first, convincing bankers, who were used to managing their entire IT infrastructure in-house, was not easy. Then, when they accepted the idea of outsourcing core banking in order to start operating faster in other countries, TagPay was advised to resort to the cloud services providers that the banks were accustomed to working with. Hervé Manceron recalls, “So we would face the banks’ purchasing departments with OVH’s prices, being 5 times lower than their IT providers and get them to ask themselves what makes them stand out from OVH.com.” TagPay, which has the ambition to manage 10 million accounts within the next 5 years, has never had to face an objection that would cast doubt on choosing OVH.com. “Not even concerning the relative distance between the Roubaix datacenter, that hosts our infrastructure, and the African continent from which users perform transactions. This is made possible by the quality of the network OVH.com deploys worldwide."
A frugal innovation that inspires Western banks
The issue of financial inclusion led TagPay to address the needs of people in emerging countries in the easiest possible way, using a minimum of resources, thereby providing a prime example of frugal innovation. Jostled from their hegemonic position by new and very dynamic players, that seize the latest technologies to overtake them in the field of innovation, Western banks are faced with a serious problem. They heavily invest in systems that become obsolete, yield less and less, and restrain their ability to offer new services. “This is why, today, banks are increasingly interested in the way TagPay reinvents banking technologies on the African continent,” said Yves Eonnet. “In Eastern Africa, more than 40% of adults pay their invoices using a phone, compared to 2% on average worldwide. Africa—that moved to mobile phone technology directly, having skipped the landline transitory stage—now leads the West in the digital banking sector. The continent is a model.” TagPay does not rule out the possibility to give Western banks and start-ups the opportunity to benefit from its experience in Africa nor from its technologies.
“One of the first lessons we can probably learn from this is to entrust one’s IT infrastructure to a hosting service provider rather than self-managing datacenters, as has always been the case in the banking world,” said Laurent Allard, CEO of OVH, who spoke at the TagPay World Conference in Paris on September 20th, 2016. “TagPay’s technology, coupled with OVH.com’s Cloud, led to a significant decrease in the cost of entry for new players wishing to offer banking services, which are helped by the absence of intellectual property in this field (it is impossible to patent new types of banking services so they can be copied on the very first day of their launch). The banking fortress is being besieged!