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.

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.