Bankable Frontier Weblog

Net 1 UEPS Technologies was listed in early August on the NASDAQ exchange. New listings, especially of technology companies, are common on NASDAQ. New listings of companies which claim to have a solution for all the world’s unbanked are rarer; and those which were started in developing countries, rarer still.

A South African-born company created in 1989, Net 1 had previously been listed on the Johannesburg Stock Exchange. Net 1 cut its teeth in the context of SA’s experiments to provide banking services to unbanked people, developing proprietary smart card and payment standards technology which is widely used there. The company recently relocated its head office to the US in a move, linked to its NASDAQ listing, designed to give the company better global reach to roll out its products. The listing showcases the financial success of Net1 to date: revenues have risen more than three times in three years to some $180m; net income after tax up more than five times in the period. The company is now valued on NASDAQ at over $1 billion.

More interesting for this blog, however, are some of the underlying issues which the case of Net 1 brings out. An obvious one first, which follows the argumnent of Michael Porter in The Competitive Advantage of Nations: the challenges of the original home market created the push to innovate. Recognizing this factor, Net1 says that, even after the relocation of its head office to the US, it will continue to maintain its research and development in South Africa. We are likely to see more such technology solutions for low end consumers developed and successfully applied in the ‘south’, especially from growing tech giants such as India.

Second, Net1 has largely built its current customer base on the provision of payment services to pensioners as a provincial/state-level government contractor in South Africa: 3.3 million people are paid monthly using its system. Having a thick market of card holders in these areas has enabled the roll out of other parts of its system: for example, point-of-sale (POS) devices for merchants. At these devices, pensioners can withdraw cash, load their card, buy goods and check their balance/s. The off-line/ on-line feature of the devices is considered an advantage in rural areas especially, where on line communication may be unreliable or expensive; or where electricity to run POS devices may not be available. The point here is products like these subject to network externalities require a solid, critical mass of customers to be successful. And state pensioners, where the state can prescribe the payment system, offer just such a market. Hence the importance of initiatives to convert social grant payments into electronic transfers in developing countries today, covered in a previous blog.

Net1 has also had some success, though fairly limited to date, in developing payment systems in smaller developing countries like Malawi: Malswitch cards which enable ATM withdrawal based on fingerprint ID are available in that country today.

You too can use a smart card at ATMs in Malawi today

Third, the issue of competing payment standards has loomed large in Net1’s past and will continue to do so in its future. Net1 invented and patented the Universal Electronic Payment System (UEPS) some 14 years ago as the standard by which secure payments are encrypted and enabled between cards and card readers. This proprietary standard is one of the jewels of Net1’s intellectual property—or is it? A standard is only a jewel if it is widely accepted as such, and the patent holder can benefit from it. Rather than adopt a proprietary standard for ‘smart’ or chip-enabled credit cards, the major credit card associations chose to develop a co-operative standard for chips (for identification) on their cards: the so-called E(uropay)M(astercard)V(isa) standard, which is widely applied in Europe today, and increasingly in other markets.

The founder of Net 1 is dismissive of EMV: “..it is still in the times of archaic smart card technology. It is just a credit card, you can’t load cash onto it, it is not secure enough and can’t work offline”, as reported in Electronic Payments International 30 June 2005. However, given that the EMV consortium is backed by massive banks with wide reach, little Net1 cannot afford to compete head on: instead, it has developed the ability to ‘morph’ or inter-operate with EMV. This feature may be essential to UEPS having a long term future, in a world of ubiquitous inter-operable acquiring devices like cellphones. As everyone who has heard the examples of QWERTY or Betamax/VHS knows, the standards race is not necessarily to the best, but to the quickest to get sufficient scale. As EMV rolls out, hopefully it will not squash innovation in payments space by smaller rivals, such as UEPS. Whatever one may think of the propriety of proprietary systems for payments, UEPS has earned a reputation as an innovator to watch.