CheqOut set to disrupt African mobile payments industry

CheqOut, launching today, will allow anyone with an iPhone — and later an Android phone or BlackBerry — to accept credit card payments, by swiping cards through a plug-in card reader.

While CheqOut is similar to Square (Twitter founder Jack Dorsey’s juggernaut electronic payment service) CheqOut is tailored for the African market.

“We’ve done our research and adapted the Square concept for Africa. Our main focus has been on catering for the rich diversity of mobile handsets. Tablets still represent a tiny amount of usership, hence they are not our key device at this point. Another major concern is security. We have an extremely thorough vetting process and the app itself it’s highly secure to prevent fraudulent transactions”, says CheqOut founder Bradley Elliott.

Merchants will be able to sign up and fill in their banking details on the CheqOut app. CheqOut will then send them a free card reader that plugs into a compatible mobile phone’s headphone jack. That’s all there is to it. Customers swipe their cards through the card reader and funds will clear in the merchant’s bank account within 48 hours.

Although the functionality to accept credit card payments has been built into the CheqOut app, it is currently disabled. CheqOut was dealt a blow late last week when it received a notification from Visa, stating that CheqOut’s readers had to gain EMV certification and compliance, before the CheqOut app would be allowed to accept credit card payments via the card reader. “Security and compliance is CheqOut’s top priority, and users can still perform transactions by manually inputting card data. We are working around the clock with Visa and hope to be distributing EMV readers in about a month or so,” said Elliott. On the positive side by gaining EMV certification, the CheqOut app will also be able to accept chip-and-pin transactions — it would only have been able to accept chip cards via a swipe before.

Square is a runaway hit and the company’s growth has left the mobile payment market’s collective mouths agape. Maybe it’s that Square went from processing one to US$11 million in payments per day in one year, or maybe it’s that Square is processing more in payments than PayPal did at this stage of its growth. Whatever it is, clones are popping up all over the place. PayPal’s recently launched PayPal Here experienced 1000 sign-ups per hour on launch day, successful serial company cloner, Rocket Internet is rumoured to be working on a Square competitor and of course, there’s CheqOut.

Africa is a hotbed for tech growth and its in this very soil that CheqOut is taking root. More specifically, CheqOut is based in South Africa, a place devoid of Square and PayPal Here, a place where mobile payment solutions such as the Kenyan born M-Pesa has experienced slow uptake.

Is the absence of a mobile payment market leader in the country a sign that the environment is unconducive to growth, or is the market lying dormant, waiting for the right innovation to strike? Memeburn spoke to super angel investor and entrepreneur, Fabrice Grinda earlier this year. When asked about the absence or presence of innovation when cloning successful ideas from the Western World in emerging markets he said, “it is innovative in the sense that it is not a pure copy, you obviously need to adapt for the local market place.”

If CheqOut is to be a success, there will have to be plenty of innovation on top of what Fast Company considers the 5th most innovative company in the world.

CheqOut’s pièce de résistance is being first to market. In order to avoid being tied up in regulation headaches CheqOut opted not to be a payment gateway or to hold any funds in Escrow. Instead, CheqOut only captures — without storing — credit card details and relies on a third party for payment processing. “We would like to become one [a payment gateway] in time to reduce the fees, but doing that comes with server infrastructure costs in addition to the legislation and regulation surrounding it,” says Elliott. For the time being this means higher transaction fees.

Elliott tells Memeburn that fees are 3.5% excluding VAT plus 50 cents per transaction. Paying only a flat fee is still an attractive reduction on fees for merchants. Right now, on for example, US$3 800 turn-over a month, traditional card machines cost around US$113 for machine rental, US$25 for fees and have a rate of 5.2% per swipe.

Says Elliot, “in South Africa, machine rental ranges from R300 – R800 per month ex VAT. You also need to pay for a merchant account and landline, an additional R400 ex VAT. If you’re doing a turnover of R20,000 – R40 000 your transaction fee is roughly 4.5% ex VAT per transaction. So your ‘traditional’ total is around R2050 – R2550 on a R30 000 turnover. Our equivalent is R1100 if you’re doing 100 transactions @ R300 each (i.e. R30 000).”

CheqOut is entering a challenging market, something which Elliott readily acknowledges. South Africa’s population of 50 million is roughly six times smaller than that of the US, Square’s originating country. In a country with 24% unemployment, 21 million South Africans have bank accounts and only 7 million have credit cards. Square processes US$11 million in sales per day in a country with an estimated 180 million credit cards. Given that almost all of Square’s 2.75% fee goes back to Visa, MasterCard, and American Express, it remains to be seen how CheqOut’s similar business model will scale to its locale. Elliot admits that it’s going to be tough, but that CheqOut is already in the process of being able to cater for debit cards too. Elliot foresees South Africa — and Africa as a whole — leap frogging mobile wallets and moving straight to NFC in the next two to three years. CheqOut will be aiming to adapt to this potential scenario.

CheqOut could also face competition on its home turf soon. Square is planning international expansion and another local startup, Ching, is readying to launch its own mobile payment system. Elliot sees Ching as indirect competition as it uses no hardware and relies both on vendor and consumer to download an app. Users register their debit/credit card details with Ching, after which they can pay at participating merchants by simply entering their telephone number and PIN. There’s also Gust, a geo-fenced mobile payment solution that allows patrons and merchants to conduct transactions only if they are on the same Wi-Fi network.

Which model will consumers gravitate towards, or will PayPal eclipse them all? PayPal launched officially in South Africa in 2010. With its brand recognition, momentum and foothold, it’s Here service could become the mobile payment of choice.

How secure is CheqOout? It has a “3-­layer security system as well as various fraud detection systems, both on CheqOut’s side and with the bank itself.” Elliott tells us that CheqOut’s readers encrypt information on swipes and that further encryption happens within the app itself. Initially, Square’s card reader did not support encryption, something which one of its competitors, Verifone, was quick to point out. Square’s card reader has since been updated and now encrypts card information.

Elliott is a director at digital marking company Platinum Seed and although CheqOut is a separate company, Platinum Seed has provided the first round of funding for the venture.

The CheqOut iPhone app is now available in the Apple App Store.