TALLINN (Reuters) - The key to success for ride-hailing providers like Uber is keeping drivers happy so they run their app, ensuring that enough cars respond to passenger demand.

FILE PHOTO: A taxi with the Taxify logo waits for a passenger in Riga, Latvia, January 15, 2015. REUTERS/Ints Kalnins/File Photo

Estonia upstart Taxify is hoping to win over drivers and take on Uber Technologies Inc [UBER.UL], the industry leader, by offering a larger share of the profit.

Upstarts across the world, such as Lyft Inc and Ola, are trying to catch Uber in the on-demand car-ride market by securing brand loyalty.

But Uber has gathered critical mass and reached a valuation of over £60 billion in just eight years, despite a lack of profits. It has kept rivals at bay, partly by offering incentives to drivers to stay online.

Taxify, a minnow compared to Uber, cannot afford these perks but believes that by taking a smaller share of fares - 15-20 percent compared to Uber’s 20-25 percent - it can steal market share form its San Francisco-based rival.

It also hopes that allowing drivers to take cash as well as credit card fares will also help it attract more passengers.

“Taxify’s biggest advantage is the focus on good service by treating the drivers and riders better than other platforms. This means having higher pay for drivers, thanks to lower fees,” Chief Executive Markus Villig told Reuters at Taxify’s headquarters in Estonia.

“By the end of the year, I think we will be No. 1 in about 10 countries in Europe and Africa.”

An Uber spokeswoman declined to comment but the company has said it had fare revenue of around $20 billion last year. Villig said Taxify generated fares worth “tens of millions of euros” each month. Taxify runs in just 25 cities in Europe and Africa, while Uber operates in nearly 600 cities worldwide.

Its basic business model is identical – both hook up passengers with self-employed drivers. Many incumbent cab companies in Europe have developed apps to operate in a similar manner but most have focused on their domestic markets.

But Taxify is unusual in launching in about 18 countries, mainly smaller markets in Eastern Europe and Africa, where Uber is absent or not yet dominant.

Slideshow ( 7 images )

Uber usually takes market share by giving drivers money to sign on to its app, paying them even if they are not driving passengers. Then, as it becomes more popular with passengers, it withdraws the inducements. Analysts say Uber aims to build a customer franchise and stable of drivers to dominate the market.

“The way I see it, Taxify is cheaper than Uber,” said Tumelo Malatjie, 33, a former truck driver for a logistics firm turned full-time Taxify driver in Johannesburg. “Taxify takes 15 percent and Uber about 25 percent or 30 percent,” said Malatjie, who nonetheless is on a waiting list to become an Uber driver.

Taxify has avoided expensive head-to-head battles with its much larger rival but its model will soon be tested as Villig plans to launch in London - Uber’s biggest European market in the coming months.

“We are coming in as a second wave,” Villig said.

Founded 3-1/2 years ago, Taxify has 140 staff worldwide, a third of whom are based in Estonia. It says it has 2.5 million active passengers in 18 countries. Uber says it has more than 12,000 people across the world and millions of passengers in 70 countries.

In Africa, Villig said Taxify has hired away 20 former Uber executives, helping its expansion in cities like Lagos, Cairo and Johannesburg.

The start-up has raised 2 million euros in outside financing from local venture capitalists. Like Uber, it is losing money, although it was “close to profitability for the past six months,” Villig said.

Uber reported in late May that its net loss, excluding employee stock options and other items, narrowed in the first quarter to $708 million, from $991 million in the fourth quarter. (reuters.co.uk/article/idUSKBN18R3EQ)

STEERING CLEAR

Taxify and Uber face many of the same regulatory and commercial challenges.

Uber was dealt a major setback to its European ambitions in May when the lead advocate for Europe’s highest court said it should be regulated like a transport company rather than an online electronic intermediary.

Taxify could face the same legal treatment, which would make it more susceptible to new regulations being introduced by a growing number of European cities. (reut.rs/2sKxTIy)

Similarly, bans on ride-sharing in cities such as Brno in the Czech Republic, apply to Taxify as much as Uber.

Uber has faced complaints from its drivers in London, France and the United States who were unhappy about compensation.

But Taxify has also had protests from drivers in Estonia unhappy at how the company had slashed fare rates. Villig declined to comment.

While analysts do not expect Uber to be dethroned by Taxify anytime soon, the Estonian company’s lower commission model may put pressure on Uber’s margins in countries where it is seeking to cut fares or increase its share of fares.

“Uber is still the market leader, which gives them the possibility to take higher fees,” Villig said. “But I think over time, they definitely need to get more competitive.”