DEEP DIVE is a series of in-depth articles on FinTechtris that explores a particular fintech leader, discussing its history, products / services, and how it has grown to be an industry leader.

For those in the US or UK, we may not have heard of a digital bank founded in 2013 in Brazil, built to challenge the financial system and provide access to the unbanked. Nubank is now Latin America’s largest and most valued fintech, offering digital banking solutions to its 20M+ customers as a neobank. The Brazilian-based unicorn (valued at $10B) is the largest virtual bank outside of Asia, building a loyal mass of clients in one of the most difficult countries to bank in (due to onboarding requirements and expensive rates). This giant in LATAM continues to launch innovative product solutions for consumers and businesses, and expand its reach beyond Brazil.

Let’s take a deep dive on the banking landscape in Nubank’s home country of Brazil, how the neobank got started, product and service offerings, expansion opportunities, and what’s next for this banking leader.

BANKING and fintech IN BRAZIL

In South America’s largest country, close to $190B (BRL 817B) is moved annually within its banking system. There are 55M people without banking access — the majority from the poorest areas. The financial institutions in Brazil are criticized for the profit margins they make on fees and interest revenue (higher than banking in US and Europe), and lack of industry competition in the region. The top 5 largest banks (Itau, Banco Santander, Bradesco, Banco do Brasil, and Caixa Economica) oversee over 80% of banked assets in the country.

For those who do have banking accounts, they walk into a highly-guarded bank branch with double doors to see a teller. The overall service experience is cold and uncomfortable. This is a leading factor in 45M banking customers having inactive accounts (i.e. no transaction activity in the last 6 months), per Instituto Locomotiva.

Similar to other developing countries, most of the population (about 85%) has a mobile phone. Internet usage and access is also high for Brazil at 70%. The combination enables a huge market for innovative mobile banking and FinTech applications to become solutions with mass adoption. The country’s estimated rate of fintech adoption in 2019 was 64%, up from 40% in 2017.

As the leading FinTech hub in Latin America, Brazil has over 500 startups in its ecosystem. Half of these companies doubled revenue growth last year, and raised nearly 60% of venture funding in LATAM for 2018.

Over 200 of these fintechs are expected to bring $12B+ in revenue by the end of the decade — many of them focused on payment processing. The country is truly set to continue its leadership throughout the region over the long term.

ORIGINS of NUBANK

It was in the restrictive banking climate of Brazil that Nubank emerged back in 2013 (founded by David Vélez, Cristina Junqueira, and Edward Wible), as a startup focused on giving individuals financial control of their lives. David (CEO) had prior venture experience with Sequoia Capital, in leading their investments in Latin America. Cristina previously worked in Sao Paulo for both banking and consulting firms. Edward (CTO) has a background in private equity investments and consulting. Less than a year after being founded (in April 2014), Nubank would post its first Nubank card transaction. This purple card would go on to be used by over 20M customers in Brazil.

The company is backed by well-known investors such as Goldman Sachs, Ribbit Capital, Tencent, and Fortress Investment Group. Nubank’s funding history:

• Series A round of $14M from Sequoia in 2013;

• $30M Series B in 2014 from Tiger Global Management;

• $52M Series C in Jan. 2016 from Founders Fund;

• $80M Series D in Dec. 2016 from DST Global;

• $150M Series E in 2018 (also from DST);

• $400M Series F in 2019 from TCV.

With about $1.4B in total funding, the world’s largest neobank is now valued over $10B. This consistent level of funding has helped Nubank achieve remarkable growth in its transaction activity, product suite, and overall reach in Latin America. The combination has helped the fintech double its customer size between 2018 and 2020, now serving more than 22M clients in Brazil alone.

nubank PRODUCTS and SERVICES

Nubank started with their first offering of an international credit card in 2014. Signing up for the signature purple card was a seamless process that was easy for customers to onboard and utilize (in comparison to traditional banking options). There was no need for multiple documents or other verification that added unnecessary friction to the customer experience. The card reduced high interest rates and fees that Brazilians were accustomed to paying. Customers were able to request credit line increases, block their card to avoid fraud, and view transactions in real-time through the bank’s app. This first product propelled Nubank to become the 6th largest credit card provider in the country.

The neobank would go on to launched multiple banking products (and programs over the next 6 years that serve both consumer and business users throughout Brazil. In 2017, the company introduced a high-interest savings accounts for customers to make transfers and bill payments. Soon after, Nubank offered direct deposit of payroll to a deposit account (NuConta) with a debit card attached for ATM access and purchases.

Beyond accounts and cards, the fintech also launched Nubank Rewards — a loyalty program that earned points redeemable for travel, entertainment, and services. The points earned don’t expire, and the premium program is optional — even though it has a fee, customers have a 30-day trial period to get started. Overall, products from the fully virtual bank come without maintenance costs and accessibility via mobile phone.

Similar to the fintech trend in the US, Nubank is exploring and expanding their book of business outside of deposits and further into lending with personal loans. In early 2019, the neobank ran a pilot with 2M users on what this lending program would look like — this included a prequalification. This would drive tremendous value for its small and medium sized business users that struggle to obtain credit for their company.

market expansion in latam

With an established foundation in Brazil, Nubank has looked to expand outside of its borders into the greater area of Latin America. Its expansion strategy has focused on Argentina and Mexico (most recently) as its first markets. The decision to bring a proven business model and infrastructure into other developing countries proved successful in Asia, with other digital banks like Paytm. By expanding through Mexico, Central, and South America, Nubank hopes to serve all millennials that struggle financial services in their native country.

The expansion to Mexico was announced in May 2019 and would be under a subsidiary called Nu. The country has a similar concern with unbanked — about 36M have no banking access. About half of Mexico is 24 yrs. old or younger and has digital or mobile access. The population is in need of taking control of their finances, moving away from transacting in cash, and creating savings and lending accounts through a solid banking experience.

The initial product launched is the no-fee Nu credit card, which received 30K on its wait list after the announcement. Since comparable options are non-existent in developing countries, Nubank has not had to spend on customer acquisition or affiliate referrals. Word-of-mouth was the primary advertising tool in Brazil (driving 80% of new customers), and Mexico is following the same path.

Despite this move to Mexico, the market is large and diverse enough that multiple neobanks (including those in Mexico such as Albo) can find success through specialized offerings. Other competitors from overseas (such as N26 and Revolut) also have their eyes on expansion here. As the landscape gets crowded in Mexico, acquisition costs are likely to increase and impact available funding for other startup in other areas needed for growth.

What’s next for this global leader?

Despite its scale and reach, Nubank as a whole company is not yet profitable. Its credit card division on its own has been cash flow positive since 2017. Like many other neobanks around the world, investment rounds have been used to help scale operations and boost its technology infrastructure. Its only recent that Starling Bank announced that they have passed their break-even point in monthly revenue, showing how trubulent the journey to profitability can be.

As the company scaled in Brazil over the last 7 years, the fintech learned that enhancing talent in its pool of engineers was critical. Even though there are 50K engineers trained annually in their home country, actual demand is much more. Nubank has worked with local universities and created tech centers in Mexico, Argentina, and Germany to develop engineers. The neobank giant also acquired PlataformaTec (in Jan. 2020), a software consulting company with a team of 50 engineers specialized in agile methodologies, to boost it own team.

With industry leading valuation, many wonder when Nubank would IPO and go public? The general sentiment of leadership is to keep the firm as private for the long-term. This aligns with the mindset of investors who are not in a rush to be in the public markets. When the decision is made, the company would likely list itself in the US, Brazil, or a combination of both.

Further expansion is on the horizon for the largest independent digital bank in the world. There are other opportunities in neighboring countries in South America and Central America, as well as diversifying their product suite further into lending. Nubank can fully engage the small business segment with specialized enhancements to existing consumer products. The SMB segment is lacking globally with a full service bank offering that manages day-to-day expenses, handles invoices and payments, provides savings and lending solutions — all within one platform.

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