Brazil’s Nubank Is Leaving U.S. Digital Banks In The Dust

David Vélez has built an $8 billion fortune turning nearly half of Brazil’s adults into users of his credit card, digital banking and loan products. Why can’t American fintechs do the same?

_{By Jeff Kauflin, Forbes Staff}

David Vélez has delivered a string of surprises since leaving his nascent venture capital career in 2013 to start a Brazilian digital bank. The most recent came on May 15, when his company Nubank blew away analysts’ expectations by posting $142 million in net profits for the first quarter and $1.6 billion in revenue, an 87% increase from the year before. The results were all the more striking given how many other fintechs are mired in slow growth and slim or no profits. Nubank’s stock, which trades on the New York Stock Exchange, has surged 30% since that report, pushing its market value to $37 billion and Vélez’s 21% stake to nearly $8 billion.

“To be frank, it should not really come as a surprise,’’ the 41-year-old CEO told analysts, adding that it’s “consistent” with what he’s been saying for years: once his low-cost, digital-only, data-dependent model reached maturity in a market, it would produce a high return on equity. Nubank now claims an astonishing 46% of Brazil’s adults as customers. In just the past two years, it has more than doubled its customer base to 80 million people in Brazil, Mexico and Colombia–all served by just 8,000 employees. By contrast, Chime, the most successful digital bank in the U.S, likely has fewer than 20 million registered users (it doesn’t disclose the number), laid off 12% of its staff last year amid slowing growth and is probably worth a lot less now than the $25 billion it was valued at in a 2021 fundraise, during the pandemic-fueled fintech boom.

Vélez, in his analytical, measured way, frames it as entirely predictable that Nubank would outpace its Yankee counterparts. “We thought this would happen faster in emerging markets than in developed economies like the U.S. or Europe, because the consumer pain you’re addressing in emerging markets is much, much bigger,” the Colombian-born, Stanford-educated MBA tells Forbes.

A decade ago, when Nubank first launched, five Brazilian banks controlled 80% of that market, earning fat profits by lending at 200% to 400% annual interest rates, charging monthly fees for everything from fraud protection to text-message alerts and delivering lousy customer service. The U.S. market was much more competitive, with 5,800 traditional banks, more digital bank startups in the works and a generally higher standard of service—despite consumers’ gripes about overdraft and other fees.

Vélez not only chose his target market wisely, but also smartly tailored his strategy to meet both the opportunities and pain points in Brazil. Most U.S. digital banks have started out with a checking account and debit card. But Nubank launched with a no-fee credit card, because it didn’t need a banking license to issue a card and because almost all the Brazilian card issuers charged fees. Still, it was an arguably risky move, since credit card losses “can really kill your company,” says Nubank cofounder and chief growth officer Cristina Junqueira. She’s a 40-year-old Brazilian engineer with an MBA from Northwestern’s Kellogg School who was recruited by Vélez specifically for her credit card expertise—at a young age, she ran the largest credit card division of Itaú, Brazil’s largest bank. Now, she’s got a 2.7% stake worth $1 billion in Nubank.

One advantage of launching with credit cards is that, unlike its U.S. counterparts, Nubank wasn’t burdened with high upfront marketing costs. Instead, it started with a classic “velvet rope” strategy, inviting early adopters (and then their friends) to apply for its distinctive purple credit cards. “Telling customers, ‘Come and give me your money. Deposit your money here,’” is a more difficult sale than offering them credit, Junqueira observes.

Such strategic and marketing insights have helped make Nubank the second most valuable financial services company in Latin America, behind only 78-year-old Itaú. True, with its stock trading around $8, Nubank is still down 12% from its initial offering price of $9 in December 2021. But that’s impressive compared with a 54% drop for the fintech category in the same time period.

The big question now is whether Nubank can repeat its Brazilian success in the Mexican and Colombian markets while continuing to grow and become even more profitable in Brazil.

Within three years of launching its credit card in 2014, Nubank had nearly two million customers. In addition to the absence of annual fees, its mobile app, which lets customers do everything from applying for a card and requesting credit-limit increases to reporting fraud, has helped Nubank build a broad, loyal customer base. The company says between 80% and 90% of its customers have come through word of mouth or unpaid referrals, and it has 35 million active credit cardholders today. Last year, about 45% of Nubank’s $4.8 billion in revenue came from interest income on consumer loans (both credit card and personal loans), according to Mario Pierry, a research analyst at Bank of America who covers Latin American financial services companies. The rest was a mix of the interest it earns on customers’ cash balances, the card-swipe interchange fees paid by merchants, fees it receives through its life insurance and investing services, late fees it charges to consumers and other fees.

By contrast, U.S. neobanks have largely avoided credit–most began with debit cards by partnering with traditional banks to offer checking and savings accounts. They chose that path for many reasons. Lending isn’t just risky–it’s also expensive, because neobanks need to rely on debt funding from Wall Street and other financial firms and pay hefty prices for it, especially when interest rates are high. Lending startups also don’t generally command big valuations relative to the revenue they bring in. They’re capital-intensive and cyclical. The list of highly successful fintech companies that have started with credit is small, Vélez notes. He cites Tinkoff in Russia, Kaspi in Kazakhstan and Capital One, which was founded in Virginia in 1994 by Richard Fairbank and Nigel Morris, an early Nubank investor and the managing partner of venture capital firm QED, which focuses on fintechs.

“Venture capital and credit are a marriage made in hell,” Morris quips. “Venture capital is by its very nature impatient. It wants to see results and wants to see accelerated growth … whereas lending requires you to be incredibly meticulous, logical, linear and exhaustive.” Learning to lend profitably requires giving money to people who won’t pay you back, then figuring out who they are so you don’t give them money again. “Training that mathematical model doesn’t take weeks. It doesn’t take months. It takes quarters or years,” Morris says from experience.

While many fintech experts say U.S. neobanks aren’t set up to become good lending businesses because their customers are low- and middle-income, Vélez counters that Nubank has many low-income customers. Lower income doesn’t mean bigger lending losses, just as higher income doesn’t lead to smaller losses, Vélez says, as long as you’re extending the right amount of credit. Nubank starts some customers at a limit as low as $10, and for higher-risk customers, it only offers them a secured card, meaning they must make a cash deposit before using it. Then it ramps up a card’s limits–sometimes after just 15 or 30 days–as it collects more data on both a particular user and users in general. This patient approach means you must be willing to lose money for a significant period of time among low-income customers, Vélez notes.

Another difference in Nubank’s approach also took a lot of patience (and four years of effort): it obtained its own banking payments license, rather than partnering with incumbents to offer bank-like services, as most fintechs in developed economies have. That license boosts Nubank’s profitability since it can fund its own loans, rather than relying on outside investors. It also gives the operation more control over the customer experience, Junqueira says. For example, Nubank lets customers dispute charges from within the app, which wouldn’t be possible otherwise.

In the U.S., fintech startup Varo tried to pursue this strategy, spending three years and nearly $100 million to get its own bank charter. But it hasn’t worked out, likely because steep competition and rising costs to acquire customers have hampered growth. As of the end of March 2023, Varo reported 5.2 million total accounts, down from 5.3 million in December 2022.

While Nubank’s growth so far has been stunning, keeping up that pace will be tough. It launched its credit card in Mexico and Colombia in 2020, yet in the first quarter of 2023, $1.5 billion of its $1.6 billion in revenue still came from Brazil. So far, Nubank counts just 3% of Mexican adults and 2% of Colombians as customers, compared with its 46% penetration in Brazil—though Vélez told analysts he expects reaching critical mass in those countries will be faster than it was in Brazil. “So far, the experience we are having in Mexico and in Colombia is more positive than what we saw in Brazil in the first few years,’’ he said. “Mexico and Colombia are beating Brazil at effectively all metrics, from customer growth to early monetization, and plans for these countries are ahead of expectations.”

One challenge for Vélez and his team as they expand: the incumbent players, having taken note of Nubank’s success, are reacting faster than Brazil’s banks did. In Mexico, Banorte, the second largest bank by assets, has a three-pronged strategy to digital banking: it has its own mobile app, a home-grown, independent digital bank called Bineo and a joint venture with ecommerce startup Rappi, says Bank of America’s Pierry. Startups are growing there, too–Stori, a credit card startup led by Bin Chen, a former manager at Capital One and executive at MasterCard, recently reached two million customers, it says. Nubank reached 3.2 million customers in Mexico at the end of March 2023.

Another tall order for Nubank: profitably expanding its variety of offerings. “You have to diversify away from being a one-product player,’’ says Pierry. He notes its newer financial products like life insurance and its investing platform have grown more slowly. Nubank “is still in the early days of its product development lifecycle, having begun the expansion beyond core products only in 2020,” a Nubank spokesperson says. “The pace at which we are developing and launching new products is accelerating over time.”

Nubank has been offering personal loans for the past several years, but it had to pull back on them when delinquencies and interest rates rose sharply in mid-2022, says Pierry, who notes that Nubank’s average monthly revenue per customer is about $8, while it’s roughly $30 for Brazil’s incumbent banks. Of course, its expenses per customer are a lot lower, too–just one twentieth those incurred by brick-and-mortar banks, according to Vélez.

Another pitfall is one that can come with such outsized success—regardless of industry. “Nubank needs to make sure that its culture continues to promote entrepreneurship and scrappiness,” says venture capitalist Morris. “They need to make sure they don’t start to believe their own publicity and get intoxicated by their own success.”

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