By Marcella McCarthy and Toni Sciarretta — Banking in Brazil has traditionally been an onerous task, one filled with frustrating bureaucracies, and so expensive that most of the population can’t afford a credit card.
These problems would have been a challenge for any entrepreneur to tackle. Yet, David Vélez, CEO and co-founder of Nubank, knew close to nothing about the Brazilian banking system when he started Nubank. But he was hellbent on turning it on its head. This task has proven a monstrous pursuit. Colleagues and friends often refer to the Nubank story as “David vs. Goliath.” David is winning.
Fast forward seven years, and today, Vélez has become a digital banking expert. The company, which started as credit card provider, has now evolved into a full-service digital bank. Nubank now has 40 million users and a valuation of $30 billion thanks in part to Kaszek Ventures and Sequoia, who gave him $2 million when all he had to show them was a PowerPoint of how Nubank would work.
Today, Nubank continues to be privately held, but rumors of an IPO have been circulating.
Bloomberg Línea spoke with Vélez to get insight on Open Banking, what the incumbents think, how P2P is changing everything, Nubank’s new investment product, and more.
What are the main impacts that the rules of “Open Banking” have for the banking sector in Brazil?
Open Banking grants people the freedom of choice. Customers are able to access plans and products that are better suited to their profile since the exchange of information between the chosen banks will streamline the entire process of identifying the user. Also, this process tends to make the services provided by financial institutions to be cheaper, as customers have more freedom to choose and therefore are not held hostage with a particular player. Open Banking pushes the sector to reinvent itself to build customer loyalty based on an even more competitive market.
In Brazil, the Central Bank’s objective with the launch of Open Banking is precisely this: foster more competitiveness and the inclusion of millions of Brazilians in the financial market. This implementation generates an impactful change in the logics of the traditional banking system: the banks have now to adapt to the customer needs to better serve them at more competitive rates; no longer the opposite.
Open Banking gives customers the power and we support its implementation in Brazil, and across all Latin America.
Brazil’s incumbent banks complain that they are disadvantaged by asymmetrical treatment which favors fintechs and digital platforms such as Nubank. Do you agree with these arguments?
The local regulation does not favor fintechs. The Brazilian Central Bank is keeping the principle of proportionality, which is largely established in many other countries, with the goal of fostering competition and reducing entry barriers. In the end, to create better conditions for customers.
Around the world, regulators have taken proportionality measures to promote initiatives that aim to guarantee conditions to enhance competition in the market. Examples are the transitional regime adopted in Australia, and the mobilization of capital employed in the United Kingdom. Some countries, like Taiwan, Hong Kong, South Korea, Singapore, Malaysia and the United Arab Emirates, have specific licensing structures for digital banks.
Due to this framework, many of these countries have seen tremendous progress on financial inclusion and the innovation of their financial services industries. This proportional regulation allowed the emergence of fintechs and, consequently, a more competitive market with a reduction of prices and more people being able to access financial services. On the contrary, a framework that disregards the different complexities makes the system extremely concentrated and expensive. In Brazil, incumbents still concentrate more than 80% of the credit market; with a 4%. reduction from 2017 to 2020 from 85,5% to 81,8%.
Fintechs not only insert more people into the financial system due to their reduced bureaucracy and costs, but also have forced large banks to adopt the same path, making the whole industry more inclusive.
At Nubank, we are able to see the transformative social impact fintechs can have in terms of financial inclusion and education. A recent study points out that 3.8 million people claimed they did not have access to any banking product before joining Nubank and more than 23.4 million customers said they were able to save money with Nubank services. On financial literacy, which we see as an important form of empowerment, 36% of our customer base (of 35 million people by the time of the study) said they had greater financial awareness after becoming a Nubank customer.
What are the barriers to entry for investments in Brazil and how does Nubank’s new investment product make it easier for more people to invest?
From a total population of 221 million Brazilians, only 3 million are actively investing, according to B3 (São Paulo Stock Exchange). This means that only a very small part of the population has access to this fundamental part of financial life and planning. The main barrier to access is that it is still a complex market, with expensive and hard-to-use products, especially for those who don’t have in-depth knowledge or experience. It’s a frustrating and confusing experience to make your first investment, so many end up never doing it. But learning to invest accordingly can help millions of people to achieve a better financial future and make better use of their money.
At Nubank we have the vision of democratizing the access to investments, in the same way we have done with financial services. We want to make investments easy to understand and to use, with a product offering that can satisfy the needs of more experienced investors but also grant an opportunity to those who are interested in entering or taking a step further in the investment journey but never felt confident enough to do so. At Nubank, our products are simple, transparent and human. This is the experience we want to take to the investments sector.
With the advent of Pix and WhatsApp Pay, how are instant payments a game changer for consumers in Brazil? How has inflation and the rapid fluctuation of currencies played a role in the development of instant payments?
Instant Payments are certainly a game changer for Brazil. Only a couple of months after being launched, Pix became one of the favourite payment methods for Brazilians, who highlight its easiness and safeness. More than R$ 1 trillion have already been handled in Brazil via Pix in just over six months of operation.
Nubank is a true believer in Pix and instant payments in general, due to the great potential they have to bring a very positive change to the financial market. We are optimistic it will boost banking in the country and expand further the digitization and financial inclusion of Brazilians, something we have been focusing on for years. The operational and payment processing costs are also cheaper because of its infrastructure, which is more modern and more efficient, which enables the arrival of new players in the sector and gives more options to customers when making transactions.
Nubank is well-known for offering access to credit in a region where credit has often been reserved for the wealthy. How has technology enabled you to offer credit to a bigger portion of the population?
Nubank is a technology company. We knew from the very beginning that technology was going to be the key enabler to offer the type of product and experience we wanted to offer. While legacy banks hold a lot of data from their customers by having been in the market for years, they often lack the capability to make smart decisions based on that data to offer better suited products to their customers. Nubank, on the contrary, was built around the pillars of data science and technology.
It’s that smart use of data that enables us to offer better and more fair access to credit to our customers. We analyse an endless number of variables to be able to offer credit lines to those people who never had a credit product before and were neglected by traditional banks. We start with low credit lines of US$5 approximately to grant them the chance to start building their credit history. Then, based on their performance, we are able to minimize risks and expand that limit more and more.
In a region in which 190 million people are still unbanked and rely heavily on cash and informal credit, being able to offer cheaper and more fair access to credit has the potential to truly change the lives of millions and our countries as a whole. All this is enabled by technology.
Nubank has a large consumer base built of young people that are currently entering the job market. What other consumer segments are you looking to attract at Nubank - small businesses, upper class etc. and what are your strategies and products for these other segments?
There is a misconception that Nubank is only for millennials. Our strategy is to be a digital services platform in which everyone no matter their needs, their age, their income can find a product that satisfies them.
When we first started, certainly younger demographics were faster to adopt our digital value proposition and they have historically been a key segment of our customer base. But we have a very diverse demographic. Almost 20% of our customers are over 46 years old. The pandemic has also accelerated the adoption of digital services in those demographics that were more traditionally reluctant.
In a similar fashion, we have wide diversity in terms of income: 6.3 million of our clients earn less than minimum wage, and were historically excluded by big banks. Nubank is for everyone. And over the past 8 years we have developed a wide portfolio that has products for all. For those who don’t have a credit history but need access to credit, we have a secured card product that is currently used by 1 million customers. For the segment of customers that want the “premium card experience” but in a Nubank way, we have recently launched our Ultraviolet credit card. For those customers who wanted Nubank products for their small businesses, we launched our PJ offering that currently has over 700,000 customers.