Shocked by the difficulty of opening an account with a traditional bank, David Vélez
: a financial institution that would offer no-fee accounts and credit cards, and welcome the largely unbanked Brazilian population to their first-ever bank accounts after they answered a few easy questions through an app.
“When I started talking to the experts in the industry everybody told me, ‘David, you’re a foreigner. You don’t understand Brazil — these are the most powerful companies in Brazil that you’re going after.” They said, "nobody competes with the five banks that own the market. They’re going to crush you. It is impossible to compete, ” Vélez, who is originally from Colombia, told CNN Business
Vélez knew that the unbanked were a potentially risky customer base. Additionally, as a foreigner, he’d need to secure a presidential decree to get a permit to start Nubank in Brazil: a process that could—and did — take years.
Above all, he knew Brazil’s banking oligarchy was powerful. According to the Wall Street Journal, in Brazil, five banks control almost all of the market and charge high fees — with annual interest rates on credit cards recently averaging nearly 300%
on unpaid balances.
“In Brazil, which is Latin America’s largest economy, the banking industry has historically been highly concentrated: Last year
, the five largest banks controlled 81% of the country’s total financial system assets and 85% of all loans. With precious little consumer choice, the banks have been able to set the parameters most favorable to them: high fees and rates, confusing loan terms and sometimes blasé service. After all, customers didn’t really have anywhere else to go.”
In 2014, the company launched its first product in Brazil: a no-fee, low-interest international Mastercard credit card completely managed by a mobile app.
In 2018, Nubank launched a digital savings account called NuConta
, after the company finally received its special banking permit from the Brazilian government. Earlier this year, the company debuted a personal loan product.
As the cost of technology started to come down and there was better access to Wi-Fi, venture capital was also starting to pour into Latin America, while consumer demand put pressure on the region’s governments to encourage a more competitive banking market.
Lindsay Davis, a senior intelligence analyst at CB Insights
who focuses on the fintech industry, stated,
“In emerging markets like Brazil, for years monopoly banks hadn’t had to stay competitive… They were able to charge their fees and serve only part of the population and do just fine that way.”
For Nubank, the digital focus helps keep costs low. Vélez explained that because the company doesn’t have the overhead of banking branches, Nubank able to cut out certain fees. Instead, revenue comes from interest and from interchange, the fees merchants pay to Nubank for the processing of card payments to make a purchase.
According to CNN Business
, Nubank is focused primarily on Latin America, where the company estimates it has saved customers $1 billion in fees alone so far. Today, Nubank has 50% share of all new credit cards issued in Brazil.
The company is not yet profitable, although it is narrowing losses: from $117 million Brazilian Reais (USD $29.4 million) in 2017, to about a $100 million Reais net loss (USD $25 million) in 2018.
Looking ahead, Nubank is focused on continuing expansion rather than making a profit.
“For the next five years we’re focused on Latin America, but over a very long-term horizon, we think emerging markets are very interesting — when you look at Nigeria, Indonesia, Vietnam, India, you find the same oligopoly structure,” Vélez said.