How Nubank is disrupting the banking industry in Brazil

Anand Laishram *

Most people who have been to a bank wouldn't describe it as a pleasant experience, to say the least.

From long lines & even longer waiting times (for things to get approved, for example), to uncooperative (or even straight-up rude) staff, unending paperwork, to exorbitant charges and hidden fees, people all over the world have had to deal with all kinds of issues whilst trying to access banking services.

This was the experience David Velez went through, when he had to deal with banks in Brazil. At the time, Brazil's banking sector was dominated by five incumbents. They charged exorbitant interest rates (some of the highest in the world) for loans and credit cards. Nor did they invest in providing better service, knowing they were the only options available to customers.

David Velez, a Stanford MBA and partner at Sequoia Capital, thought to himself that people in Brazil were paying up to 450 % APR (Annual Percentage Rate of Interest) for some very lousy service. He decided to tackle the problem head-on. He reasoned that there was space for a financial services company in Brazil, that didn't burn holes through their customers' pockets and treated them nicely.

This led him to start Nubank in 2013, with co-founders Cristina Junqueira and Edward Wible. They decided to take advantage of the increasing broadband connectivity and smartphone penetration in Brazil and opted for a digital-only banking business model. Nubank offers all its services via digital channels.

Therefore, it doesn't have to invest a tremendous amount of capital on physical infrastructure, which is instead used to improve their technological capabilities& offerings and for passing on savings to customers. Moreover, the digital model allows Nubank to scale rapidly, as it doesn't have to construct bank branches physically in new locations.

Nubank charges no fees to its customers. Nubank customers have saved over a billion dollars in savings since the company was started. At the time, Brazilian banks were charging $10 per month per account. When other Brazilian banks were charging 13.9% interest per month on loans, Nubank charged between 2.75-9.99% per month.

On credit cards, Nubank charged 2.75-14% per month (as opposed to other banks' 14-26%). Affordability wasn't the only consumption barrier that Nubank addressed. It also tackled the Accessibility and Time barriers. (For reference, the four barriers to consumption are Affordability, Accessibility, Time and Expertise).

Nubank made it easier and quicker for customers to access their services. Instead of travelling to banks, waiting in lines, filling up paper forms etc., Nubank customers can open bank accounts, apply for loans and resolve various issues directly through their smartphones. Customers can register an account in 20 minutes, get credit cards approved in a day and get the cards delivered within 8 days.

In contrast, it took customers of the incumbent banks up to 21 days to get their credit card application approved and another 8-31 days for the cards to be delivered. Before Nubank, customers also faced a lot of difficulty in proving their credit-worthiness. The credit reporting infrastructure was very bureaucratic and opaque.

Nubank developed an innovative credit scoring process, based on analysing data from customers' smartphones. Nubank also invested in providing quality customer service. It has a Net Promoter Score (a highly used metric for customer satisfaction) of almost 90. Incumbent banks have NPS scores in the 40s and 50s.

All these have enabled Nubank to shake up the Brazilian banking industry. It has served more than 65 million customers and has expanded to other Latin American countries as well. Its year-on-year revenues also exceed $1 billion.

When Nubank filed for an Initial Public Offering at the New York Stock Exchange last year, it was valued at $41.5 billion, higher than that of Itau Unibanco, which was the largest Brazilian bank, based on assets, when Nubank started.

Nubank has also broken-down barriers and opened up banking services to people who were previously unbanked. About 2 million of its customers earn less than the minimum wage. It also provides services to around 2 million small businesses and entrepreneurs.

Without Nubank, the economic disruptions caused by the COVID pandemic would have been even greater for these customers and SMEs. The incumbent banks in Brazil are finally starting to make changes. They are investing in digital infrastructure and closing down physical banking branches. Nubank shows how technology and an innovative business model can be used to challenge even the most entrenched incumbents.

By focusing on treating its customers well, charging reasonably and providing an easier and less time-consuming experience, it has been able to reach very impressive milestones in the short time it has been in operation.