Case Study – Nubank As you read the case study, be attent

Case Study – Nubank
As you read the case study, be attentive to Nubank’s successful
strategy, the difficult industry David Vélez is
going against and the untapped market potential that Vélez
visualized. Answer the questions below based on the
case study. Your answers should fit in the lines below each
question. Be sure to include all the elements
mentioned in the article as well as your own knowledge about
the financial and banking industry.
Question 1: Why were ‘unbanked’ individuals such a high risk
and high reward business opportunity?
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Question 2: Describe in your own words why Nubank’s strategy
against a concentrated banking industry is
proving to be successful and what are the remaining obstacles

faced by Nubank as it continues to expand?
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Source CNN Business:
https://www.cnn.com/2019/12/06/business/nubank-david-velez-
risk-takers/index.html
When David Vélez walked into a Brazilian bank branch to open
an account six years ago, he was appalled by the
experience.
First, he had to check his bag in a locker outside. Next, he
waited to pass through a security line manned by three
armed guards. He sat there for 45 minutes and finally spoke to
someone, who acted like they were doing him a favor
by deigning to talk about opening an account. Then, he was sent
off to make a phone call to bank employees elsewhere
and was later forced to return to the bank a half-dozen times

over the next four months.
Vélez knew his experience was common throughout Latin
America, where about half the population is
"unbanked," with no bank accounts and often no credit
histories. 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,
according to the Wall Street Journal.
So Vélez decided to build something entirely new, aptly named
Nubank: a financial institution that would offer no-fee accounts
and
credit cards, welcoming the largely ignored Brazilian unbanked
population to their first-ever bank accounts after they answered
a
few simple questions via an app.
In Brazil, as elsewhere, unbanked status makes everyday life
difficult: Customers must make purchases in cash, or shell out
for
preloaded debit cards or money orders. If they receive a check,
they
have to pay extra at a check-cashing facility. And with little to
no
chance of securing a traditional loan, they may be forced into
high-fee services similar to the US payday loans if they

need to borrow money.
Six years after its founding, Nubank is a bona fide tech unicorn
reportedly raising money at a $10 billion valuation.
One of the most valuable startups in all of Latin America,
Nubank has already attracted marquee investors including
Sequoia Capital and Goldman Sachs, and it has signed on nearly
20 million customers in Brazil alone. The company
is also expanding to Mexico and Argentina.
Clearly, Vélez's bet has paid off so far. But Nubank's simple
premise belies complex competitive, regulatory and
unbanked-customer challenges that early critics thought would
be impossible for Vélez — or anyone — to overcome.
"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," Vélez, who is originally
from Colombia, told CNN Business in an interview. They said,
"nobody competes with the five banks that own the
market. They're going to crush you. It is impossible to
compete."
He knew the unbanked were a potentially risky customer base.
He knew that as a foreigner he would need a presidential
decree to get a permit to start Nubank in Brazil, a process that

could—and later did — take years. And he knew Brazil's
banking oligarchy was powerful.
The comments were "intimidating," Vélez said, especially when
attempts to fundraise locally in Brazil failed with
people telling him: "You're crazy. There's no way I'm going to
invest."
But Vélez also saw the massive opportunity in the Brazilian
market, where 55 million people were unbanked, and in
Latin America at large. And he felt a responsibility to them. He
partnered with two other cofounders Edward Wible,
an American, and Cristina Junqueira from Brazil to bring the
vision to fruition.
"There was a lot of conventional wisdom around banking...like
[it] was almost sacred and that entrepreneurs could
not go compete with them," Vélez said. "But as I dig deeper and
talk to consumers and felt firsthand the pain of being
a banking consumer, I realized that people just really needed
more alternatives. Technology was going to create a
window of opportunity to build a fully digital bank."
How Nubank is upending traditional banks
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%
https://globalfindex.worldbank.org/
https://www.wsj.com/articles/brazils-sky-high-lending-rates-
hurt-consumersand-economic-growth-1535707800
https://www.wsj.com/articles/brazils-nubank-to-be-valued-at-
more-than-10-billion-in-new-financing-round-11564100322
https://www.bnamericas.com/en/features/brazil-banking-report
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 emerging markets like Brazil, for years monopoly banks
hadn't had to stay competitive," said Lindsay Davis, a
senior intelligence analyst at CB Insights who focuses on the
fintech industry. "They were able to charge their fees
and serve only part of the population and do just fine that way."
But then, the cost of technology started to come down, and
suddenly there was better access to Wi-Fi, Davis explained.

Meanwhile, venture capital was starting to pour into Latin
America, and consumer demand began to put pressure on
governments to foster a more competitive banking market.
Enter Nubank. The company launched its first product to
Brazilians in 2014: a no-fee, low-interest international
Mastercard credit card completely managed by a mobile app. In
2018, it launched a digital savings account called
NuConta — after Nubank finally received its special
banking permit from the Brazilian government — and
earlier this year the company unveiled a personal loan
product.
For Nubank, the digital focus helps keep costs low. The
company is able to strip out some fees because the
company doesn't have the overhead of hundreds of
banking branches, Vélez explained; instead, revenue
comes from interest and from interchange, the fees
merchants pay to Nubank for the processing of card
payments to make a purchase. (The interchange fees
average 1% on every credit card transaction)
Nubank uses unique data sets and algorithms to approve new
applicants

for financial accounts, often within minutes. (Beto
Chagas/Shutterstock)
Vélez says customers can be approved for a bank account, credit
card or loan in "a few minutes" after downloading
the app, uploading a few documents and answering a couple of
basic questions.
Some customers receive credit card interest rates as much as
50% lower than those of traditional Brazilian banks,
Vélez said. In other cases, Nubank hedges by offering a line of
credit as low as $10 to start, increasing the amount
over time as customers build up a history of good payments.
Vetting the unbanked
The problem that Nubank and Vélez are tackling goes far
beyond the struggles of the individual unbanked, as the
effects ripple deeply into countries' macroeconomics and culture
at large.
In rich, developed countries, widespread access to credit fuels
the ability for consumers to purchase goods,
entrepreneurs to launch small businesses, students to pursue
higher education and the housing market to thrive —
overall, for the economy to continue to grow.
But in emerging economies where credit is rare, consumer
spending is inhibited. Small businesses have less

opportunity to grow. Both problems in turn hurt companies'
ability to hire. All of the interconnected issues pile up and
can hold back a country's economy. Brazil, specifically, has
grappled with years of sluggish economic growth.
Unlocking credit could be a key to turning around Brazil's
economy. But by targeting the unbanked population, many
of whom do not have credit histories, Nubank doesn't have
historical data to assess potential customers — an inherent
risk as customers may not have the ability to pay it back.
In the US, tools like FICO scores are paramount: Customers'
histories of taking out loans, using credit cards and
paying back their debts determine whether they are considered
high or low-risk. In turn, lenders may grant them a
high-limit credit card or loan at a low interest rate, a lower limit
at a high interest rate or even deny their request
altogether.
https://www.prnewswire.com/news-releases/with-over-4mm-
credit-card-customers-nubank-opens-1-5mm-digital-savings-
accounts-in-6-months-in-brazil-300665746.html
https://www.prnewswire.com/news-releases/with-over-4mm-
credit-card-customers-nubank-opens-1-5mm-digital-savings-
accounts-in-6-months-in-brazil-300665746.html

But in Brazil, this type of concept is new. Until recently, the
only credit scoring system was a blacklist of sorts, with
unpaid balances listed on a register and removed once they were
resolved. Over the past few years, though, change
has begun. Brazil's five largest banks have been working to set
up a more US-like credit research company to track
information on customers' bill-paying history, and companies
like FICO and Equifax are moving into Brazil as well.
Nubank, however, has built its business on a wholly new
foundation: unique data sets and algorithms that are
based on "a lot of nontraditional information," Vélez
said.
"We look at where you live...how you move, who your
friends are, who invited you to Nubank, the type of
people that you're sending money to," he said. "We look
at whether you read the contract of the credit card or
whether you don't — it turns out that people [who "read"
the contract] really fast tend to be fraudsters. We look at
the type of transactions that you're doing, if you're

buying groceries or if you are in a bar."
Nubank is based in São Paulo, Brazil but is expanding to
Mexico Overall, Vélez said, it boils down to looking
"at a lot of
and Argentina as well. (Jo Galvao/Shutterstock)
behavioral information to try to create a more holistic picture.
Davis, the CB Insights analyst, said such algorithms represent
how Nubank and other challenger banks "are using
innovation and technology to see how customers can be
underwritten. Traditional business models just haven't kept
up with the pace of that technology, and it creates a huge
opportunity when you couple it with the pent-up demand [of
customers who want to become banked]."
Brazil and beyond
That pent-up demand has driven Nubank to sign up nearly 20
million customers so far, and Vélez said the goal is to
reach 100 million customers in Latin America. The company has
already expanded to Mexico and in 2020, it will
begin operating in Argentina as well.
"Traditional banks' business models have been able to sustain
them up until this point," Davis said. "They're are
waking up to the idea that they're being disintermediated, that
'the bank' can be abstracted away from the branch. In

Latin America specifically, where someone like Nubank is able
to get a charter, challengers can absolutely pull power
away."
With more than 1.7 billion unbanked adults around the world,
there is ample room for other Nubank-style upstarts to
disrupt traditional banking. Davis added: "Even more broadly
than Brazil, the challenger-bank opportunity is
spreading rapidly."
Nubank, at least, is still focused squarely on Latin America,
where the company estimates it has saved customers $1
billion in fees alone so far. Today, the company has 50% share
of all new credit cards issued in Brazil.
The company is not yet profitable — though it is narrowing
losses, from 117 million Brazilian reais (USD $29.4
million) in 2017 to about a 100 million reai net loss (USD $25
million) in 2018. And 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.
In the long term, Nubank wants to explore all emerging markets

to connect people with credit cards, bank accounts
and other products that could change people's financial lives,
Vélez said — a lofty goal that early detractors would
have scoffed at, he knows.
"It's been a very surreal experience; our [original] goal was a
million customers in five years," Vélez said. "It has all
really happened way faster than anything we expected."
https://www.reuters.com/article/us-banks-brazil-credit-bureau-
idUSKBN1342Z3
https://www.fico.com/en/newsroom/fico-acquires-goon-to-
advance-growth-in-brazil
https://investor.equifax.com/news-and-events/news/2011/05-31-
2011a

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Case Study – Nubank As you read the case study, be attent