NuBank: Leapfrog Development
Growing up in Brazil, I can’t help but to be very excited to be writing this article. To be quite honest, I never expected to see the day that a Brazilian start-up, especially one in the consumer fintech sector, would become a world powerhouse. Much less one whose headquarters is just a few blocks away from where I grew up.
What’s impressive is that a start-up like this was able to survive in the Brazil, a market that shoo’ed away even the most established of players (like Citi). Don’t get me, wrong the Brazilian financial system certainly has its merits. For instance, as a kid, I recall that depositing and sending checks was an incredibly quick, 1-day process. This is still the case to this day, although the same can’t be said about these transactions in all traditional American banks.
At the same time, the Brazilian financial system as a whole has always lagged behind compared to more developed countries. The process of opening an account at a traditional bank in Brazil is still incredibly bureaucratic, a great portion of the population does not have a bank account and customers are still required to physically attend bank branches (trust me, very inconvenient).
For these reasons, Brazil historically emulated the industrial development of other, more prosperous nations like the US. As I grew up, I saw local firms copy international ones, and foreign businesses pouring into the country, although the opposite was rarely true.
Perhaps, this may be changing quicker than we think.
As you may remember reading in the news, Brazilian digital bank NuBank (NYSE: NU) made its’ market debut on the New York Stock Exchange in late 2021. Shares of the Brazilian digital bank closed up ~15%, giving the company a ~$50 billion market cap upon public offering.
Behind the World’s Largest Digital Bank
David Velez, the start-up’s CEO and founder, was born in Columbia to a family of entrepreneurs. He grew up in Costa Rica and later moved to California to attend Stanford University, where he graduated from in 2005 with a BS in Management Science and Engineering and later in 2012 with an MBA.
When he moved to Brazil to join Sequoia’s effort to expand their presence in the country, Velez spent six months trying to open a bank account. The process was, as I can confirm, long and arduous: he had to pass through layers of security, provide piles of documentation and scrutinize over more technicalities than should be legally acceptable. Sequoia’ eventually left Brazil, but this experience gave Velez an idea.
Instead of seeing this highly regulated, unchanging bank environment as a barrier, the founder spotted what he believed to be the opportunity of lifetime. After recruiting local co-founders, Velez used his engineering background to develop a solution.
Bank 2.0: Digital Banks
NuBank was founded in 2017 by a group of tech entrepreneurs. In essence, the fintech serves like a traditional bank; they provide a wide range of banking services to consumers, with the caveat being that all of these services are provided digitally.
In other words, instead of using brick-and-mortar locations, the whole process of banking is conducted at the comfort of customer’s homes through the Nubank’s website or mobile app. As a result, the customer experience can be controlled, allowing customers like me to create an account in less than a day.
More interestingly, NuBank’s cost structure does not follow that of a traditional bank. The company doesn’t require as many employees or have the need to establish branches. In fact, during the early days of this venture, Velez and his team operated from a small rented house. Instead, funds can be allocated towards aggressive marketing, expansion strategies and other areas of the business not typically considered (such as UI/UX design).
To date, NuBank received $4.1 billion in funding across multiple rounds and debt financings. The start-up was backed by a series of major players, including: Invesco, Tencent, Dragoneer Investment Group, GIC, Sequoia, Ribbit Capital, Kaszek, Google Ventures, Berkshire Hathaway, Sands Capital and others.
Leapfrog Development
The opportunity that Velez spotted is a perfect example of leapfrogging, a phenomenon that becomes increasingly more common as the world globalizes.
In international business, the term refers to a nation’s industrial ability to bypass traditional development stages. The idea is that firms in a given local industry can mimic the steps taken by similar, more prosperous firms in other economies. As this effect compounds, entire industries can play “catch-up” or even, at times, progress past the innovation curve of the very same economies that were being mimicked in the first place.
In NuBank’s market, roughly 30% of the population, or ~170 million people, didn’t have a bank account. That being said, a significant chunk of the Brazilian population is young and already accustomed to digital solutions. The same population characteristics can be found in markets like Colombia and Mexico, where NuBank expanded.
The banking sector in Latin America is under penetrated, costly, highly concentrated, and has a low history of innovation; but as Velez noted, this is the perfect environment to be a disruptor. Because much of the customer base does not have a bank account, the experience can be reconstructed from scratch to fit modern consumer wants without worrying about consumer re-education. Moreover, the low technology environment allows for an opportunity to stand-out from competition and to truly benefit from tactics like word-of-mouth marketing, which account for ~80–90% of NuBank’s customer acquisitions.
As you may have noticed, leapfrogging is not unique to the financial industry. While companies like NuBank in Brazil, OPay in Nigeria and Razorpay in India remind us that the world has much to learn from leapfrogging in the fintech sector, the concept can theoretically apply to any less developed local industries.
