Why I’m Excited to Join Banco BS2
Combining two great companies to create Brazil’s premier digital bank for SMBs
A while back, a former manager and mentor told me something about FinTech lenders that changed my whole perspective:
“To survive, FinTech lenders either need to become a bank or partner with a bank.”
FinTech has created tremendous transformation in banking, but some things can’t change. In order to lend, lenders need capital. Banks have large amounts of “free” capital because they have deposit accounts (checking, savings, etc.). In their early years, monoline FinTech lenders generally try to avoid the need for deposit accounts because the regulatory and compliance requirements of managing a bank with deposit accounts slows down innovation. As an alternative, monoline lenders pursue debt capital from debt investors. In other words, the monoline lender will borrow at 8% to lend at 18%. This is a great strategy to scale fast, but over time, the cost of capital from debt investors becomes an expensive burden and the monoline lender has trouble competing with banks. When WEEL reached a mature state as a FinTech lender, my mentor’s advice came back to me, and we realized that WEEL had to make a decision.
Become a Bank or Join a Bank?
There have been many examples of “monoliners” evolving into banks in the consumer banking segment. Capital One, for example, launched in 1994 as a credit card company and in 2005 started its journey as a bank. Today, Capital One is the 12th largest bank in America.
In Brazil, a more recent example is NuBank. Nubank launched a credit card for consumers in 2014 and only three years later started offering basic banking products. Today NuBank is the largest digital bank in the world by number of customers.
WEEL needed to decide on our path. Would we pursue an independent path like NuBank and go head-to-head with the traditional banks or find an existing bank that we could partner with?
After a lot of internal debate and conversations with our customers and investors, we realized that partnership was the best path. Capital One and Nubank have maintained a great strategy of slowly introducing more and more products. That strategy makes a lot of sense for consumers, but modern SMBs need a vast number of inter-related products:
- Deposit accounts (checking, savings, etc.)
- Payment processing (credit card, check, ACH, etc.)
- Payroll
- Treasury Services
- Foreign Exchange
- Invoice factoring
- Loans, Lines of Credit, and Credit Cards
- Vendor Financing
In order to provide all of these products in the fastest amount of time, we realized that we needed to find a banking partner that could immediately complement the lending products that we had already built. Partnership was clearly the fastest way for us to “complete the puzzle” and provide SMBs with the full suite of digital banking products they need to succeed in the rapidly changing business environment.
Getting Married During COVID
Merging with a bank is a lot like getting married. Over the past year, we have all heard crazy stories about COVID weddings and WEEL’s path to the wedding canopy was equally wild. We spoke with many prospective suitors over the last eighteen months. There were many “maybe this is the one” moments that did not come to fruition.
At the same time, the market reality around us changed dramatically. Before COVID, a typical interaction between an SMB owner and his banker in Brazil never happened without 2–3 espressos and a nice long chat. Today, with a solution to COVID not yet in sight in Brazil, SMB owners have dramatically changed what they expect from their bank. They are demanding a fully digital experience that links seemlessly with their accounting, payments, and ERP systems. The incumbent banks recognize that they are not able to deliver solutions fast enough for this rapidly changing market. Milton Maluhy, CEO of Itaú, the largest bank in Latin America, was quoted in the Financial Times saying:
“We need to be quicker and better for our products and services to outdo competition.”
Brazil’s incumbent banks have been extremely slow to digitalize over the past decade. They have failed to embody a culture of continuous innovation and improvement and their profitability has suffered as a result.
Eventually, the WEEL management team realized that we couldn’t partner with a traditional bank in order to fulfill our mission of transforming SMB banking. We needed (a) a bank with a digital-first attitude and (b) a leadership team that was ready to break down silos in order to create a unified digital experience for users. That’s when we fell in love with Banco BS2.
Starting a Revolution
Revolutions start with revolutionary leaders, and we were extremely impressed with Banco BS2’s CEO, Marcos Magalhães. Marcos joined BS2 only two months ago and already seems on a mission to create a revolution in Digital SMB Banking. He is a person with a strong reputation for promoting digital transformation, particularly during his leadership of Itaú’s credit card processing unit, Rede. The WEEL team felt a strong alignment with Marcos on the critical ingredients needed for this new revolution:
- Relentless focus on creating the optimal digital customer experience
- Commitment to constant improvement and innovation
- Leveraging data analytics and data science to build best-in-class products
- Being open and honest with customers in everything we do
BS2’s existing suite of digital banking products is the perfect complement to WEEL’s digital lending products. It’s a match made in heaven. So now we’re “off to the races.” We have a lot work ahead of us, but we’re excited to get started. We feel like it’s the perfect time, with the perfect team, that can produce “NuBank-level” results in the SMB Digital Banking space. Viva la revolución!
