Nubank operates in one of the most concentrated banking sectors in the world, with the top 5 banks controlling 70 to 85% of the loan market.
Market concentration has allowed Brazil’s banks to levy massive interest rates and charge fees for all their services, leaving many customers unbanked and ill-served.
Nubank has exploited the flaws in the market to deliver products with an amazing product-market fit.
Although still unprofitable, the company’s growth prospects and the size of the market opportunity, and how far ahead Nubank is of the competition, make me confident that it can attain profitability.
Chris McGrath/Getty Images News Brazilian neobank, Nu Holdings Ltd (NYSE: NU ), hereafter, “Nubank”, after its bank operation, listed on public markets in a traditional initial price offering (IPO) held on Thursday, 9 December. According to its F-1/A filing , the Berkshire Hathaway-backed digital bank operator had set an initial price range of $8 to $9 per share of its class A common stock, and eventually sold 289 million shares at the top of that range, raising $2.6 billion and earning a $41.4 billion valuation. Shares ended the day 155 higher at $10.33, for an implied valuation of nearly $50 billion, making it bigger than Brazil’s largest traditional lender, Itaú Unibanco ( ITUB ) and the largest financial services company in Latin America. Nubank is a chance to invest in a disruptor with a huge runway for growth ahead of it. Why Nubank is a Disruptor
Brazil is Latin America’s largest economy and has one of the most profitable banking industries, as well as some of the world’s most developed financial markets. In many ways, Brazil is ahead of the United States. For instance, financial transactions that typically take several days in the United States thanks to automated clearing house (ACH) processes happen immediately in Brazil. However, for all the fingerprints of a first world economy, Brazil is a deeply unequal society where large sections of people experience staggering levels of poverty, awful customer service, eye-gouging fees and poor access to bank services.
The banking sector has two key flaws that allowed Nubank to disrupt the market. Firstly, the market is incredibly concentrated. Basic economics tells us that oligopolistic and monopolistic competition allow market incumbents to have enormous levels of pricing power, which of course is great for them, but comes at the expense of the customer, who has to pay high prices to access a more limited pool of products and services. According to a Harvard Business School (HBS) case study , corporate loans attracted an interest rate of 52.3%, consumer loans had a 120% interest rate and credit card indebtedness earned an interest rate of 272.42%. Even in Latin America, those figures are extremely high. Just 60% of Brazil’s cities have bank branches, leaving many people unbanked, such that Nubank can state that it has issued the first credit card or opened the first bank account for around 5.1 million people. The top five Brazilian banks are able to push the boat out on what’s possible because they control more than 80% of Brazil’s assets and between 70% and 84% of the loan market, deposits as well as overall banking revenue. That kind of market power screams, “impenetrable”, but the story of disruption is also about how founders are able to use the strengths of incumbents against them. The traditional banks became soft, lacking the kind of battle hardened pedigree, nimbleness and ability to innovate that they needed in order to beat off challengers.
Secondly, Brazilian banks have high costs to serve, which is why there are so few bank branches in the country. The five biggest banks in Brazil each have between 2,000 and 5,000 branches, and all five employ about 80,000 employees. The result is a high cost to serve. The logical response for them is to focus on high margin products, products which the typical Brazilian does not need. According to Nubank’s own calculation, its cost to serve is 85% lower than the traditional banks. Market Opportunity
Nubank found itself attacking a large but immobile target: the traditional banking giants. The prize was one of the largest swathes of unbanked people on the planet and the chance to become Brazil’s biggest bank.
The company was founded in 2013 with the aim of attacking the rich prize before them. Nubank developed a zero-fee credit card that customers could use on the Nubank app. Traditional Brazilian banks are built around a model in which fees are charged for all services. For […]