In 2014, when Nubank was a small company, it received a $14 million investment from Sequoia Capital. As for why Sequoia Capital ever noticed Brazilian startups, it has something to do with its founder.
David Vélez is the founder and CEO of Nubank, a 36-year-old Colombian from the hometown of Pablo Escobar. Vélez graduated from Stanford Graduate School of Business, worked as a partner at Sequoia Capital where he was responsible for investing in Latin America, before establishing his own company.
In 2013, fintech startups had its best opportunities in the U.S., and companies like Stripe, Lending Club, and Prosper received huge financing. Vélez decided to bring fintech to Latin America. He chose Brazil, as it has more people than any other Latin American country. Security in Brazil was poor, with bank robberies a common occurrence.
And going to the bank is a nightmare for many Brazilians, as they need to go through (sometimes airport like) security check and to store personal belongings like laptops in lockers.
Vélez, a financial professional, chose to enter the market with a low-cost virtual credit card. Most credit cards issued by Brazilian financial institutions has very complex application, and their annual loan interests reach 400 percent (we have seen extremes of close to 700 per cent). Whereas Nubank cards could be applied directly on mobile phone, with an annual loan interest rate of just 145 percent and without annual fee.
Nubank quickly grew.
Nubank is popular with young people for that virtual credit cards make them feel able to control their accounts and spending. Nubank started out with credit card, a banking business, which greatly enhances its efficiency and speed of development.
It now has five million virtual credit card customers, making it one of the top five credit card issuers in Brazil, according to data just released by Nubank in September. In addition, about 2.5 million people have signed up for digital bank accounts that Nubank launched a year ago.
It is not that local banks are unaware of the threat posed by Nubank. Major Brazilian banks, including Itaú Unibanco, are actually working hard in the digital world. For now, though, they haven’t developed fast enough to contain Nubank.
The last two years have seen many independent startups in the fintech world closing down during competition with banks. We don’t think it’s because the banks are too powerful, but that it’s the companies that are trying to make a change met difficulties in product, customer acquisition and, above all, financing.
A sea of challenges
As noted above, however, fintech entrepreneurship in Brazil has not been easy.
Actually, it is quite difficult. Vélez talked about the difficulties he met in entrepreneurship in multiple interviews, including political factors, infrastructure, government efficiency, and strong regulations by Central Bank.
Although Nubank is a star that everyone wants to invest in and it has a large business volume now, there are still many challenges which may even hinder its development.
- If history is a curse
Brazil’s economy grew rapidly during Lula administration from 2003 to 2010, rising as the world’s seventh-largest, and attracting attention from European and American international banks.
However, since Dilma Rousseff took office in 2010, its economy has deteriorated, with increasing unemployment rate and inflationary pressures and unstable regulatory policies. Large international banks fled from Brazil one after another.
In 2011, Merrill Lynch closed its private banks in Brazil. In late 2013, Citigroup sold its Brazilian credit card and consumer finance business. In 2015, HSBC sold its whole business in Brazil to Banco Bradesco SA, Brazil’s second-largest private bank. In February 2015, Societe Generale sold its inefficient Brazilian consumer finance business.
The problems facing these banks will be encountered by Nubank when it develops to a certain size (and in certain economic situation).
2. Uncertain political outlook
Brazil just finished its first round of general elections on October 7. Elites in the country are fed up with the economic mess left by the previous Workers’ Party administrations. But Jair Bolsonaro from Social Liberal Party, the only candidate from other parties, is a far right winger with racist remarks. It is a pretty tough choice for any informed and well educated Brazilian.
They were let down once. Back in 2014, many Brazilians working abroad flew back home to vote (some flew for more than 30 hours), in an attempt to stop Rousseff from being re-elected. Yet voters chose her again.
What’s more, emerging markets generally faced debt crisis this year, and Brazil has been hit by corruption scandals, nationwide trucker strikes and fire at its National Museum (not an auspicious sign).
In a word, there is no sign of recovery in Brazil’s economy, and confidence needs to be boosted in the whole society.
In the first round of the general election on October 7, Bolsonaro won nearly half of the vote, but was not directly elected as president for it was less than half. It is hard to tell whether it is PSL’s Bolsonaro or PT’s Haddad that will win the second round in a few weeks.
- Cyclical “bear market” is around the corner
Brazil’s economy is heavily dependent on commodity exports, with sugar, coffee, soybeans and iron ore as the driving forces successively.
But as commodity markets go through a downward cycle about every four years, Brazil’s economy has its own economic cycle.
The year 2015 was the last bear market for commodities, implying that in 2019 we will likely see the next downturn.
In a downturn, if companies meet difficulties in operation and/or fail to meet regulatory requirements, they are likely to be liquidated or be acquired by the Central Bank. The big local banks have never been soft-hearted on this.
- Regulatory policies are tightening
As with the recent wave of P2P failures in China, what financial startups fear most is the tightening of regulations, or being regulated the same as banks.
Central Bank of Brazil located in Brasilia (one-hour-and-45-minute flight from the commercial centre Sao Paulo) has been tough on keeping the financial system in order. Local banks could be forced into liquidation by the Central Bank if they fail to meet quarterly reserve requirements or compliance requirements.
Central Bank ensures that systemic risks in the financial sector would not be amplified and that local banks would not face bankruptcy liquidation.
Central Bank of Brazil located in the open and empty Brasilia has a firm grip on Brazil’s financial order
At the end of 2017, the Central Bank intended to replicate the European policy of shortening the settlement period between credit card issuers and merchants from 30 days to seven days. Once implemented, it would be a devastating blow for Nubank. Nubank had to lobby other banks to persuade the Central Bank to reconsider the policy.
Although this policy wasn’t implemented in the end, Central Bank may introduce other measures to enhance the stability of the financial system. Nubank is less resilient than other local banks that have been operating for decades. And local banks may not work with Nubank in lobbying the Central Bank on other policies.
- Nubank has competitors
Brazil has plenty of talents in finance. Nubank also has some fast-growing competitors.
Nubank has at least one competent competitor: digital bank Banco Inter. Banco Inter was founded in 1994 with the name of Intermedium.
Banco Inter launched digital accounts in 2014, and online platform covers all its services, enabling users to apply for bank accounts for free online.
Unlike Nubank, Banco Inter is a real bank with complete businesses, including deposits, loans, credit cards and so on. Banco Inter launched IPO in Brazil in April 2018, and is the first Brazilian retail bank to go public in nearly a decade.
Despite the difficulties, the opportunities are great. If Nubank can overcome these challenges and get to the top, it will be another boost for the entire venture system in Latin American.
And if Nubank succeeds, Tencent should gain more than just financial returns in the process.
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This article was originally published by Momentum Work in WeChat.