Colombian entrepreneur David Vélez got the inspiration for his São Paulo-based online-only credit card company Nubank a few years ago after becoming frustrated with Brazilian banks.
Then an executive with venture group Sequoia Capital, Mr Vélez found himself constantly stuck in the armour-plated rotating doors banks often use to screen harried customers for weapons as they try to navigate what is one of the world`s most bureaucratic banking systems.
“I remember getting locked in those bulletproof doors a couple of times because I had my cell phone in my pocket and guards looking at me with guns,” he says in Nubank`s chic offices in São Paulo. “I was like: ‘Oh my God, people are paying 450 per cent in APRs [annual percentage rate of interest] to get this type of horrible customer experience’.”
That was in 2012. The following year he launched Nubank, Brazil`s biggest “fintech”, or financial technology company, which offers consumers credit cards via their smartphones without requiring physical documents or branch visits.
While Nubank does not reveal customer numbers, it says since April 2014 it has received more than 10m applications. In a report released in May and titled Fintech’s Brazil`s Moment, Goldman Sachs estimated Nubank had more than 500,000 cardholders, and the company says it has now topped 1m. This is still a fraction of the 165m credit cards the central bank estimates have been issued in the country but represents rapid growth for a newcomer with very low overheads.
The rise of Nubank, which has raised $180m from six venture capital groups including Mr Vélez`s former employer, Sequoia, has sparked investor interest in the potential for disruptive technology start-ups in financial services in Latin America’s largest economy.
Brazil`s banking system is concentrated into five large banks: three listed groups, Itaú Unibanco, Banco Santander and Bradesco, and state-controlled Banco do Brasil and Caixa Econômica. The industry is one of the world`s most lucrative, with return on equity still at nearly 19 per cent for Itaú and 15 per cent for Bradesco in the first quarter of this year even after almost three years of recession, according to data company Economatica, higher than US and European averages.
The industry has some of the highest lending rates in the world. Interest rate spreads in Brazil are second only to those in Malawi and Madagascar, according to the Goldman report.
The big incumbent banks still rely heavily on their branch networks, but these are now being leapfrogged by an estimated 200-plus fintech companies, Goldman said. It estimated the potential revenue pool for Brazilian fintech was R$70bn over the next 10 years in areas ranging from regular banking services to credit cards and wealth management.
“Smartphones and internet access — key delivery mechanisms for fintech — are also increasing rapidly as Brazil’s tech-savvy generation comes of age,” Goldman wrote.
Nubank has placed the smartphone, whose penetration has grown in Brazil to roughly half of all mobiles sold, at the centre of its strategy. New customers — millennials are the target group — apply for a card through their mobiles, with Nubank checking creditworthiness online using its own algorithms.
Nubank charges no fees to customers and its interest rates, while high by international standards at between 2.75 per cent and 9.99 per cent per month, remain below the Brazilian average reported by the central bank of 13.9 per cent a month. The company charges a 1.5 per cent transaction fee from vendors and also charges a 4 per cent foreign exchange spread on overseas purchases.
Traditional banks have not taken the challenge lying down. Many do not allow customers to auto-pay their Nubank credit card bills from their bank accounts. Bradesco and Banco do Brasil last year launched their own online credit card Digio. Itaú and Bradesco have also launched fintech “accelerators” that seek to nurture fintechs and benefit from their innovation.
But so far the most aggressive fintechs have been independent companies. Apart from Nubank, these include GuiaBolso, a personal finance management app that had 3.1m users by the end of last year, up from 240,000 in 2014. The app collates users’ financial information from their various accounts and helps them reduce indebtedness and loan payments to banks by finding better deals on the internet.
Others include Bidu, an online insurance broker that allows users to compare policies and quickly sign up for the best deal, and Orama, an online broker that lets users compare the past performance and fees of investment funds and other assets and then buy them online. One way or another, these upstarts are all threatening the profitability of the big players.
Most analysts do not see the fintechs toppling the big banks, however. These have begun scaling down their brick-and-mortar offerings. Itaú, for example, shut down 10 per cent of its branch network over the past three years, according to a Moody`s Investors Service report.
“Fintech companies in Brazil are driving the innovation in the nation’s digital banking landscape, but ultimately it will be the sector’s established leaders that will dictate the scope of changes in the industry,” Moody’s said.
Mr Vélez begs to differ. He said Nubank was applying for a banking licence to tackle the incumbents on other fronts beyond credit cards. This could include traditional banking services, such as deposit taking and auto loans. “Consumers in Brazil hate these banks. So let’s offer them a good platform . . . and treat them nicely,” he said.