What makes Nubank’s business model tick?

If one of the world’s most infamous old-school investors is investing in a challenger bank, then you know we are reaching an inflection point in the market.

The intrigue of the newly-minted $30 Billion Nubank goes a level further when you realize they are a Brazilian challenger bank. That’s why we dig into the Business Model Canvas behind Nubank.

Nubank Business Model

Nubank – Credit Cards in Brazil + LatAm

Warren Buffet made waves in the market this week when it was announced that Berkshire Hathway had invested $500 Million in Brazilian-based Nubank as an extension to the Series G at a valuation of $30 Billion.

Nubank’s stock has risen – so to speak – on the back of the digital acceleration in Fintech and payments brought on by the pandemic, combined with the abysmal state of financial services in Brazil, a country with 200 million+ citizens.

One of the world’s largest challenger banks, it has amassed 40 million clients across Brazil, Mexico and Colombia.

Even with the rampant growth and impressive user numbers across Latin America, a $30 Billion valuation is on par with some of the other leaders in the challenger banking space like Chime. There is no emerging market discount here, which means that beneath the surface there is some serious money being made by the upstart digital-only bank started in 2013.

Part of the deal with being a challenger in the banking sector is to challenge the old guard of banking with new products, streamlined digital interfaces, and some form of a disruptive business model. We saw some of the earlier challenger banks in the UK and Europe test a subscription business model, which has had limited success.

Chime – the leader in the U.S. market – has a debit-based payment processing model, along with an innovative credit product. SoFi has created a competitive, members-only lending model combined with a cloud-based platform for other Fintechs in Galileo.

Brex has opened-up the business credit and cash management category with a suite of products. All of these companies, however, operate in “developed” economies with competitive, and generally open banking sectors.

Brazil is an oligopoly where the incumbent banks rule the roost. The ‘Big 5 of Brazilian Banking’ dominate everything to do with retail banking, credit, and asset management.

Even today, 81% of the country’s assets are controlled by a Big Five of Itaú, Caixa Economica, Banco do Brasil, Bradesco, and Banco Santander. They also hold 85% of the country’s loans. 

The Generalist

Beyond controlling the vast majority of the country’s assets, they make absurd profits because of the insane NIM (Net Interest Margin) margins they are afforded, in a country where some consumers paying north of 450% in interest per year.

How does Nubank make money?

Nubank’s primary revenue streams are built around the company’s credit card business.

They make money each and every time their customers tap their credit cards in-store or make a payment online (#Interchange Fees) and the earn revenue on the carried credit-card balances of their customers based on the interest rates applied to those balances (#InterestIncome).

Like other players in the credit card side of payment processing, there is a lot of money to be made on interchange fees for issuing banks during the course of each credit card transaction. The merchant pays the fees (~2-3% on average) and those fees are split across the stack of banks, cards networks, and processors.

Interest Income is then earned on top of the carried balance that consumers pay, in what is typically referred to as the APR (Average Percentage Rate) of the interest rate.

The Nubank credit card has no annual fees. As Brazil is famous for having ’10X sem juros’ (or “10 payments, no interest”), consumers are used to paying in installments, something not dissimilar in function to BNPL (Buy Now Pay Later). Nubank customers pay interest on installments.

Its interest rates vary between 2.75% and 9.99% per month. While these rates exceed those of international markets, they are below Brazil’s average of 13.9% per month

HBS

The interest rates are cheaper than the average in Brazil, but that does not make them cheap.

As of Q3 2020, Nubank had gained approximately 5% of the credit card market share in the Brazilian market.

The company also has a low/no-fee debit account that pays out above-average APY (Average Percent Yield) interest to savers, a strategy that has been common with challengers worldwide.

That’s because they will make Loans to other customers and pocket the NIM spread between the two rates (the rate they pay savers vs. the rate they charge to the customers taking the loan).

Overall, as of the end of 2020, the business has about 33 million users (up 68% YoY) and 95 Billion BRL (~$18.7 Billion USD) in TPV (Total Payment Volume) from credit card transactions. Revenues across all business units were $5 Billion BRL ($1 Billion USD), and Net Losses narrowed in 2020 to $230 Million BRL ($45 Million USD) vs. $312 Million BRL in 2019 ($61 Million USD).

Community-Centric or Commercial Partner Strategy?

The company recently announced they now have more than 35 million users in Brazil alone, meaning they are growing like wildfire.

In Fintech, we have seen a divergence among challenger brands from a strategy perspective; some are more community-centric, while others are more commercial and work with more established corporate partners to gain market shares.

Nubank is slightly different as a comparable because Brazil is a country with a high mobile penetration, large % of unbanked customers, and a large number of people who are dissatisfied with the status quo of retail banking.

Not to mention, because of the prohibitively high interest rates, a much lower % of consumers using credit cards compared to the United States and other Western economies. It took an outsiders viewpoint to even begin the journey to build Nubank into what it is now.

Nubank could never have been started by a local. . . . It required a Silicon Valley investor who has seen this story of the tiny ant going against the elephant and succeeding. A Latin American investor sees that and says, ‘No way, the elephant is going to crush you.’ ”

Forbes

The whole strategy from the outset needed to be divergent compared to other challenger banks as no company could just walk into Brazil and start offering bank accounts.

Nubank couldn’t start with bank accounts because it faced a high hurdle to getting a bank charter—a Brazilian constitutional provision barring foreign bank ownership. But it didn’t need a banking license to offer credit cards.

Forbes

Their strategy in the early days was built on word-of-mouth, so in that sense Nubank did build an early community of users who became promoters and got the name out there.

Rather than burn scarce cash on marketing, Nubank used the “velvet rope” strategy common in Silicon Valley—at the start you had to be invited by a friend to apply for its credit card. Faux exclusivity aside, the appeal for Brazilians was obvious: Nubank charged no annual fee and handled applications entirely through its app.

Forbes

The combination of the smooth digital interface, no fee model, and relatively lower hurdle/rates for credit cards (they built their own proprietary credit model), helped propel Nubank into prominence even in the midst of a huge economic crisis.

At the end of 2014, Brazil slipped into a deep recession. Yet just 12 months later, more than a million people had applied for a spot on the Nubank card’s waiting list. To protect itself from losses, Nubank approved only 20% of applicants and gave some ultralow spending limits of $14, raising that only if payments were timely.

Forbes

The whole strategy enabled them to reach 1 million accepted credit card users by 2016, almost all of which were driven by referrals and word-of-mouth. After the 1st million users, the company began raising progressively larger rounds and scaling up the user-acquisition strategy.

After the company received their banking license in mid 2017, they were able to begin scaling up the business, with almost half of its credit card users also signing up for the Digital Account within five months of launching.

Finally, in May 2017, after a presidential decree gave it an exemption from foreign ownership rules, Nubank received a Brazilian banking license. Now it could offer its checking and savings accounts—all digital, naturally.

The loyalty they have generated with their customers is evident in their NPS scores, and bodes well for the next phase of their strategy, which is to start plugging other banking ‘modules’ into their platform and building new revenue streams.

They launched a life-insurance product in 2020 – Nubank Vida, underwritten by Chubb. They also acquired Easynvest, which had 1.5 million users at the time of acquisition in Sept. 2020. With the new round of financing, they will be able to start rolling out some form of investment product (see SoFi as a reference) that is complementary to their current product portfolio.

With 40 million+ users and growing, across 3 countries, Nubank has a captive ecosystem that it can start to test new products on and generate new sources of revenue.

Even with increasing competition, the switching costs are high; meanwhile demand for digital-first banking products continues to grow exponentially across Latin America.

Fundraising and Valuation

From the first seed round in June of 2013 until the latest Series G – which including Berkshire’s $500 Million totalled $1.15 Billion – the company has raised more than $2 Billion USD.

The company is now well capitalized, and despite indicating they will one day list publicly, it does not appear the listing will happen in 2021. Nevertheless, the $30 Billion valuation puts the Nubank in the big leagues among challenger banks, globally, and the pressure to continue growing profitability will escalate between now and the time they list.

Nubank Business Model Canvas

A business model is defined as:

Alex Osterwalder et al invented the Business Model Canvas to help individuals and organizations conceptualize how to analyze, create, and develop business models.

Nubank Value Proposition

Brazilian-based challenger bank. Digital-only, offers suite of banking products, including:

• Credit Card with low-friction application, easier acceptance and lower rates than mainstream banks
• Debit Account – no fee/low fee account for chequing, savings
• Easynvest -new product for investing

View FULL PDF

Nubank Business Model Analytics

There are always advantages and disadvantages to each type of model. In Fintech/Digital Banking as a whole, one of the biggest problem for the upstarts is Customer Acquisition Costs (CAC). In addition to the marketing cost to acquire a customer there are:

• onboarding costs
• fraud mitigation costs (AML/KYC)
• customer retention costs

Furthermore, the revenue for a bank due to Interchange Fees is typically split between multiple parties, with the lion’s share going to the ‘Issuing Bank’ or the consumer’s bank. By operating in ’emerging markets’ in Latin America (Brazil, Mexico, Colombia), Nubank has the advantage of a super-low CAC of $5 per user.

Only Square’s (Block) Cash App has a comparable CAC at $10 (it was once $5) in a ‘developed market,’ an almost unheard of anomaly for a brand that reaches scale.

When you combine this with the interest rates that Nubank earns on its Credit Card business, you can see how the company makes money and became a big player in the market seemingly out of nowhere in 2021.

Scaling a Digital Bank with a $5 CAC is a winning strategy, as most often the early CAC costs rise exponentially as market competition heats up.

This doesn’t mean that Nubank will hold onto this level forever – but getting to this level has helped to keep the business growing without burning endless amounts on CAC, which can be a Digital Bank killer.

Nubank ARPU Data

Below we can see ARPU (Average Revenue Per User) data for the Nubank business model from Q4 ’21 to contrast with the CAC data. Combining these data points, it starts to make sense why Nubank has the ability to be such a big business in the future.

The Nubank IPO and Buffett Doubles Down

In Q4 ’21, Nubank hit public markets with a dual listing on both the NYSE (New York Stock Exchange) and the Brazilian São Paulo Stock Exchange. They have subsequently de-listed from the São Paulo Stock Exchange in Q3 ’22 due to liquidity and administrative concerns, which may be instructive to companies thinking about that strategy in the future.

Nevertheless, the company successfully floated their shares for a valuation of $41.5 Billion at the time, making them the most valuable listed LatAm bank in the world.

The timing of the IPO was fairly good – in hindsight – as the market for Fintechs and Digital Banks has taken a beating in 2022. The market for such companies started to sour in Q3 ’21 when most of these companies reached their peak valuations, both public and private. In fact, Nubank was actually forced to slash its valuation leading up to the IPO for this exact set of reasons.

Last week, Nubank decided to slash its IPO valuation by 20% after facing weak demand from investors wary of unprofitable banking fintechs.

Reuters

Had they not went public in Q4 ’21, however, it is unlikely they would have went public in all of 2022 given market conditions. That would have left them in a challenging scenario going into 2023 like many others who remain private, as both public and private capital has dried-up across the Fintech sector.

A couple months later, it was announced that Warren Buffett had upped his stake in Nubank to $1 Billion, while simultaneously disposing of shares in Visa in Mastercard in the same quarter.

Looking at NuBank’s first ever quarterly report, we can see how the #s looked as they exited 2021:

• 52.4 Million customers in Brazil (30% of the adult population) – up 58% YoY
• 1.4 Million customers in Mexico, 114,000 customers in Colombia after 14 months
• $636 Million in Revenue in Q4 ’21, with a Gross Profit Margin of 35.7%
• $9.7 Billion in Deposits, $2.0 Billion in ‘Interest Earning Deposits’
• Credit Loss Expenses of 3.0% in Q4 ’21 and 7.3% in FY ’21 as a ‘% of the Credit Portfolio’

As we can see from their revenue mix above, the vast majority of revenue for Nubank comes from ‘Interest Income’ (69%) on their Credit Card Business, versus that from ‘Fee and Commission Income’ (31%). That’s a logical calculation given the interest rates they are able to charge. All told, Nubank reported a loss of $66 Million in the quarter.

NuMexico – A Big Opportunity in Mexico

It is easy to get caught up in the hype around Nubank in Brazil, where they:

• a) dominate the market
• b) continue to grow at a rapid pace
• c) continue to launch new products and innovate (more on that below)

But NuBank’s big push into Mexico started to yield some serious dividends in 2022. A few headline stats on the Mexican market:

• 49.1% of Mexicans are ‘banked,’ only a 2% increase between 2018 and 2021
• Cards are only used 12.3% of the time for transactions over 500 pesos (~ $25 USD)
• Mexico represents about 20% of the LatAm population (130 Million people)

There are of course various reasons that Mexicans are skeptical of banks and use cash extensively, but for Nubank that was a clear opportunity when they entered the market in 2019.

Mexicans use their credit card as a financial vehicle much more than Brazilians; they are more revolvers or no totaleros, as we say in Mexico, meaning that they effectively use credit and carry their balance from one month to the next.

LABS

Scaling Up Nubank in Mexico

Fast forward to 2022:

• 2.1 Million cardholders in the Mexican market at the end of Q1 ’22
• A growth rate of nearly 230,000 customers per month from the end of 2021
• Growing at a faster pace than Brazil

In early Q2 ’22, the company announced a credit line of $650 Million to speed up expansion in Mexico and Colombia. In mid Q4 ’22 they announced the beta launch of their inaugural ‘Mexican Savings Account’ following regulatory approval.

Finally, in later Q4 ’22, they announced an additional $330 Million equity capitalization for Mexico on top of the $1 Billion it had already invested there. Obviously NuBank likes what they see in the Mexican market.

There are of course other upstart Digital Banks in Mexico, to name a few:

• Klar
• Albo
• Vexi

Furthermore, the big Fintech players like Revolut are moving into the Mexican market here in 2023; nevertheless, it seems like NuBank has built a pole position in the Mexican market and is pouring capital into it just like they did in Brazil.

NuCoin + CBDCs in Brazil

In partnership with Polygon, NuBank is launching a blockchain-based token in early 2023.

To kickoff, Nubank will be inviting 2,000 users to actively take part in the co-creation of Nucoin. The participants will be selected from the most active and engaged members of NuCommunity, an online forum for Nubank customers.

Nubank

The strategy to beta test in the community makes a lot of sense. Because the token will be free floating, there is a profit incentive for those who participate, a practice that is in line with most other major token launches.

Brazil’s Central Bank also recently announced they will be piloting their own Central Bank Digital Currency (CBDC) in 2023, with a target rollout of 2024.

Brazil’s central bank aims to launch its digital currency in 2024 after a closed pilot program next year with financial institutions

Reuters

The two are completely different:

• Nucoin is a free-floating token that trades more like Bitcoin (ie. highly volatile)
• The Brazilian CBDC is more like a stable coin, and is pegged to the BRL (Brazilian Real)

In line with the Future Banking Business Model, there seems to be an inevitability to ‘Blockchain Banking’ making its way into not just the Brazilian market, but the global market, here in the near future.

Markets like Brazil and Mexico are still heavy cash-based societies, so it is not like cash is going anywhere. But these types of models have multiple complexities, especially given that merchants bear the cost of transactions, not consumers. In Brazil, this is evidenced with their Pix money transfer system.

Launched in November 2020, Pix is ​​free for individuals, but the system lets banks and payment institutions freely define merchants’ costs both for transfers and receiving funds.The Pix system has grown immensely popular in Brazil, with use now surpassing transactions with credit and debit cards in the country.

Reuters

The Brazilian CBDC may remove the MDR (Merchant Discount Rate) fee for merchants, meaning Pix will increase even more in popularity (in theory). Naturally, Nubank integrates with Pix, but it is going to be interesting to see how NuCoin performs in this mix going forwards. On the surface, it looks like a new free-floating system of Rewards, incentivizing both retention and engagement.

But in a world of localized CBDCs, will it actually be a competing coin?

Seems unlikely, but it is always hard to predict how these types of innovations will perform in emerging markets. Especially since Nubank has more than 65 Million Brazilian users going into 2023.

Nubank Outlook – 2023 and Beyond

Nubank’s stock (Ticker: Nu) was down 59.2% in 2022, which isn’t great. All the consumer-facing Digital Banks got hammered in 2022, the majority worse than Nubank. The company still has a market cap of nearly $20 Billion, however, keeping it in the top-tier of Digital Banks globally.

With a predicted valuation of US$126bn by 2025 on its current growth trajectory, the challenger bank currently serves an estimated 70 million customers. Nubank’s NPS rating of +87 (Itaú’s is +14 and considered acceptable) is just one aspect that reflects its popularity among customers. 

Fintech Magazine

They come into 2023 with roughly:

• 66 Million+ users in Brazil
• 3.5 Million+ users in Mexico
• 0.5 Million+ users in Colombia

By many standards – despite the 60% haircut – Nubank had a great year in 2022. Especially when you look at the performance of some of the ‘next-gen’ credit players in the BNPL market like Klarna (private) and Affirm (public), who were down approximately 85% and 90% respectively in 2022. Ouch!

In an Outlook type mindset, however, we have to look at what looks good for Nubank, and where the risks are entering 2023.

Despite being heavily leveraged towards credit, they have started diversifying their business model across multiple products including investments, business accounts, cryptocurrency trading, and insurance. That’s a positive.

Credit Portfolio & NPL Risks

The risks lie in the credit card business. Any type of model where you lend significant amounts, in total, to customers at the lower end of the income spectrum, the potential to blow up the balance sheet is always there. We have seen this many times throughout history, and in many ways we saw it in 2022 in the BNPL market in developed markets like the U.S. and UK.

Nubank does lend to a lot of Low-income customers. And their delinquency rates started to shoot up late in 2022.

‘NPL’ stands for ‘Non-performing Loan.’ We can see that a similar pattern emerged in 2020 during the lockdown period, before reversing. It is intuitive that NPL rates will be higher in lower-income groups, as we can see below.

Naturally, NuBank has stated they have ‘superior credit underwriting’ and is ‘adequately pricing credit risk.’ Yet if we see a sharp macro downturn or any major events in 2023 that were similar to 2020, this risk may start to the company’s outlook.

Thus 2023 looks full of major swings in both potential directions for Nubank. It’s rapid growth in Mexico and continued dominance in Brazil bode well for it’s top-line growth heading into the year.

Nucoin adds another dimension of potential upside to the company, with little downside. But risks to their credit portfolio ticked-up at the tail end of 2022, and the overall global economic outlook looks rocky heading into 2023.

More Nubank Posts

Nubank + Nucoin Token

FIntech CAC – Customer Acquisition Costs

Digital Banking Business Model Outlook – 2023