Blog de José Octavio Dettmann: The History of Nubank

terça-feira, 10 de dezembro de 2024

The History of Nubank

Nubank is revolutionizing the financial market in Brazil, and it all began with an idea and a desire to go against the grain. To talk about the company, it’s essential first to explore the story of its founder, David Vélez.

The Colombian entrepreneur had an unexpected encounter with Brazil. In his homeland, Vélez experienced various situations. He enjoyed a comfortable childhood in Colombia—his father was a businessman, and Vélez started working at an early age to save money to buy cows. In no time, those cows turned into a herd, paving the way for his first small business venture. However, everything changed when the Vélez family had to leave the country abruptly due to the escalating violence of Colombian cartels. Beyond direct violence, the cartels began taking over local businesses, intimidating and extorting entrepreneurs. These challenges forced the family to leave the country. This story is detailed in an episode of the Brasil de Imigrantes series by the History Channel.

After being forced to leave his homeland, Vélez moved to Costa Rica and later to the United States, where he attended the prestigious Harvard University. After graduating, he worked in the financial market at prominent investment firms such as Atlantic Capital and Sequoia. During one assignment, he was sent to Brazil for a temporary stint, but upon his arrival, he had an unpleasant experience. When attempting to open a bank account, he encountered a revolving door security system and a cumbersome process, which made him feel like a criminal. Additionally, he noticed how costly and time-consuming it was to perform even basic financial operations in Brazil, such as opening a bank account.

Faced with these frustrating experiences, Vélez saw an opportunity: "If the market is so closed and difficult, why not create a business to simplify the lives of Brazilian consumers?"

With this idea in mind, Vélez designed a business model within the banking sector that could be viable and appealing to the Brazilian market. The goal was to create a lean financial institution with minimal bureaucracy, going against the practices of traditional banks. Furthermore, the bank would be entirely digital, without physical branches or areas that could generate red tape. All documents would be digitized, and a simple registration process via smartphone would suffice to collect customer data, photos, and other necessary information.

To kick off his journey, Vélez launched the project offering a single service: a credit card. The idea was to establish a sustainable business with just one product, with plans to later expand to include other products and services. However, as he tried to fine-tune his business plan, Vélez faced significant discouragement from those who heard about his idea. Many believed it was impossible to implement such an innovative concept in a market dominated by just five or six large banks. Additionally, friends and colleagues argued that starting a business in Brazil was already a bold move—and doing so in the banking sector was sheer madness.

Despite the skepticism, Vélez gained the support of two individuals who believed in his vision. From the banking sector came Cristina Junqueira, an executive, and from the startup world came American Edward Wible, who would oversee the technology. Beyond their partnership, they brought complementary skills and expertise that Vélez lacked.

With the team assembled, Vélez headed to Silicon Valley to meet with his former employers to raise the initial capital needed to bring his idea to life. The project was met with optimism, and the team successfully secured the investment required to launch the venture.

At that point, the project did not yet have a fixed name. The initial idea was to call it "EO2," a reference to oxygen, symbolizing a company aimed at "oxygenating" the Brazilian market. However, after consulting with experts, the chosen name became "Nubank," a word with multiple layers of meaning. Beyond suggesting the idea of a bank, it incorporated "NU," which could signify "nude"—reflecting the transparency of a bank without hidden fees—or "new," as a nod to its innovative approach. Thus, in May 2013, Nubank was born: a 100% digital bank designed to be the financial institution of the future.

The initial investment was substantial but far from sufficient for a company aiming to enter the banking sector. As a result, from the outset, the company operated as a small, lean organization, maximizing efficiency with minimal resources, adhering to the classic startup model as described in The Lean Startup and Startup Owner’s Manual.

The company's first workplace was a rented house—not in California, as some might assume, but on California Street, located in the Brooklyn neighborhood of São Paulo. The house was old and relatively inexpensive, serving as the company's headquarters and occasionally providing temporary accommodation for employees who relocated to São Paulo for the project. While the limited and modest infrastructure of Nubank's first office offered cost savings, which was crucial for the startup, it posed challenges in attracting skilled professionals.

Despite receiving job offers and learning about the project’s potential, most candidates declined the positions upon seeing that the innovative bank was headquartered in an old, barely equipped house. This initial setup, while cost-effective, underscored the difficulties Nubank faced in building its team and realizing its ambitious vision.

Due to this initial challenge, the team started with only 12 members, including the three original founders. According to Vélez, this small group was crucial in establishing the company's culture, which emphasized innovation, rapid implementation of ideas, and a strong focus on customer satisfaction. The primary goal was to ensure customers never felt undervalued, as Vélez had when he first experienced banking in Brazil. This cultural foundation guided the company's actions and hiring practices. Cristina Junqueira explained that the aim was to bring together people with diverse profiles to make the company more modern and provide a broader perspective on the market and ways to delight customers.

The initial goal of the fintech was to offer financial services without monthly fees, breaking away from the traditional banking model. However, Nubank couldn't start as a full-fledged bank and needed a single product to test its innovative, fee-free concept.

To operate as efficiently as possible, Nubank began by offering a credit card service through Mastercard to a limited number of customers. The service launched in 2014, with the first purchase made on April 1 of that year. The digital bank earned revenue through transaction fees from Mastercard, as well as interest from installment payments or overdue bills. However, Nubank offered lower interest rates than the market average, staying true to its goal of outperforming traditional banks.

Before long, the startup became known for issuing credit cards with no annual fees. Its simple registration process attracted the attention of young people, who were particularly affected by traditional banks' annual credit card fees. Additionally, young adults often struggled to obtain credit approval from conventional financial institutions. Nubank's card, being independent of a bank account, offered an accessible alternative.

This appeal to younger generations caused Nubank’s popularity to go viral, with the brand quickly spreading across social media as a trendy must-have. The unique purple card also stood out from competitors and resonated with users. Without annual fees, the card became an attractive option, allowing users to keep it for occasional use without worrying about ongoing costs.

The growing buzz resulted in a waiting list of eager potential customers. Thanks to its early success, the startup outgrew its Brooklyn Street house in just one year. It moved to a new headquarters in the heart of São Paulo, accommodating a workforce of over 300 employees. Along with the new office, Nubank secured another round of international investment, increasing its resources and valuation.

In the eyes of the public, Nubank became one of the first examples of a fintech in Brazil, setting the stage for a new era in the country’s financial industry.

Fintechs are technology-based financial companies that seek to bring innovation and simplify the market. These institutions have been multiplying and increasingly gaining traction across the country. In addition to Nubank, other similar institutions have emerged, while others transitioned from traditional structures to digital ones, such as the Intermedium Bank from Minas Gerais, now known as Inter, one of Nubank’s main competitors today. In 2016, the company launched its second product, called Rewards, a points program similar to those used by other credit cards, where users can earn points as they use their credit cards. However, unlike regular cards, this program is paid, currently costing R$19.90 per month, and is completely optional. Additionally, the points do not expire, another innovation in the market. In 2017, the company expanded its service offerings by creating Nuconta, the institution's checking account, which also has no fees.

Thanks to its pioneering spirit, Nubank gained an edge over its competitors and secured a significant share of the market, drawing the attention of more investors. In February 2018, the company became a unicorn — a startup valued at over $1 billion. Its total valuation reached $4 billion after receiving an investment from the Chinese fund Tencent, owner of various digital businesses, including WeChat, a WhatsApp-like platform that dominates the Chinese market. Tencent acquired a 5% stake in Nubank. In December of that year, another service was introduced: a debit card. Subsequently, a cash withdrawal feature was also integrated into the account balance. In 2019, the company went international, opening branches in Mexico under the brand Nu and an office in Argentina. It also announced the implementation of a loan system aimed at revolutionizing the market, Nu Financeira. This initiative offers interest rates lower than the market average, though the rate varies per user based on credit evaluation and recommendations.

The Central Bank reports that Nu Financeira charges an average interest rate of 3.52%, compared to the market average of 6.71%. In 2020, the company made its first acquisition, purchasing Plataform Tech, a software engineering company. The goal was to enhance the technology and security embedded in Nubank’s system. All this growth has led to the company being valued at approximately $10 billion. However, this expansion has not been without criticism.

Throughout its journey, the company has faced recurring losses — in 2019, its losses tripled compared to 2018, amounting to R$313 million in losses. On the other hand, its revenue almost doubled, rising from R$1.23 billion to R$2.1 billion in the same period. This seemingly unbalanced equation is explained by the company’s founders as intentional — to maintain exponential growth levels, Nubank prioritizes reinvesting all its revenue and more, leaving profitability as a secondary concern. The strategy aims to capture a larger market share and become the bank of the future. Meanwhile, investors continue to support the idea. Another challenge is the complexity of the Brazilian market, both in regulatory and legal terms. However, only time will tell whether the founders’ vision will prove sustainable in the long term. Despite this, the company continues to innovate and promises new developments in the coming years. According to them, this is just the beginning.

Regardless, Nubank has undeniably revolutionized the Brazilian banking market.