What Nubank's IPO means for the future of LATAM fintech

Nubank's rise to fame says a lot about the potential of fintech in LATAM.

Jul 28, 2022

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Nubank’s story

On December 9th, 2021, Brazilian start-up Nubank went public on the New York Stock Exchange, raising more than $2.6 billion in the process. Nubank, a “neobank” offering a fully-digital banking experience for users across Brazil, Colombia and Mexico is often seen as the poster boy for Latin America’s recent “fintech boom”.

Nubank was founded in Brazil in 2013 by a Colombian (David Velez), an American (Edward Wible), and a Brazilian (Cristina Junqueira). The impetus to found the company came from Velez’s complicated and lengthy experience opening a bank account in Brazil, which he theorized could be done entirely online. As the Nubank prospectus states:

“All three of us saw a massive opportunity, using technology, data, and truly thoughtful service to eliminate the complexities and anxieties that customers face every day dealing with Latin American banks, by creating a truly new experience, not just a digital copy.”

Kickstarted by some initial investment from renowned VC firm Sequoia Capital, for which Velez previously worked, Nubank was founded with the ambition to disrupt the highly concentrated Brazilian banking market, where five major banks control four-fifths of the space.

The allure and attractiveness that explain how Nubank went from an idea to an IPO in less than a decade can be explained by one major component: the singular banking experience it offers. To start, one of Nubank’s strengths has been its branding: the distinctive purple color, the simple yet effective name, and the crisply designed card have created somewhat of a “Nubank” fanbase, something other banks had no idea could even exist. The simple, all-digital onboarding and KYC (Know Your Customer) process also contributed to its explosive growth. Lastly, Nubank’s stellar customer service offers a stark contrast to the infamous “please hold” we get when most of us call our bank.

The numbers speak for themselves. With over 54 million users to date, and a presence “only” in Brazil, Mexico and Colombia, Nubank still has an ocean of potential users to onboard from Latin America’s 663 million people. Contrary to other neobanks, especially in Europe (that are struggling to get profitable), Nubank developed a product that could make money early on: credit. Through a variety of acquisitions, Nubank now offers a plethora of different financial services including credit cards, personal/business checking accounts, investments, loans, mobile payments and life insurance.

Nubank hasn’t been without its problems, including difficulties to compete with big banks’ profitability levels. Although revenue is growing, extracting value from users when the company’s value proposition revolves around low fees is difficult. The numbers paint an accurate picture:

“Notably, the company’s SEC filing showed that Nubank’s revenues doubled to $1.06 billion across the first nine months of 2021, though the company’s net losses expanded to $99.1 million over the same period - representing a significant rise on the $64.4 million from a year before.”

It is also important to note that Nubank hasn’t been immune from the current bear market, with its stock price dropping 36.6% in May 2022.

LATAM’s fintech opportunity

Nubank’s success is the “cherry on the cake” of what has been a phenomenal past couple years for the LATAM fintech sector, both in terms of funding and growth. In 2021, fintech start-ups captured 40% of the total $15.1B VC funding the region received. This isn’t surprising, as financial inclusion is almost always a prerequisite to using any digital product created by start-ups in other fields.

As Johan Lindblom Siewertz, the executive country manager at Fin-Pay puts it:

“In many ways, neobanks are re-imagining how and where to charge the customer and doing so in at a speed that a traditional bank simply can not compete with.”

Neobanks focus on making money where big banks usually lose money, namely remittances and payments. Customers now have the opportunity to have multiple bank accounts, picking and choosing the features most adapted to their own particular use cases. Some LATAM fintech experts counter the view that neobanks represent a threat to incumbents, instead arguing that by bringing more people into the banking ecosystem, fintechs are widening incumbent banks’ total addressable market.

Two major factors explain this success, and why it is unlikely to slow down anytime soon. An important element of LATAM’s fintech sector is its focus on inclusion, meaning the onboarding of a previously unserved population onto financial products, instead of offering more complex services to wealthy clients which incumbent banks specialize in.

Unbanked vs Disconnected

First, there is a true dichotomy between the number of unbanked people in the region compared to the number of people with either a mobile or an internet connection. This gap is where fintech comes in, offering financial services to people who don’t have access to them but have the tools needed to use them. According to the GSMA:

“Around 93% of LATAM is now covered by a mobile network, and Statista reports, in 2019, 69% of all mobile connections in LATAM were smartphones – a share expected to increase to 80% by 2025.”

The pandemic has accelerated the population’s adoption of digital services, which has drastically reduced the share of the unbanked population in countries such as Brazil, where digital-only covid handouts onboarded millions virtually overnight. However, countries such as Mexico and Peru still remain severely underbanked (and thus an opportunity for more fintech innovations).

Poorly-performing incumbent banks

The term poorly performing is to be nuanced here. In purely investment terms, Latin American banks have performed extraordinarily well for their shareholders, achieving impressive returns on equity. This is mostly due to the fact that big LATAM banks prefer to serve wealthier clients, imposing strict underwriting rules in order to make sure their money is protected. As a16z adequately puts it, the opportunity for LATAM fintechs truly lies in “biting at the margins”. Furthermore, LATAM incumbent banks suffer from low-trust levels from the general population, either because of the exclusivity described above or the often subpar customer experience. Lastly, LATAM’s young generation has grown up with digital services and is often out of phase with the lengthy, bureaucratic processes that are so characteristic of banks.

Where fintechs innovate

Fintech, which stands for financial technology, spans a wide range of different services, for different customer segments. a16z breaks down fintech innovations in three categories: consumer-facing, business-facing and infrastructure building. Let’s see how each of those categories are being filled in LATAM.

Consumer-facing

These encompass innovations such as payments, neobanks, PFM (personal finance management), and digital credit. These are the most funded and widespread fintech innovations, as they act as a prerequisite to using the other fintech services described later. Examples of these obviously include Nubank, as well as others such as Argentina’s Ualá. Interestingly enough, other non-fintech LATAM start-ups such as Colombian food-delivery Rappi and Argentina’s e-commerce giant MercadoLibre have also created their own fintech divisions, through Rappi Bank and Mercadopago respectively.

Business-facing

SMEs (think corner shops, family-owned restaurants, etc..) in LATAM suffer from a huge lack of financing and digitalization. According to IDB Invest:

“The Latin American and Caribbean region has about 27.5 million MSMEs, of which some 26.2 million are micro-enterprises. The overall funding gap for MSMEs is estimated to be $1.2 trillion.”

Fintech start-ups in LATAM often follow a path of first digitizing an SME by offering logistics/fulfillment software and point of sales (POS) before then venturing into financial services such as loans/credit.

Infrastructure facing

These include fintech companies that are building the infrastructure for the two previously mentioned types of fintech to function properly. These can take the shape of start-ups providing better KYC (Know Your Customer) /AML (Anti-Money Laundering) services, credit score rating services, or POS (Point of Sale) services. Examples include Brazil’s idwall and Argentinian Pomelo.

The numbers

With the opportunity laid out and the sector dissected, let’s see what the numbers come out to. In 2021, LATAM was the region that saw the biggest jump in VC funding, with fintechs taking the lion’s share of that. With 70% of the region’s VC going towards so-called mega-rounds, it comes as a surprise to no one that the three largest of those mega-rounds went to fintech start-ups, namely Nubank (Brazil / $1.15B), eBanx (Brazil / $430M), and Ualá (Argentina / $350M). Factor in the statistic that cash usage is expected to drop 36% in the region between 2020 and 2024, and you have a recipe for more mega-rounds to come. Other regional fintech giants such as Mexico’s Bitso and Clip have also recently achieved unicorn status.

Future trends

Regulation

With all that being said, what should we expect for the future of LATAM fintech? First and foremost, we should see a lot of movement regarding the regulatory side of things. As fintechs gain more and more power, and thus more and more leverage into their customers’ lives, the role of regulators is to strike the right balance between protecting the customers’ rights (against predatory loans for example) and not hindering useful innovation in the process. The recent move by the Bank of Ghana (yes, I know it’s not in LATAM) to request fintech start-up Dash to stop operations due to them not being properly licensed is a case in point.

A couple of landmark laws have recently been passed, such as Mexico’s “Ley Fintech”, Brazil’s moves to regulate equity crowdfunding or Chile’s proposed fintech law. Lawmakers and ecosystem actors across the region have even consolidated into an organization called “Fintech LAC”, which is supposed to coordinate and streamline the different fintech policy proposals across the continent. For example, Mexico’s Ley Fintech is asked to set the parameters for crowdfunding, cryptocurrencies, and APIs, alongside detailing regulatory sandboxes for new fintech products.

Open Banking

Another topic related to fintech regulation is the concept of Open Finance/Open Banking/Open Insurance. The concept is simple; big banks have to enable outside companies to access the banks’/insurances’ user data through APIs, in order for third parties to offer more accurate/customized services to their users. The end goal is to stimulate financial innovation and create more transparency in a historically opaque sector. One of the Open Banking trailblazers is Brazil, whose government required Brazilian banks to take part in the system. This spurred the creation of Pix, an app developed by the Brazilian Central Bank that “enables funds to be transferred between accounts in under ten seconds, making it a practical, instant, and secure payment option that can be used from an online wallet, checking account, savings accounts or prepaid payment account.” Less than a year after its launch, 110 million Brazilians had installed the app.

Cryptocurrency

The elephant in the room, cryptocurrency is set to take more and more space in the LATAM tech ecosystem. Two areas in which it could be particularly useful are the areas of remittances, which have historically been plagued with colossal fees, and protection against inflation, such as holding one’s savings in stablecoins pegged to the dollar or the euro to counter fluctuations of the national currency. Most countries in the region are also looking into the development of their own CBDC (Central Bank Digital Currency).

Conclusion

The rise of fintechs in LATAM stems from a fundamental gap between the region's relatively high internet and mobile connectivity compared to the still very large number of unbanked individuals. This opportunity is exacerbated by the general unpopularity of incumbent banks, combined with the “digital” leapfrog millions in the region experienced during the pandemic. The sheer number of people left to offer financial services is fueling the massive increase in foreign investment into LATAM fintechs, and local governments are scrambling to find fair yet effective ways to regulate them. Overall, fintechs in emerging markets tend to attract a lot of attention because they seem to combine a useful and impactful societal objective with potentially lucrative financial returns. I’m excited to see what’s next.