Nubank: David vs Goliaths

Sector

FintechLATAM

Background

Daniel Bakalarz is the Managing Partner of Unison Asset Management. We cover the competitive dynamics of banking in South America, why the industry was ripe for disruption, and how Nubank took advantage of the opportunity.

Cover

Date

August 9, 2023

Episode Number

123

Business Breakdown: Nubank

Background / Overview

Nubank, founded in 2013 in Brazil by David Vélez, Cristina Junqueira, and Ed Wible, is a digital-first retail bank operating primarily in Brazil, with expansions into Mexico (2019) and Colombia (2020). Starting with a $2 million seed round from Sequoia and Kaszek Ventures, Nubank has grown into Latin America's leading fintech, serving over 80 million customers (75 million in Brazil, ~4 million in Mexico, and the rest in Colombia). It went public in December 2021 on the NYSE, raising $2.8 billion at a $45 billion valuation. As of April 2025, its market capitalization stands at $37 billion. Nubank operates without physical branches, delivering all services via a mobile app, targeting a digitally native, underserved population in a region historically dominated by an oligopoly of large banks. Its employee base supports a client-to-employee ratio of 8,000:1, far surpassing traditional banks’ 400:1, highlighting its lean, tech-driven model.

Ownership / Fundraising / Recent Valuation

Nubank’s IPO in 2021 priced shares at $9, valuing the company at $45 billion, a remarkable figure given its $1.3 billion in gross revenue compared to Brazil’s largest bank, Itaú, with $36 billion in revenue at a similar valuation. Post-IPO, its market cap has settled at $37 billion. The company has attracted significant venture capital from top-tier firms like Sequoia and Kaszek, reflecting strong investor confidence in its disruptive potential. No specific data on recent fundraising or ownership changes post-IPO is provided, but its public status implies broad institutional ownership.

Key Products / Services / Value Proposition

Nubank offers a suite of financial products, all delivered digitally with a focus on simplicity, transparency, and customer-centricity. Its flagship product, the no-fee, purple Mastercard-branded Nu credit card (launched 2014), disrupted Brazil’s market by eliminating annual fees and offering a mobile-first experience. Other products include:

• Banking: Checking and savings accounts (NuConta, launched 2018).
• Lending: Credit cards and personal loans (secured and unsecured, launched 2019).
• Investing: Brokerage and asset management via NuInvest (acquired Easynvest, rebranded 2020).
• Insurance: Life and cell phone insurance (2020).
• Payments: Supports traditional wire transfers, mobile formats (QR codes, Pix, Boletos, WhatsApp), with Pix being a key Brazil-specific instant payment platform.

The value proposition lies in:

1. Accessibility: Targets unbanked/underserved populations (60% of clients earn <3x Brazil’s minimum wage).
2. Cost Advantage: No-fee products and lower APRs (e.g., 80% APR on credit cards vs. 260% market average).
3. User Experience: Seamless, app-based interface with features like one-tap card blocking.
4. Transparency: Clear pricing and no hidden fees, contrasting with incumbent banks’ complex structures.

Segments and Revenue Model

Nubank operates as a single-segment digital retail bank, with no distinct business units but a diversified product portfolio. Revenue comes from three sources:

1. Interest on Loans (~50%): From credit cards and personal loans. Credit card balances yield ~80% APR (vs. 260% market average), personal loans ~50% APR.
2. Fees and Commissions (~20%): Primarily interchange fees (~1.1% of Mastercard’s 2.25% transaction fee), plus late fees, card recharge fees, and commissions from brokerage, asset management, and insurance.
3. Interest on Non-Client Assets (~30%): Income from undeployed capital invested in short-term government/corporate bonds and interbank deposits.

The high proportion of non-client asset income is unique, driven by an underutilized capital structure ($15 billion in cash/equivalents, half its asset book) due to regulatory buffers ($1.5 billion per Basel III), growth reserves, and Brazil’s quirky credit card receivable financing (merchants finance receivables for 30 days, freeing Nubank’s capital).

Splits and Mix

• Geo Mix: Brazil dominates (93% of clients, 75 million), followed by Mexico (5%, 4 million), and Colombia (<2%). Brazil generates ~95% of revenue, with Mexico and Colombia still in early, loss-making stages.
• Customer Mix: 60% of clients earn <3x Brazil’s minimum wage ($750/month), 40% earn 2-5x ($250-$1,300/month). Focus on retail, with SME banking in beta.
• Product Mix: Credit cards drive most revenue, followed by personal loans and bank accounts. Investments and insurance are smaller but growing.
• Channel Mix: 100% digital via mobile app, with 85% of customer acquisition through word-of-mouth referrals.
• End-Market Mix: Retail financial services, with no exposure to mortgages, auto loans, or payroll loans (yet).

Mix shifts show increasing ARPC (average revenue per active client) from $4.80 in 2018 to $8.60 today, with mature cohorts reaching $24, indicating cross-selling success. Younger cohorts achieve $8.60 in ~30 months vs. 50 months for older cohorts, signaling faster monetization.

KPIs

• Customer Growth: 80 million clients (46% of Brazil’s adult population), doubling year-over-year in early years, now growing steadily.
• ARPC: $8.60/month overall, $24 for mature clients (5+ years).
• CAC (Customer Acquisition Cost): $6.50, with $2 on marketing, recovered in <1 year.
• LTV/CAC Ratio: >30x, using a 12% discount rate and 10-year client life.
• Contribution Margin per Client: $7.80/month (up from $3.40 in 2018, 20% CAGR).
• Efficiency Ratio: 39% vs. 50%+ for incumbents.
• Client-to-Employee Ratio: 8,000:1 vs. 400:1 for incumbents.
• NIM (Net Interest Margin): 15%, matching incumbents (up from 7% early on).
• ROE: 11% consolidated, 40% for Brazil operations (vs. 18% for incumbents).
• NPLs (Non-Performing Loans): 15-90 day NPLs 170 basis points better than top banks; 90+ day NPLs in line.

Headline Financials

• Revenue Trajectory: Rapid growth driven by client acquisition (5 million in 2018 to 64 million active clients today) and ARPC increase ($4.80 to $8.60). Brazil contributes ~95%, with Mexico/Colombia nascent but accelerating.
• EBITDA/Profit Margins: Not directly provided, but contribution margin per client ($7.80) suggests strong unit economics. Efficiency ratio (39%) indicates significant operating leverage vs. incumbents (50%+).
• FCF: Not detailed, but high deposit growth (63% YoY) and low capex (digital model) imply positive FCF potential. Undeployed capital ($15 billion) could boost FCF if converted to loans.
• Capital Intensity: Low due to no physical branches and scalable tech. Capex is minimal, with reserves for growth and acquisitions.

Value Chain Position

Nubank operates downstream in the retail financial services value chain, directly interfacing with consumers via its app. It bypasses traditional branch-based distribution, leveraging Brazil’s Pix platform and partnerships (e.g., Mastercard for credit cards). Its GTM strategy relies on:

• Digital Acquisition: 85% word-of-mouth referrals, minimizing CAC.
• Cross-Selling: Upselling mature clients to multiple products (3-4 per mature client).
• Underwriting: Proprietary algorithms using real-time data (e.g., app interactions) for superior credit risk assessment.

Nubank’s value-add lies in its tech-driven efficiency, low-cost structure, and ability to serve underserved segments profitably. Its competitive advantage stems from digital scalability and data-driven underwriting, unlike incumbents’ branch-heavy models.

Customers and Suppliers

• Customers: Primarily low-to-middle-income retail clients (60% earn <$750/month). 46% of Brazil’s adult population uses Nubank, with mature clients (5+ years) generating $24/month.
• Suppliers: Minimal reliance on physical suppliers. Key partners include Mastercard (credit card processing), credit bureaus (data), and cloud providers (tech infrastructure). Brazil’s Central Bank (CBB) indirectly supports via Pix and Open Finance.

Pricing

Nubank’s pricing is a key differentiator:

• Credit Cards: 80% APR (vs. 260% market average), no annual fees.
• Personal Loans: 50% APR, competitive for unsecured loans.
• Deposits: Pay 80% of interbank rate (13.8%), slightly below incumbents.
• Interchange Fees: ~1.1% per transaction, standard for Mastercard.

Pricing power stems from brand affinity, low-cost structure, and superior UX, allowing Nubank to offer lower rates while maintaining 15% NIM. Contracts are short-term (86% of loans <1 year), enhancing flexibility but exposing to rate fluctuations.

Bottoms-Up Drivers

Revenue Model & Drivers

Nubank generates $1 of revenue through:

• Credit Cards: $0.50 via interest ($4/month on $65 revolving balance at 80% APR) and $0.15 via interchange ($1.35 on $120 monthly purchases).
• Personal Loans: $0.25 via interest ($15/month on $360 loan at 50% APR).
• Bank Accounts: $0.08 via float ($2/month on $300 balance).
• Fees/Commissions: $0.02 via late fees, brokerage, etc. ($0.50/month).

Drivers:

• Volume: Client growth (80 million, 46% of Brazil’s adults) and transaction volume ($245 billion monthly via Pix). High smartphone penetration (78%) and app usage (9 hours/day) drive engagement.
• Pricing: Lower APRs (80% vs. 260%) attract price-sensitive customers. Brand and UX support premium positioning despite commoditized products.
• Mix: Credit cards dominate, but personal loans and bank accounts grow. Mature clients (3-4 products) boost ARPC to $24 vs. $8.60 overall.
• Stickiness: High switching costs due to seamless UX and data integration (e.g., Open Finance). 85% referral-based acquisition indicates loyalty.

Cost Structure & Drivers

• Variable Costs: Minimal, including credit bureau fees, card printing/shipping, and transaction processing. Contribution margin per client ($7.80) reflects low variable costs (~$0.80 cost to serve).
• Fixed Costs: Primarily personnel (tech and customer support) and cloud infrastructure. Efficiency ratio (39%) and client-to-employee ratio (8,000:1) highlight operating leverage.
• Cost Trends: Cost to serve ($0.80) stable despite 50% client growth, indicating scalability. CAC ($6.50) is low due to referrals, with marketing at $2/client.

EBITDA Margin: Implied high due to low efficiency ratio and stable costs. Absolute EBITDA growth requires revenue scaling, which Nubank achieves via client and ARPC growth.

FCF Drivers

• Net Income: Driven by contribution margins and operating leverage.
• Capex: Low, as a digital bank requires minimal physical investment.
• NWC: Favorable due to Brazil’s credit card receivable financing (30-day merchant float). Cash conversion cycle is short, as receivables align with payables.
• Undeployed Capital: $15 billion in cash/equivalents suppresses ROE but supports future growth without debt reliance.

Capital Deployment

• Organic Growth: Focus on client acquisition, cross-selling, and new products (e.g., payroll loans, SME banking).
• Inorganic Growth: Acquired Easynvest (rebranded NuInvest). Potential for further M&A in LATAM.
• Capital Allocation: Reserves for expansion (Mexico, Colombia, new geos) and regulatory buffers. No mention of buybacks or dividends, prioritizing growth.

Market, Competitive Landscape, Strategy

Market Size and Growth

• LATAM Retail Financial Services: $200 billion revenue pool, Nubank holds 3%. Brazil ($90 billion, 7% share), Brazil/Mexico/Colombia ($122 billion, 5% share).
• Growth: Driven by volume (client growth, transaction volume via Pix) and price (higher ARPC from cross-selling). Industry growth tied to GDP ($6 trillion), population (650 million), and fintech adoption.
• 3 KDs (Key Drivers): Smartphone penetration (78%), millennial demand for digital UX, and CBB’s pro-fintech policies (Pix, Open Finance).

Market Structure

• Oligopoly: Brazil’s top banks (e.g., Itaú, Banco do Brasil) control 70-90% of the market, with 170-180 banks serving 200 million people (1.2 million per bank vs. 65,000 in the U.S.).
• Fragmentation: ~1,000 fintechs in Brazil, 2,500 in LATAM, but few scale (e.g., Interbank, Nequi). High MES (minimum efficient scale) favors large players.
• Cycle: Fintech adoption is early-stage, with 40 million unbanked adults in Brazil (down from 60 million in 2013).

Competitive Positioning

Nubank targets low-to-middle-income retail clients with a low-cost, digital-first model, contrasting incumbents’ branch-heavy, high-fee approach. It avoids mortgages and auto loans, focusing on unsecured lending and payments. Risks include disintermediation by incumbents retrofitting digital offerings or fintechs replicating its UX.

Market Share & Relative Growth

• Share: 7% of Brazil’s $90 billion market, 14% of card payment volume (vs. Itaú’s 23%). Fifth-largest financial institution in Brazil, sixth in LATAM.
• Growth: Outpaces market due to client acquisition (46% of Brazil’s adults) and virality (Mexico’s NuConta reached 1 million clients in 1 month vs. 6 months in Brazil).

Competitive Forces (Hamilton’s 7 Powers)

1. Economies of Scale: High, with 8,000:1 client-to-employee ratio and 39% efficiency ratio. Low MES allows Nubank to scale without diseconomies.
2. Network Effects: Moderate, via word-of-mouth referrals (85% of acquisition) and Pix ecosystem integration.
3. Branding: Strong, enabling 15% NIM despite lower APRs. Purple Nu card is iconic, fostering loyalty.
4. Counter-Positioning: Digital-first model disrupts branch-based incumbents, who struggle to retrofit legacy systems.
5. Cornered Resource: Proprietary underwriting algorithm, leveraging real-time data (e.g., app interactions) and a 10-year dataset, gives a structural edge.
6. Process Power: Tech-driven operations (e.g., one-tap card blocking) enhance UX and efficiency, unmatchable by incumbents’ patchwork IT.
7. Switching Costs: High, due to seamless UX, data integration (Open Finance), and multi-product adoption (3-4 products per mature client).

Porter’s Five Forces:

• New Entrants: Low threat due to Nubank’s data advantage and scale. Fintechs struggle to build credit DNA.
• Substitutes: Moderate threat from payment fintechs (e.g., Mercado Libre), but credit dominates profit pools.
• Supplier Power: Low, as Mastercard and cloud providers are commoditized. CBB’s Pix reduces reliance on intermediaries.
• Buyer Power: Moderate, as price-sensitive clients value low fees, but multi-product adoption reduces churn.
• Rivalry: High with incumbents (Itaú, Banco do Brasil) and fintechs, but Nubank’s UX and underwriting lead.

Strategic Logic

• Capex Bets: Offensive, with reserves for new products (payroll loans, SME banking) and geos (Mexico, Colombia, potential LATAM expansion).
• Vertical Integration: Limited, focusing on core banking. Easynvest acquisition added investing capabilities.
• Horizontal Expansion: Entering SME banking ($17 billion market) and payroll loans ($14 billion). Mexico/Colombia show early success.
• M&A: Strategic (Easynvest), with potential for further deals to accelerate LATAM penetration.
• MES: Nubank operates at optimal scale, avoiding diseconomies (unlike incumbents’ branch-heavy models).

Risks

• Credit Risk: Unsecured loans (60% to low-income clients) pose default risk, but best-in-class underwriting (170 bps better NPLs) mitigates.
• Regulatory Risk: Low, as Nubank aligns with CBB’s fintech-friendly policies and matches incumbents’ lobbying power.
• Liquidity Risk: Minimal, with 63% YoY deposit growth and short-term loan durations (86% <1 year).
• Market/FX Risk: Unhedged FX exposure in Mexico/Colombia, but small relative to Brazil.
• Competition: Incumbents retrofitting digital offerings and fintechs replicating UX could erode share, though Nubank’s data and scale provide a moat.

Valuation

At $37 billion, Nubank trades at 5.6x annualized revenue ($6.6 billion, estimated). This is high relative to incumbents like Itaú (1x revenue), reflecting growth expectations. Nubank’s 7% share of Brazil’s $90 billion market and 3% of LATAM’s $200 billion suggest a $18 billion revenue opportunity in 5-6 years, with $2 billion in profits (assuming stable costs). An LTV/CAC ratio >30x and 40% ROE (Brazil) justify a premium. However, risks (credit, competition) and undeployed capital temper upside.

Key Takeaways and Unique Dynamics

1. Disruptive Digital Model: Nubank’s branchless, mobile-first approach achieves 20x efficiency (8,000:1 client-to-employee ratio) and 39% efficiency ratio, leveraging Brazil’s 78% smartphone penetration and 9-hour daily app usage. This contrasts sharply with incumbents’ branch-heavy, high-cost structures.
2. Underwriting Edge: Proprietary algorithms using real-time data (e.g., app interactions) and a 10-year dataset enable best-in-class underwriting, with 170 bps better NPLs for low-income clients, a segment incumbents avoid.
3. Capital Structure Quirk: Brazil’s 30-day merchant-financed credit card receivables free $10 billion in capital, boosting float income (30% of revenue) but suppressing ROE (11% consolidated vs. 40% Brazil). This is unique to Brazil’s regulatory environment.
4. Virality and Low CAC: 85% word-of-mouth acquisition and $6.50 CAC (recovered in <1 year) drive scalability, with an LTV/CAC ratio >30x rivaling top tech firms.
5. Cross-Selling Runway: ARPC of $8.60 (vs. $24 for mature clients) and faster monetization (30 vs. 50 months) indicate only 20% of cross-sell potential is realized, projecting $18 billion revenue by 2030.
6. Regulatory Tailwind: CBB’s pro-fintech policies (Pix, Open Finance) and rejection of anti-Nubank regulations create a supportive environment, unlike typical regulatory capture.
7. Oligopoly Disruption: Nubank’s 7% share in Brazil’s $90 billion market, gained in a decade against a 70-90% incumbent-controlled oligopoly, showcases its ability to challenge entrenched players.

Nubank’s business model thrives on digital scalability, data-driven underwriting, and a customer-centric UX, uniquely positioned to capture LATAM’s $200 billion fintech market. Its ability to serve low-income clients profitably, leverage Brazil’s digital infrastructure, and maintain low costs sets it apart, with significant growth potential in untapped segments and geos.