As Brazil continues to reel as a result of its economic turmoil and its worst recession in 80 years, one of the country’s first financial tech startups has raised significant funding. Sao Paulo-based Nubank, whose first (and to-date only) product has been a “no-fee” credit card that is managed only through a mobile app, has raised $80 million in a Series D round of funding — money that the company says it would like to use to continue expanding its operations with more hiring and new products, David Vélez, the founder and CEO, said in an interview earlier.
The investment was led by DST Global, the prominent VC firm headed by Yuri Milner that has backed the likes of e-commerce giants Alibaba, enterprise juggernauts like Slack, consumer tech icons like Twitter, Spotify and Facebook, and other fintech companies like Klarna and Lending Club. DST last year raised a new $1.7 billion fund and it looks like it’s been flying into newer areas with it: this is DST’s first-ever investment in Brazil.
Others in this round included previous investors Sequoia (where Vélez was once an investor), Tiger Global, Founders Fund and QED. Nubank seems to be a poster child of sorts for investing in South America for these firms. As with DST, Nubank had been the first investment in the region also for Sequoia, Founders Fund and QED (but not Tiger).
Nubank is not revealing its valuation, but in its last round — $52 million led by Peter Thiel’s Founders Fund — it had a post-money valuation of $500 million, and sources tell me that this round is not catapulting Nubank into the realm of “unicorns” (in other words, Nubank is still valued at under $1 billion).
Given the financial climate in Brazil right now, it might seem counterintuitive for VCs to be putting their money into a startup that is building its business on credit products, since these carry risk and you’d think that risk becomes acute when money is tight. In fact, the opposite seems to be true.
Currently Brazil has the largest credit card market in the region, with 100 million cards in circulation. But as Vélez describes it, the country’s five largest banks — which control some 95% of all consumer financial services in the country — are being impacted by the economy today, and they are pulling away from some services and trying to cut their costs, resulting in worse terms for their customers. This means that smaller offerings like Nubank’s, whose credit card is “free” — as long as you pay your balance on time (that is, no upfront or service charge as many others do in Brazil) — suddenly become more attractive to consumers.
Then for the VCs, along with the crisis and lower costs for products and services, come lower valuations for businesses as well. In other words, this is the right time to come in before valuations and the climate improves. “In addition to Brazil’s economy gradually getting better, prices have hit a bottom,” Vélez said.
The company, he added, is using the tough economic climate to its advantage as well. He notes that the company’s credit modelling — which lets Nubank decide whether or not to issue a customer a card — has been built out at the worst possible time for consumers. Essentially, that means that the model is conservative and is better able to identify and encourage the addition of low-risk credit customers.
He believes that the companies that are more challenged are those “built during booms” because they find it harder to adjust to adverse conditions.
Nubank’s business itself has been on a tear since it launched in 2014. Vélez is not disclosing total customer numbers but says that while many other smaller fintech startups appear to have maxed out at around 150,000 customers, Nubank has well surpassed that. He said that there have been some 7 million applications for the card, and some 500,000 are currently on the waiting list to get it. (Nubank doesn’t approve everyone who applies.)
The company doesn’t charge a fee up front, but makes its money in three areas: transaction charges of 1.5% with each purchase; foreign exchange when people buy abroad (so far the card has been used in 171 countries); and interest on unpaid balances.
However, Vélez said that ideally it doesn’t want customers who pay interest on their balances, focusing instead on those who are more likely to pay in full each month. The reason: they are less likely to default (and not pay) over time. And this is exactly what Nubank is doing: today over 90% of its current customer base pays their balances in full each month.
Some 75 million purchases have been made using Nubank’s cards up to now.
As for what the company would like to build next, while Nubank was an early mover and more or less was operating with virtually no competition, that is no longer the case. Others looking to rival and beat Nubank at its own game include Digio, which is a joint project between two of the big banks in the country, Bradesco and Banco do Brasil.
Unsurprisingly, that will likely spur more activity from Nubank. It looks like the next product is likely to be a rewards service, where you get credits for air miles and other products with each purchase. This service, which interestingly will be charged at a monthly fee, is already being tested and is likely to be widely rolled out next year.
Apart from this, Vélez said that there will be another major, new service launched next year but would not disclose what it was. However, considering that the goal is to create a new kind of bank, one clue could be to recreate the most popular services that those traditional banks offer today, such as consumer or small business loans; and savings and current accounts.
There is also the issue of marketing. The company today boasts “zero” customer acquisition costs, said Vélez, as it’s been built entirely on word of mouth and viral campaigns on social media and elsewhere. That could be another area where Nubank finally decides to spend some money to acquire customers. (Or not, and keep the margins up.)
For now, Nubank will stay focused on Brazil, but part of the interest for its investors is to ultimately grow into other markets in the region, too:
“David and the team at Nubank are building a global leader in digital financial services that brings significant benefits to their customers in Brazil, including improved service levels, reduced ecommerce payment friction and lower cost,” said Tom Stafford, managing partner at DST Global, in a statement. “Nubank is establishing one of the leading technology teams in South America and we are excited to partner with them.”