How Nubank Became Most Valuable Bank in Latin America Without Making a Profit

The debut on the New York Stock Exchange this week made Nubank the most valuable bank in Latin America.

With shares priced at US$9 (R$50), fintech reached a market value of US$41.5 billion, equivalent to approximately R$230 billion.

After the first day of trading on the New York Stock Exchange (Nyse), this Thursday (9), the shares closed at an even higher value, around US$ 10.5 (R$ 58.33), raising the market value to almost US$50 billion (about R$278 billion).

Itaú, which until then occupied the first position in the ranking of financial institutions in the country, has a market value of R$ 213 billion.

In a letter published on Wednesday, part of a publicity report, one of the founders of Nubank, the Colombian David Vélez, recalled the episode that motivated him to undertake a business in the Brazilian banking sector. In 2012, when he arrived in the country, it took him four months to open a checking account at “one of the biggest banks in Brazil”.

“When I finally opened my account, I found that I would have to pay hundreds of reais a year in fees,” the text says.

The following year, Nubank was founded, with the proposal to turn into a business the idea that many Brazilians felt they were paying dearly to traditional banks for bad services.

In 2014, it launched an annual credit card, its first product. The registration, through an application, was made by cell phone with the submission of an image of a document and a selfie of the future client, approved after a credit analysis.

A few years later came the current account without fees and with free TED, the loyalty program, the corporate account, insurance products, and the debut in countries like Mexico and Colombia.

With an aggressive growth strategy, Nubank’s customer base now totals 48 million people, making the company the largest fully digital bank in the world. In the United States, for example, the biggest “neobank” (another name used in the market for companies with this profile) is Chime, which should close 2021 with 20 million customers, according to estimates by research firm eMarketer.

In almost a decade of existence, however, Brazilian fintech has not yet managed to generate profit. What then explains its billionaire value?

Fintech ou big tech?

A company’s market value is the result of the multiplication of two factors — the volume of shares outstanding and the price of each.

In Nubank’s case, the share price is key to understanding what brought the company here. The share was priced at US$9, a value considered high by some analysts in Brazil (the initial target price was even higher, in the range between US$10 and US$11, but the company reduced it to US$8 a $9 at the end of November).

For an unprofitable business, the main explanation for investor appetite is an expectation of future profitability. It’s a gamble.

“The market is pricing something else,” says João Bragança, director of financial services at Roland Berger consultancy.

In his assessment, despite being in the banking sector, Nubank has a business model that often brings it closer to technology companies than to banks.

While their focus is “understanding the needs of users and designing specific products to meet those needs”, that of traditional banks, roughly speaking, is centered on the distribution of financial products.

“What they know how to do is call 20 times to offer credit card, insurance. Push products that, in general, are bad, that do not match the customer’s needs and that offer a bad experience for the user. It’s a relationship where there is friction”, he highlights.

“When I stop pushing products on customers and start looking at the specific needs of each group, friction ceases to exist”, he adds.

Both Bragança and Órama Investimentos analyst Phil Soares, who also spoke with the report, highlighted the fact that the products launched by Nubank have generally been well received by customers in recent years.

“They don’t release anything that isn’t completely round”, emphasizes Soares.

Bragança cites, among the examples, life insurance, which has been receiving good adhesion from lower-income users, and the new ultraviolet card, aimed at high-income customers. With a different model from the premium cards that circulate in the market today, it offers 1% cashback on all credit purchases and pays 200% of the CDI for the money that is not used.

“The idea is to make the experience the best possible. And, then, you stop being a bank and become a relationship platform. It’s a business of digital relationships”, says Bragança.

Why is Nubank not making a profit?

But the fact is that, year after year, the company registers losses on its balance sheet. In October, it announced its first profit period, of R$ 76 million in the first half of 2021, but there is no guarantee that the result for the year will be in the blue.

The performance is explained by the growth model adopted by Nubank, focused from the beginning on gaining market share, investing to increase the customer base.

The idea of ​​prioritizing growth over profit is not uncommon among tech startups, especially the most innovative ones. The idea is that it is necessary to “burn the box” to enter and consolidate in the market, making the brand remembered by customers.

The inspiration comes from successful cases such as Amazon, recalls Soares, from Órama.

After going public in 1997, the now e-commerce giant took 6 years to register its first quarter profit. And it continued to report modest results for at least the next 14 years, until it reached its current level of profitability. Some divisions, such as retail, are still falling short of expectations today.

In investor communications, company founder Jeff Bezos has for years reiterated his view that the business must maintain a high level of investment, initially to build its customer base and, more recently, to develop new technologies and remain innovative .

In the case of Nubank, the aggressive growth of recent years has been largely supported by investment funds. In about ten rounds of investments, the company raised US$ 1.7 billion (R$ 9.4 billion) in resources, used to finance the expansion. One of the biggest contributions, of around US$ 500 million (R$ 2.7 billion), came from the fund of super-investor Warren Buffett, Berkshire Hathaway.

In less than a decade, the bank conquered space in a market that had been very concentrated until then. Until 2018, according to a report released by the investment analysis company Suno, 75% of credit operations in Brazil were in the hands of a small group, the “big five”: Bradesco, Itaú, Caixa, Banco do Brasil and Santander.

“This oligopoly is losing market share in the last three years thanks to the growth of digital banks. And the main protagonist of this change was and still is Nubank”, write analysts João Daronco, Lincon Broedel and Tiago Reis in an extensive report in which evaluated the prospectus (document disclosed by companies that are going to go public) of the bank.

After the successful debut on the stock exchange, the challenge now is to show that the company can deliver what it promises. The behavior of shares in the coming months should indicate whether investors continue to believe that the company is worth what they paid for it.