The founders of Nubank, a digital banking company in Brazil, identified a need that turned into billions of dollars in the stock market.
This company, which sought to lower the costs of banking services in the South American country, became the most valuable bank in Latin America on Thursday after its debut on the New York Stock Exchange.
With shares valued at US$9, the financial technology company reached a market value of US$41 . 5 00 million.
At the close of markets on Thursday, its shares reached $10.5, raising its market value to $50bn.
In a letter published on Wednesday, David Vélez, a Colombian who is one of the bank’s founders, recalled the event that motivated him to start a business in Brazil.
In 2012, when he arrived in the South American country, it took him four months to open a current account in a national bank.
“When I finally opened my account, I discovered that I had to pay hundreds of reais a year in commissions,” the text says.
A year later, he founded Nubank on the premise that many Brazilians were paying too much money for poor banking services.
The Brazilian Cristina Junqueira and the American Edward Wible also participated as partners in the creation of the company.
In 2014, this bank launched an annual credit card. It was his first product. Registration was through a mobile application. With the image of a document and a selfie of the future client, it was approved after due credit analysis.
The following year the checking account arrived, with free electronic transfers, and the loyalty program, the corporate account, the insurance products and the debut in countries such as Mexico and Colombia.
With an aggressive growth strategy, Nubank’s customer base amounts to 48 million people. It is the largest fully digital bank in the world.
In the United States, for example, the closest bank in size would be Chime, which will end 2021 with 20 million customers, according to the research firm eMarketer.
However, in more than a decade the Brazilian company has failed to generate profits.
So what explains its value in the market?
Investors bet on your success
The market value of a company is the multiplication of two factors: the volume of outstanding shares and the price of each of them.
In the case of Nubank, the price of its shares is key to understanding how it became such a valued company. Its shares were around US$9, a value considered high by some analysts in Brazil.
The anticipated starting price was even higher, in the $10-$11 range, but the company lowered it to $8-$9 by the end of this year.
Despite the price, investors have a huge appetite to acquire these shares, given the expectation of future profitability of the company. They bet on your success.
“The market is putting a price on something else,” says João Bragança, director of financial services at consultancy Roland Berger.
In his opinion, despite being in the banking sector, Nubank has a business model that brings it closer to technology companies than to banks.
The focus of this new company is to “understand the needs of users and design specific products to meet those needs”; that of traditional banks, in general terms, focuses on the distribution of financial products.
“What they know how to do is call 20 times to offer credit cards, insurance. Push for products that, in general, are bad, that do not meet the needs of the client and that offer a bad experience for the user. It is a relationship that generates friction”, he compared with traditional banking.
“When I stop pushing customers for products and start looking at the specific needs of each group, the friction ceases to exist,” he added.
Bragança, like Phil Soares, an analyst at investment firm Órama, highlighted that the products launched by Nubank have been well received by their clients in recent years.
Why hasn’t it made a profit?
Serving the needs of its customers is precisely what prevents Nubank from generating profits today.
Its business model focuses on gaining market share, investing to increase the base that buys its products.
For this reason, year after year it has losses. It wasn’t until October of this year that it announced its first earnings period, amounting to some US$135 million during the first part of 2021. There are no guarantees that these positive numbers will continue.
The idea of prioritizing growth over profit is common among tech startups. They seek to “burn the box” to consolidate themselves in the market and make the brand remembered by customers.
This strategy is similar to that used by Amazon , a company that took six years to generate profits and remained for another 14 with modest income.
In the case of Nubank, the aggressive growth of recent years has been largely supported by investment funds. In some ten investment rounds, the company raised $1.7 billion that was used to finance its expansion. One of the biggest contributions, about $500 million, came from Berkshire Hathaway, the fund of investor Warren Buffett .
In less than a decade, the bank gained space in a market that until then had been highly concentrated. Until 2018, according to a report 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 banking. And the main protagonist of this change was and continues to be Nubank,” analysts João Daronco, Lincon Broedel and Tiago Reis wrote in the extensive report. in which they evaluated the possibilities of the company.
After the successful debut on the stock market, the challenge now is to show that the company can deliver what it promises.
