{"id":19441,"date":"2016-11-18T16:41:51","date_gmt":"2016-11-18T21:41:51","guid":{"rendered":"https:\/\/digital.hbs.edu\/platform-rctom\/submission\/the-geeks-shall-inherit-the-earth\/"},"modified":"2016-11-18T16:43:08","modified_gmt":"2016-11-18T21:43:08","slug":"the-geeks-shall-inherit-the-earth","status":"publish","type":"hck-submission","link":"https:\/\/d3.harvard.edu\/platform-rctom\/submission\/the-geeks-shall-inherit-the-earth\/","title":{"rendered":"The geeks shall inherit the earth"},"content":{"rendered":"

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In some cities in Brazil, you don\u2019t need to carry cash. Even street peddlers accept credit cards in Sao Paulo.<\/p>\n

\"flanelinha\"<\/p>\n

It comes as no surprise, then, that there is a move to digital payments and banking happening in the country, more specifically in the city of Sao Paulo. One example is Nubank, one of the hottest Brazilian start-ups in recent years.<\/p>\n

Although relatively digital, the Brazilian banking system is very concentrated: the four largest banks control about 75% of the banking assets in the country [9], a result of a series of mergers and acquisitions over the last 15 years.<\/p>\n

With scarce competition and high interest rates (the Brazilian reference rate, Selic, is now at 14% a.a.), the banks charge what is one of the highest spreads in the world. The average credit card interest rate in Brazil is north of 470% a year [10]. Banks say that the high rates are due not only to the high prevailing reference rate, but also because of high default rates.<\/p>\n

If you don\u2019t believe me, here is a screenshot of my latest credit card bill, showing a staggering 514.24% yearly interest rate.<\/p>\n

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\"taxa_1\"<\/a><\/p>\n

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Is there a David to challenge these Goliaths?<\/strong><\/p>\n

One start-up is trying to break into this exclusive world of the Brazilian banks without opening a single branch. Nubank is a digital financial services provider that offers a credit card, coupled with a personal finance app that lets you track, label and organize your spending. The app is very intuitive and simple, and they charge no fees at all.<\/p>\n

Besides charging no fees, Nubank charges lower interest rates on credit card debt compared to other Brazilian banks: the average rate is 145% a year, with rates as low as 38.5% a year [3]. This is a screenshot from wife\u2019s Nubank credit card bill, showing interest rates of 41.86% a year.<\/p>\n

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\"taxa_2\"<\/a><\/p>\n

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They claim this ability to charge less stems from their low-cost structure \u2013 possible due to the digital nature of the service provided – and because of their superior credit risk modeling, which leverages cutting edge big data analytics.<\/p>\n

Not only is the service all provided online, but also the whole application process can be done from your smartphone. After downloading the app, you just follow the instructions, take a couple of pictures of selected documents, and you\u2019re done! More than 3 million people have already registered, but there is currently a waitlist to become a client. (Tip: getting a referral from a current customer increases your odds of being accepted).<\/p>\n

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The miracle of digitization<\/strong><\/p>\n

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Nubank\u2019s capacity to threaten the establishment has been recognized by a handful of VC funds (e.g. Sequoia Capital, Peter Thiel\u2019s Founders Funs etc), which have invested at least $80 million so far [2] [3] [7]. Their ability to enter this market was made possible thanks to the power of data: not only is the whole experience provided through the app, but also their superior credit modeling is enabled by big data.<\/p>\n

To better decide which customers to accept and how much to charge, Nubank has put together a team that uses public and private data to assess credit risk. Whereas the average bank considers about 10 variables when making these assessments, Nubank uses from 2,000 to 3,000 variables [3]. Credit rating agencies are not as widespread in Brazil as they are in the United States, so there is huge value in having a state-of-the-art internal credit model.<\/p>\n

Commandments for the future<\/strong><\/p>\n

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There are 168 million Smartphone users in Brazil, a number expected to reach 236 million by 2018 [11]. Also, only about 28% of the Brazilian population owns a credit card \u2013 versus about 70% of the adult population in the USA [13]. These factors, coupled with Brazilian\u2019s dissatisfaction with the major bank\u2019s services, makes for great opportunity for Nubank.<\/p>\n

To make things even more promising, Brazil actually has the world\u2019s largest number of installed PIN card prepared POS equipment, at 4.4 million units [12].<\/p>\n

To fully capture the potential market, I believe they should follow the path of a couple of other small digital banks in Brazil and broaden their product offering, with actions such as:<\/p>\n