Case Study I uploaded the question below with that pdf. Please read it. Case Study – Nubank As you read the case study, be attentive to Nubank’s success

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I uploaded the question below with that pdf. Please read it.

Case Study – Nubank

As you read the case study, be attentive to Nubank’s successful strategy, the difficult industry David Vélez is

going against and the untapped market potential that Vélez visualized. Answer the questions below based on the

case study. Your answers should fit in the lines below each question. Be sure to include all the elements

mentioned in the article as well as your own knowledge about the financial and banking industry.

Question 1: Why were ‘unbanked’ individuals such a high risk and high reward business opportunity?
















_________________________________________________________________________ ___

Question 2: Describe in your own words why Nubank’s strategy against a concentrated banking industry is
proving to be successful and what are the remaining obstacles faced by Nubank as it continues to expand?

















Source CNN Business:

When David Vélez walked into a Brazilian bank branch to open an account six years ago, he was appalled by the


First, he had to check his bag in a locker outside. Next, he waited to pass through a security line manned by three

armed guards. He sat there for 45 minutes and finally spoke to someone, who acted like they were doing him a favor
by deigning to talk about opening an account. Then, he was sent off to make a phone call to bank employees elsewhere

and was later forced to return to the bank a half-dozen times over the next four months.

Vélez knew his experience was common throughout Latin America, where about half the population is

“unbanked,” with no bank accounts and often no credit histories. In Brazil, five banks control almost all of the market
and charge high fees — with annual interest rates on credit cards recently averaging nearly 300% on unpaid balances,

according to the Wall Street Journal.

So Vélez decided to build something entirely new, aptly named
Nubank: a financial institution that would offer no-fee accounts and

credit cards, welcoming the largely ignored Brazilian unbanked

population to their first-ever bank accounts after they answered a

few simple questions via an app.

In Brazil, as elsewhere, unbanked status makes everyday life

difficult: Customers must make purchases in cash, or shell out for

preloaded debit cards or money orders. If they receive a check, they

have to pay extra at a check-cashing facility. And with little to no

chance of securing a traditional loan, they may be forced into high-fee services similar to the US payday loans if they

need to borrow money.

Six years after its founding, Nubank is a bona fide tech unicorn reportedly raising money at a $10 billion valuation.

One of the most valuable startups in all of Latin America, Nubank has already attracted marquee investors including

Sequoia Capital and Goldman Sachs, and it has signed on nearly 20 million customers in Brazil alone. The company

is also expanding to Mexico and Argentina.

Clearly, Vélez’s bet has paid off so far. But Nubank’s simple premise belies complex competitive, regulatory and

unbanked-customer challenges that early critics thought would be impossible for Vélez — or anyone — to overcome.

“When I started talking to the experts in the industry everybody told me, ‘David, you’re a foreigner. You don’t

understand Brazil — these are the most powerful companies in Brazil that you’re going after,” Vélez, who is originally

from Colombia, told CNN Business in an interview. They said, “nobody competes with the five banks that own the

market. They’re going to crush you. It is impossible to compete.”

He knew the unbanked were a potentially risky customer base. He knew that as a foreigner he would need a presidential

decree to get a permit to start Nubank in Brazil, a process that could—and later did — take years. And he knew Brazil’s

banking oligarchy was powerful.

The comments were “intimidating,” Vélez said, especially when attempts to fundraise locally in Brazil failed with

people telling him: “You’re crazy. There’s no way I’m going to invest.”

But Vélez also saw the massive opportunity in the Brazilian market, where 55 million people were unbanked, and in

Latin America at large. And he felt a responsibility to them. He partnered with two other cofounders Edward Wible,

an American, and Cristina Junqueira from Brazil to bring the vision to fruition.

“There was a lot of conventional wisdom around banking…like [it] was almost sacred and that entrepreneurs could

not go compete with them,” Vélez said. “But as I dig deeper and talk to consumers and felt firsthand the pain of being

a banking consumer, I realized that people just really needed more alternatives. Technology was going to create a

window of opportunity to build a fully digital bank.”

How Nubank is upending traditional banks

In Brazil, which is Latin America’s largest economy, the banking industry has historically been highly

concentrated: Last year, the five largest banks controlled 81% of the country’s total financial system assets and 85%

Source CNN Business:

of all loans. With precious little consumer choice, the banks have been able to set the parameters most favorable to

them: high fees and rates, confusing loan terms and sometimes blasé service. After all, customers didn’t really have

anywhere else to go.

“In emerging markets like Brazil, for years monopoly banks hadn’t had to stay competitive,” said Lindsay Davis, a

senior intelligence analyst at CB Insights who focuses on the fintech industry. “They were able to charge their fees

and serve only part of the population and do just fine that way.”

But then, the cost of technology started to come down, and suddenly there was better access to Wi-Fi, Davis explained.

Meanwhile, venture capital was starting to pour into Latin America, and consumer demand began to put pressure on

governments to foster a more competitive banking market.

Enter Nubank. The company launched its first product to Brazilians in 2014: a no-fee, low-interest international

Mastercard credit card completely managed by a mobile app. In 2018, it launched a digital savings account called

NuConta — after Nubank finally received its special

banking permit from the Brazilian government — and

earlier this year the company unveiled a personal loan


For Nubank, the digital focus helps keep costs low. The

company is able to strip out some fees because the

company doesn’t have the overhead of hundreds of

banking branches, Vélez explained; instead, revenue

comes from interest and from interchange, the fees
merchants pay to Nubank for the processing of card

payments to make a purchase. (The interchange fees

average 1% on every credit card transaction)
Nubank uses unique data sets and algorithms to approve new applicants

for financial accounts, often within minutes. (Beto Chagas/Shutterstock)

Vélez says customers can be approved for a bank account, credit card or loan in “a few minutes” after downloading

the app, uploading a few documents and answering a couple of basic questions.

Some customers receive credit card interest rates as much as 50% lower than those of traditional Brazilian banks,
Vélez said. In other cases, Nubank hedges by offering a line of credit as low as $10 to start, increasing the amount

over time as customers build up a history of good payments.

Vetting the unbanked

The problem that Nubank and Vélez are tackling goes far beyond the struggles of the individual unbanked, as the

effects ripple deeply into countries’ macroeconomics and culture at large.

In rich, developed countries, widespread access to credit fuels the ability for consumers to purchase goods,

entrepreneurs to launch small businesses, students to pursue higher education and the housing market to thrive —

overall, for the economy to continue to grow.

But in emerging economies where credit is rare, consumer spending is inhibited. Small businesses have less

opportunity to grow. Both problems in turn hurt companies’ ability to hire. All of the interconnected issues pile up and

can hold back a country’s economy. Brazil, specifically, has grappled with years of sluggish economic growth.

Unlocking credit could be a key to turning around Brazil’s economy. But by targeting the unbanked population, many

of whom do not have credit histories, Nubank doesn’t have historical data to assess potential customers — an inherent

risk as customers may not have the ability to pay it back.

In the US, tools like FICO scores are paramount: Customers’ histories of taking out loans, using credit cards and

paying back their debts determine whether they are considered high or low-risk. In turn, lenders may grant them a

high-limit credit card or loan at a low interest rate, a lower limit at a high interest rate or even deny their request


Source CNN Business:

But in Brazil, this type of concept is new. Until recently, the only credit scoring system was a blacklist of sorts, with

unpaid balances listed on a register and removed once they were resolved. Over the past few years, though, change

has begun. Brazil’s five largest banks have been working to set up a more US-like credit research company to track

information on customers’ bill-paying history, and companies like FICO and Equifax are moving into Brazil as well.

Nubank, however, has built its business on a wholly new

foundation: unique data sets and algorithms that are

based on “a lot of nontraditional information,” Vélez


“We look at where you live…how you move, who your
friends are, who invited you to Nubank, the type of

people that you’re sending money to,” he said. “We look

at whether you read the contract of the credit card or

whether you don’t — it turns out that people [who “read”

the contract] really fast tend to be fraudsters. We look at

the type of transactions that you’re doing, if you’re

buying groceries or if you are in a bar.”

Nubank is based in São Paulo, Brazil but is expanding to Mexico Overall, Vélez said, it boils down to looking “at a lot of

and Argentina as well. (Jo Galvao/Shutterstock) behavioral information to try to create a more holistic picture.

Davis, the CB Insights analyst, said such algorithms represent how Nubank and other challenger banks “are using

innovation and technology to see how customers can be underwritten. Traditional business models just haven’t kept

up with the pace of that technology, and it creates a huge opportunity when you couple it with the pent-up demand [of

customers who want to become banked].”

Brazil and beyond
That pent-up demand has driven Nubank to sign up nearly 20 million customers so far, and Vélez said the goal is to

reach 100 million customers in Latin America. The company has already expanded to Mexico and in 2020, it will

begin operating in Argentina as well.

“Traditional banks’ business models have been able to sustain them up until this point,” Davis said. “They’re are

waking up to the idea that they’re being disintermediated, that ‘the bank’ can be abstracted away from the branch. In

Latin America specifically, where someone like Nubank is able to get a charter, challengers can absolutely pull power


With more than 1.7 billion unbanked adults around the world, there is ample room for other Nubank-style upstarts to

disrupt traditional banking. Davis added: “Even more broadly than Brazil, the challenger-bank opportunity is

spreading rapidly.”

Nubank, at least, is still focused squarely on Latin America, where the company estimates it has saved customers $1

billion in fees alone so far. Today, the company has 50% share of all new credit cards issued in Brazil.

The company is not yet profitable — though it is narrowing losses, from 117 million Brazilian reais (USD $29.4

million) in 2017 to about a 100 million reai net loss (USD $25 million) in 2018. And looking ahead, Nubank is focused

on continuing expansion rather than making a profit.

“For the next five years we’re focused on Latin America, but over a very long-term horizon, we think emerging markets

are very interesting — when you look at Nigeria, Indonesia, Vietnam, India, you find the same oligopoly structure,”

Vélez said.

In the long term, Nubank wants to explore all emerging markets to connect people with credit cards, bank accounts

and other products that could change people’s financial lives, Vélez said — a lofty goal that early detractors would

have scoffed at, he knows.

“It’s been a very surreal experience; our [original] goal was a million customers in five years,” Vélez said. “It has all

really happened way faster than anything we expected.”

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