The Nubank Business Model – How Does Nubank Make Money?

Executive Summary:

Nubank is a neobank that offers a variety of financial products, including savings accounts, loans, or insurances, to either individual or small business customers.

Nubank makes money via interchange fees, interest on customer deposits, overdraft fees, ATM withdrawal fees, subscriptions, referral fees, interest from loans, as well as insurance premiums.

Founded in 2013, Nubank has grown to become the world’s largest neobank. The company now boasts over 40 million customers.

What Is Nubank?

Nubank is a financial technology company that offers various banking-related products and services to customers across South America.

Nubank, much like any other neobank, offers a digital checking account, allowing customers to check their balances, send and receive payments, earn interest, charge up their mobile cards, and many more.

The digital account comes with a Mastercard-branded debit or credit card with which users can make in-store payments, earn cashback rewards, and withdraw money from ATMs.

Apart from personal accounts, Nubank also offers banking solutions for businesses. Much like the personal account, the business one gives users access to their transaction history, allows them to send and receive money, and plenty more.

Additionally, customers can also apply for personal loans as well as purchase life insurance (via Nubank Life).

The majority of Nubank’s customers come from Brazil. The company has, furthermore, expanded into Argentina, Columbia, and Mexico.

Customers need to be at least 18 years of age, obtain CPF status on the Receira Federal Brasileira, and be a resident of Brazil. Similar requirements apply in other countries.

Nubank can be accessed by visiting the firm’s website or downloading any of its mobile applications (available on Android and iOS devices).

How Nubank Started: Company History

Nubank, headquartered in São Paulo, Brazil, was founded in 2013 by David Velez, Cristina Junqueira, and Adam Edward Wible.

Velez, how is of Columbian descent, spent the first nine years of his life in Medellín, which at the time was riddled by a deadly drug war.

His family eventually moved to Costa Rica where his father, who had previously run a button factory, set up a similar company. Velez went on to graduate from high school as a valedictorian and ended up at Stanford where he pursued an engineering degree.

Instead of giving in to the Valley’s start-up frenzy, Velez headed up east to join Morgan Stanley’s analyst program. He then joined General Atlantic, one of the world’s leading private equity funds, to build up the firm’s investment arm in Latin America.

In 2010, Velez returned to Stanford to pursue his MBA. While still in school, he was recruited by Doug Leone, one of Sequoia Capital’s long-standing partners, to scout startups in Brazil and beyond.  

Unfortunately, that task proved to be much tougher than expected. During his two-year tenure at Sequoia, Velez did not source any deals at all. Brazil’s startup ecosystem simply did not offer many attractive business opportunities, largely as a result of an ongoing financial crisis as well as a lack of engineering talent.

However, where others only saw problems, Velez found opportunities. Being inspired by his family, which largely consisted of entrepreneurs, Velez began researching various business opportunities.

The industry he circled back towards again and again was banking. Back then, Brazil’s banking industry was dominated by five major institutions, namely Itaú, Bradesco, Santander, Banco do Brasil, and Caixa, which had a combined market share of over 80 percent.

Their market dominance created a whole set of different problems for customers. First, the banks were notorious for charging exorbitant fees, for instance by demanding customers to pay up to 15 percent in interest for outstanding payments.

Second, registering a bank account or getting a credit card was a cumbersome process. Customers had to visit the physical branch (which was often only open for a few hours per day), wait to receive a statement by mail, and then go through a lengthy phone interview when requesting changes.

To make matters worse, physical branches were not available in every region of Brazil, therefore leaving a significant number of its population unbanked.

At the same time, the adoption of smartphones and access to broadband internet started to quickly accelerate, thereby planting the seeds to a whole new set of business opportunities.

Velez spent the next few months chatting with bank executives from Brazil and beyond to figure out the details. Many of the experts he talked to advised him against going after the incumbent banks. After all, even multinational banks like HSBC had previously failed to establish a local footprint in Brazil.

Velez, however, remained undeterred. To get himself the necessary help, he recruited Junqueira and Wible as his co-founders. Junqueira, who holds an MBA from the Kellogg School of Management, possessed years of experience in the banking sector.

At 24, she was leading a team of 20 at Unibanco, then Brazil’s largest private banking group, as its head of the SME credit sector. The next year, Unibanco merged with Itaú, Brazil’s second-largest private bank, where she was hired as a portfolio manager for Itaúcard, the company’s new credit card.

In 2012, Junqueira left the firm after getting tired of her employer’s shady business practices (she had previously proposed to launch a commission-free credit card). A mutual friend then introduced the two soon after.

To complement the team, Velez and Junqueira recruited Adam Edward Wible, an American with a Computer Science degree from Princeton University, who had spent the first five years of his careers in consulting and private equity, respectively.

Given that Velez’s relationship with Leone and Sequoia remained intact even after his departure (Sequoia shut down its LATAM operations soon after), he was able to convince them to pour money into his idea. Nicolas Szekasy (via his venture firm Kaszek Ventures) also contributed to the seed funding.

In July 2013, both firms invested $1 million each. The signing of the documents, however, proved a little tougher than expected. Co-founder Cristina Junqueira was just admitted to the hospital due to the birth of her first child. The day before she gave birth, the deal was ultimately signed. And one day after she gave birth, Junqueira was already back in the office.

Armed with $2 million in seed funding, the team got to work. Over the next year, they managed to secure a banking partner (allowing them to store customer funds), a partnership with Mastercard (which provided the credit card), as well as developed the Android and iOS app.

In September 2014, Nubank finally unveiled its first product, a MasterCard Platinum credit card linked to the customer’s smartphone, to the world. On top of that, the team managed to secure $14.3 million in Series A funding (led by existing backers Sequoia Capital and Kaszek Ventures).

Within the first year, more than 200,000 people put their names on the waiting list of which 100,000 were successfully onboarded. Nubank remained cautious with its onboarding speed to allow its systems to scale with increased traffic as well as to optimize the app experience.

In fact, Nubank managed to develop a system that takes in around 3,000 data points to assess a customer’s attractiveness and risk. On the other hand, the incumbent banks had only been using 10 variables, therefore leading to much higher risk and, oftentimes, less accepted applications.

The slow and steady approach netted the company another round of funding, raising $30 million from Tiger Global Management and existing investors in June 2015. Much of 2016 and 2017 was spent raising additional rounds of debt and equity funding.

In those two years, Nubank managed to secure around $274 million in additional cash. Instead of pouring it into expensive marketing campaigns, the company invested most of its funding into the hiring of exceptional employees.

As previously stated, Brazil’s startup ecosystem had always suffered from a lack of talent, in particular with regards to software engineers. Nubank bypassed this issue by hiring people from abroad or opening up foreign offices. For example, in December 2017, the company opened an engineering hub in Berlin, Germany, from which some of the development work was going to be conducted.

Furthermore, investing in high-quality employees eventually led to Nubank’s ability to create a great product experience, from onboarding all the way to customer service. As a result, most of its customers joined the app simply due to word-of-mouth.

Meanwhile, Nubank also managed to quietly secure a banking license, which would allow the company to expand its product line. Much of that inspiration originated from Velez visiting China in 2018.

There, tech companies like Alibaba (Alipay) and Tencent (WeChat) have built so-called super apps which offer services like loans, insurances, or investments all within one ecosystem. Moreover, China’s population in the late 2000s showed many similarities to Brazil’s in 2018, thereby providing them with a playbook on how to scale Nubank beyond credit card payments.

To get first-hand access on how to develop such an ecosystem, Nubank agreed to $180 million from the Chinese internet giant Tencent, which in turn would become an advisor to the Brazilian bank.

Over the course of 2019, Nubank launched a personal loan product as well as a digital savings account. Furthermore, small and medium-sized business owners would be able to open accounts and accept client payments.

By July 2019, Nubank managed to cross the inaugural mark of 10 million customers. Additionally, Nubank did not only expand vertically (into new product lines) but also horizontally, namely by launching in new markets.

Throughout 2019, the company first opened engineering hubs in Mexico and Argentina. Then, in August, Nubank launched its credit card product in Mexico, a market that shared many similarities to its home base (such as a great number of unbanked people).

Growth, quite literally, exploded. By January 2020, Nubank had doubled its customer base from 10 million to now 20 million. From that point onwards, Nubank became the largest neobank in the world, greatly surpassing the user count of Chime or Revolut amongst others.

The coronavirus crisis, while devastating to many people, proved to be another accelerant for the firm. Nubank launched a variety of initiatives, such as a $3.8 million fund to keep people afloat as well as the temporary lifting of fees.

Its explosive growth also allowed Nubank to make its first-ever acquisitions. In 2020 alone, Nubank bought three different businesses (Plataformatec, Cognitect, Easyinvest), which it integrated into its own ecosystem.

Unfortunately, not everything was always going according to plan. Cristina Junqueira, after being asked about the firm’s low percentage of black people in management positions in a TV interview, said that the firm could not “lower its standards”.

That response caused a serious amount of backlash. To Nubank’s credit, the company quickly responded by funding the teaching of programming skills for over 1,000 people of color. Despite the small setback, Nubank managed to cap off the year with over 30 million customers.

Even heightened competition, such as Santander launching an app or N26 being granted a banking license in Brazil, could not stop the firm’s ascend. What was even more impressive was the fact that Nubank grew despite a decade of economic downturn. For instance, Brazil’s GDP in December 2020 was lower than when Nubank was first conceived in 2013.

The company continued to focus on growth, for instance by launching in Columbia in February 2021. As a result of its increased market penetration, David Velez, in April 2021, became Nubank’s global CEO while Cristina Junqueira rose to CEO of the firm’s Brazilian operations.

That very same month, CTO Adam Edward Wible left his position to get into the trenches again and simply work as a software engineer for Nubank. His replacement became Matt Swann who previously led engineering teams at Amazon and Booking, respectively.

Today, Nubank boasts over 40 million customers. The company, furthermore, employs more than 3,000 people across offices in São Paulo (Brazil), Mexico City (Mexico), Buenos Aires (Argentina), Bogotá (Colombia), and Berlin (Germany).

How Does Nubank Make Money?

Nubank makes money via interchange fees, interest on customer deposits, overdraft fees, ATM withdrawal fees, subscriptions, referral fees, interest from loans, as well as insurance premiums.

Its business model is predicated on creating an ecosystem of products that it can offer to its customers. Many of the world’s biggest FinTech companies, such as Robinhood, were launched with the goal of improving one particular customer pain point (in the case of Nubank high interest rates and access to bank accounts).

Over time, as these companies managed to onboard millions of users, they began to expand their offerings. Nubank, for instance, has now moved into business accounts, insurances, personal loans, or cashback rewards.

Much like Amazon, these products end up creating a flywheel effect for the company. For instance, Nubank is able to use its customer’s spending or salary data to more accurately determine how much interest it should charge on a loan. The customer, on the other hand, also benefits by being offered an optimized (and likely cheaper) interest rate.

The following section will take a closer look at each of the revenue streams that Nubank has.

Interchange Fees

Whenever a customer uses their Nubank-branded debit or credit card to make a payment, a so-called interchange fee is being applied.

The interchange fee is being paid by the merchant that receives the payment, for instance, a restaurant or clothing store.

Interchange fees come out to about one percent of the purchasing price. That fee is then to be shared with Mastercard, the issuer of its debit card. The actual percentage share is not being disclosed to the public.

Interest On Cash

Whenever customers deposit money into their Nubank savings account, they can earn interest on the funds held in that account.

Nubank, just like any normal bank, then uses that cash to lend it out to other institutions, such as said banks. The company will then collect interest on the money that it lends out.

Overdraft Fees

Another source of income for Nubank is the overdraft fees it charges whenever a customer extends the limit on the credit card.

Its comparatively low overdraft rates were one of the many reasons why Nubank was able to attract so many customers right from the get-go.

For comparison, incumbent Brazilian banks used to charge around 145 percent on the negative balance.

Nubank, on the other hand, attracted customers with rates as low as 38 percent (subject to change, however).

This was made possible by the fact that Nubank did not operate any physical branches. Therefore, its cost structure was significantly lower.

Cash Withdrawal Fees

Whenever a customer retrieves cash from one of Nubank’s partners, namely anco24Horas and Saque e Pague, a withdrawal fee of R$ 6.50 (a little over $1) is applied.

The fee is used to cover the cost of being able to use its partners’ ATM network. As such, Nubank likely does not make a profit from cash withdrawals.  

Subscription

In 2021, Nubank launched a premium credit card (in metal format) called the Ultravioleta. The card grants customers a variety of benefits, including:

  • Access to Mastercard’s Black VIP Lounge
  • Free travel medical insurance whenever tickets are bought via the card
  • Purchase protection against accidental damage, theft, or robbery for up to 90 days after the initial purchase
  • WiFi at any airport

… and many more. In order to use the card, customers will have to pay a monthly subscription fee of R$49 (around $10).

Referral Fees

Subscription fees, however, are not the only method with which Nubank is able to monetize its premium credit card.

Whenever a customer uses the card to make a payment, he or she will receive a cashback reward equal to 1 percent of the purchase price.

The money can either be paid out (by sending it to the savings account), exchanged for miles, or invested into stocks and index funds (via its acquisition of Easyinvest).

It can be assumed that Nubank receives some sort of compensation (often called referral fees) from its cashback partners in exchange for encouraging customers to conduct their purchases at the partner store.

For instance, in late 2020, Nubank partnered with Amazon to reimburse customers who purchased a product within its e-commerce marketplace.

Insurance

Nubank, via its Nubank Life entity, offers life insurance products to its customers in Brazil. For as little as R$ 9 per month, customers can ensure that their loved ones are taken care of in case of an unforeseen fatality.

Customers can, furthermore, add on additional coverage. This can cover the funeral cost, hospitalization bills, or provide financial assistance in case of disability.

Loans

Apart from insurances, Nubank customers can also apply for personal loans which can be paid back in multiple installments.

Nubank generates income with those loans via the interest it charges on a monthly basis. The interest rate ultimately depends on the repayment period, the amount loaned, as well as a variety of other factors.

Given that Nubank is able to collect thousands of data points on its customers, such as their spending habits, level of income, or location, it can accurately assess how likely it is that someone can repay that loan.

As a result, its default rate should be extremely low. Given the integrated app experience, customers can receive quasi-instant offers whenever they apply for a loan.

Nubank Funding, Revenue & Valuation

According to Crunchbase, Nubank has raised a total of $2.3 billion across 12 rounds of debt and equity financing.

Notable investors include Sequoia Capital, Tencent, Dragoneer Investment Group, Ribbit Capital, Berkshire Hathaway, and many more.

After extending their Series G round in June 2021, which brought another $750 million into the business, Nubank was valued at a whopping $30 billion.

For the fiscal year 2020, Nubank has generated $963 million in revenue. This is close to a 100-percent increase from the $523 million it generated in 2019.

Hi folks, my name is Viktor! By day, I lead a tech team of 10 for an e-commerce startup. At night, I work on expressing my weird thoughts through this blog. And if there's time, I cuddle my cat..