David Vélez - Building the Branchless Bank - [Founder’s Field Guide, EP. 41]

My guest today is David Vélez, founder and CEO of Nubank, the world’s largest digital bank with over 40 million customers. In our conversation, David talks about his venture capital background at Sequoia and how that led him down an entrepreneurial path in Latin America. We also talk about the pros and cons of building a digitally native business and what gets him most excited about innovation and technology in emerging markets. Before we start the episode, I would also like to highlight our newest Colossus show, Business Breakdowns. Since launching in early April, we have published over 15 Breakdowns and continue to release a new episode weekly. To learn more, check out joincolossus.com. I hope you enjoy my conversation with David Vélez. For the full show notes, transcript, and links to mentioned content, check out the episode page here. ----- This episode is brought to by Dell Technologies. Dell Technologies and Windows can help you upgrade your business tech with its Small Business Month specials. Save up to 45% on PCs with Windows 10 Pro— plus business docks, monitors & more. To learn more, call a Dell Technologies Advisor at 877-ASK-DELL or check out the deals at https://www.dell.com/en-us/work/shop/deals ----- This episode is brought to you by Vanta. Vanta has built software that makes it easier to get and maintain your SOC 2, HIPAA or ISO 27001 reports at a fraction of the typical cost. Founder’s Field Guide listeners can redeem a $1k off coupon at vanta.com/patrick. ----- Founder's Field Guide is a property of Colossus, Inc. For more episodes of Founder's Field Guide, visit joincolossus.com/episodes. Stay up to date on all our podcasts by signing up to Colossus Weekly, our quick dive every Sunday highlighting the top business and investing concepts from our podcasts and the best of what we read that week. Sign up here. Follow us on Twitter: @patrick_oshag | @JoinColossus Show Notes [00:02:55] - [First question] - Why Berkshire Hathaway took such an interest in Nubank [00:04:46] - Key differentiators between Nubank and other incumbent banks [00:07:11] - Onboarding user experience and overview of customer acquisition [00:10:38] - The original problem Nubank wanted to solve and how they approached it [00:15:32] - Lessons from working at Sequoia about great FinTech businesses [00:19:18] - What parts of his personality and life experience worked its way into NuBank [00:23:18] - Obstacles that needed to be overcome in order to serve the Brazilian public [00:27:52] - Transparency and patience needed to overcome a complicated problem [00:31:11] - Nubank’s business economics compared to other banks [00:34:46] - Overview of rewards programs and why customers like them so much [00:37:27] - Best questions asked that explained Nubank’s market opportunity [00:42:02] - Second layer unit economics of the company and where to look for them [00:45:51] - How far we are into the Latin American technological ecosystem’s development [00:47:24] - Lessons learned from some of the worst decisions he’s made as a founder [00:51:30] - What he’s most excited about for the future [00:54:19] - The kindest thing anyone has ever done for him

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Patrick O'Shaughnessy?

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• 0:45Patrick O'Shaughnessy?

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• 1:30Patrick O'Shaughnessy?

  Integrate with your cloud provider and tools, check off items on the customized to-do list and let Vanta continuously monitor your security so you can focus on growing your business. Founder's Field Guide listeners can redeem a $1,000 off coupon at vanta.com/patrick. That's vanta.com/patrick. Hello and welcome, everyone. I'm Patrick O'Shaughnessy and this is Founder's Field Guide. Founder's Field Guide is a series of conversations with founders, CEOs and operators building great businesses. I believe we are all builders in our own way and this series is dedicated to stories and lessons from builders of all types. Founder's Field Guide is part of the Colossus family of podcasts and you can access all of our podcasts, including edited transcripts, show notes and resources to keep learning at joincolossus.com.

• 2:19Speaker 01

  Patrick O'Shaughnessy is the CEO of O'Shaughnessy Asset Management. All opinions expressed by Patrick and podcast guests are solely their own opinions and do not reflect the opinion of O'Shaughnessy Asset Management. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of O'Shaughnessy Asset Management may maintain positions in the securities discussed in this podcast.

• 2:45Patrick O'Shaughnessy?

  My guest today is David Velez, founder and CEO of NewBank, the world's largest digital bank with over 40 million customers. In our conversation, David talks about his venture capital background at Sequoia and how that led him down an entrepreneurial path in Latin America. We also talk about the pros and cons of building a digitally native business and what gets him most excited about innovation and technology in emerging markets. Before we start the episode, I'd also like to highlight our newest Colossus show, Business Breakdowns. Since launching in early April, we have published over 15 breakdowns and continue to release a new episode weekly. To learn more, check out joincolossus.com. I hope you enjoy my great conversation with David Velez.

• 3:28Patrick O'Shaughnessy?

  So David, I think an interesting entry point here is a fun and interesting one since the news was just announced that Berkshire Hathaway made a very large investment into your company. And you just told me that they're the largest bank investor ever. So that's quite an interesting dynamic. Can you walk us through this story? Why do you think Berkshire was so interested in your business? How did this go down?

• 3:48Speaker 02

  To be completely honest, we never really considered him as a potential investor as we've seen him very actively investing in traditional banks and traditional incumbents. We're one of the biggest investors in Goldman Sachs through the financial crisis. Today, they're one of the biggest investors in Bank of America. And they tend to look more at traditional incumbents in more mature industries. But we had a conversation with them a few months ago and they started digging in and they were very, very curious, asking really, really good questions about the market size, about the unit economics of the business, about cohorts, very thoughtful understanding of financial services and what we're doing here in the markets and how we're competing with some of the traditional banks in Latin America.

• 4:33Speaker 02

  And in a few weeks, they were very excited and very willing to lead around in low bank. And so for us has been, we see this, and I think the market has perceived this as a bit of the big validation of the business model, big validation of our ability to compete with traditional banks, and eventually your ability to surpass traditional banks in the future of financial services.

• 4:59Patrick O'Shaughnessy?

  What do you think are the most important differentiators between what we'll call the incumbent banks that maybe Berkshire invested in more traditionally versus new bank? What are the largest important differences for those out there listening to understand?

• 5:13Speaker 02

  I think the first one is the consumer obsession and a culture that is based on consumer obsession. And I don't think this is necessarily specific to financial services. I think what common denominator of incumbent industries, either financial services, or if you look at insurance, or even in media or transportation, is that after, let's say, six, seven decades of traditional capitalism, you ended up with a number of players oligopolies, where four or five companies effectively own the market. And whenever you see an oligopoly structure, you find that there are normal returns, and you also find a lot of complacency among incumbents.

• 5:54Speaker 02

  And that complacency ultimately ends up translating into taking customers for granted, when it should be the actually opposite. Ultimately, you win because customers choose you. So what you find in Latin America and a lot of emerging markets, and in a little bit of the US, is that there are five banks that won, let's say, banking 1.0, and they will become complacent and they forget about customers. There are a number of different things that we're doing differently, but I would say the number one is having a culture that is obsessed about customers and doing the right thing for the customers, from doing the right decisions to giving the right customer service to building products that are really actually good for them. So I would say that's number one.

• 6:35Speaker 02

  And then there is all the tactical advantages that being a technology company at heart provides, obviously from being a fully digital company and not needing to have a full offline distribution, very expensive banking branches, that allows us to have about 50x more customers there. Human than traditional banks, just being into the digital. We have one building here in Sao Paulo and have 40 million customers in all different 5,570 Brazilian cities in the Amazons, in the South. We have customers in Mexico City, obviously, and Colombia. That gives us huge operational efficiency. Ultimately, that translates into significant cost efficiency that we can pass to the end

• 7:19Speaker 02

  consumer via lower fees. So we don't need to charge so many fees, we don't charge any fees. And then there is all the other advantages of being a tech company from a data first, analytics, infrastructure, to being able to use a lot of data to make a lot of different decisions. So all of these different advantages add up to building a type of offering that is very hard for the traditional incumbents to match.

• 7:44Patrick O'Shaughnessy?

  Maybe you could just level set for us today in the markets where you operate. If I was about to become a new bank customer, what does that traditionally feel like? Like, what is the modal customer doing with you? And how do they sort of get on board to begin?

• 8:00Speaker 02

  So 90% of our customers come through word of mouth, completely referred by other friends. We've been really growing fully by word of mouth, no customer acquisition cost since 2014 when we launched. And our latest cohort last month is exactly the same as our first cohort in 2013. So it's been viral, which is unexpected for a financial services product. You don't see a credit card has no virality characteristics. There's no real network effects, if you think about it. It's not Facebook, it's not Instagram, where if all your friends are there, you want to be there. Here, you have a loan product that doesn't necessarily make it better for your friends. I'll provide a little bit more nuance then later on, because in fact, that's one of the things that we've done differently.

• 8:45Speaker 02

  But in general, most people will hear from us through a friend, will download the app or will be invited by a friend. The friend will send you an invitation via WhatsApp or email or Facebook or any type of channel. You accept the invitation, you download the app. And you know, in a few seconds or a few minutes, you have a bank account open. You have a credit card, a virtual credit card working. We'll send you a physical credit card to your house in one or two days, it's there. And then you get access to a number of different invest products that we have. You can get an insurance product. You can start investing your money in a number of different funds. And also equities to invest a company we bought last year.

• 9:30Speaker 02

  If you have any questions, you can ask any question via the chat that we have in our app. And all of your interaction is fully digital through the app. The last thing I'll add is, one of the big pains in this market is over forty percent of the population are blacklisted in the consumer boroughs. They are outside the credit system. If you want a credit, you do not pay the average five hundred percent APR. You pay a thousand percent APR. Because there are a couple of institutions that will lend you money at that rate. Most traditional institutions will not lend you if you are blacklisted in one of the boroughs. And that's because there is no FICO score. There was no positive credit information, only negative. I'll give you an example.

• 10:09Speaker 02

  In my case, I moved apartments and the cable company still sent me a bill for ten dollars. And I never got that bill. And so I became a delinquent for them. They sent me to one of these credit boroughs. And if I needed a loan from one of the big banks, I would have been rejected. So a lot of the opportunity here was for us to build new credit methodologies, build our own FICO proprietary, allow us to underwrite most of the population, both the banked and the unbanked better. And one of the big variables in our model is who invites you? Since ninety percent of our customers come through referrals, we use the credit information of their referral as an input into our credit model. And it turns out it's very predictive.

• 10:54Speaker 02

  And it has allowed us to underwrite to people at lower cost that never had access to any type of credit product.

• 11:01Patrick O'Shaughnessy?

  Completely fascinating that you could use that mechanism to build up data profile of people. And it seems like I just got done doing one of these with the founders of Loft. Their story was so interesting in that it's kind of like the equivalent here where there was no MLS. So they could build sort of a proprietary database and supply. And it sounds like you've done something similar, which is actually bring online and make legible the average person that just had nothing before. That begs the question, like, how did you do this to start? So you've got all this data and all this referral now, but back when you began the service, maybe you could tell us the origin story, like, what did it look like? What was the original problem that you wanted to solve? And why were you with your co-founders in a position to potentially solve it?

• 11:42Speaker 02

  I come from the investing world, as you do, but I always wanted to be an entrepreneur. And I was working for Sequoia. I moved to Sequoia in 2012 to open their office here in Brazil. And after going around in circles for two years, trying to find interesting startups to invest, all of us came to the sad conclusion that there was very little technology in Brazil, then Latin America, no interesting startups, and they didn't justify opening a Sequoia office in here. Me being Latin American, Colombia, I was very sad by that conclusion, but I did disagree. I was in agreement, there was no point. And that was my cue to finally do what I always wanted to do, which was start my own business. I told Sequoia, I'm not going back to California. I'm staying here and I'm gonna go on my own.

• 12:27Speaker 02

  I want to start something. And I have spent a lot of time looking at financial services. I was very curious on financial services because it's the largest industry in Latin America. It's a trillion dollar market cap industry. Most, if you look at the largest companies in almost every country, in Mexico, who are the largest companies? In Colombia, who have the highest market caps in Brazil, it's generally banks. In Brazil, five of the top 10 companies are banks. And that's where most of the market cap of Latin America exists. So I was curious about the overall size, curious about the overall profitability. Brazilian banks for 20 years have shown returns of equity in the 30s or 20s. That's 10x of what you find in the US or in Europe.

• 13:11Speaker 02

  And that has been through all the volatility of macro, in the good times, in the bad times, you find very large growth and very good ROEs. So I was interested about how just overall profitability of that industry. And then I had an experience personally, opening a time to open a bank account when I moved here, when I had to go to a banking branch to open a bank account. And it was the most painful and frustrating experience I've ever had. It was going through that banking branch, I had to go to a bulletproof door, I had my cellphone in my pocket and so alarms started sounding because there were metal detectors. Two police guards armed came running to see if I was somehow armed and trying to rob the bank.

• 13:55Speaker 02

  Then I had to leave back the branch, leave my, everything I own in a locker, go back into the branch, waited forty minutes to talk to a banking manager that had no interest in helping me. And anyway, I won't bore you with all the details, but it was a process of four months of going to that banking branch several times, sending a lot of information to finally get a simple bank account, a credit card, and having to pay hundreds of dollars in fees. So that experience on one end just didn't square with the overall market cap and profitability that I saw in the other side of that market. And that all created the obvious question, why isn't anybody competing with these big banks? Why isn't anybody providing a better experience? This seems like an amazing opportunity.

• 14:39Speaker 02

  The answer was, yeah, I spent a lot of time talking to the experts, to the CEOs, to the consultants, and the overall sense, the overall conclusion was that it wasn't possible. A lot of arguments as to why it wasn't possible, from the regulators who never let anybody entry this market to these big oligopolies are too powerful, they control the government, they have a lot of lobby, they will put a lot of barriers, and indeed, there were a lot of barriers. Brazil is one of the only countries in the world where it's in the constitution. Imagine if in the constitution of the US, there was an amendment that said that no foreigner can invest in banks. And that's what Brazilian constitution has, at that level of protection.

• 15:23Speaker 02

  That's a lot of protection that the incumbents have enjoyed for a very long time. And so about two months of doing a lot of homework, investigating a lot of these arguments, I concluded that there was an entry point that could be a window of opportunity through mobile. This was 2012, where smartphone penetration was starting to grow very fast in Brazil. And Brazil has huge technology adoption. The speed of technology adoption in Brazil is one of the highest in the world. And got very excited about this opportunity and ultimately decided, let's give it a shot. Let's see what happened and be on a fun ride. And let's see if I really get kidnapped by the incumbents or by the regulator at some point. You're just gonna have to try. The only way to really validate is by giving it a shot.

• 16:05Patrick O'Shaughnessy?

  Before going into the next step in the story of how you built stuff initially and got that first hook into the market. You mentioned this time spent at Sequoia studying fintech businesses. What were the big lessons from that period? What in your mind made for a great fintech business versus a good one or a mediocre one?

• 16:25Speaker 02

  At that point, this was 2011, 2012, the word fintech didn't even exist. The industry didn't even exist, so there was no studying to fintech per se. I started a lot of technology companies though. And we looked at Sequoia as obviously one of the best technology investors. And I was very lucky in being able to sit in some of the best entrepreneur speeches in Silicon Valley and sitting in the table of the Sequoia Investment Committee and hearing the partners on what were the things that they were looking for and why investment made sense. There were a number of insights to how they make decisions and how did they ultimately decide to invest in a tech company that I was able to learn into crafting the NewBank

• 17:10Speaker 02

  strategy. And those are some of the basic elements of a great technology company. I'll go back to first that consumer obsession. If you understand Amazon, or if you look at Netflix, or if you look at a number of different great technology companies, consumer obsession is one of those first values. And that's going back to what I said initially, that was one of the first values that we also instigated here, especially in a market that has so much scarcity as Brazil or Latin America. The second point was building technology in-house, really owning your technology, creating a company culture where the engineer, the software engineer is at the center of the strategy, and is as good of a culture as it gets to allow engineers to build the best work of their lives.

• 17:55Speaker 02

  Which in traditional incumbent industry, especially in Brazil, branding is the opposite. You hear about the people from IT that need to come in and do the work, and they're in a different building, and you barely even see them. They're not front and center. They are outsourced. And a lot of the time, you don't even build your own technology. It's all outsourced to a third-party company. So those were two elements. All elements were the way the initial team, the initial founding team is built, and the initial culture is built. One of the things I heard a lot initially at Sequoia was that the initial, the success of a company was very much based on the culture, and that the culture of a company is set up in the first five to six months with the first five to 10 employees.

• 18:39Speaker 02

  And so Sequoia looked very carefully about the existing, the initial founding team, and the initial five, 10 people, and they asked a lot of our own questions around what the culture, how that culture is built. Because those initial conditions will tell you a lot about the first, the next 100 employees you hire, or the next 1,000 employees you hire, and the values that you will create as a company. So one of the first things that I did at NewBank was not only setting up a deck to fundraise, but then a deck, a culture deck, that had all the values that we're going to have in a company. And then I was able to use that with my co-founders that I went and recruited. Looking for people that were very complimentary to me, that were able to fill

• 19:22Speaker 02

  the gaps that I personally had professionally. I had a lot of different gaps that were going to be obstacle for me to execute this plan and use that deck to set up the basis for that culture and then get those next 10 employees, which then helped us get the 100 employees on a very consistent basis. So that be about culture, that be about technology, that be about focus on the customer were lessons that I took as an investor to then set up as Nubank in the initial days.

• 19:51Patrick O'Shaughnessy?

  What parts of your personality and background bled into the culture most? You've got an interesting story in that you're Colombian by background. Your co-founders were, I think, Brazilian and American. It's kind of interesting hodgepodge. You're building a company in Brazil. You came from Sequoia. You've got this really cool kind of melting pot background. How did your own history and story and personality work its way into the culture?

• 20:15Speaker 02

  A great conversation I had with Rulof at Sequoia. When I was pitching him the Nubank story, Rulof has a lot of experience in financial services. He was one of the early employees in PayPal. He told me something that it was a punch in the stomach and ended up being incredibly valuable. He told me that this makes a lot of sense. The idea makes a lot of sense conceptually. Your background is very inadequate to be able to fund and execute this business plan. You're not an operator. You're not a technologist. All you effectively has in background is an investor. You have a big mountain to climb. And I always feel that while I left that meeting feeling this hurtful, it was a bit of a punch in the stomach.

• 20:59Speaker 02

  It helped me a lot because the next step that I had to do then was, okay, fine, I have all of these gaps. How do I fill these gaps? And the first big gap was I'm a foreigner in Brazil. I'm Colombian. I had no network. I was fully immigrant and I did never work for a retail bank. Didn't really know how credit card worked, to be honest. And so the first step was let's find a perfect insider. I was the perfect outsider. Let's find somebody that understands credit cards and that is Brazilian and that has a huge network. And when I met a bunch of people and I met Chris, my co-founder, who's obviously with us, and she brought all that knowledge that I lacked. The second big gap was We were building a technology company, not a bank.

• 21:44Speaker 02

  And so, technology was going to be in the center of the strategy. And I did study engineering, but I was not a computer scientist. So I went and met a bunch of potential CTOs, co-founders, and I met Ed. And he was great. He joined us and he was responsible in the entire technology strategy and some of the big technology decisions since the very beginning. And so with those two co-founders, I filled some of the gaps. And then the mission for the next six months or 12 months was actively asking the question, what are all the other gaps? Then how do we find the best people to be filling those gaps? From knowledge of credits to funding, to data science, to design, to marketing, to branding. Executing this entire plan required so many different skill sets that this value of diversity

• 22:29Speaker 02

  has been a big value for us and it's there in our deck since 2013. And even now, this is how we think about our architect and entire organization. You are a new bank, you'll find a ton of diversity everywhere you look. We have 35 different nationalities. We have people working in something like 25 countries today. We have people that speak something like 15 different languages. We have obviously a lot of introverts working next to extroverts. We have people that studied physics, sitting next to people that studied philosophy, next to people that studied communications. And we love creating those teams with a lot of diversity because ultimately, out of that diversity, out of conflict of ideas, is that you can really come up with original insights.

• 23:14Speaker 02

  And that's what a lot of the traditional incumbents, especially banks, don't get. If they really want to compete with companies like ours, they don't need to overcome a technology challenge, but mainly a cultural challenge and a talent challenge. Because they're extremely homogeneous. You find these traditional banks, 95% white males, all going to the same schools, all speaking the same way, all providing the same views about the world. And in that environment, it's very hard to have that type of conflict of ideas because everybody really agrees with each other. So those early, I would say, a lot of those decisions around team building and culture came from A humbled recognition of a lot of weaknesses and then trying to figure out how to overcome those.

• 24:00Patrick O'Shaughnessy?

  I'd love to move from the weakness idea to that of strength and the strength that it must have required for you to run through some of the walls put up, literally in the constitution, as you mentioned, and just generally speaking. What was it like in those early days? Like, what were the major walls you had to break down to just be able to offer the service that you did to Brazilian consumers, given the incumbency and, it sounds like, regulatory capture of the incumbent Brazilian banks? What were the big early obstacles?

• 24:28Speaker 02

  So, one of the things that we as a team had in the early days was we were trying to go against the most powerful companies in Brazil, and we have spent months hearing from everybody that it was completely impossible and almost ridiculous what we were trying to do. I heard so many times, "You're not even Brazilian. You have no idea what you're talking about. It's impossible to go against these guys. You don't know this local." And we were hearing the no and the skepticism so often from so many different people that there was a huge sense of urgency to prove everybody wrong. To prove everybody wrong just created a sense of urgency inside that we just had to find a way to do it,

• 25:11Speaker 02

  to make it. It was amazing, create a level of energy and sense of urgency that forced us to ask why, five times, everybody told us that we couldn't do it. Even a bigger forcing function, when we started working together about five months after, I knew that we were going to start with a credit card product as a first product. A new regulation came in regulating that industry. And this was something like November 2013, and the regulation said if you are not operational by April or 2014, if you're not operational in five months, you're going to have to enter and ask for a license, and that process is going to take you two years. So for us, that would have been death.

• 25:53Speaker 02

  That basically meant we had five months to build our entire product and be operational. We were forced to grab our roadmap and figure out a way to make it successful in half of that time. So that meant that, I remember a weekend, we had to be able to get Mastercard on board. They needed to get a piece of paper in their office in the Netherlands by a Monday, and DHL was not going to be able to deliver it by Monday. So we considered just flying ourselves to the Netherlands to be able to deliver it physically in the office of Mastercard by the deadline on Monday, so that we could gain two days in the entire roadmap implementation. And the same thing happened with regulation. Every time somebody put us, "No, you cannot regulate it." We would go and triple-check and triple-click.

• 26:37Speaker 02

  One of the first things we had, obviously, the regulators were going to hate what we were doing. So we just went and checked. We went into a plane, we flew to Brasilia, where the government, where Central Bank is. We went and talked to the other regulators. We made a very honest case, saying, "Regulators, you have five banks that own 90% of this market, and they're charging the highest interest rates in the world. You have 40 million Brazilians outside this banking system. How is this type of concentration good for Brazil?" And they agreed. They said, "It's not good. We want competition." And that was the first step where we started making the case, the education case, that technology and smartphone opened a window of opportunity for new entrants

• 27:18Speaker 02

  to provide competition that was ultimately going to really enable more Brazilians to get more access to more products. They have become our biggest allies. And today, their Central Bank of Brazil is very forefront. They are supporting competition. They're trying to remove all those barriers. Sometimes, we couldn't get any barriers removed. In the case of the constitution that I mentioned, it took us three years to get a banking license. It had to go all the way to the President of Brazil. To get a presidential decree to create an exception for us to get a banking license because we had foreign investors. At that point, we just had to be patient. And one of the decisions that we made, especially there, is we had to just be compliant. We're not going to take the route that a lot of our technology companies have taken,

• 28:02Speaker 02

  which is grow very fast, but one point you'll be so big, the regulator is going to be forcing to accepting you. Here, we decided we were going to be always compliant. We're going to be friendly with regulators. We're going to maintain good conversation with them. And if it cannot happen in six months, we'll just have to be patient and figure all our ways to provide products while being fully compliant with all the regulators.

• 28:25Patrick O'Shaughnessy?

  Is it fair to sum all this, the lesson here up as like, there is no trick to this. It's not a trick at all. It's to be transparent, to appeal to the fact that you're doing the right thing for a big customer base and then to be patient. Like, that's the formula for dealing with an entrenched situation with a lot of red tape. Is that a fair summary?

• 28:43Speaker 02

  Yeah, I would say first, it helps a lot when you're on this good side. It's almost like you're in the, you're not in the dark side of the force. You're in the positive side of the force. You're the Jedi against the empire because ultimately you have 200 million Brazilian, potential Brazilian consumers on your back, helping you. And that's ultimately the best defense that you can have for many lobby, for many politicians, for many regulation. There was one changing regulation in 2015 over a weekend. I remember it passed on a Thursday afternoon that was being pushed by some of the incumbents to make it very hard for us, would have required us to, over a weekend, raise over

• 29:26Speaker 02

  a billion reais and would have probably put us out of business. And we were very vocal through the weekend with the press, saying if that regulation passes, we're dead, we're done. And by Monday morning, the Twitter account of the central bank had 15,000 Brazilian consumers telling the central bank, you cannot do this, you have to protect New Bank. New Bank is, for the first time, somebody in this market is helping us and doing something good for us, and you guys are going to come here and let this happen? To your question, I think, beginning and having been on the good side and doing something that is good for society, it's good for consumers. Is ultimately the best protection that you can have. But then beyond that, I would add just listening very carefully and being willing to double click,

• 30:11Speaker 02

  triple click, quadruple click every time somebody tells you that you cannot do something. And then ask sort of the why, why, why five times until you get to the bottom. Because a lot of the times, what we found is when a lot of those industry experts told us you cannot do it. What lied beneath was ultimately a lot of fear. It was fear of going against these big banks, these big dinosaurs. But nobody had ever attempted to do it. So nobody knew that you could do it. And what we did was just go deep and really find opportunities to actually do what a conventional wisdom thought it was impossible. So being able to like ask five, six times why is important.

• 30:53Speaker 02

  Being honest and open, I think a lot of regulators helped a lot and developed good relationships. I think that's the right strategy if you're playing the long game. Right? You're going to be with the regulator for 10, 20, 30 years. Sometimes you have to be patient, as you say, and it is what it is. That's life. Some of these regulations have been there for decades. You're not necessarily going to be able to challenge them or change them. But there is a lot of opportunity to innovate within the existing regulatory framework. And so that's what we did. We want to be compliant, but given this guardrails, there is a lot of opportunity to do things differently. And a lot of our products, like our savings account, for example,

• 31:34Speaker 02

  we were able to create a fully new savings account within the existing framework, a regulatory framework, and that was a very noted product.

• 31:43Patrick O'Shaughnessy?

  Can you talk through how the actual business works itself? Because I have to imagine that, I don't know what the number is globally, but there's lots of places still where tons of people are unbanked, where going straight digital makes a ton of sense for some new company being built, something that might look like New Bank, say, for Asia or wherever it is. Talk us through like the actual business. How does New Bank make money from its customers? How does that most differ from how a traditional bank, MITRE, is it the same, just better? Just walk us through the kind of business itself.

• 32:14Speaker 02

  One of the advantages of being in banking is that banking per se is one of the oldest industries in humanity. I think banking has something like 5,000 years. We're not Uber doing a fully new business model. We're taking a bunch of different risks. We're not taking business model risk. So people understand how to make money in banking, especially in a market like Latin America, where you have some of the largest margins in banks. The question for us was a bit of a different bet. The bet was, can you make it free? First product, which was a credit card. Credit cards in Brazil, banks charge a ton of different fees for a credit card. And the bet that we had was, well, what happened traditionally is that

• 32:58Speaker 02

  a consumer might pay a hundred dollars a year for a credit card. So the bank gets a hundred dollars in revenue and they use that money to do customer acquisition, to acquire a customer. So the flows go, a hundred dollars get out of the customer's pocket and goes into Google or Facebook or the TV channel. Goes directly into customer acquisition. A bit of, well, some of the bets that we had initially was, let's charge nothing to the consumer and hopefully that translates into no customer acquisition cost. So Google, Facebook, they lose. That money stays in the customer's pocket. And that bet worked. We charge no fees, but our customer acquisition cost is effectively zero, even today.

• 33:42Speaker 02

  And so that was the first bet. But then there was a number of our revenues that we don't have fee revenue, but we have interchange revenue. So we make money out of every transaction that a customer makes with a credit card. And we also make money when the customer decides to use the credit card to finance themselves. And that's with the credit card. And then we make all our money in other type of financial services products. When we sell an insurance product, we charge a fee, a broker's fee. When you invest your money in an investment product, we charge a fee for AUM. We don't charge any money for peer-to-peer transfers or any type of transfers. It's no fee, we charge no type of fees there. We charge a recurring fee when you want to have access to our reward program and get points for every spend that you have.

• 34:26Speaker 02

  So we have, we tend to have very similar revenues as the traditional banks have, but we don't have any fee revenue. And then we have a huge advantage on the cost side because, as I mentioned, we don't have to pay 5,000, 6,000 branches. Or a hundred thousand employees. Itaú, the biggest bank in Brazil, has fifty million customers and they have a hundred and twenty thousand employees.

• 34:49Patrick O'Shaughnessy?

  Wow.

• 34:50Speaker 02

  The advantage in terms of cost is fifty X. And that allows us to also charge less from customers. And ultimately deliver financial products that are better for customers, easier experience, less friction, less fees, and also cheaper. And so ultimately, it's a valuable position that is unbeatable.

• 35:11Patrick O'Shaughnessy?

  I'm really interested by rewards programs. You mentioned briefly there, new banks rewards. Tell us everything you've learned here. What is the value of rewards programs? How do they work? Why do consumers like them so much? What has this experience taught you?

• 35:24Speaker 02

  One of the things that we also saw initially, as we understood this market was customers were paying some of these high fees for credit card and they were getting associated rewards program. And the marketing of banks, in a way, taught them that rewards was a basis of differentiation, that they should differentiate credit cards based on who gave you the best rewards. In reality, when you analyze a lot of these rewards, the programs were so complex, so hard for consumers to understand, that a lot of the times, these consumers were making irrational decisions. You were paying very high fees to get a rewards program that supposedly was good. But if you had kept those fees money in your pocket,

• 36:10Speaker 02

  that was worth more than the rewards program itself. So one of the orbits that we did initially with our first product is no fee, no rewards. That went completely against the conventional wisdom that you needed a good rewards program to get a card. Lots of consumers loved it and we grew extremely fast. Lot of consumers didn't like it. They wanted their rewards. They were the true real rewards consumers. And they were willing to actually pay for it. And so then we added a voluntary rewards program on top of it, where you actually pay a monthly fee. And we created a program that is extremely simple for consumers where it's effectively cashed back for a number of different categories where points never expire. You get the points instantly.

• 36:55Speaker 02

  You don't have to wait until the end of the month to get your points. You get them instantly and you can use them instantly if you need them. That has worked well. It has been a probe. We have over a million consumers in that program. But one of the opportunities that we still see there, and we still haven't necessarily been able to crack it, is that huge transparency we give to customers, which we think we have to give it because it's a value of us. Sometimes it's a bit of a shot in the foot because customers compare us apples to apples with our programs. They think our banks have better programs because they give them better points. But then there is a lot of complexity and footnotes that they don't end up seeing. Customers end up preferring something else that is much more complex, that is worse for them.

• 37:39Speaker 02

  So that's a challenge that we, I guess, an opportunity that we're, of course, and how do we continue evolving this program, maintaining the value transparency because we're not going to move away from that, giving more value to the consumer, but forcing the consumer to also ask hard questions from the bank's programs to force them to be as transparent as we are.

• 37:59Patrick O'Shaughnessy?

  One of the things that I'm totally fascinated by is the line of questioning of investors into companies like yours. I love that you've had experience as an investor and then also just went, you mentioned at the beginning that Buffett and Berkshire were just asking great questions about your business. What were those best questions? Like if I was trying to understand New Bank today from an investor's point of view, maybe just using Berkshire as the example, what were the best questions that they asked you as a part of that process getting to know you?

• 38:27Speaker 02

  I would say it's first around really understanding the market opportunity and really understanding the peculiarities or the specificities of a market like Brazil. Some of the biggest opportunities, you were mentioning LOFT and not having MLS in Brazil. I gave you the case here of not having FICO score. Some of the biggest opportunities I think exist today globally are in this market, these locations, are in these markets that have a significant failure.

• 39:00Speaker 02

  And where technology adoption suddenly creates an opportunity to beat the incumbents. And this could be in real estate, or in financial services, or in a number of different industries. So a lot of investors, especially now emerging market investors, or US investors are getting into emerging markets, go very deep and are able to understand with a lot of clarity, why is this market dislocation, this market failure? And then understand how the company is able to find a unique angle into filling that market dislocation. US and Europe are very efficient markets. When you look at economics, one on one, your market textbook, generally is very efficient.

• 39:42Speaker 02

  And even in financial services in the US, the margins of US banks are small, they're very small margins. And that's ultimately because in the US, you have 4,000 banks. Everywhere you look, it's fine to have an angle, it's hard to find differentiation. Even capitals, traditionally capital was a constraint in an environment like ours, it's not a constraint anymore. So in US, Europe, it's really hard to find that edge. Some of the best investors we've had today are investors that have been able to understand why we have an edge. They are going to emerging markets, not deterred by the volatility or the imperfections that these markets provide, but actually attracted by them. They're able to be contrarian in a way.

• 40:25Speaker 02

  I remember talking to Sirius C when Founders Fund led our series, talking to Peter Thiel. We were closing in November 2015, Brazil was going into the worst economic recession in 100 years. Everybody talked to runs through the hills, they didn't want to talk to us, they had no interest. When talking to Peter at Founders Fund about Brazil macro, he said, I couldn't care less. This is when the headlines in the newspapers were horrible about Brazil. Middle of corruption investigation, it could not get worse. And that's because he was able to go very deep and understand this angle and this dislocation and why this created an opportunity.

• 41:08Speaker 02

  So I would say that in macro view is one big bucket of great questions. The second is a lot of focus on the team, how is this team really able to execute on that vision? Because ultimately, I would bet on the team more than necessarily the market. The team can really change and pivot and move as needed. Since a lot of these opportunities have to be very dynamic, you need a very dynamic team. And a third one is more of an understood kind of unit economics, horizontal economics type of view of the business. I see this still in a lot of Brazilian or Latin American investors where they hear we charge no fees. And we don't do this anymore, but when they hear that a startup has financial losses,

• 41:52Speaker 02

  that means the business model is broken. Obviously Silicon Valley in US, they're already much more sophisticated to understand that startups operate differently. And it's about where are the underlying economics of a customer? And how do underlying economics of this customer evolve over time to provide massive profitability down the road? A lot of the most sophisticated investors get to these unit economics or economics very quickly and ask the right questions to understand the potential for value generator down the road. And I think this is already very much common in US and Europe. I would say in Latin America, still the more traditional investors are very stuck in a P and L that generates losses.

• 42:34Patrick O'Shaughnessy?

  What is the layer two of unit economics for you guys? So I certainly understand like trying to figure out, okay, how much revenue might I generate from a new customer over time? You've already talked about your cost of acquisition is basically zero, so that's pretty good. Level one unit economics, what's beneath that? The best investors dig in on unit economics for new bank, where do they go beyond that layer one?

• 42:58Speaker 02

  We don't pay much money in marketing, cost of acquisition, but we do have a setup cost, which is data cost, underwriting a customer, sending the customer, creating a physical car, sending the car to a customer. So we do have some setup cost. So the first question is like, is what the payback of that initial cost is? And one of the things that is hard, let's say in the early stages, let's say serious A, B and C, when you already have some data, but you don't have a lot of data is understanding how the payback time might evolve over time and where there might be economies of scale. And I remember when I was at Sequoia. At times in certain business model, there was a lot of skepticism on whenever an entrepreneur would

• 43:41Speaker 02

  teach economists of scale or improvements in those unit economics over time. And there are some areas that I would be rightly skeptic. Let's say customer acquisition cost, for example, you can build arguments on both sides of the table that as the company grows, that customer acquisition cost will come down or that customer acquisition cost could go up, right? It could go both ways. It depends a lot on the market, it depends a lot on the competition, it depends a lot on differentiated product. Scalability of CAC is hard to make a case either way. But when you look at the cost structure of the business, obviously, my ability to negotiate a better contract with data providers, with logistics companies, with Mastercard, with any other type of provider

• 44:24Speaker 02

  today, when I have 40 million customers, is way, way, way, way better than when I had 10,000 customers. That's undebatable. And so if you're stuck as an investor, only giving credit to that entrepreneur for the cost structure that they have when they have 10,000 customers, you're being too skeptic. You've got to understand how that cost structure is going to evolve over time. You give some credit at that evolving cost structure. The hard part in our business is we're giving credit. And this is something that makes our analysis much harder because a lot of the time when you see very fast growing businesses with credits, the cohorts might look fine until the next crisis come. And then all bets are off, your delinquency spikes.

• 45:09Speaker 02

  And this is what happened actually a lot to the financial services business that have balance sheets in the US through the crisis. A lot of financial services businesses were growing very, very fast in the good times. Then financial crisis came and delinquency spiked and those unit economics went really badly very quickly. So in our case, it's been different because the only thing our credit models know is Brazil is in a recession. We launched in 2014 and the past eight years for us has been preceding a recession. And not only a recession, I've been the worst recession in a century. So our models have been stress tested as it can possibly get. Now we had a pandemic, an entire pandemic to test those credit models.

• 45:53Speaker 02

  A lot of these investors have been sophisticated enough in understanding, asking their questions and looking at our loan data and getting a view of cohorts of credit and getting comfort in the underlying credit risk that we might take or we might not be taking. So that nuance around payback curves and how they evolve over time, depending on the stage of the company, depending on the scale of the company, it's a nuance that not all investors really look through.

• 46:22Patrick O'Shaughnessy?

  If we were to zoom out a little bit and just think about Latin American technology opportunity and companies more generally, how far into this story do you think we are? I always fall in the trap of like, well, it was a good idea to invest in these things seven years ago, but now some of the major categories, banking, housing, et cetera, have been sort of tackled. Where do you think we are in this story? Is it early? Is it in the middle? I'm sure it's not towards the end. Just give us a sense of the Latin American technology ecosystem.

• 46:50Speaker 02

  It's extremely early and there are a couple of data points there. We still have 250 million people out of 750 million people in Latin America completely unbanked. They're literally grabbing cash and putting them under their mattress. And this is even now. So this is financial service, one of the biggest industries. But then when you look at all our verticals, insurance, you talked about lost and real estate. When you talk, when you see transportation, when you see healthcare, when you see education, it's all effectively still offline. Most education in Latin America is offline. People go offline. Most healthcare still happens in hospitals.

• 47:32Speaker 02

  There is no real yet telemedicine at scale. When you compare some of these ratios with, let's say, China, a nor emerging market or Southeast Asia. It's not even comparable yet to the level of digitalization that you've seen in countries like China or Southeast Asia. So it's extremely early still for Latin America, I think, technology for the entire technology story.

• 47:56Patrick O'Shaughnessy?

  You mentioned earlier, a lot of the things that have driven your success, thinking about this as a technology company, all the things that have led New Bank to be successful so far. What are some of the worst decisions that you've made and what did you learn from them? Like, just think about it viscerally, like, what was the big error in building the company that stands out in hindsight?

• 48:17Speaker 02

  Oh, man, so many. I had to remember it all. I'll tell you a couple of ones very quickly. One specific one that I remember, very early days, I think it's indicative to a lot of decisions is, I wanted the first two, three months at New Bank, I expected everybody to be in the office Mondays at 8:00 a.m. If they were not Mondays at 8:00 a.m. in the office, I would start mistrusting the people in the team. Where did I get this from? It was sort of my natural environment, coming from Sequoia, from General Atlantic, from Morgan Stanley. That's where you expect people there in the office at 8:00 a.m. and

• 48:59Speaker 02

  being there, even questioning somebody's competence or commitment if they're not there. And I just started distrusting the team and getting very mad at people that weren't there, until I had to be slapped in the face a little bit by my microfounders, saying, "What are you doing? This is the tech company, engineers, stay here until 11:00 p.m. You're going to give them the autonomy. You cannot be spending so much time trying to hire the very best people and then mistrusting them the first couple of weeks." And so that, already in the first few weeks of New Bank, that's something that I had to start programming my brain versus some of the experiences, the managing experience that I had before, in trying to create an environment of trust, in trying to create an environment of autonomy,

• 49:45Speaker 02

  that ultimately are some of the key values we have as companies. Then, some of the biggest mistakes have been around

• 49:53Speaker 02

  Talent, I would say hiring the wrong people. It's a very hard decision because I think just the entire recruiting process, it's regardless of how good you are and how sophisticated you can become at that recruiting process. You can start using a lot of data. You can use a lot of data on the questions that you ask and tracking those questions down the road in terms of performance. It's still a very imperfect process. You're gonna be making a lot of mistakes a lot of the time. And I would say there've been big decisions around people. Sometimes when I was too impressed by background or by the CV or by the logos,

• 50:34Speaker 02

  not necessarily focused enough on the character or the engagement or the attitude of the person. So some of the big talent decisions that I made was because of that. And then the follow-up mistake is being too slow at letting that person go. And one of the things is funny, I did business school and I remember people sitting in business school. When you start asking yourself if you should let somebody go, it's already too late. And I remember reading that, I was like, yeah, it makes sense. You know, you gotta, you gotta let go fast. In reality, it's much harder to actually do that than the business school, traditional business school would say it. Because you have the relationship with the person, because it's a nice culture.

• 51:18Speaker 02

  But sometimes when I overthought that decision and it took three, four months more than it should have to make that decision, we just lost time. And by the moment you make the call, generally 95% of the times, the person is thankful. The person is happy because they already knew that it was not working out. They live in good standing and it ends up being better than you ever expected. Because then you open up the space for somebody else that wanna come do the job. You see a completely different trajectory in terms of a team that can be executing way better. So it has always been easier and better than what I expected. And therefore, I should have made that decision faster.

• 52:01Patrick O'Shaughnessy?

  What has you most excited about the future? Just generally speaking, can be new bag related or not. Just given your unique perch and perspective on things and experience, what are you most excited about in the future?

• 52:14Speaker 02

  You know, we've been in the countries that we are, Brazil, Colombia, Peru, Mexico.

• 52:21Speaker 02

  We see a number of really bad news every single day. And the pandemic has been an incredibly tough year for so many millions of people in our countries because we lack the healthcare systems. We've been way behind on vaccinations. People didn't have the right knowledge. Lot of fake news around, lot of miscommunication. And I think one common denominator, I think, around the world for the pandemic is how unprepared emerging markets are to deal with a crisis like this one. And has shown just really horrible stories around poverty and lack of location.

• 53:04Speaker 02

  And then even corruption is heartbreaking to see in a lot of these countries politicians engaging in corruption with a pandemic. There are literally a number of cases of politicians that use healthcare contracts to get rich, completely ignoring the level of pain that hundreds of millions of people have been having over the last year and a half, two years. The overall environment around Latin America today is really bad. The political environments, the level of leadership of the public sector, poverty increased, some of the good stories around the middle class growing. We've gone back to 10, 20 years.

• 53:46Speaker 02

  And so it's a very dire, very sad picture overall. What gets me excited is figuring out how Nubank and companies like Nubank can have a shot at improving, even if it's a little bit that entire scenario. And when we see that we just all, for example, as we have saved over $3 billion in fees to our customers, that if we weren't around today would be in the pockets of five big institutions. And now those $3 billion are allowing to people buy medicines or allowing people to... Send their kids to school. That makes it very helpful. When I see this happening in our industries,

• 54:27Speaker 02

  more competition, forcing lower prices, forcing more adoption, forcing better quality of life. That gets me very, very excited. So I think ultimately what gets me most excited is the opportunity of companies like NoBank to contribute to economic growth and ultimately create the conditions for hundreds of millions of people to just be able to live a better life.

• 54:51Patrick O'Shaughnessy?

  David, I asked the same closing question of everybody. It's been so much fun learning about what you've built and just an incredible area of the world that has so much opportunity, a lot to be fixed, as you just laid out, but it's been a pleasure learning from you today. The same question I ask everybody is, what is the kindest thing that anyone's ever done for you?

• 55:08Speaker 02

  I had a WhatsApp conversation with my mother yesterday. She found a letter that I had written 15 years ago thanking her, and it was the first time that I'd written paper thanking her for all the sacrifices she had to do for me and for my sisters when we were growing up. We grew up in Colombia in the eighties, in the middle of a pretty effectively a civil war. We had to leave, my parents had to just leave and we went to Costa Rica to try to find a more peaceful place. They had to leave all their family behind, they had to leave their friends behind, and that was a huge sacrifice, I think my parents did. And when I read that WhatsApp yesterday and read that letter, I think that's

• 55:51Speaker 02

  the kindest thing ever. You remind me that the type of sacrifice that my parents did and my mom did with all of us was incredible. They effectively sacrificed their lives, their dreams, leaving a country behind to try to create the best conditions they could possibly have for me and my sisters. And that was just amazing. I think that's it.

• 56:10Patrick O'Shaughnessy?

  What an incredible story and place to close. Thank you so much for your time today. It's been a blast.

• 56:15Speaker 02

  Thank you, Patrick. It was an honor and a pleasure. Thank you very much.

• 56:19Patrick O'Shaughnessy?

  This episode of Founder's Field Guide was brought to you by Dell Technologies. Upgrade your business during Dell Technologies Black Friday in July event. Get savings up to 50% off and take your office with you with Windows 10 Pro. Call 877 ASK DELL for a Dell Technologies advisor. You can also check out the link in our show notes to see deals that Dell has today. Thanks for listening.

• 56:42Patrick O'Shaughnessy?

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