New Open Banking regulation in Brazil will let us compete with big banks, says David Velez, CEO at Nubank

May 6, 2020
Repórter de Economia em VEJA
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veja.abril.com.br
David Vélez, the founder of the largest digital bank in the country believes that opening bank details will facilitate credit and increase competition

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Sailing in rough seas is not an easy task. But Colombian businessman David Vélez, CEO and founder of Nubank, has done well. Main name at the head of the digital bank that has revolutionized the Brazilian banking market and troubled large institutions, he believes that the pandemic of the new coronavirus (Covid-19) is forcing a change in professional relationships and behavior on the part of consumers. In addition, he recognizes that the regulation of open banking - the Open Financial System - by the Central Bank was the last step for digital banks to compete on an equal footing for the customer. “Open banking will facilitate access to credit, account and data portability, in addition to lowering competitive barriers. It will be very good for the consumer ”, he says. With the new system, which will be implemented until October 2021 in the country, citizens will have more control over their data, which will help them when obtaining credit or financing, for example.

Nubank managed to reach the point of financial equilibrium in 2017, after overcoming the challenge of growing amid the chaos that took over Brazil between 2014 and 2016. Now, after a sigh, the company again faces a challenging scenario. How do you analyze this moment?

Our life in Brazil can be described in crises. Since when we started in 2013, we have grown in a hostile environment, both regulatory and in the macroeconomic scenario. But these challenges meant that we were able to implement our DNA and adapt very quickly to these circumstances. Now, we are going through another difficult time, but we are very strong in this crisis. We are sailing well and we will come out of it very strengthened, leveraging on trends that we had already identified, such as the digitalization of the banking financial system. This business of spending an hour in the bank branch line has become a thing of the banking industry's past. Even the demographic segments that were resisting more to join this transformation, like the elderly, have already changed their behavior. Since the crisis began, the number of Nubank customers over 60 has grown by more than 8%. It was a demographic area that we had not yet penetrated much. But with the crisis, these people cannot go to bank branches, and they started using digital banks for the first time. We are benefiting from this behavioral change. The post-pandemic banking world will be much more digital and this change helps us.

There is a fear that the pandemic is crucial to the bankruptcy of startups and fintechs that have not yet reached operational breakeven.

Unfortunately, the crisis will be difficult for many of them. Some of these companies are more capitalized than others. Each startup has its own universe. Now, if the fintechs manage to endure and go through this crisis, the world that will exist afterwards will be much more open to the products they offer compared to what it was before. It is important to try to hold on now and be more aggressive in the resumption. I think that this philosophy of growth in full swing, without looking at profitability in the business model, may only work in the United States or Europe, where, it is believed, there is infinite capital. In Brazil, capital has always been very scarce. You can't think of growing without being profitable or having a well-structured business model. That option never existed. In our case, we always think that generating cash is important and profitability is important. And we've looked at that since the beginning of the company.

How do you assess the impact of the pandemic on the result of Brazil's Gross Domestic Product (GDP) this year?

We are working with an economic contraction figure of around 5% for this year. It is a tragedy. I think we will need to rebuild this country after getting out of this crisis. And this will require a lot of work from everyone, be it the private sector, entrepreneurs, as well as an active role of the government to sustain this large mass of unemployment that will increase substantially. It will be necessary to invest to generate new jobs and foster all chains of the Brazilian economy.

Several sectors of the economy have complained about the difficulty of accessing credit at this time. How do you see this?

Febraban recently announced that it has already transferred more than 200 billion reais in new loans, which is already a lot. In other words, banks are lending. But, what I have been feeling is that much of this value is being allocated to the largest companies. Small and micro-entrepreneurs are finding it more difficult to access credit. In addition, they also have higher interest rates, as the degree of risk is higher. And that is the big problem. Borrowing money in the midst of a crisis creates enormous risk. We have been talking to the government and the BNDES so that there is some kind of risk sharing by the state. This is especially important for banks and fintechs to continue to release credit. In the United States, for example, the government is taking most of the credit risk. I think there is a lack of a mechanism like this to be able to take credits at lower interest rates for micro and small entrepreneurs.

What would be the solution, then? Follow the American financial market?

It would be a path. In the United States, banks are lending money to micro entrepreneurs and small businesses, but the government is taking 100% credit risk. In this way, we know that this money will reach the interest given by the government to this final microentrepreneur. Other options would be, for example, making agreements with the BNDES or some public bank, so that it takes most of the credit risk, sharing this risk with fintech. Today, fintechs are very well positioned to help bring resources to consumers or small companies across the Brazilian territory. Almost 210,000 people received Caixa contributions through Nubank. So, fintechs are very well positioned in this crisis, but the problem is that they do not have the capacity to take 100% of that risk. That is why sharing this risk with the government, perhaps through the BNDES, would help to make fintechs manage to release more loans and lower interest rates for this microentrepreneur.

What are the risks for default at this time? Has Nubank changed, in any way, the parameters for risk analysis due to the pandemic?

Bad debt has grown, as unemployment has increased. It is certainly a worrying factor and it tends to intensify. On the one hand, this pandemic moment is a great opportunity to strengthen our brand and our relationship with customers. Therefore, we are launching a refinancing program at very low interest rates. A few weeks ago, we launched new installment programs at less than 2% per month, which is a discount of more than 80% compared to the interest rate we charged before the crisis. We launched a 20 million reais fund, called “People First”, in which we partnered with Sírio Libanês hospital, to give telemedicine to our clients; we partnered with some meditation, stress and other apps. That is, we are trying to help our client in several ways. On the other hand, there is an increase in terms of overall risk. And we have understood that we have to be a little more careful to evaluate the possibility of new loans.

How has banking portability influenced Nubank's recent growth?

The Central Bank's measures to facilitate portability have positively impacted our business. We already have several customers who are receiving their salaries through Nubank every month, and the number just grows. But it is still difficult. There are several points of friction in this process. The big banks don't love this specific product, so it ends up getting in the way. It is still not as easy as it could be. Credit portability is even more complicated than that of salary. It is difficult for a customer to take his loan from one bank to another. So, we are working with the Central Bank to facilitate this process. Many of the Central Bank's measures are aimed at lowering these competitive barriers.

How, for example, the regulation of open banking?

Yes. Open banking is in this way, to facilitate access to credit, get down competition barriers and facilitate the portability of everything, account, credit, data… We understand that this whole line of open banking will make it very easy, no just because all the barriers go away and it will be easier for the consumer to choose my product, but also because today banks have a big advantage in terms of data. They have internal databases, something that fintechs don't have, which puts us at a disadvantage. Part of this explains why the interest rate doesn't fall as much as it should. In the same vein as open banking, the Positive Registration Law, which was a regulation that passed last year, will also help. Now, the consumer will be able to migrate all his data and show that his behavior in relation to risk is good, that he is a good payer, etc. This will give him access to lower interest rate loans. Always remembering that it is the consumer who will decide whether he wants to share this information or not. But, in general, it will help to lower his interest and that's what we want. Today, our interest rate is already up to 40% lower than other banks.

How has Nubank adapted to the pandemic?

Is the home office structure here to stay? The remote work structure worked better than we imagined. As many people did not have a suitable chair or monitors, we sent more than 1,000 ergonomic chairs and 400 monitors to assist employees, in addition to making the journey more flexible for those who have children. I believe that, with this pandemic, the way companies will exist and the way they work will change significantly. The first change is that the crisis forced companies to try the home office, something that many were afraid of. I do not believe that the post-crisis will be 100% remote, there will still be offices, but the physical space will become increasingly optional and not mandatory. In addition, the crisis may show that remote work can make companies invest in diversified professionals, spread across several regions in the world. We, for example, have a German developer and a designer in Italy. My talent market is global. This can also be a big change for companies.

Las opiniones compartidas y expresadas por los analistas son libres e independientes, y de ellas son responsables sus autores. No reflejan ni comprometen el pensamiento u opinión de Latam Fintech Hub, por lo cual no pueden ser interpretadas como recomendaciones emitidas por la platafomra. Esta plataforma es un espacio abierto para promover la diversidad de puntos de vista sobre el ecosistema Fintech.

Sailing in rough seas is not an easy task. But Colombian businessman David Vélez, CEO and founder of Nubank, has done well. Main name at the head of the digital bank that has revolutionized the Brazilian banking market and troubled large institutions, he believes that the pandemic of the new coronavirus (Covid-19) is forcing a change in professional relationships and behavior on the part of consumers. In addition, he recognizes that the regulation of open banking - the Open Financial System - by the Central Bank was the last step for digital banks to compete on an equal footing for the customer. “Open banking will facilitate access to credit, account and data portability, in addition to lowering competitive barriers. It will be very good for the consumer ”, he says. With the new system, which will be implemented until October 2021 in the country, citizens will have more control over their data, which will help them when obtaining credit or financing, for example.

Nubank managed to reach the point of financial equilibrium in 2017, after overcoming the challenge of growing amid the chaos that took over Brazil between 2014 and 2016. Now, after a sigh, the company again faces a challenging scenario. How do you analyze this moment?

Our life in Brazil can be described in crises. Since when we started in 2013, we have grown in a hostile environment, both regulatory and in the macroeconomic scenario. But these challenges meant that we were able to implement our DNA and adapt very quickly to these circumstances. Now, we are going through another difficult time, but we are very strong in this crisis. We are sailing well and we will come out of it very strengthened, leveraging on trends that we had already identified, such as the digitalization of the banking financial system. This business of spending an hour in the bank branch line has become a thing of the banking industry's past. Even the demographic segments that were resisting more to join this transformation, like the elderly, have already changed their behavior. Since the crisis began, the number of Nubank customers over 60 has grown by more than 8%. It was a demographic area that we had not yet penetrated much. But with the crisis, these people cannot go to bank branches, and they started using digital banks for the first time. We are benefiting from this behavioral change. The post-pandemic banking world will be much more digital and this change helps us.

There is a fear that the pandemic is crucial to the bankruptcy of startups and fintechs that have not yet reached operational breakeven.

Unfortunately, the crisis will be difficult for many of them. Some of these companies are more capitalized than others. Each startup has its own universe. Now, if the fintechs manage to endure and go through this crisis, the world that will exist afterwards will be much more open to the products they offer compared to what it was before. It is important to try to hold on now and be more aggressive in the resumption. I think that this philosophy of growth in full swing, without looking at profitability in the business model, may only work in the United States or Europe, where, it is believed, there is infinite capital. In Brazil, capital has always been very scarce. You can't think of growing without being profitable or having a well-structured business model. That option never existed. In our case, we always think that generating cash is important and profitability is important. And we've looked at that since the beginning of the company.

How do you assess the impact of the pandemic on the result of Brazil's Gross Domestic Product (GDP) this year?

We are working with an economic contraction figure of around 5% for this year. It is a tragedy. I think we will need to rebuild this country after getting out of this crisis. And this will require a lot of work from everyone, be it the private sector, entrepreneurs, as well as an active role of the government to sustain this large mass of unemployment that will increase substantially. It will be necessary to invest to generate new jobs and foster all chains of the Brazilian economy.

Several sectors of the economy have complained about the difficulty of accessing credit at this time. How do you see this?

Febraban recently announced that it has already transferred more than 200 billion reais in new loans, which is already a lot. In other words, banks are lending. But, what I have been feeling is that much of this value is being allocated to the largest companies. Small and micro-entrepreneurs are finding it more difficult to access credit. In addition, they also have higher interest rates, as the degree of risk is higher. And that is the big problem. Borrowing money in the midst of a crisis creates enormous risk. We have been talking to the government and the BNDES so that there is some kind of risk sharing by the state. This is especially important for banks and fintechs to continue to release credit. In the United States, for example, the government is taking most of the credit risk. I think there is a lack of a mechanism like this to be able to take credits at lower interest rates for micro and small entrepreneurs.

What would be the solution, then? Follow the American financial market?

It would be a path. In the United States, banks are lending money to micro entrepreneurs and small businesses, but the government is taking 100% credit risk. In this way, we know that this money will reach the interest given by the government to this final microentrepreneur. Other options would be, for example, making agreements with the BNDES or some public bank, so that it takes most of the credit risk, sharing this risk with fintech. Today, fintechs are very well positioned to help bring resources to consumers or small companies across the Brazilian territory. Almost 210,000 people received Caixa contributions through Nubank. So, fintechs are very well positioned in this crisis, but the problem is that they do not have the capacity to take 100% of that risk. That is why sharing this risk with the government, perhaps through the BNDES, would help to make fintechs manage to release more loans and lower interest rates for this microentrepreneur.

What are the risks for default at this time? Has Nubank changed, in any way, the parameters for risk analysis due to the pandemic?

Bad debt has grown, as unemployment has increased. It is certainly a worrying factor and it tends to intensify. On the one hand, this pandemic moment is a great opportunity to strengthen our brand and our relationship with customers. Therefore, we are launching a refinancing program at very low interest rates. A few weeks ago, we launched new installment programs at less than 2% per month, which is a discount of more than 80% compared to the interest rate we charged before the crisis. We launched a 20 million reais fund, called “People First”, in which we partnered with Sírio Libanês hospital, to give telemedicine to our clients; we partnered with some meditation, stress and other apps. That is, we are trying to help our client in several ways. On the other hand, there is an increase in terms of overall risk. And we have understood that we have to be a little more careful to evaluate the possibility of new loans.

How has banking portability influenced Nubank's recent growth?

The Central Bank's measures to facilitate portability have positively impacted our business. We already have several customers who are receiving their salaries through Nubank every month, and the number just grows. But it is still difficult. There are several points of friction in this process. The big banks don't love this specific product, so it ends up getting in the way. It is still not as easy as it could be. Credit portability is even more complicated than that of salary. It is difficult for a customer to take his loan from one bank to another. So, we are working with the Central Bank to facilitate this process. Many of the Central Bank's measures are aimed at lowering these competitive barriers.

How, for example, the regulation of open banking?

Yes. Open banking is in this way, to facilitate access to credit, get down competition barriers and facilitate the portability of everything, account, credit, data… We understand that this whole line of open banking will make it very easy, no just because all the barriers go away and it will be easier for the consumer to choose my product, but also because today banks have a big advantage in terms of data. They have internal databases, something that fintechs don't have, which puts us at a disadvantage. Part of this explains why the interest rate doesn't fall as much as it should. In the same vein as open banking, the Positive Registration Law, which was a regulation that passed last year, will also help. Now, the consumer will be able to migrate all his data and show that his behavior in relation to risk is good, that he is a good payer, etc. This will give him access to lower interest rate loans. Always remembering that it is the consumer who will decide whether he wants to share this information or not. But, in general, it will help to lower his interest and that's what we want. Today, our interest rate is already up to 40% lower than other banks.

How has Nubank adapted to the pandemic?

Is the home office structure here to stay? The remote work structure worked better than we imagined. As many people did not have a suitable chair or monitors, we sent more than 1,000 ergonomic chairs and 400 monitors to assist employees, in addition to making the journey more flexible for those who have children. I believe that, with this pandemic, the way companies will exist and the way they work will change significantly. The first change is that the crisis forced companies to try the home office, something that many were afraid of. I do not believe that the post-crisis will be 100% remote, there will still be offices, but the physical space will become increasingly optional and not mandatory. In addition, the crisis may show that remote work can make companies invest in diversified professionals, spread across several regions in the world. We, for example, have a German developer and a designer in Italy. My talent market is global. This can also be a big change for companies.

Las opiniones compartidas y expresadas por los analistas son libres e independientes, y solamente sus autores son responsables de ellas. No reflejan ni comprometen el pensamiento o la opinión del equipo de Latam Fintech Hub y, por lo tanto, no pueden interpretarse como recomendaciones emitidas por la plataforma. Esta plataforma es un espacio abierto para promover la diversidad de puntos de vista en el ecosistema Fintech.
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