Quick Dive: Nu Holdings

Revolutionizing Banking Through Customer Obsession and Technological Innovation

Dear readers,

In this quick dive, we’ll attempt to break down the business of Nu Holdings (NYSE:NU) and understand what makes this company special. We’re trying a new series of business quick dives, so do feel free to share your feedback. If you have any suggestions on what company we should do next, feel free to let us know too. Have a great week ahead!

Financial Snapshot

About Nu Holdings

Nu Holdings (“Nu”) is a digital financial services platform and technology company for Latin American consumers and small businesses. Nu, in Portuguese, means bare, naked, and transparent. Nothing to hide. It also sounds phonetically like “new”, which symbolizes the new digital banking model, rather than traditional banking. Nu is a digital bank, which is a bank that offers banking services without traditional physical branches.

The company’s products can be broadly divided into five categories, which Nu calls the “Five Financial Seasons”. They are:

• Spending (Credit and prepaid cards, QR, Pix, WhatsApp Pay, traditional wire transfers);

• Saving (Personal and business accounts);

• Investing (Direct-to-consumer digital investment platform);

• Borrowing (Transparent credit cards, secured and unsecured loans; and

• Protecting (Insurance solutions).

Nu earns revenue from two main sources: fees and interest income. Fees include fees and commissions applied to credit and prepaid card transactions, payments, loyalty programs, prepaid mobile phone top-ups, as well as the marketplace for and distribution of certain financial products and services, such as investments, insurance and remittance products.

Interest income is related to interest charged on revolving and refinanced credit card balances, purchases of credit card receivables and loans to customers, as well as interest earned on deposits, government bonds and other interest-earning instruments.

Majority of Nu’s revenue is from interest income (~80%), with the remaining from fees (~20%) for the full year 2023.

Pain Points in Latin America’s Traditional Banking Model

To understand the core of Nu is to understand the significant pain points in Latin America’s banking industry. Prior to the founding of Nu, David Velez, co-founder and current Chief Executive Officer of Nu, faced difficulties and complexities in opening just a simple bank account in Brazil.

First, the bank wasn’t easily accessible. Upon entering the bank, Velez had to leave his backpack in a locker, as he couldn’t bring his own bags into the bank. Many banks in Brazil are designed to withstand robberies and attacks. Some branches have reinforced walls, bulletproof glass, metal detectors and bag scanners. Once, Velez had accidentally triggered the alarm by forgetting to empty his mobile phone from his pocket.

Second, the bank staff had a poor level of customer service. If you weren’t considered a VIP or wealthy, the staff’s attitude could be cold and dismissive, acting as if they were doing you a favor. Velez said he was given a bunch of forms and was asked to fill them up and come back the next day. Third, these banks would charge excessively high fees and rates for credit cards and loans, and even just for having the “privilege” of maintaining an account at the bank.

Incumbent banks dominate the banking industry while providing terrible customer service. In 2020, incumbent banks in Brazil, Mexico and Colombia held an average between 70%-85% of all loans and deposits and consequently charged very high fees and generated outsized profits, based on data from their respective central banks. Velez saw this gap and sought to disrupt the traditional banking model characterized by its high fees, terrible customer service, and the unnecessary bureaucracy that more often than not, left a bad taste in customer’s mouth.

The Customer Obsession

Nu was built on a few core principles; the first of which is customer obsession. Latin America’s high smartphone penetration and its large underbanked population created an ideal environment for Nu to be mobile and digital-first. This is because there was a strong desire for financial inclusion from the underbanked population and low competition from traditional banks as they saw this segment as unprofitable. The proliferation of affordable smartphones and low-cost data plans also meant that many would have access to an internet enabled mobile phone as a primary device.

By adopting a digital-first approach, Nu avoids the high real estate costs associated with maintaining physical bank branches, which are often located in prime areas. Nu’s customers are able to easily access and manage their finances through the mobile application on their smartphone. Nu also prioritizes simplicity and transparency in their products, offering digital financial services products that are easy to understand and have transparent pricing – something often lacking in incumbent banks.

Nu then passes on the efficiency gains from their digital-first model to the customer in terms of lower fees and rates. For example, many of Nu’s products including their savings account and credit card have no annual or maintenance fees.

Furthermore, Nu has their own approach to customer service. They have a customer support team called the Xpeers – a team of highly trained and passionate customer service agents with a human-focused mentality. Xpeers are supposedly subject-matter experts that are empowered to solve customer questions at first contact, which can be made via chat, email or phone.

Nu uses a combination of two platforms to improve customer service efficiently: Shuffle and Proximo!. Shuffle is a platform that provides Xpeers a single go-to application for the latest information on the customer, interaction history and insights into the likely problem that the customer is facing; this would give Xpeers a holistic profile of the customer they’re addressing. What Proximo! then does on the back-end is that it intelligently tags each customer inquiry with a designated reason, and routes these inquiries back to the most appropriate agent. This combination helps in maximizing first contact resolution, minimize transfers and friction for the customer, ultimately improving the customer experience.

In addition, Nu has developed a WoW Approach that builds stronger human connection to delight their customers. Nu has a designated team of over 30 customer excellence professionals to train and manage this approach throughout the customer service team. With the WoW Approach, Xpeers are encouraged and empowered to send personalized gifts in building a real human connection with the customer. For example, during a customer interaction with an Xpeer, the customer shared that they had two cats. The Xpeer then surprised the customer by giving toys, a box for the cats, and a handwritten letter.

To further understand how Nu thinks about the customer, here’s Cristina Junqeira, co-founder and current Chief Growth Officer of Nu:

“We must never assume that the customer is here to stay. Every day, we need to continue earning their loyalty, because they can leave at any moment. They have to choose to stay with us. We did not want to lock them in with tricks or contracts.”

This type of empowerment to solve problems and to go above and beyond to help the customer reminds me of how the Chinese hotpot restaurant chain, Haidilao handles customers. They believe that the perfect customer experience is different for everyone, and that each customer experience should be tailored to the specific customer’s wants and needs. By allowing the Xpeers the freedom and creativity to express themselves, the customer experience could be hard to compete with. The WoW Approach has caused many customers to share their positive experiences on social media, further increasing customer referrals and customer acquisitions.

Given the focus on customer satisfaction, it’s no surprise that Nu’s Net Promoter Score, a metric used to measure customer loyalty, satisfaction and enthusiasm for a company or product, is up to three times better than competitors, not only for incumbent banks, but also including fintech companies in the countries they operate in. The average NPS score for incumbent banks in the 30s range, while Nu’s is over 90. Moreover, in the last three months of 2023, more than 80% of the calls received were answered in less than 45 seconds and the customer dissatisfaction rate for the calls was below 8%. Nu measures customer satisfaction rate as the percentage of customers who rate their customer service as a 1 or 2 on a scale of 1 to 5.

Nu’s dedication to its customer is clear, but the company also emphasizes the importance of its employees. Jorge Livingstone, in his book NuBank Purple Revolution, said that the corporate culture is the nervous system of a company. Nu believes in cultivating a culture of ownership among employees. At the end of 2023, approximately 94.6% of Nu employees owned Nu shares or held share-based incentive awards. Livingstone also explained that Nu has a Slack channel called “Bureaucracy Hunters”, which is meant to encourage staff to question any rules that seem unproductive and bureaucratic.

Consequently, Nu’s excellent customer service and high-quality products attracts organic growth as customers would refer Nu to their family and friends. Over time, Nu has been able to grow through word-of-mouth or direct unpaid referrals without the need for significant marketing expenses. Since inception, approximately 80-90% of customers growth per year is through these referrals. As Nu acquires more customers, Nu continues to focus more resources on their customer experience and products, further fueling their marketing strategy and improving the cycle.

Innovation and Technology

Another main pillar of Nu’s foundation is innovation and technology. Here’s how Nu defines their business:

“…more than a bank, we are a technology company that just happens to be in the financial sector”

Rather than using an on-premise or hybrid model like most incumbent banks, Nu operates in a fully cloud-based environment. This would enable them to manage growth efficiently and cost-effectively by optimizing capacity as needed. Nu runs all of their products, services and operations through NuCore, their proprietary, cloud-based core banking platform that they designed from the ground up. NuCore enables centralized management of key functions such as transaction authorization and processing, core banking, regulatory reporting, business operations, customer services, credit underwriting and fraud prevention. Nu claims that this will allow them to innovate on product features that won’t be immediately accessible to competitors that leverage platforms that are standard in the market today.

Furthermore, Nu operates their business with a microservices approach, which is a decentralized technology to manage and deploy over 500 modular microservices. This is becoming increasingly common, especially among technology companies, as this allows them scalability, flexibility, resilience and overall technology diversity.

Another part of Nu’s technology stack is their immutable database. Nu created an immutable ledger, utilizing the Datomic database technology that they own, providing a highly reliable audit trail and transaction history that provides better accuracy, control, reliability and transparency when compared to traditional database architectures. An immutable database is a type of database where data, once written, cannot be modified. Instead of updating the data in place, new versions of the data are created, preserving the entire history of changes.

With the immutable database, Nu is able to develop new code more aggressively. While an immutable database has data integrity, storage requirements can grow significantly over time, since data is never overwritten. Further, it can be challenging to delete data, as it often means marking data as deleted rather than physically removing it.

Moreover, Nu’s large customer pool means that Nu has significant data advantages. Their proprietary NuX Credit Engine (“NuX”) collects approximately over 30,000 data points on each monthly active customer, which can then be used to better understand customers’ behavior, risks and financial needs to better serve them across their Nu lifecycle. NuX leverages data analytics and machine learning to assess credit risk and underwrite customers more effectively than incumbent banks’ homogenous credit underwriting models. The NuX underwriting is able use live data points from the customer and tailor the credit strategy as they learn more about the customer. For example, NuX could initially provide a small credit line to a customer. Over time, if the customer’s credit behavior is good, the credit could be expanded, and vice versa. This would allow people with limited credit histories access to credit.

As a result of the digital-first and technology focused model, Nu has a significantly lower number of employees compared to incumbent banks. For example, at the end of 2023, Nu has approximately 7,686 employees while the two largest banks in Brazil by total assets, Banco do Brasil SA and Itaú Unibanco Holding SA, both have over 80,000 employees.

Being digital-first, Nu has significantly advantaged unit economics from having no physical branches and proprietary technology that helps scale their growth efficiently. Thanks to their relatively efficient cost structure, in 2023, Nu estimated their customer acquisition efficiency, defined by comparing the lifetime value of acquired customers (“LTV”) to the customer acquisition cost (“CAC”), to be an LTV/CAC ratio greater than 30 times.

In their 2023 annual report, Nu estimated that their CAC is about USD7 per customer, of which paid marketing accounts for about 29%. This would include expenses such as printing and shipping a card, credit data costs (primarily consisting of credit bureau costs) and paid marketing. Based on Nu’s internal data, they believe that their CAC is one of the lowest across consumer FinTech companies and incumbent banks, mainly because of their referral network.

Additionally, for the last three months of 2023, Nu’s consolidated Monthly Average Cost to Serve per Active Customer (“ARPAC”) was about USD10.5 – USD10.6 in Brazil. For customers that were considered active across their core products like credit card, NuAccount, and personal loans, monthly ARPAC was about USD45 for the year 2023. Nu estimates that the ARPAC for incumbent banks in Brazil was approximately 4.5 times higher than Nu’s for the full year 2023. Over time, Nu believes that they can capture a bigger share-of-wallet across customers using existing products, as well as cross-selling additional products to existing customers.

Ecosystem, Partnerships and the Flywheel

Nu serves a massive and growing customer base of 98.8 million as at the end of Q3 2024. This scale brings about a powerful added benefit: it makes Nu an attractive partner for businesses. For example, e-commerce platforms like Amazon, Casas Bahia, and Magalu or travel booking platforms like Hopper, recognize the value of tapping into Nu’s vast customer base. By partnering with Nu, these businesses gain access to millions of potential customers, leveraging the reach and engagement that Nu has built.

That’s not all though. Nu also benefits from this dynamic as it strengthens Nu’s engagement with users, creating a mutually beneficial cycle that enhances customer retention and business appeal. A comparative example is seen in Tencent’s WeChat in China, with its vast user base of about 1 billion people being a magnet for local and foreign businesses looking to reach its massive audience. Just as businesses flock to WeChat to tap into its extensive network, Nu’s growing customer base makes it increasingly attractive for companies seeking partnerships with its users.

The Nu Business Flywheel. Company Filings

1. More customers

2. More engagement and scale

3. More data

4. Lower costs

5. Attractive fees and rates

6. Better products and experiences

7. Growing Nu Ecosystem (More marketplace partners to partner with)

Tying it all together, Nu’s focus on delivering extraordinary customer experience would lead to more customers and a more engaged user base. Having more customers means having more data, that lowers costs for Nu through enhanced credit underwriting, operational efficiency, and economies of scale. In turn, Nu passes the efficiency gains back to the customer through lower fees and rates. Nu also leverages insights from the data to design better products and experiences, to further increase customer engagement and satisfaction. The final element of the flywheel is, as noted earlier, the growing Nu ecosystem. As more businesses partner with Nu, the cycle of customer engagement strengthens, further accelerating the customer acquisition and fueling the growth of the platform.

Conclusion

Nu has a promising business model in the flywheel they have created. It borrows from Costco and Amazon’s model of passing efficiency gains back to the customer, which is undoubtedly strong. In our view, Nu’s long-term success would largely depend on management’s ability to continue its innovative culture; maintain the discipline of passing gains to the customer; and continue to execute with its long-term vision. Since it’s IPO in 2021, Nu has already shown early signs of a long-term compounder in the making.

Disclaimer: Please note that none of the information provided constitutes financial, investment, or other professional advice. It is only intended for educational purposes. We have a vested interest in Nu Holdings. Holdings are subject to change at any time.