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May 23, 2021

Nubank: Finding Brilliance in Brokenness

The world's largest digital bank is a feat of ingenuity.

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"You always have to use a soccer analogy in Latin America." — David Vélez, CEO of Nubank

"Don't forget, the first ball goes to Garrincha."

Huddled in the bowels of Gothenburg's Ullevi Arena, Vicente Feola stood in the dressing room and barked his instructions. As the coach of Brazil's international team, the squat manager with a neat side-part had been tasked with one of the most difficult jobs in sport: winning the World Cup for his country for the first time. 

Despite a decade of sustained brilliance, somehow, the Seleção had failed to secure football's most illustrious prize. Four years earlier, in 1954, the team had stumbled at the quarter-finals. Four years before that, Brazil had endured the ignominy of losing the final to Uruguay. So scarring had that defeat been, it produced a word of its own: Maracanaço, or "the agony of the Maracanã stadium," the scene of that spiritual crime.

Like those other tournaments, the 1958 edition had gotten off to a decent start. Now, Feola's side would face its first real test: the USSR. 

If Brazil's team was defined by artistry and improvisation, the Soviet Union's success had been built on physical stamina and a "scientific" obsession for scripting play. Rumors swirled that the USSR's players could run for 180 minutes, the length of two matches, without tiring. And in Lev Yashin, dubbed "the black panther" for his feline reflexes, they had not only the best goalkeeper in the world but an embodiment of their cool, unfussed efficiency. 

Playing against such disciplined opposition would require a different approach, Feola knew. He needed to unsettle the Soviets' defenders, to shake things up. He needed Garrincha. 

That Garrincha was there at all was a miracle. Born to a poor family near Rio de Janeiro, Manuel Francisco dos Santos, his given name, had a congenital defect that skewed both legs. His right was not only more than 2 inches longer than his left, it bent inward, while its complement slanted outward. Doctors classified the young boy as "crippled," recommending leg braces that Garrincha's parents couldn't afford. Small of size but high-spirited as a child, Manuel earned the nickname "Garrincha" from his sister, which meant "little bird." 

Proof that God has a keen sense of irony, with a ball at his feet, "crippled" Garrincha was magical. Though archival footage is limited, the clips that endure portray a player of impish gifts, a Loki-style trickster that disappears behind a veil and emerges on the other side of a defender as if he has traveled through a rip in the fabric of space. Like no other player, Garrincha manages to play football without the ball, shimmying left and right and showing a defender to the ground without touching the orb in front of him. 

Despite those skills, many didn't want Garrincha to play on that June day. Though talented, some coaches on the team worried the right-winger didn't have the requisite temperament for high-pressure situations (a concern they also had about a young striker named Pelé). 

Feola disagreed: Garrincha would start. And not only that, as soon as Brazil won possession, he wanted the ball to go to the Little Bird. 

The whistle sounded in the Ullevi Arena. What followed is described by some as the most beautiful three minutes of football in history. 

Within twenty seconds, Garrincha has the ball, just as Feola wanted. The dour Russian defender, Boris Kuznetzov, blocks his path, but a barricade for Garrincha is just an opportunity to dance. He breezes past the Russian, then doubles back and does it again. And again. And again. The fifth time he tortures Kuznetsov, he asks him to bring a few friends. The Brazilian skips past three Soviets, and as they tumble behind him, the stadium bursts into laughter. Garrincha crashes a shot against the post, and even the imperturbable Lev Yashin looks worried. 

A moment later, Garrincha has the ball again. Once more, he asks Kuznetzov to sit down, and the Russian obliges. Garrincha moves the ball to midfield, and a pass is floated over the top to Pele, who hits the bar. A minute later, Brazil would finally have the goal they deserved. As described by a writer at the time:

The pace is mind-boggling. As is Garrincha's rhythm...The wave of attacks continues. Time after time, Garrincha decimates the Russians. There is hysteria in the stadium. And an explosion when Vavá scores after exactly three minutes.

Brazil won the match 2-0 and would go on to become world champions, securing the team's place in sporting history. 

When thinking about Nubank, the Brazilian fintech company, those three minutes come to mind. Not only was Garrincha's brilliance a triumph of the gifted underdog, football's "bent-legged angel" besting the USSR's physical specimens, but an example of one of the most virtuosic opening salvos across disciplines.

In an interview last year, Nubank's CEO David Vélez noted, "We're in the first second of the first minute of the first half of the soccer game." 

The oligopolistic dynamics of Brazil's banking system meant that Nubank entered as the sector's ultimate underdog, a player with both absurd disadvantages and mesmeric gifts. Since launching in 2013, Nubank has attracted 40 million users, reached a valuation of $25 billion, and altered the financial landscape in Latin America. It may be just the beginning — the "first second" in Vélez's parlance — but what a beginning it has been. 

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Still, Vélez is right to counsel caution. The second-most valuable fintech in the world has become a dominant force in its home country, but it can't necessarily rely on the same serendipity as it spreads beyond Brazil. 

In today's briefing, we'll explore…

  1. Brazilian banking's perfect brokenness
  2. The making of Vélez
  3. Nubank, an accidental hit
  4. The product secrets of the fintech's feijoada 
  5. Competition from above and below
  6. The tricky alchemy of winning new markets

Brazilian Banking and Kintsugi

In its symbolism, I have always found the Japanese art of "kintsugi" particularly appealing. The point of the practice is to reform broken pottery by annealing fragments with gold or silver joinery. The resulting piece evokes a resilient beauty, in which scars and fissures are not hidden but highlighted, not marks of shame but stunning, gilded rivulets. 

Kintsugi suggests that not only can things be broken, they can be perfectly broken. Something can be fractured in such a way that its flaws only increase the beauty of the piece. 

Anyone who looked at Brazil's banking system in the past ten years saw it was broken; only David Vélez — an entrepreneur with the craft of an artisan — saw it was perfectly broken.

Brazilian banking was, and is, an oligarchy. Even today, 81% of the country's assets are controlled by a Big Five of Itaú,  Caixa Economica, Banco do Brasil, Bradesco, and Banco Santander. They also hold 85% of the country's loans. 

In relative terms, these are massive businesses. According to the Fortune 2000, three of the top five Brazilian companies are banks. The size and positioning of these organizations have not only granted substantial political and social power but permitted a hostile consumer culture to flourish. With little competitive pressure to improve, the Big Five traditionally treated customers poorly. Opening a bank account could take multiple visits to a local branch, phone support was subpar, and online service, non-existent. 

At the same, these banks levied extraordinarily high interest rates, with some consumers paying 450% a year. The country's monetary policy committee recently decided to cap interest rates at 150% with average rates above 306%, illustrating the problem remains unsolved. A map of interest rate spreads — the difference a bank receives from loans and the rate it pays on deposits — demonstrates how far of an outlier Brazil is, with a spread of 32.04% compared to 3.35% in Russia and 2.85% in China. 

Data from World Bank, S&P Global

Brutal fees further padded bankers' pockets. Want to receive text message updates? Pay up. Looking for fraud protection? That'll cost you. Needing to withdraw cash? Here's the bill. 

One JP Morgan study suggested that Brazilian banks earned 40% of their revenue through fees in 2019, far outstripping the 15-20% standard in Mexico, Argentina, Chile, and Peru. 

FT

These factors created a uniquely profitable banking sector, with Brazil's return on equity (17.2%) easily outstripping the US (10.6%), Asia-Pacific (8.8%), and Europe (5.8%).

It is unsurprising then that much of Brazil's population has gone without basic financial services. Poor service and high costs deterred even many qualified customers. Today, 55 million, a quarter of the country's population, are considered unbanked. 

In a myriad of ways, banking in South America's largest economy was broken. But David Vélez saw gold running through its rifts: lazy incumbents, unhappy consumers, extortive financial models, and unfilled demand.

In retrospect, it seems obvious the Big Five were ripe for disruption. But at the time, confronting the most powerful and profitable sector of Brazilian business looked like an act of lunacy, the mission of a madman or a fool. 

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Oops! Something went wrong while submitting the form.

David Vélez, Nigel Morris, and Interpreting Scarcity

Vélez was neither. 

Born in Medellin, Vélez came from a family of entrepreneurs. Even as a boy, he shared that enterprise, saving money from birthdays and summer jobs to buy a cow. Over time he amassed six heifers. When it came time to attend college in the United States, Vélez sold his herd, partially subsidizing his Stanford education. 

Though Vélez tried to find a startup idea in those tender Palo Alto years, he failed to find one he considered viable, instead matriculating to Morgan Stanley before moving on to growth equity firm, General Atlantic (GA). 

It was during this stint that the young Vélez intersected with Nigel Morris, founder of Capital One...

Become a member to keep reading

Leading CEOs, CIOs, GPs, and technologists read The Generalist for practical business wisdom. For just $16.58/month on the annual plan, you'll unlock: 

  • Briefings every week
  • Private community
  • 🌟 Premium IPO coverage
  • 🌟 Premium startup ideas
The Generalist combines the wit, snark, and metaphors of The New Yorker with the tech-insight of The Information.

- Jake Saper, GP of Emergence Capital

Join today to begin mastering the future.

"You always have to use a soccer analogy in Latin America." — David Vélez, CEO of Nubank

"Don't forget, the first ball goes to Garrincha."

Huddled in the bowels of Gothenburg's Ullevi Arena, Vicente Feola stood in the dressing room and barked his instructions. As the coach of Brazil's international team, the squat manager with a neat side-part had been tasked with one of the most difficult jobs in sport: winning the World Cup for his country for the first time. 

Despite a decade of sustained brilliance, somehow, the Seleção had failed to secure football's most illustrious prize. Four years earlier, in 1954, the team had stumbled at the quarter-finals. Four years before that, Brazil had endured the ignominy of losing the final to Uruguay. So scarring had that defeat been, it produced a word of its own: Maracanaço, or "the agony of the Maracanã stadium," the scene of that spiritual crime.

Like those other tournaments, the 1958 edition had gotten off to a decent start. Now, Feola's side would face its first real test: the USSR. 

If Brazil's team was defined by artistry and improvisation, the Soviet Union's success had been built on physical stamina and a "scientific" obsession for scripting play. Rumors swirled that the USSR's players could run for 180 minutes, the length of two matches, without tiring. And in Lev Yashin, dubbed "the black panther" for his feline reflexes, they had not only the best goalkeeper in the world but an embodiment of their cool, unfussed efficiency. 

Playing against such disciplined opposition would require a different approach, Feola knew. He needed to unsettle the Soviets' defenders, to shake things up. He needed Garrincha. 

That Garrincha was there at all was a miracle. Born to a poor family near Rio de Janeiro, Manuel Francisco dos Santos, his given name, had a congenital defect that skewed both legs. His right was not only more than 2 inches longer than his left, it bent inward, while its complement slanted outward. Doctors classified the young boy as "crippled," recommending leg braces that Garrincha's parents couldn't afford. Small of size but high-spirited as a child, Manuel earned the nickname "Garrincha" from his sister, which meant "little bird." 

Proof that God has a keen sense of irony, with a ball at his feet, "crippled" Garrincha was magical. Though archival footage is limited, the clips that endure portray a player of impish gifts, a Loki-style trickster that disappears behind a veil and emerges on the other side of a defender as if he has traveled through a rip in the fabric of space. Like no other player, Garrincha manages to play football without the ball, shimmying left and right and showing a defender to the ground without touching the orb in front of him. 

Despite those skills, many didn't want Garrincha to play on that June day. Though talented, some coaches on the team worried the right-winger didn't have the requisite temperament for high-pressure situations (a concern they also had about a young striker named Pelé). 

Feola disagreed: Garrincha would start. And not only that, as soon as Brazil won possession, he wanted the ball to go to the Little Bird. 

The whistle sounded in the Ullevi Arena. What followed is described by some as the most beautiful three minutes of football in history. 

Within twenty seconds, Garrincha has the ball, just as Feola wanted. The dour Russian defender, Boris Kuznetzov, blocks his path, but a barricade for Garrincha is just an opportunity to dance. He breezes past the Russian, then doubles back and does it again. And again. And again. The fifth time he tortures Kuznetsov, he asks him to bring a few friends. The Brazilian skips past three Soviets, and as they tumble behind him, the stadium bursts into laughter. Garrincha crashes a shot against the post, and even the imperturbable Lev Yashin looks worried. 

A moment later, Garrincha has the ball again. Once more, he asks Kuznetzov to sit down, and the Russian obliges. Garrincha moves the ball to midfield, and a pass is floated over the top to Pele, who hits the bar. A minute later, Brazil would finally have the goal they deserved. As described by a writer at the time:

The pace is mind-boggling. As is Garrincha's rhythm...The wave of attacks continues. Time after time, Garrincha decimates the Russians. There is hysteria in the stadium. And an explosion when Vavá scores after exactly three minutes.

Brazil won the match 2-0 and would go on to become world champions, securing the team's place in sporting history. 

When thinking about Nubank, the Brazilian fintech company, those three minutes come to mind. Not only was Garrincha's brilliance a triumph of the gifted underdog, football's "bent-legged angel" besting the USSR's physical specimens, but an example of one of the most virtuosic opening salvos across disciplines.

In an interview last year, Nubank's CEO David Vélez noted, "We're in the first second of the first minute of the first half of the soccer game." 

The oligopolistic dynamics of Brazil's banking system meant that Nubank entered as the sector's ultimate underdog, a player with both absurd disadvantages and mesmeric gifts. Since launching in 2013, Nubank has attracted 40 million users, reached a valuation of $25 billion, and altered the financial landscape in Latin America. It may be just the beginning — the "first second" in Vélez's parlance — but what a beginning it has been. 

Still, Vélez is right to counsel caution. The second-most valuable fintech in the world has become a dominant force in its home country, but it can't necessarily rely on the same serendipity as it spreads beyond Brazil. 

In today's briefing, we'll explore…

  1. Brazilian banking's perfect brokenness
  2. The making of Vélez
  3. Nubank, an accidental hit
  4. The product secrets of the fintech's feijoada 
  5. Competition from above and below
  6. The tricky alchemy of winning new markets

Brazilian Banking and Kintsugi

In its symbolism, I have always found the Japanese art of "kintsugi" particularly appealing. The point of the practice is to reform broken pottery by annealing fragments with gold or silver joinery. The resulting piece evokes a resilient beauty, in which scars and fissures are not hidden but highlighted, not marks of shame but stunning, gilded rivulets. 

Kintsugi suggests that not only can things be broken, they can be perfectly broken. Something can be fractured in such a way that its flaws only increase the beauty of the piece. 

Anyone who looked at Brazil's banking system in the past ten years saw it was broken; only David Vélez — an entrepreneur with the craft of an artisan — saw it was perfectly broken.

Brazilian banking was, and is, an oligarchy. Even today, 81% of the country's assets are controlled by a Big Five of Itaú,  Caixa Economica, Banco do Brasil, Bradesco, and Banco Santander. They also hold 85% of the country's loans. 

In relative terms, these are massive businesses. According to the Fortune 2000, three of the top five Brazilian companies are banks. The size and positioning of these organizations have not only granted substantial political and social power but permitted a hostile consumer culture to flourish. With little competitive pressure to improve, the Big Five traditionally treated customers poorly. Opening a bank account could take multiple visits to a local branch, phone support was subpar, and online service, non-existent. 

At the same, these banks levied extraordinarily high interest rates, with some consumers paying 450% a year. The country's monetary policy committee recently decided to cap interest rates at 150% with average rates above 306%, illustrating the problem remains unsolved. A map of interest rate spreads — the difference a bank receives from loans and the rate it pays on deposits — demonstrates how far of an outlier Brazil is, with a spread of 32.04% compared to 3.35% in Russia and 2.85% in China. 

Data from World Bank, S&P Global

Brutal fees further padded bankers' pockets. Want to receive text message updates? Pay up. Looking for fraud protection? That'll cost you. Needing to withdraw cash? Here's the bill. 

One JP Morgan study suggested that Brazilian banks earned 40% of their revenue through fees in 2019, far outstripping the 15-20% standard in Mexico, Argentina, Chile, and Peru. 

FT

These factors created a uniquely profitable banking sector, with Brazil's return on equity (17.2%) easily outstripping the US (10.6%), Asia-Pacific (8.8%), and Europe (5.8%).

It is unsurprising then that much of Brazil's population has gone without basic financial services. Poor service and high costs deterred even many qualified customers. Today, 55 million, a quarter of the country's population, are considered unbanked. 

In a myriad of ways, banking in South America's largest economy was broken. But David Vélez saw gold running through its rifts: lazy incumbents, unhappy consumers, extortive financial models, and unfilled demand.

In retrospect, it seems obvious the Big Five were ripe for disruption. But at the time, confronting the most powerful and profitable sector of Brazilian business looked like an act of lunacy, the mission of a madman or a fool. 

David Vélez, Nigel Morris, and Interpreting Scarcity

Vélez was neither. 

Born in Medellin, Vélez came from a family of entrepreneurs. Even as a boy, he shared that enterprise, saving money from birthdays and summer jobs to buy a cow. Over time he amassed six heifers. When it came time to attend college in the United States, Vélez sold his herd, partially subsidizing his Stanford education. 

Though Vélez tried to find a startup idea in those tender Palo Alto years, he failed to find one he considered viable, instead matriculating to Morgan Stanley before moving on to growth equity firm, General Atlantic (GA). 

It was during this stint that the young Vélez intersected with Nigel Morris, founder of Capital One...

Become a member to keep reading

Leading CEOs, CIOs, GPs, and technologists read The Generalist for practical business wisdom. For just $16.58/month on the annual plan, you'll unlock: 

  • Briefings every week
  • Private community
  • 🌟 Premium IPO coverage
  • 🌟 Premium startup ideas
The Generalist combines the wit, snark, and metaphors of The New Yorker with the tech-insight of The Information.

- Jake Saper, GP of Emergence Capital

Join today to begin mastering the future.

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