Nubank’s credit lending strategy: how it works

As Latin America’s largest neobank with more than 100 million customers, Brazilian fintech Nubank, backed by Berkshire Hathaway’s Warren Buffett, has well surpassed the break-even mark, posting profits of more than $1 billion. It now aims to expand further into the credit market, a crucial area largely untapped by Latin American fintechs but critical to maximizing revenue.

In its pursuit of profitability, the institution has diversified its offering of financial products, with a strong focus on expanding its loan portfolio. Given the region’s macroeconomic volatility and high default rates, lending in Latin America is highly dependent on sound risk management.

Boasting a portfolio close to $20 billion, made up mostly of credit card loans and nearly a quarter of personal loans, the bank saw a 52% increase over last year. This increase underlines the bank’s ambitious effort to strengthen its presence in the lending market. CEO and co-founder David Velez highlighted the growth of certain credit segments in Brazil, the bank’s home country, as a key priority for the year.

David Velez, CEO and co-founder of Nubank.

NPL under control

“We know a number of banks that have tried to move in this direction, but then they had to step back because it was just too difficult to do or it just didn’t produce the results they expected,” said Ravi Prakash, who oversees risk management at Nubank. “Fintechs are also in difficulty. I know of almost no fintech company that has really, really cracked the credit business other than Nubank. They are native to technology, but what they don’t have is banking DNA, they take an approach that is too technology-centric.”

Despite facing a challenging macroeconomic landscape, Nubank said it has managed to keep non-performing loan rates below the industry average. In the latest quarter, the company reported a 90-day delinquency rate of 6.3%, compared to 5.5% a year earlier, reflecting the complexities of the Brazilian market.

“When we think about credit underwriting, we aim to combine the best of technology and banking,” said Youssef Lahrech, the company’s COO. We always start from the assumption that the future will be worse than the past. We’re actually designing this business to be durable and resilient over the long term, able to deliver despite the ups and downs of the cycle.”

The Nubank method

Lahrech said in Nu Videocast, a series of internal interviews at Brazil’s neobank, that Nubank’s native digital infrastructure and proprietary technology enable rapid implementation of credit models, offering a significant advantage in speed and cost savings over to traditional banks and fintechs.

The company is pursuing a “low and grow” strategy, reflecting the challenges of lending too quickly in this Latin American market. According to Prakash, customers start with credit limits that gradually increase based on positive payment behavior. “This is a way to broaden our offering and attract segments that we otherwise would not have been able to attract as new customers in a profitable and sustainable way,” she said.

Before significantly expanding its lending offerings into new markets like Mexico, the company plans to conduct tests to gather data and refine its models. This cautious approach aims to ensure preparation for expansion in the coming years.

Nubank, he said, sees high levels of satisfaction among customers who renegotiate their debts. “We actually see that over 50% of our customers in the renegotiation phase are ongoing or less than 15 days past due. It’s good for the customer, it’s good for Nubank,” she said.

The opportunity of Open Finance in Latin America

As Open Finance continues to expand across Latin America, Nubank and similar technology-based lenders are poised for growth. With Brazil leading the implementation and other countries like Chile following suit with implementing legislation, adoption of the framework is gradually spreading across the region.

Nubank executives see Open Finance as an opportunity to offer personalized lending services to their customers. This framework allows financial institutions to share customer financial data with consent, leveling the playing field and challenging traditional banks’ historical advantage built on decades or even centuries of lending data.

“Open Finance will make more data available in the system, and we believe we have a comparative advantage in being able to use that data to design and offer better products, better pricing and greater convenience for customers,” Lahrech said. The idea that consumers have the power to share their data with different industry players and get the best deal for them is incredibly in line with our DNA.”

• David is a Latin American journalist. He regularly reports on the region for global news organizations such as The Washington Post, The New York Times, The Financial Times and Americas Quarterly.

  He worked for S&P Global Market Intelligence as a Latin America financial reporter and gained experience on fintech and market trends in the region.

  He lives in Buenos Aires.

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