Last week I spent some time off, laughing with some colleagues by remembering the most typical recommendations received by our parents to make us become easy going and wiser.
I recall being a toddler that my mom used to say I should go to bed early and eat completely my meals to avoid the boogey man coming and picking me up. I Never knew why would this mysterious man, pick a skinny night crawler child with him though. Anyhow, the hidden sense of this recommendation masked an incentive to proceed as mandated and avoid major troubles.
Later on, while dealing with the adolescence carrousel, I remind her telling me that I should always perceive positive things even coming from most traumatic negative events.
Considering there is not too much negative stuff going on at a student level, nor having to see ever the boogey man, I overlooked both recommendations until I came old enough to apply both recommendations. Today, I have come to the conclusion that both of them fit very well to describe the intrusion of the Fintechs in the traditional banking and retail finance sector.
On April 2020 I released a paper named Banks and Fintechs @ the New Revolution Era where I exposed a recommended risk approach to overcome the Covid19 pandemic through the eyes of the retail risk financing divisions. The idea was to describe strategies on how to tap the default risk of customers; keep playing the game; and grow stronger afterwards. The base line of this paper, was an extension of several strategic conversations held with our banking partners on how will the banking and retail finance be dealing with the evolution of the Fintech, when they both hit the wall of the pandemic.
For those who have heard from me, especially our Big Data Scoring customers in Latin America, Africa and Asia, you are witnesses of how emphatic I have been in the last 5 years towards the need of modernization of your processes to cope with online lenders standards that are coming in full throttle. This warning call emitted by us, came in by partnering some heavy growing skillful Fintechs now called Neobanks at that time in Europe.
Though the consciousness of the risk managers at a global scale seemed to be somehow aware of the fintech threats, I did find some counter arguments that has been annoying me for a while. These seemed to be the best selection of arguments against the likelihood of these institutions to be able to compete with the traditional banks: 1) the access to a low funding cost gained by the banking intermediation (approved by a banking license mostly); 2) the small market size of those fintechs; and 3) the low attractive targeted market they are scouting for, the unbanked population...
Let me elaborate a bit more on these 3 excuses rather than arguments.
Latin America stands today for 250 million adults unbanked, Subsaharian Africa 360 million and South and East Asia for more than 1,5 billion adults according to the World Bank. That is more than half the adult population of the planet, and I am not even including East Europe, Middle East and Central Asia which stands for 400 million more.
Being half of the planet yet to be served with the banking services, I cannot be more than in disagreement on the long vision sustained for some of these industry fellows.
The USA reflected in 2009 a 7.7% of their population being in this situation (unbanked), which has now come to be just 5.4% according to the FDIC Survey. In 10 years, the accessibility to banking products of the most economically developed country (among OECD) has grown 30%. The US GDP growth for the same period has been 47%, reaching US$ 65,280 per capita (from US$ 47,009 in 2009). There is a strong correlation between the size of GDP per capita a country has, with the access to formal financial products of their population (though not being a linear relation).
On the contrary, based on the last 10 years (2009-2019) the average GDP growing velocity of the 2 largest economies in Latin America (Mexico & Brazil) has grown fairly slow. While the first one grew from US$ 14,558 GDP per capita PPP in 2009 to US$ 20,447 in 2019 (40% growth), the second one merely grew from US$ 13,269 GDP per capita PPP to US$ 15,076 GDP per capita PPP in 2019 (14%). Both underperforming economies compared to the US, has managed to still leave around 30% of their population un/underbanked by 2019 (Mexico 32% in 2019 and Brazil 29% in 2020)
According to the difference in GDP between these 2 Latin American countries and the US, you could expect the gap of un/underbanked population to be closed in 32 years for Mexico and 151 years for Brazil (when the GDP per capita reaches at least the base line of USA of US$ 47,009), else being constant (especially considering possible technological breakthroughs which at this stage is mostly evident).
Are you funding your bank's strategy solely in these market tendencies? Are you serious?
Let me bring to the table some other facts to go deeper. There is an example of a successful Brazilian fintech called Nubank. This Neobank was created in 2015 by 3 young entrepreneurs with all newly fresh views of how traditional operations needed to be re-addressed, after a long complex and expensive banking experience. They created an online lender that could simplify and reduce the cost to the accessibility of unbanked population to banking basic services. I'd like to call these guys “the out of the box bankers”.
They questioned all the status quo of the banking processes with a basic European Neobank mold, mostly scattered in East Europe as online lenders and wallet fintechs somehow also very popular in West Europe, and in the payday lending form at the USA.
They triggered their venture not only by challenging the unknown markets of unbanked population in Latin America but also questioning the options to access to proper funding VC rounds for their challenging purpose. Daredevils!
Making the story short, Nubank is currently filing an F1 US SEC form to execute an IPO. This draft could bring interesting facts to the reader:
In 5 years Nubank have now reached 48 million customers in Brazil, 0.7 million in Mexico in 6 months, and a few others in a recent Colombian operation. They became the 3rd largest bank in Latin America based on the count of customers in 5 years.
The expected IPO round is estimated to be within the US$ 40-50 billion range. That is 5.2 times Bancolombia market value (US$ 7.7 Bn.), 1 time ITAU (US$ 40 Bn.), and 4.4 times Banco Chile (US$ 9 Bn.), being these banks, some of the most representative institutions in the region and #1 in their home markets. Nubank market cap (IPO based) could make them the fastest capitalization growing “bank” ever in the region to reach that scale by far.
Nubank is currently hitting a monthly ARPAC of around US$ 4.9 per account, and around US$ 23-30 monthly ARPAC for their active credit card users. Nubank is expected to reach by 4Q21, more than 5 million active credit cards (loans).
The loan portfolio risk will be managed by the usage of big data and customers behavioral patterns based on their wallet transactions. This technology is mostly found at companies such as Big Data Scoring which I lead, or partly covered by these Fintech itself through heavy data scientist teams, with full connection with technological ecosystems and a wide array of startups/fintechs with collaboration schemes.
Let’s make some quick numbers: Nubank Monthly ARPAC is US$ 245 million all customers-services in., and US$ 115 Million Monthly ARPAC solely coming from credit cards (I used the base line of US$ 23 monthly ARPAC to do the calculations). As derived from the previous calculation, the non-credit card services bring in merely US$ 130 Million monthly ARPAC, hence US$ 2.8 per account. Not so difficult to sculpt what business are they aiming at.
As a matter of a magnitude exercise, if they simply: a) improve their admission rated by duplicating their admission of credit cards, from lets say their actual 10% to 20% without harming their risk appetite using enriched data sources (process completely possible based on my extensive personal experience), then these guys could expect to increase their Monthly ARPAC to US$ 342 million (+140%); or b) They could anticipate the learning experience on their customers behavior, based on non-traditional data to tap the underbanked population earlier on, hence accelerating the credit card onboarding process. Both processes allow them to move into the sweet spot of US$ 23 monthly ARPAC area...
Are you getting the picture now?
Another KPI is their operational cost of US$ 2,3 dollars per account monthly, allowing them to serve the staggering figure of 12,000 accounts per employee. To some of you this may not mean a thing, but let me just give you a quick idea on how good this is. An average bank in Chile (most efficient banking operations in Latin America) has an operational cost of US$ 43 per account monthly (US$ 517 per account a year), this is an 18.6 times higher cost than Nubank's. Are you following the analysis?
Finally, let me come with what I think is the hidden most crucial KPI for them. Nubank is rated to be the #1 most Loved Brand in Brazil by eCGlobal in 2021. What can make a 5 year old fintech become the most valuable brand among ALL possible brands in Brazil?. We could speculate on several reasons but arguable it could be their high value perceived at a fair price.
How can you define this previous value? It could be simplicity, intuitive services, usefulness, and perhaps the most clear of them all: serving unattended customers where no other banks deemed to serve before.
Under these facts, it gets very clear to all of you readers, that the 3 excuses set by some of the risk managers are hardly sustainable.
Cost of funding: How long do you think it will take these guys to start intermediating loans with a banking license, allowing them to access to a low cost of funding? How expensive will it be to receive fresh equity from the largest formal market of the world (US Stock market)? They are about to become the largest IPO Latin America has ever filed in the US.
Despite this, do you still think their cost of funding is even relevant when they have an operational cost per account 18.6 times lower than traditional banks?
Market size of the fintechs. Nubank is already larger (market cap sized) than most of the largest banks in the region, after Itau, Bradesco and Banco do Brasil (Nubank may become 4th in Latin America). They accomplished this by a) having the sweet spot of the banks services (loans and transactions); b) avoiding to have the huge number of unnecessary branches to serve and attend people with cash tellers needs, among few other traditional highly inefficient banking services; c) being able to grow in customers count at a steady CAGR year rate larger than 100%.
The unbanked population dilemma. The only reasons why unbanked population is fairly inaccessible to the traditional banks are: a) operating costs for minor sized tickets because of their high operational costs, and b) being unable to determine the risk of this segment by not having the proper tools to address it. Both parts of the equations are solvable: The operational costs somehow will require the bank’s commitment to modernize their processes, invest in startups and/or M&A activity (buying out tested solutions for those). The second part of the equation is even simpler, there are some highly technological partners that could bring non-traditional data to be able to determine the default risk of unbanked population. Partnering strategical technological companies from the fintech ecosystem serves the same purpose either.
In conclusion, there is no need to be highly visionary to understand that a portfolio of well served customers, will grow with Nubank along the years to achieve not only credit cards, but personal loans, auto loans, SME loans and finally mortgages to become finally a full bank. The reader can also address so many other complementary services to speculate with the full scope of banking services coming in as well: insurances, investments, savings, asset management, private banking, etc.
No need to panic now, but do you still believe the boogey man is yest to come? I beg to disagree; it is already here. Have you eaten your meal already?
As my mom used to say, let’s hope that the challenges faced today by traditional banks after Pandemic and Fintech market boarding, could bring the most entrepreneurial spirit from their teams to come to reach the standards. After all, positive things always come from the most traumatic events.