Digital upstart tries to crack Mexico’s rigid banking market

Brazilian fintech Nubank takes advantage of efforts to introduce competition to a concentrated sector

Mexico’s banks, already under pressure from lawmakers for charging “abusive” and “usurious” fees, face competition from a Brazilian digital upstart — the first new lender in this closed market in a dozen years. Nubank, a Brazilian fintech unicorn with 8.5m customers and financial backing from China, is making its first international foray with a move into Mexico and hopes to launch its first product — possibly a credit card — by the end of this year. “We’re coming in to bring efficiency to the market,” David Vélez, chief executive, told the Financial Times. “Banks will have to compete.” Nubank — which has no branches and zero commissions — is taking advantage of a new fintech law in Mexico that will help it gain a foothold even without a banking licence — something the Colombian CEO, who co-founded Nubank in 2013, says could take several years. Mexico, whose banking sector is dominated by foreign-owned groups including Citibanamex, BBVA Bancomer and Santander, has not had a new retail bank since Walmart a dozen years ago, according to the National Banking and Securities Commission. Nubank, considered the biggest digital bank outside Asia, this month announced the creation of a Mexican subsidiary and Mr Vélez said “we can start with products that don’t require a licence . . . we hope to be ready to launch in the second half”. With more than four out of 10 Mexicans aged under 25, Nubank’s target demographic is the millennial WhatsApp-using, Uber-riding early adopter.  The bank does not expect to focus initially on the 42 per cent of Mexicans still outside the banking system, but is attracted by the fact that only 34 per cent of adult Mexicans has a bank credit card.  Three-quarters of the credit card business is concentrated in the hands of just four banks. Furthermore, nearly 80 per cent of Mexicans do not use banking apps on their phones, although a Bank of Mexico-backed cashless payment method using mobile phones is being trialled before a full rollout later this year.  “The company will also benefit from low intermediation in Mexico — financial system loans make up only 34 per cent of Mexico’s GDP — and the country’s high penetration of smartphones and internet,” said Patrícia Fortunato, a senior strategist at Moody’s Investors Service.  Nubank’s entry will not overturn Mexico’s stolid banking sector overnight, but “it is a challenge because banks will need to change the way they operate and the ones that don’t embrace change will suffer more,” said Eduardo Rosman, equity analyst at BTG Pactual, a Brazilian bank. The quality of banking services in Mexico has been under the spotlight since the ruling Morena party chief in the Senate, Ricardo Monreal, launched a drive to slash a raft of banking commissions last November, even before President Andrés Manuel López Obrador took office. Bank shares crashed as a result.  After consultations with lenders, the initiative has been amended “to eliminate commissions and products at the base of the pyramid”, including free banking for recipients of government social programmes and digital services, said Juan Garay, an adviser to Mr Monreal. The bill, likely to go before Congress in September, will also oblige banks to publish clear fees for their products, with the central bank to allow customers to shop around. Mr Garay, who said some Mexican banks were guilty of “fairly abusive practices”, hailed Nubank’s entry but said it would still need access to established cash machine networks. “If the banks continue to operate in a quasi cartel-like manner, it will be very difficult for Nubank,” he said. But Nubank is hoping to build customer loyalty through social media recommendations, as in Brazil. The company enjoys a net promoter score — a gauge of consumer loyalty — of 89 per cent, compared to 60 per cent for Amazon, 50 per cent for Apple and US banks scoring between 10-20 per cent, Mr Vélez said.  One of the upstart’s chief advantages is that it has no need to make money immediately. Nubank, which sees itself as a tech company at heart, has raised $420m in seven investment rounds including $180m from China’s Tencent, and is valued at more than $4bn.  Mr Vélez is measured in his outlook. “We want to go at the right pace. We want to build a company for the next several decades . . . We don’t have to grow too fast. Slow but steady.”

Source: financial times

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