Invest Like the Best with Patrick O'Shaughnessy - David Vélez - Building the Branchless Bank - [Founder’s Field Guide, EP. 41]

Episode Date: July 8, 2021

My guest today is David Vélez, founder and CEO of Nubank, the world’s largest digital bank with over 40 million customers. In our conversation, David talks about his venture capital background at Sequoia and how that led him down an entrepreneurial path in Latin America. We also talk about the pros and cons of building a digitally native business and what gets him most excited about innovation and technology in emerging markets.   Before we start the episode, I would also like to highlight our newest Colossus show, Business Breakdowns. Since launching in early April, we have published over 15 Breakdowns and continue to release a new episode weekly. To learn more, check out joincolossus.com. I hope you enjoy my conversation with David Vélez.   For the full show notes, transcript, and links to mentioned content, check out the episode page here. ----- This episode is brought to by Dell Technologies. Dell Technologies and Windows can help you upgrade your business tech with its Small Business Month specials. Save up to 45% on PCs with Windows 10 Pro— plus business docks, monitors & more. To learn more, call a Dell Technologies Advisor at 877-ASK-DELL or check out the deals at https://www.dell.com/en-us/work/shop/deals   -----   This episode is brought to you by Vanta. Vanta has built software that makes it easier to get and maintain your SOC 2, HIPAA or ISO 27001 reports at a fraction of the typical cost. Founder’s Field Guide listeners can redeem a $1k off coupon at vanta.com/patrick.    -----   Founder's Field Guide is a property of Colossus, Inc. For more episodes of Founder's Field Guide, visit joincolossus.com/episodes.   Stay up to date on all our podcasts by signing up to Colossus Weekly, our quick dive every Sunday highlighting the top business and investing concepts from our podcasts and the best of what we read that week. Sign up here.   Follow us on Twitter: @patrick_oshag | @JoinColossus   Show Notes [00:02:55] - [First question] - Why Berkshire Hathaway took such an interest in Nubank [00:04:46] - Key differentiators between Nubank and other incumbent banks [00:07:11] - Onboarding user experience and overview of customer acquisition [00:10:38] - The original problem Nubank wanted to solve and how they approached it [00:15:32] - Lessons from working at Sequoia about great FinTech businesses [00:19:18] - What parts of his personality and life experience worked its way into NuBank [00:23:18] - Obstacles that needed to be overcome in order to serve the Brazilian public [00:27:52] - Transparency and patience needed to overcome a complicated problem [00:31:11] - Nubank’s business economics compared to other banks [00:34:46] - Overview of rewards programs and why customers like them so much [00:37:27] - Best questions asked that explained Nubank’s market opportunity [00:42:02] - Second layer unit economics of the company and where to look for them [00:45:51] - How far we are into the Latin American technological ecosystem’s development [00:47:24] - Lessons learned from some of the worst decisions he’s made as a founder [00:51:30] - What he’s most excited about for the future [00:54:19] - The kindest thing anyone has ever done for him

This episode of Founders Field Guide is brought to you by Dell Technologies. Enjoy a powerful business upgrade with Dell Technologies Black Friday in July event. Get amazing savings without the 50% off high performance computers and tech built for business and be able to take your office with you with Windows 10 Pro. Plus, get great offers on Dell servers, monitors, docs, and more, all with easy financing options through Dell financial services. Call 877 Ask Dell. That's 877 Ask Dell and speak to a Dell technology.

Technologies Advisor today. If your startup doesn't have the right compliance certifications, you can't close major customers. It's that simple. Vanta is trusted by over 1,500 SaaS companies to automate the time-consuming and expensive process of preparing for a SOC2, HIPAA, or ISO-27001 audit. With Vanta's continuous monitoring solution, you avoid hosting auditors on site and taking hundreds of screenshots to prove that you're compliant.

Here's how it works. Integrate with your cloud provider and tools. check off items on the customized to-do list, and let Vanta continuously monitor your security so you can focus on growing your business. Founders Field Guide listeners can redeem a $1,000 off coupon at vanta.com forward slash Patrick. That's vanta.com forward slash Patrick. Hello and welcome, everyone. I'm Patrick O'Shaughnessy, and this is Founders Field Guide.

Founders Field Guide is a series of conversations with founders, CEOs, and operators building great businesses. I believe we are all builders in our own way, and this series is, dedicated to stories and lessons from builders of all types. Founders Field Guide is part of the Colossus family of podcasts, and you can access all of our podcasts, including edited transcripts, show notes, and resources to keep learning at join colossus.com. Patrick O'Shaughnessy is the CEO of O'Shaughnessy Asset Management. All opinions expressed by Patrick and podcast guests are solely their own opinions and do not reflect the opinion of O'Shaunacy Asset Management. This podcast is for

informational purposes only and should not be relied upon as a basis for investment decisions. Clients of Oshonosi asset management may maintain positions and the securities discussed in this podcast. My guest today is David Balez, founder and CEO of New Bank, the world's largest digital bank with over 40 million customers. In our conversation, David talks about his venture capital background at Sequoia and how that led him down an entrepreneurial path in Latin America. We also talk about the pros and cons of building a digitally native business and what gets him most excited about innovation and technology in emerging markets. Before we start the episode, I'd also like to highlight our newest Colossus show, Business Breakdowns.

Since launching in early April, we have published over 15 breakdowns and continue to release a new episode weekly. To learn more, check out JoinColossus.com. I hope you enjoy my great conversation with David Veles. So, David, I think an interesting entry point here is a fun and interesting one since the news was just announced that Berkshire Hathaway made a very large investment. into your company. And you just told me that they're the largest bank investor ever.

So that's quite an interesting dynamic. Can you walk us through this story? Why do you think Berkshire was so interested in your business? How did this go down? To be completely honest, we never really considered him as a potential investor as we've seen him very actively investing in traditional banks and traditional incumbents. We're one of the biggest investors in Goldman Sachs through the financial prices. Today, they're one of the biggest investors in Bank of America.

and they tend to look more on traditional incumbents in more mature industries. But we had a conversation with them a few months ago, and they started digging in, and they were very, very curious asking really, really good questions about the market size, about the unit economics of the business, about cohorts, very thoughtful understanding of financial services and what we're doing here in the markets and how we're competing with some of the traditional banks in Latin America. And in a few weeks, they were very excited and very willing to lead around in NoBank.

And so for us, we see this and I think the market has perceived this a bit of a big validation of the business model, big validation of our ability to compete with traditional banks. Eventually, your ability to surpass traditional banks in the future of financial services. What do you think are the most important differentiators between what we'll call the incumbent banks that maybe Berkshire invested in more traditionally versus new bank? What are the largest important differences for those out there listening to understand? I think the first one is the consumer obsession and a culture that is based on consumer obsession. And I don't think this is necessarily specific to financial services. I think one common denominator of incumbent industries, either financial services or if you look at insurance or even in media or transportation,

is that after, let's say, six, seven decades of traditional capitalism, you ended up with a number of players, oligopolis, where four or five companies effectively own the market. And whenever you see an oligopoly structure, you find that there are abnormal returns, and you also find a lot of complacency among incumbents. And that complacency ultimately ends up translating into taking customers for granted when it should be the actually opposite. Ultimately, you win because customers choose you.

So what you find in Latin America and a lot of emerging markets, and in a little bit in the U.S., is that there are five banks that won, let's say banking 1.0, and they will become complacent and they forgot about customers. There are a number of different things that we're doing differently, but I would say the number one is having a culture that is obsessed about customers. and doing the right thing for the customers, from doing the right decisions, to giving the right customer service, to building products that are really actually good for them. So I would say that's number one. And then there is all the tactical advantages that being a technology company at heart provides, obviously from being a fully digital company and not needing to have a full offline distribution, very expensive banking branches, that allows us to have about 50x more.

customers spare human than traditional banks. Just being in total digital, we have one building here in Sao Paulo and have 40 million customers in all different 5,570 Brazilian cities. In the Amosons, in the south, we have customers in Mexico City, obviously, and in Colombia. It gives us huge operational efficiency. Ultimately, that translates into significant cost efficiency that we can pass to the end consumer via lower fees. So we don't need to charge so many fees. you're in charge A-feece. And then there's all the other advantages of being a tech company from a data-first analytics infrastructure to be able to use a lot of data to make a lot of different decisions. So all of these different advantages adapt to building a type of offering that is very

hard for the traditional income markets to match. Maybe you could just level set for us today in the markets where you operate. If I was about to become a new new bank customer, what does that traditionally feel like? What is the modal customer doing with you and how do they sort of get on board to begin? So 90% of our customers come through word of mouth, completely referred by other friends. We've been really growing fully by word of mouth. No customer acquisition cost since 2014 when we launched. And our latest cohort last month is exactly the same as our first cohort in 2013. So it's been viral, which is unexpected for a financial services product.

You don't see a credit card has no virality characteristics. There's no real network effects. You think about it. It's not Facebook. It's not Instagram where all your friends are there. You want to be there. Here, you have a loan product that doesn't necessarily make it better for your friend. I'll provide a little bit more nuance than later on because in fact, that's one of the things that we've done differently.

But in general, most people will hear from us through a friend. friend will download the app or will be invited by a friend. The friend will send you an invitation via WhatsApp or email or Facebook or any type of channel. You accept the invitation, you download the app and in a few seconds or a few minutes, you have a bank account open. You have a credit card, a virtual credit card working. We'll send you a physical credit card to your house in one or two days it's there. And then you get access to a number of different investments that we have. You can get an insurance product. You kind of start investing your money in a number of different funds and also equities

through this invest, a company we bought at least last year. If you have the questions, you can ask any questions via the chat that we have in our app. And all your interaction is fully digital through the app. The last thing of a lot is one of the big pains in this market is over 40% of the population are blacklisted in the consumer bureaus. They are outside the credit system. If you want a credit, you do not pay the average 500% APR. You pay a thousand percent APR because there are a couple institutions that will lend you money at that rate.

Most traditional institutions will not lend you if you are blacklisted in one of the world. And that's because there is no FICO score. There was no positive credit information, only negative. I'll give an example. In my case, I moved apartments and the cable company still sent me a bill for $10. And I never got that bill. And so I became a delinquent for them. They sent me to one of these credit girls.

And if I needed a loan from one of the big banks, I would have been rejected. So a lot of the opportunity here was for us to build new credit methodologies, build our own FICO, proprietary, allows to underwrite most of the population, both the banked and the unbanked better. And one of the big variables in our model is who invites you, since 90% of our customers, come through referrals. We use the clear information of the referral as an input into a credit model. And it turns now it is very predictive. And it has allowed us to underwrite to people on lower cost that never had access to any type of credit product. Completely fascinating that you could use that mechanism to build up data profile of people. And it seems like I just got done doing one of these with the founders of Loft. Their story was so interesting in that it's kind of like the equivalent

here where there was no MLS. So they could build sort of a proprietary data. database and supply. And it sounds like you've done something similar, which is actually bring online and make legible the average person that just had nothing before. That begs the question, like, how did you do this to start? So you've got all this data and all this referral now. But back when you began the service, maybe you could tell us the origin story. Like, what did it look like? What was the original problem that you wanted to solve? And why were you with your co-founders in a position to potentially solve it? I come from the investing world, as you do. But I always wanted to be an entrepreneur, and I was working for Sequoia.

I moved to Sequoia in 2012 to open their office here in Brazil. And after going around in circles for two years, trying to find interesting startups to invest, all of us came to a sad conclusion that there was very little technology in Brazil and Latin America, no interesting startups. And they didn't justify opening a Sequoia office in here. Me being Latin America and Colombia was very sad by that conclusion, but I didn't disagree. I was in agreement. There was no point.

And that was my cue to finally do what I always wanted to do, which was start my own business. I told Sequoia, I'm not going back to California. I'm staying here and I'm going to go on my own. I want to start something. And I spent all the time looking at financial services. I was very curious on financial services because it's the largest industry in Latin America. It's a trillion-dollar market cap industry. Most if you look at the largest companies in almost every country in Mexico,

who are the largest companies in Colombia who have the highest market caps in Brazil. It's generally banks. In Brazil, five of the top 10 companies are banks, and that's where most of the market cap of Latin America exists. So I was curious about the overall size. Curious about the overall profitability, Brazilian banks for 20 years have shown returns of equity in the 30s or 20s. That's 10x of what you find in the U.S. or in Europe.

and that has been through all the volatility of macro in the good times, in the bad times, you find very large growth and very good ROEs. So I was interested about how just overall profitability of that industry. And then I had an experience personally opening a time to open a bank account when I moved here, when I had to go to a banking branch to open a bank account. And it was the most painful and frustrating experience I've ever had. It was going through that banking branch. I had to go to a bulletproof door.

I had my cell phone in my pocket, and so alarms started sounding because they were metal detectors. Two police guards armed came running to see if I was somehow armed and trying to rub the bank. Then I had to leave back the branch, leave my everything I own in a locker, go back into the branch, waited 40 minutes who took to a banking manager that had no interest in helping me. And anyway, I won't bore you with all the details, but it was a product of four, months of going to that banking branch several times, sending a lot of information to finally get a simple bank account, a credit card, and having to pay hundreds of dollars a fee. So that experience on one end just didn't square with the overall market cap and profitability that I saw in the other

side of that market. And that all created the obvious question. Why isn't anybody competing with these big banks? Why isn't anybody providing a better experience? This seems like an amazing opportunity. The answer was, yeah, I spent a lot of time talking to the experts, to the CEOs, to the consultants. And the overall sense, the overall conclusion was that it was impossible. A lot of arguments as of why it was impossible from the regulators who never let anybody entry, this market, to this big oligopolis are too powerful. They control the government. They have a lot of lobby.

They will put a lot of barriers. And indeed, there were a lot of barriers. Brazil is one of the only countries in the world where it's in the Constitution. Imagine if in the Constitution of the U.S. there was an amendment that said that no foreigner can invest in banks. And that's what Brazilian Constitution has. At that level of protection, that's a lot of protection that the incumbents have enjoyed for a very long time. And so about two months of doing a lot of homework and valid getting a lot of these arguments, I concluded that there was an entry point that could be a wind of opportunity.

through mobile, this was the 2012, where smartphone penetration was starting to grow very fast in Brazil. In Brazil has huge technology adoption. The speed of technology adoption in Brazil is one of the highest in the world. And got very excited about this opportunity and ultimately decided, let's give it a shot. Let's see what happened and be on a fun ride. And let's see if I really get kidnapped by the incumbents or by the regulator at some point, we're just going to have to try. The only way to really validate is by giving it a shot. Before going into the next, step in the story of how you built stuff initially and got that first hook into the market. You mentioned this time spent at Sequoia studying fintech businesses.

What were the big lessons from that period? What, in your mind, made for a great fintech business versus a good one or a mediocre one? At that point, this was 2011, 2012. The word fintech didn't even exist. The industry didn't even exist. So there was no studying to fintech per se. I started a lot of technology companies, though, and we looked at Sequoia is obviously one of the best technology investors, and I was very lucky in being able to sit in some of the best entrepreneur speeches in Silicon Valley

and sitting in the table of the Sequoie Investment Committee and hearing the partners on what were the things that they were looking for and why investment made sense. There were a number of insights to how they make decisions and how did they ultimately decide. to invest in a tech company that I was able to learn into crafting the new bank strategy. And those are some of the basic elements of a great technology company. I'll go back to first that consumer obsession. If you understand Amazon or if you look at Netflix or if you look at a number of different great technology companies, consumer obsession is one of those first values. And that's going back to what I said initially, that was one of the first values that

we also instigated here, especially in the market that has so much a scarcity as Brazil or Latin America. The second point was building technology in-house, really owning your technology, creating a company culture where the engineer, the software engineer, is at the center of the strategy and it's as good as a culture as it gets to allow engineers to build the best work of their lives, which in traditional and company, especially in Brazil, ranking is the You hear about the people from IT that need to come in and do the work and they're in a different building. And you barely even see them.

They're not front and center. They are outsourced. And a lot of the time, you don't even build their own technology. It's all outsource to a third-party company. So there were two elements. All elements were the way the initial team, the initial founding team is built and the initial culture is built. One of the things I heard a lot initially at Ticoya was the initial success of a company.

was very much based on the culture and that the culture of a company is set up in the first five to six months with the first five to ten employees. And so Sequoia looked very carefully about the existing, the initial founding team and the initial five, ten people and they asked a lot of our own questions around what the culture, how that culture is built, because those initial conditions will tell you a lot about the next hundred employees you'll hire or the next thousand employees you're higher, and the values that you will create as a company. So one of the first things that I did at New Bank was not only setting up a deck to fundraise, but then a deck, a culture deck, that had all the values that we're going to have in a company.

And then I was able to use that with my co-founders that I went and recruited, looking for people that were very complementary to me, that were able to fill the gaps that I personally had professionally. I had a lot of different gaps that were going to be obstacle for me to execute this plan and use the deck to set up the basis for that culture and then get those next 10 employees, which then helped us get the 100 employees on a very consistent basis. So that would be about culture, that be about technology, that be about focus on the customer, were lessons that I took as an investor to then set up as New Bank in the initial days.

What parts of your personality and background bled into the culture most? You've got an interesting story in that you're Colombian by background. Your co-founders were, I think, Brazilian and American. It's kind of interesting hodgepodge. You're building a company in Brazil. You came from Sequoia. You've got this really cool kind of melting pot background. How did your own history and story and personality work its way into the culture? A great conversation I had with Rulow of Saquoia. When I was pitching him the No Back story, Rulov has a lot of experience in financial services. He was one of the early employees in PayPal. He told me something that it was a punch in the stomach and ended up being incredibly valuable. He told me that he, this makes a lot of sense. The idea makes a lot of sense conceptually.

Your background is very inadequate to be able to fund and execute this business plan. You're not an operator. You're not a technologist. All you effectively has in background is an investor. you have a big mountain to climb. And I always tell that while I left that meeting feeling this hurtful, it was a bit of a punch in the stomach. It helped me a lot because the next step that I had to do then was, okay, fine,

I have all of these gaps. How do I feel these gaps? And the first big gap was I'm a foreigner in Brazil, I'm Colombian. I had no network. I was fully immigrant. And I didn't ever work for a retail bank. didn't really know how credit card worked, to be honest. And so the first step was, let's find a perfect insider.

I was the perfect outsider. Let's find somebody that understands credit cards and that is Brazilian and that has a huge network. And when I met a bunch of people and I met Chris, my co-founder, who's always here with us. And she brought all that knowledge that I lacked. The second big gap was we were building a technology company, not a bank. And so technology was going to be in the center of the strategy. and I did study engineering, but I was not a computer scientist.

So I went and met a bunch of potential CTOs, co-founders, and I met Ed, and he was great. He joined us, and he was responsible to the entire technology strategy and some of the big technology decisions since the very beginning. So with those two co-founders, I feel some of the gaps. And then the mission for the next six months or 12 months was actively asking the question, what are all the other gaps? Then how do we find the best people to be filling those gaps? From knowledge of credits to funding, to data science, to design, to marketing, to branding, executing this entire plan requires so many different skill sets that this value of diversity has been a big value from us and it's there in our deck since 2013.

And even now, this is how we think about our architect and entire organization. You are on NewBank. You'll find a ton of diversity everywhere you look. We have 35 different nationalities. We have people working in something like 25 countries today. We have people that speak something like 15 different languages. We have obviously a lot of introverts working next to extroverts. We have people that study physics sitting next to people that study philosophy,

next to people that study communications. And we love creating those teams with a lot of diversity because ultimately, out of that diversity, out of conflict of ideas, is that you can really come up with original insights. And that's what a lot of the traditional incumbents, especially banks, don't get. If they really want to compete with companies like ours, they don't need to overcome a technology challenge, but mainly a cultural challenge and a talent challenge because they're extremely homogeneous. You find these traditional banks, 95% white males, all going to the same schools, all speak in the same way, all providing the same views about the world. And in that environment, it's very hard to have that type of conflict of ideas because everybody really agrees with each other.

So those early, I would say a lot of those decisions around team building and culture came from a humble recognition of a lot of weaknesses and then trying to figure out how to overcome those. I'd love to move from the weakness idea to that of strength and the strength that it must have required for you to run through some of the walls put up literally in the constant. constitution, as you mentioned, and just generally speaking, what was it like in those early days? What were the major walls you had to break down to just be able to offer the service that you did to Brazilian consumers, given the incumbency and sounds like regulatory capture of the incumbent Brazilian banks? What were the big early obstacles? So one of the things that we as a team had in the early days was we were trying to go against the most powerful companies in Brazil.

And we have spent months hearing from everybody that it was completely impossible and almost ridiculous what we were trying to do. I heard so many times, you're not even Brazilian. You have no idea what you're talking about. It's impossible to go against these guys, you don't know, these local.

And we were hearing the no and the skepticism so often from so many different people that there was a huge sense of urgency to prove everybody wrong. The prove everybody wrong, just created a sense of urgency inside, that we had just had to find a way to do it, to make it. It was amazing. Create a level of energy and says of urgency that forced us to ask why five times

everybody told us that we couldn't do it. Even a bigger forcing function, when we started working together about five months after, we were going to start with a credit card product as a first product, a new regulation came in regulating that industry. And this was something like November 2013, and the regulation said, if you're not operational by April or 2014, if you're not operational in five months, you're going to have to enter and ask for a license. And that process is going to take you two years. So for us, that would have been death.

That basically meant we had five months to build our entire product and be operational. We were forced to grab our roadmap and figure out a way to make it successfully in half of that time. So that meant that I remember a weekend we had to be able to get MasterCard on board. They needed to get a piece of paper in their office in the Netherlands by a Monday and DHS was not going to be able to deliver it by Monday. So we considered just flying ourselves to the Netherlands to be able to deliver it physically in the office of MasterCard by the deadline on Monday so that we could gain two days in the entire roadmap implementation.

And the same thing happened with regulation. Every time somebody put us not, you cannot regulate it. We would go in and triple check and triple click. One of the first things we had, obviously, the regulators were going to hate what we were doing. So we just went and checked. We went into a plane. We flew to Brazil where the government, what the central bank is. We went and talked to all the regulators.

We made a very honest case saying regulators, you have five banks that own 90% of this market and they're charging the highest interest rates in the world. You have 40 million Brazilians outside this banking system. How is this type of concentration good for Brazil? And they agreed. They said, it's not good. We want competition. And that was the first step where we started making the case, the education case,

that technology and smartphone open a wind of opportunity for new entrants to provide competition that was ultimately going to really enable more Brazilian to get more access to more products. They have become our biggest allies. And today, the Central Bank of Brazil is very forefront. They are supporting competition. They're trying to remove all those barriers. Sometimes we couldn't get any barriers removed. In the case of the Constitution that I mentioned,

it took us three years to get a banking license. It had to go all the way to the president of Brazil to get a presidential decree to create an exception for us to get a banking license because we had foreign investors. At that point, we just had to be patient. And one of the decisions that we made, especially there, is we had to just be compliant. We're not going to take the route

that a lot of our technology companies have taken, which is grow very fast. But one point you'll be so big, the regulator is going to be forcing to accepting you. Here, we decided we were going to be always compliant. We're going to be friendly with regulators. We're going to maintain good conversation with them. And if it cannot be happening in six months, we'll just have to be patient and figure our ways to provide products while being fully compliant with all the regulators. Is it fair to some all this, the lesson here up is like there is no

trick to this. It's not a trick at all. It's to be transparent to appeal to the fact that you're doing the right thing for a big customer base and then to be patient. Like, that's the formula for dealing with an entrenched situation with a lot of red tape. Is that a fair summary? Yeah, I would say, first, it helps a lot when you're on this good side. It's almost like you're in the, you're not in the dark side of the force. You're in the positive side of the force. You're the Jedi against the empire, because ultimately you have 200 million Brazilian, potential Brazilian consumers on your back, helping you. And that's ultimately the best defense that you can have for a main lobby, for many politicians, for many regulations. There was one changing regulation

in 2015 over a weekend. I remember passed on a Thursday afternoon that was being pushed by some of the incumbents, to make it very hard for us, would have required us to over a weekend raised over a billion reais and would have probably put us out of business. And we were very vocal through the weekend with the press saying if that regulation passes, we're dead, we're done. And by Monday morning, the Twitter account of the central bank had 15,000 Brazilian consumers telling the central bank, you cannot do this. You have to protect new bank.

New bank is for the first time somebody in this market is helping us and doing something good for us. And you guys are going to come here and let this happen. To your question, I think beginning and having been on the good side and doing something that is good for society, it's good for consumers, is ultimately the best protection that you can have. But then beyond that, I would add, just listening very carefully and being willing to double-click, triple-click, quadruple-click, every time somebody tells you that you cannot do something and ask sort of a why, why, why, five times until you get to the bottom,

because a lot of the times what we found is when a lot of those industry experts told us you cannot do it. What lied beneath was ultimately a lot of fear. It was fear of going against these big banks, these big dinosaurs. But nobody had ever attempted to do it. So nobody knew that you could do it. And what we did was just go deep and really find opportunities to actually do what conventional wisdom thought it was impossible. So being able to like ask five, six times why it's important. Being honest and open, I think a lot of regulators helped a lot and develop good relationships.

I think that's the right strategy if you're playing the long game, right? You're going to be with the regulator for 10, 20, 30 years. Sometimes you have to be patient, as you say. And it is what it is. That's life. Some of these regulations have been there for decades. You're not necessarily going to be able to challenge them or change them. but there is a lot of opportunity of innovate within the existing regulatory framework.

And so that's what we did. We want to be compliant, but given this guard rails, there is a lot of opportunity to do things differently. A lot of our products, like our savings account, for example, we were able to create a fully new savings account within the existing framework or regulatory framework. And that was a very noted product. Can you talk through how the actual business work? itself because I have to imagine that I don't know what the number is globally, but there's lots

of places still where tons of people are unbanked, where going straight digital makes a ton of sense for some new company being built, something that might look like New Bank, say, for an Asia or wherever it is. Talk us through like the actual business. How does New Bank make money from its customers? How does that most differ from how a traditional bank might or is it the same, just better? Just walk us through the kind of business itself. One of the advantages of being in banking is that banking per se is one of the oldest industries in humanity. I think banking has something like 5,000 years. We're not Uber doing a fully new business model. We're taking a bunch of different risks. We're not taking business model risk. So people understand how to make money in banking,

especially in a market like Latin America, where you have some of the largest margins in banks. The question for us was a bit of a different bet. The bet was, Can you make it free? First product, which was a credit card. Credit cards in Brazil, banks charge a ton of different fees for a credit card. And the bet that we had was, well, what happened traditionally is that a consumer might pay $100 a year for a credit card. So the bank gets $100 in revenue. And they use that money to do customer acquisition to acquire a customer.

So the flows go $100 get out of the customer's pocket and goes into Google or Facebook or the TV channel. It goes directly into customer acquisition. Some of the bets that we had initially was let's charge nothing to the consumer and hopefully that translate into no customer acquisition cost. So Google, Facebook, they lose. That money stays in the customer's pocket. And that bet worked. We charge no fees, but our customer acquisition cost. is effectively zero, even today.

And so that was the first bet. But then there was a number of our revenues that we don't have fee revenue, but we have interchange revenue. So we make money out of every transaction that a customer makes with a credit card. And we also make money when the customer decides to use the credit card to finance themselves. And that's with the credit card. And then we make all our money in other type of financial services products when we sell an

insurance product with charge a fee, a broker's fee. when you invest your money in an investment product, we charge a fee per AUM. We don't charge the money for peer-to-firm transfers or any type of transfers. It's no fee, we charge no type of fees there. We charge a recording fee when you want to have access to our reward program

and get points for every spend that you have. So we tend to have very similar revenues of the traditional banks have, but we don't have any fee revenue. And then we have a huge advantage on the cost side because, as I mentioned, we don't have to pay 5,000, 6,000 branches or 100,000 employees.

Ittau, the biggest bank in Brazil, has 50 million customers, and they have 120,000 employees. Wow. The advantage in terms of cost is 50x, and that allows us to also charge less from customers and ultimately deliver financial products that are better for customers, easier experience, less friction, less fees, and also cheaper. And so ultimately, it's a value proposition that is unbeatable. I'm really interested by rewards programs. You mentioned briefly there, New Banks' rewards.

Tell us everything you've learned here. What is the value of rewards programs? How do they work? Why do consumers like them so much? What does this experience tell you? One of the things that we also saw initially, as we understood this market, was customers were paying some of these high fees for credit card, and they were getting associated rewards program.

And the marketing of banks in a way taught them that rewards was a basis of differentiation, that they should differentiate credit cards based on who gave you the best rewards. In reality, when you analyzed a lot of these rewards, the problems were so complex, so hard for consumers to understand that a lot of the times these consumers were making irrational decisions. You were paying very high fees to get a rewards program that supposedly was going. good, but if you had kept those fees money in your pocket, that was worth more than the reward program itself. So one of the other bets that we did initially with our first product

is no fee, no rewards. That went completely against the conventional wisdom that you needed a good reward program to get a card. Lots of consumers loved it and we grew extremely fast. A lot of consumers didn't like it. They wanted their rewards. They were the true real rewards consumers, and they were willing to actually pay for it. And so then we added a voluntary rewards program on top of it, where you actually pay a monthly fee. And we created a program that is extremely simple for consumers, where it's effectively cash back for a number of different categories where points never expire. You get the points instantly. You don't have to wait until the end of the month to get your points. You get them instantly, and you can use them instantly if you

need them. That has worked well. It has been a probe. We have over a million consumers in that program. But one of the opportunities that we still see there, and we still haven't necessarily been able to crack it, is that huge transparency we give to customers, which we think we have to give it because it's a value of us. Sometimes it's a bit of a shot in the foot because customers compare us apples to apples with our programs. They think our banks have better programs because they give them better points. But then there is a lot of complexity and footnotes that they don't end up seeing. Customers end up preferring something else that is much more complex that is worth for them.

So that's a challenge that we, I guess an opportunity that we're, of course, and how do we continue evolving this program, maintaining the value of transparency because we're not going to move away from that, giving more value to the consumer. But forcing the consumer to also ask hard questions from the bank's programs to force them to be as transparent as well. we are. One of the things that I'm totally fascinated by is the line of questioning of investors into companies like yours. I love that you've had experience as an investor. And then also

you mentioned at the beginning that Buffett and Berkshire were just asking great questions about your business. What were those best questions? Like if I was trying to understand New Bank today from an investor's point of view, maybe just using Berkshire as the example, what were the best questions that they asked you as a part of that process getting to know you? I would say, It's first around really understanding the market opportunity and really understanding the peculiarities or the specificities of a market like Brazil. Some of the biggest opportunities, you were mentioning Loft and love not having MLS in Brazil. I give you the case here of not having FICO score.

Some of the biggest opportunities, I think, exists today globally, are in these market, these locations, are in these markets that have a significant. significant failure and where technology adoption suddenly create an opportunity to bid the incumbents. And this could be in real estate or in financial services or in a number of different industries. So a lot of investors, especially now emerging market investors or U.S. investors are getting to emerging markets, go very deep and are able to understand with a lot of clarity, why

is this market dislocation, this market failure, and then understand how the company is able to find a unique angle into filling that market dislocation. US and Europe are very efficient markets. When you look at economics, one-on-one, your market textbook, generally is very efficient. And even in financial service in the U.S., the margins of U.S. banks are small. They're very small margins. And that's ultimately because in the U.S. you have 4,000 banks. Everywhere you look is fine to have an angle.

It's hard to find differentiation, even, capital, traditionally capital was a constraint in an environment like ours, it's not a constraint anymore. So in U.S., Europe is really hard to find that edge. Some of the best investors we've had today are investors that have been able to understand why we have an edge. They are going into emerging markets, not deterred by the volatility or the imperfections that these markets provide, but actually attracted by them. They're able to be contrarian in a way. I remember talking to Syria C when Founders Fund led our Series C talking to Peter Thiel. We were closing in November 2015.

Brazil was going into the worst economic recession in 100 years. Everybody talked to runs through the heels. They didn't want to talk to us. They had no interest. When talking to Peter at Founder's Fund about Brazil macro, he said, I couldn't care less. This is when the headlines in the newspapers were horrible about Brazil, middle of corruption investigation, it could not get worse. And that's because he was able to go very deep and understand this angle and this dislocation

and why this create an opportunity. So I would say that in macro view is one big bucket of great questions. The second is a lot of focus on the team. How is this team really able to execute on that vision? Because ultimately, I would bet on the team more than necessarily the market. the team can really change and pivot and move as needed, since a lot of these opportunities seem to be very dynamic. You need a very dynamic team. And the third one is more of an understood kind of unit economics, horizontal economics type of view of the business.

I see this still in a lot of Brazilian or Latin American local investors where they hear we charge no fees. And we don't do this anymore. But when they hear that a startup has financial losses, that means the business, model is broken. Obviously, Silicon Valley and U.S., they're already much more sophisticated to understand that startups operate differently, and it's about where they underlying economics of a customer and how do underlying economics of this customer evolve over time to provide massive profitability down the road. A lot of the most sophisticated investors get to these unit economics or essential economics very quickly and ask the right questions

to understand the potential for value generator down the road. And I think this is already very much common in U.S. and Europe. I would say in Latin America, still the more traditional investors are very stuck in a P&L that generates losses. What is the layer two of unit economics for you guys? So I certainly understand like trying to figure out, okay, how much revenue might I generate from a new customer over time? You've already talked about your cost of acquisition is basically zero. So that's pretty good. Level one, unit economics.

What's beneath that? the best investors dig in on unit economics for new bank. Where do they go beyond that layer one? We don't pay much money in marketing, cost but we do have a set-up cost, which is data cost underwriting a customer, sending a customer, creating a physical car, sending a car to a customer's house.

So we do have some set-up cost. So the first question is what the payback of that initial cost is. One of the things that is hard, let's say in the early stages, let's say serious A, B, and C, when you already have some data, but you don't have a lot of data is understanding how that payback time might evolve over time and where there might be economies of scale. And I remember when I was at Sequoia, at times in a certain business model,

there was a lot of skepticism on whenever an entrepreneur would teach economies of scale or improvements in those unit economics over time. And there are some areas that I would be rightly skeptical. Let's say customer acquisition costs, for example. build arguments on both sides of the table that as the company grows, that customer acquisition cost will come down or that customer acquisition cost could go up, right? It could go both ways. It depends a lot on the market. It depends a lot of the competition. It depends a lot of differentiated on the product. Scalability of CAQ is hard to make a case there way. But when you look at

the cost structure of the business, obviously my ability to negotiate a better contract with data providers with logistics companies, with MasterCard, with any other type of provider today when I have 40 million customers is way, way, way, way better than when I had 10,000 customers. That's undebatable. And so if you're stuck as an investor only giving credit to that entrepreneur for the cost structure that they have when they have 10,000 customers, you're being too skeptic. You got to understand how that cost structure is going to evolve over time. and give some credit at that evolving construction.

The other hard part in our business is we're giving credit. And this is something that makes our analysis much harder because a lot of the time when you see very fast-growing businesses with credit, the cohorts might look fine until the next crisis come. And then all bets are off. Your delinquency spikes. And this is what happened, actually, a lot to the financial services business that have balance sheets in the U.S.

US through the crisis, a lot of financial services is going very, very fast in the good times. Then financial crisis came, and delinquency spiked, and those union economics went really badly very quickly. So in our case, it's been different because the only thing our credit models know is Brazilian a recession. We launched in 2014, and the past eight years for us has been Brazilian a recession. In not only a recession, I've been the worst recession in a century. So our models have been test it as it can possibly get. Now we had a pandemic, an entire pandemic, to test those credit models. A lot of these investors have been sophisticated enough in understanding, asking our questions, and looking at our loan data, and getting a view of cohorts of credit,

and getting comfort in the underlying credit risk that we might take or we might not be taken. So that nuance around payback curves and how they evolve over time, depending on the stage of the company, depending on the scale of the company, it's a nuance that not all investors really look through. If we were to zoom out a little bit and just think about Latin American technology opportunity and companies more generally, how far into this story do you think we are? I always fall in the trap of like, well, there was a good idea to invest in these things seven years ago, but now some of the major categories, banking, housing, et cetera, have been sort of tackled. Where do you think we are in this story? Is it early? Is it

in the middle, I'm sure it's not towards the end. Just give us a sense of the Latin American technology ecosystem. It's extremely early. And there are a couple of data points there. We still have 250 million people out of 750 million people in Latin America, completely unbanked. They're literally grabbing cash and putting them under their mattress. And this is even now. So this is financial service is one of the biggest industries. But then when you look at all our verticals, insurance, You talked about lost in real estate. When you see transportation, when you see health care, when you see education, it's all effectively still offline. Most education in Latin America is offline.

People go offline. Most health care still happens in hospitals. There is no real yet telemedicine at scale. When you compare some of these ratios with, let's say China, a nor emerging market or Southeast Asia, it's not even comparable yet to the level of digitalization that you've seen a country like China or Southeast Asia. So it's extremely early still for Latin America, I think, technology, for the entire technology story. You mentioned earlier a lot of the things that have driven your success, thinking about this as a technology company, all the things that have led New Bank to be successful so far. What are some of the worst decisions that you've made and what did you learn from them?

Just think about it viscerally. What was the big error in building the company that stands out in hindsight? Oh, man. So many. I had to remember it all. I'll tell you a couple of ones very quickly. One specific one that I remember very early days, I think it's indicative to a lot of decision is I wanted the first two, three months, a new bank.

I expected everybody to be in the office Monday, 8 a.m. if they were not Mondays at 8 a.m. in the office, I would start mistrusting the people in the team. Where did I get this from? It was sort of my natural environment coming from Sequoia, from General Atlantic, from Morgan Stanley. That's what you expect. People there in the office at 8 a.m. and being there, even questioning somebody's competence or commitment if they're not there. And I just started distrusting the team and getting very mad. of people that wouldn't there until I had to be slapped in the face a little bit in my co-founder, say, what are you doing?

This is the tech company engineers. Stay here until 11 p.m. You're going to give them the autonomy. You cannot be spending so much time trying to hire the very best people and then mistrusting them the first couple of weeks. And so that already in the first few weeks of Novang, that was something that I had to start programming my brain versus some of the experiences, the managing experience that I had before in trying to create an environment of trust, in trying to create an environment of autonomy,

that ultimately are some of the key values we have as a company. Then some of the biggest mistakes have been around talent, I would say, hiring the wrong people. It's a very hard decision because I think just the entire recruiting process, regardless of how good you are and how sophisticated you can become a direct recruiting process, you can start using a lot of data. You can use a lot of data around the questions that you ask and tracking those questions down the road in terms of performance. It's still a very imperfect process.

You're going to be making a lot of mistakes a lot of the time. And I would say there have been big decisions around people. Sometimes when I was too impressed by background or by the CV or by the logos, not necessarily focused enough on the character or the engagement or the attitude of the person. So some of the big talent decisions that I made was because of that. And then the follow-up mistake is being too slow at letting that person go. And one of the things is funny, I did business school.

And I remember people seeing in business school, when you're asking yourself, if you should let somebody go, it's already too late. And I remember reading that. I was like, yeah, it makes sense. You know, you got to let go fast. In reality, it's much harder to actually do that than the business school, traditional business school would say it because you have the relationship with the person because it's a nice culture. But sometimes when I overthought that decision and it took three, four months more than it should have to make that decision, we just lost time.

And by the moment you make the call, generally, 95% of the times the person is thinking. The person is happy because they already knew that it was not working out. They live in good standing and it ends up being better than you ever expected because then you open out the space for somebody else that want to come do the job. You see a complete different trajectory in terms of a team that can be executing way better. So it has always been easier and better than what I expected and therefore I should have made that decision faster. What has you most excited about the future, just generally speaking, can be new back related or not? Just given your unique perch and perspective on things and experience,

what are you most excited about in the future? You know, we've been in the countries that we are, Brazil, Colombia, Peru, Mexico, we see a number of really bad news every single day. The pandemic has been an incredibly tough year for so many millions of people in our countries because we lack the healthcare systems. We've been way behind on vaccinations. People didn't have the right knowledge, a lot of fake news around, a lot of miscommunication. And I think one common denominator, I think, around the world, so the pandemic is how unprepared emerging markets are to deal with a crisis like this.

and has shown just really horrible stories around poverty and lack of vocation. And then even corruption is heartbreaking to see in a lot of these countries, politicians engaging in corruption with a pandemic. There are literally a number of cases of politicians that use healthcare contracts to get rich, completely ignoring the level of pain that hundreds of millions of people have been having over the last year and a half and two years. The overall environment around Latin America today is really bad. The political environments, the level of leadership of the public sector, poverty increased,

some of the good stories around the middle class growing. We've gone back to 10, 20 years. So it's a very dire, very sad picture overall. What gets me excited is figuring out how NewPank and complex, companies like NewBank can have a shot at improving, even if it's a little bit, that entire scenario. And when we see that we just ask, for example, we have saved over $3 billion in fees to our customers that if we weren't around today would be in the pockets of five big institutions, and now those $3 billion are allowing to people buy medicines or allowing people to send their kids

school, that makes me very helpful. When I see this happening in our industries, more competition, forcing lower prices, forcing more adoption, forcing better quality of life. That gets me very, very excited. So I think ultimately, what gets me most excited is the opportunity of companies like New Bank to contribute to economic growth and ultimately create the conditions for hundreds and millions of people to just be able to live a better life. David, I asked the same closing question of everybody. It's been so much fun learning about what you've built and just an incredible area of the world that has so much opportunity, a lot to be fixed as you just laid out. But it's been a pleasure learning from you today. The same question I ask everybody is, what is the kindest thing that anyone's

ever done for you? I had a WhatsApp conversation with my mother yesterday. She found a letter that I had written 15 years ago, thanking her. And it was the first time that I had written paper, thanking her for all the sacrifices she had to do for me and for my sisters when we were growing up. We grew up in Colombia in the 80s, in the middle of a pretty, you know, effectively a civil war. We had to leave.

My parents had to just leave, and we went to Costa Rica to try to find a more peaceful place. They had to leave all their family behind. I had to leave our friends behind. And it was a huge sacrifice, I think, my parents did. And when I read that WhatsApp yesterday and read that letter, I think that's the kind of thing ever. Remind me that the type of sacrifice that my parents did and my mom did with all of us

was incredible. They effectively sacrificed their lives, their dreams, living a country behind to try to create the best conditions they could possibly have. For me, I and my sisters. And that was just amazing. I think that's it. What an incredible story in place to close. Thank you so much for your time today. It's been a blast.

Thank you, Patrick. It was an honor and a pleasure. Thank you very much. This episode of Founders Field Guide was brought to you by Dell Technologies. Upgrade your business during Dell Technologies Black Friday in July event. Get savings up to 50% off and take your office with you with Windows 10 Pro. Call 877 Ask Dell for a Dell Technologies advisor. You can also check out the link in our show notes to see deals that Dell has today. Thanks for listening. If you enjoy this episode, check out join colossus.com.

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