Brazil’s Nubank On The Universal Pain Points Of Small Business Banking

The U.K. may be the world’s hotbed for challenger banks, but it’s not the only market witnessing a surge in bank competition and industry evolution as a result of FinTech pressure.

In Brazil, Nubank is hoping to challenge the status quo with its digital-first approach to finance. Having recently announced a $400 million Series F funding round, Nubank is developing a small business banking solution after expanding from its initial services as a credit card issuer.

While the company may be operating in a different market than the U.K., Nubank Vice President and Co-Founder Cristina Junqueira told PYMNTS that many of the conditions of the financial services market that initiate change in small business banking can be felt the world over.

One of the biggest industry trends with global ramifications is open banking.

“In Latin America, countries are in different stages of the process to define the [open banking] model that will be adopted, but it’s an inevitable change,” Junqueira said. “The market as a whole can benefit from the competition and innovation that open banking will provide to the industry.”

She pointed to the opportunities in open banking that sound familiar to other parts of the world where open banking initiatives have taken shape too: The model could boost competition and empower end-customers to retain control of their data and switch providers.

Those opportunities are particularly impactful in an era of banking where customer service and end-user experiences are often the defining factor of whether a customer is loyal or not.

In small business banking, the friction points that threaten the user experience are quite similar in Latin America to the friction faced in the U.K., Europe, U.S. and other areas where open banking initiatives are taking off. Junqueira pointed to expensive, bundled services; hidden fees; and lackluster service.

Last year, researchers at Trading Economics concluded that Brazil’s current bank lending rates are hampering access to credit for small business owners. According to Trading Economics’ report, a lack of industry competition was to blame: Brazil’s current banking landscape is dominated by five players, and that lack of competition allows for higher fees with lower-quality services.

The nation’s banking federation, Federação Brasileira de Bancos (Febraban), has denied that that there needs to be more competition in the sector. Rather, high costs can be blamed on taxes, regulations and high default rates that the financial institutions themselves cannot control, Febraban told The Wall Street Journal last August.

Nubank’s own analysis drew similar conclusions to those of Trading Economics, however.

“In our initial research with our small business customers, we found that having an SME business account today in Brazil is often synonymous with headache and unnecessary costs,” Junqueira said, adding that taking a digital-first approach to these challenges can enable FinTechs to build up better services from scratch — a leg-up on traditional, legacy financial institutions that have decades of outdated systems and infrastructure to overcome if they want to instill change.

Finding Financial Inclusion

She added that tackling friction in small business banking is a multi-pronged process, one that not only involves addressing a lackluster user experience, but also requires technology to promote financial inclusion.

In Latin America, the latter challenge is one way the market’s banking challenges are not felt universally.

Pointing to data from the Brazilian Central Bank, Junqueira said that only about 60 percent of cities in the country have physical bank branches, with under-banked customers often pointing to physical distance or the burden of documentation required to open an account as the biggest barriers to getting banked.

Separate analysis from the Applied Economic Research (Ipea) revealed that 59 percent of Brazilian businesses can access a bank loan, compared to the average of 95 percent for developed markets. Small and medium-sized businesses, analysts said, have an even harder time accessing a traditional bank loan.

Like other markets with high underbanked populations, Brazil has an opportunity to wield the power of digitization to expand access to financial services — and that includes for small business owners. Digital-first finserv eliminates the challenge of geographic distance to a bank branch, for example, while Junqueira also noted that technology is essential to addressing the burden of documentation and other similar pain points in small business banking.

“Having proof of residence address or organizing too may documents are just some of the barriers that customers face when dealing with banks,” she said.

In the wake of Brazil’s worst financial recession in decades, the nation is finding hope in FinTech to address underbanked populations and small business pain points. While the industry is unique in many ways, Brazil, Latin America and much of the rest of the world may have an opportunity to tackle small business banking pain points — both those that are unique and those that are universally felt — through technology.