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140 million customers, 10,000 employees
Cost to serve
Branch real estate is a gigantic cost. Nubank's cost to serve a customer is about 3% of what a traditional incumbent bank spends, which leaves room for no fees, better interest rates, and a better experience.
What AI adds
That comes before AI. AI multiplies the efficiency, and a bank can use it two ways: automate large parts of the operation, which could mean a bank with a billion customers and five thousand employees, or raise its ambition. Nubank is raising its ambition, with a goal of 100 countries.
Return on equity
Because Nubank charges no fees, it has less revenue, yet its return on equity is two to three times that of the big incumbents in the countries where it operates. A cost structure advantage like that, usually won through technology, is a moat in a commoditized business like banking. Some US incumbent banks earn a higher return on equity than the emerging-market banks Nubank competes with, and that margin is an opportunity to undercut.
Why do bank branches cost so much to run?
A branch carries rent or ownership costs, tellers, security, vaults, and equipment, and it has to follow the same compliance rules no matter how few customers walk in. Those costs are fixed, so they do not shrink when customers shift to phones. Staffing also needs to cover opening hours and sick days. Many large banks have been closing branches steadily for years as transactions move online.
How does return on equity measure a bank?
Return on equity divides a bank's net income by its shareholders' equity. A higher figure means the bank earns more from each dollar its owners put in. Banks can raise it through lower costs or higher leverage, but regulators limit leverage through capital requirements. The Basel Accords, first agreed in 1988, set international minimums for how much capital banks must hold.
Why does a cost advantage count as a moat?
Warren Buffett popularized the term moat for a lasting advantage that keeps competitors out. He has pointed to GEICO's low-cost way of selling insurance directly to customers as an example. When a product is a commodity, a company that can profitably charge less than rivals can win share without cutting into its margin. Rivals with higher costs cannot match its prices without losing money.
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