How Profitable Is Nubank With No Fees?

David Vélez says Nubank charges no fee and still ends up with a return on equity two to three times the return on equity of the big incumbent banks in the countries where Nubank operates. Less fee income means less revenue, and the higher return still stands.

A higher return on less revenue is a cost structure advantage: a way to offer a product at better quality at a much lower cost. The advantage generally comes through technology. In markets like banking that are in ways commoditized, a technology cost advantage is a moat and a comparative advantage.

Customer growth, net promoter score, and the cost to acquire a customer come first. User count and net promoter score show whether an underserved market has been found and whether the product is one nobody else was able to offer. Growth has to stay at a sustainable pace, because marketing spend can buy growth. The equation is LTV to CAC, and return on equity exemplifies the advantages the business model could have. In the U.S., some incumbent banks now have a higher return on equity and are more profitable than the emerging market banks Nubank competes with. On the Amazon view, an incredible return on equity sitting on a huge amount of cost is a significant opportunity to undercut.