New NU thread -- help me understand

From another thread:

I truly don’t know anything about banking cycles and I’m not seeing a trend among the big banks, but one of them, JP Morgan, which usually grows revenue low/mid single digits, grew revenue by 23% in 2023. Is this the height of the credit cycle?

I also have no idea if I’m right that NU is getting much higher interest rates than they were able to get in 2020 & 2021, or even in 2022. But that’s the only reason I can think of that their interest revenue would grow so much more than their credit portfolio.

This article suggests there is a banking crisis in Brazil, and that Nubank is a big culprit: https://www.washingtonpost.com/world/2023/12/24/brazil-credit-card-debt-crisis

Again I just don’t know what to make of all this. So I just leave it here for NU bulls to research: are they charging too much interest?

Bear

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Thanks for asking the question, Bear! It’s helping me and, hopefully, others learn more and become better investors. I didn’t have much time today so I leveraged AI (specifically Perplexity.ai) to help me learn as much as I could in a short amount of time. I like Perplexity.ai because it shows you the sources it uses. Here is what I learned:

NU Holdings’ credit card interest rates appear to be significantly lower than the broader credit card market in Brazil, though still crazy high compared to international standards.

  • According to the Central Bank of Brazil, the average APR on consumer credit cards in Brazil is 431.6% which is mind blowing to me!
  • In comparison, NU has stated that 7% of its debt is assessed at the highest APRs, which is 8 percentage points lower than the industry average.
  • NU’s 90-day default rate for its lowest-income customers is about 3 percentage points lower than the industry average.

The above 3 points are in the Washington Post article (thanks for sharing it.)

So while NU’s credit card rates are very high, they are lower than the astronomical rates seen across the broader Brazilian credit card market.

While the rates seem crazy to us, they appear to be better than the norm for the people in Brazil. I suspect that is why they have such a high Net Promoter Score in Brazil.

As to why interest rates in Brazil are so high it seems to be a combination of the lack of regulation, high inflation, economic instability, predatory lending practices, and over-reliance on high-cost revolving credit. NU’s lending practices appear to be more consumer-friendly compared to traditional Brazilian banks, HOWEVER the data suggests NU is engaging in predatory lending behaviors. Even though it’s to a lesser degree than it’s competitors it’s still predatory lending and very concerning to me. I need to put more thought into this. I’m interested to hear others take on it.

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How would you define 'predatory lending practices ’ as they pertain to NU? In comparison to the alternatives in Brazil, including the mainstream banks, their terms appear to be more lenient.

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The interest rates are so high because there is no central clearing house monitoring and reporting on a person’s debt history. People are essentially applying for credit for the first time Everytime, according to at least one article. And preditory lending practices. Think about it, what rational person would lend money to someone and charge them so much that they have no hope of ever getting out of debt, or even paying back the original loan. Crazy businesses and is making me rethink my investment in NU.

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I agree with coldmountain; here’s my take:

There are two basic approaches you can take when considering $NU’s impact on its customers:

  1. You can assess a single-point-in-time “(now”) and determine whether you think $NU is predatory in that single moment.

  2. You can consider the plight of $NU’s customers prior to $NU existing, the current impact $NU is having, and the direction and velocity of the impacts $NU is likely to effect.

I think that by far the most important impact $NU is having is they are providing competition at scale, which is a seismic improvement vs. the situation prior to $NU, which was the oligopoly banks almost completely stifling competition.

According to the best available experts (Economists), ultimately it is competition which drives per-person contribution to GDP; this can roughly be restated as “competition effects improved overall economic well-being, and lack of competition detracts from overall economic well-being.”

$NU isn’t just providing better interest rates; before $NU came along, a majority of people in Brazil couldn’t get any credit at all, and to even apply to get it was a literally-insane process taking weeks of paperwork and multiple in-person appointments at a physical bank, which may or may not be anywhere close by.

$NU apparently hasn’t improved things sufficiently to satisfy some people. To those folks I recommend zoom out and add include “history” and “direction and velocity” in your assessment, instead of only considering a single point-in-time (“now”).

  1. (History:) The 100+ years it took to put $NU’s customers in the situation they were in
  2. (Current Moment)The improved situation $NU’s customers are now in, thanks to $NU, and
  3. (Direction and velocity of changes in progress) The likely market response to $NU: more competition by existing and new players; the increased competition is the best/only mechanism we are aware of that can materially raise per-person GDP in Brazil.

This dynamic isn’t relevant only to banking in Brazil; by the way; it’s relevant to lots of industries throughout LATAM. As I’ve stated before, $NU can make crazy profits at scale because as crazy as their profits are, they are a MUCH BETTER deal that their competitors can offer.

There MUST BE multiple similar situations across multiple industries all throughout LATAM. I’ve already identified just a few of them. Consider, for instance, the sea-change $MELI has had on the transportation industry in Brazil, which I’ve posted about previously.

The oligopoly industries in LATAM are like sitting ducks when visionary, efficient, tech-enabled companies come along that actually give two shakes about their Customers. There MUST be tons of greenfield opportunity waiting to be discovered in LATAM! imo :slight_smile:

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I’m all for making a reasonable profit and covering the risk of default. On the surface 400%+ interest rates seem to go beyond makeing a reasonable profit and covering the risk of non payment which makes me put things in the predatory lending cateogry.

I say “on the surfrace” because there may be things I’m not aware of that makes 400+% reasonable to cover risk and profit. That is what I’d like to learn mnore about so I can make my own conclusion on whether it’s reasonable.

I do agree with @intjudo that NU is better than the traditiobnal financial system in Brazil and is moving things in a better direction but could they be doing more? Do they have to charge 400% interest on credit cards to make a reasonable profit and cover their risks? Maybe they do but on the surface it seems sketchy.

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Bear,

There has been a “banking crisis” in all of LATAM for the past 100+ years, as I’ve outlined in some detail previously. IMO $NU is helping to address it, and is succeeding, as evidenced by their NPS. Their CAC is literally less than $1 because of word-of-mouth advertising. The competition they are providing has already forced the oligopoly banks to improve their services: bringing them online, making them more accessible etc. I think that’s evidence that $NU is having a positive effect.

Regarding questions about their numbers, you raise some good points, none of which I’m fully equipped to answer to at the moment. I’m still learning from this stuff. For now may I point you to an article from a highly successful guy named Bert (…I do subscribe to, and recommend his service):

https://seekingalpha.com/article/4679724-nu-holdings-all-digital-all-mobile-bank-developing-a-franchise-in-latin-america?source=content_type%3Areact|section%3Asummary|section_asset%3Aall_analysis|first_level_url%3Asymbol|button%3ATitle|lock_status%3ANo|line%3A2

Though you didn’t raise ethical/moral concerns per se, in light of some of the follow-on comments, I feel compelled to note that previous guidance (regarding $ZI for example) has been that ethical/moral judgements aren’t pertinent to the investment analysis we do here. [ If that’s changed, perhaps an update to the Knowledge Base is in order? ]

Bottom line though is I do appreciate you chiming in here. You have a knack for delivering a Master Class in stock analysis with just a few sentences. It’s clear that there’s a lot more work I could stand to do in my scrutiny of $NU’s numbers. Thanks very much for sharing your expertise with us.

–intjudo

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No position and no interest in banking companies (have been around long enough to remember the board’s brief love affair with Signature Bank). The problem with banks is that credit allowances (and, in the US, held to maturity investments) are such massive thumb in the wind estimates that by the time the ink is dry on the financial statements, the assets and losses can be misstated. Not according to the official GAAP rules of course.

As far as the questions posed on this thread, I can help at least with deciphering the released financials: https://www.sec.gov/Archives/edgar/data/1691493/000129281424000490/nufs4q23_6k.htm

Section 6, titled “INCOME AND RELATED EXPENSES”, has the year over year breakdown:

So of the 3b increase in interest/gain income, ~2.25b or 75% came from credit card and lending. What’s interesting is that credit card balances has increased only 50%, but income from credit cards increased 150%. Undoubtedly part of this is due to the increase in world interest rates, which were then propagated to NU’s credit card rates. But the other part is probably because the assessed risk on NU’s customers from the rapid growth has become higher, and thus the need to charge higher rates on the credit cards. You can see on the next note that allowance expense has increased 100%

Now to section 13 - where they break down composition and delinquencies of their biggest asset (~28% of total) and revenue (~31%) source - credit card loans. NU has a 2.1b allowance on 14.5b of gross credit card loans, or ~14%. JPM, with a completely different customer set, for comparison purposes, has 12.5b on 211b of credit card loans as of year end, or 5.9%. Is 14% enough for the average consumer profile you’d encounter in LATAM? Hard to say (and why I stay away from banking stocks)

Further down note 13, there’s another table with a breakdown of overdue credit card receivables - 1.4b of 14.5b fits that category (but the allowance is only 2.1b, hmm). Next, they give a breakdown of stages from 1 to 3, with 3 most likely unrecoverable. Stage 2 is 10.3% and stage 3 is 7.6% - both of which are an increase over 2022, so NU’s own analysis of their portfolio’s credit worthiness (as a percentage no less) is getting worse.

Anyways, I’ve already spent a lot of words to breakdown just a small (although significant) piece of NU’s business. There’s also the entire held to maturity securities (this is what sank SVB) and non credit card loan portfolio to go over. From the posts that I’ve read in the past few days, it doesn’t seem like many on the board invested in this company has gone at least as deep as this level on NU’s main revenue driver. And this was pretty shallow analysis. That 31% of their revenue and 28% of the assets are tied to their credit card business seems extremely high risk, as those are unsecured loans. In the event there is an economic outage, you’re not getting anything back from that part of your business like you would a business or real estate loan.

Hope this helps some on the board.

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@Aphalite

This is a goldmine of information and guidance on how to do this type of analysis. Thanks so much for posting it!

Some truly incredible Investors (Saul, Bert and world-class-banking-expert Warren Buffett) are invested in $NU, yet in short order you’ve demonstrated a compelling risk to its business model. So…thanks a lot man :stuck_out_tongue: (…I DO mean: thank you!)

A similar (…not identical) problem hit $STNE hard a while back (…Warren Buffett exited $STNE recently), and it strikes me scrutinizing $MELI’s numbers for the same pattern might be a useful exercise (…since I’m also invested in $MELI).

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Democratizing high-interest rate finance options to make them available to a larger number of people isn’t necessarily an improvement. I’m all for people having access to banking, but it’s slippery. Crude example: Maybe giving people the ability to buy a house with a 10% interest rate can improve their life. But what if the interest rate is 20%? 30%? And a credit card with a 50% rate does more harm than good as far as I can see.

I disagree, but we don’t even need to bring ethics into this! If NU is issuing debt at rates people won’t be able to pay back, that’s not just bad for their customers – it’s bad for NU! But listen, I don’t think their management is either stupid or evil. They’re not twirling their mustaches figuring out how to ruin their customers. They’re trying to make money. I’m just saying it might be a slippery slope with high interest rates. @Aphalite explains it far better than I could.

Fantastic summary. Chef’s kiss. Aphalite also points out that nearly a third of revenue is tied to unsecured CC loans. They don’t even do mortgages as far as I know. It seems they’re less Wells Fargo / JP Morgan and closer to something like Silicon Valley Bank – doing a riskier type of lending to borrowers with higher risk of default.

It’s really kind of you to say that. I think if I have a secret weapon it’s just curiosity. I don’t just want people’s opinion about what are good stocks to buy. I want to know why. I can ask why like a 3 year old. Why? Why? Why? Why does a business work? Why is it going to get bigger or more profitable? Etc etc etc.

I do agree anyone who holds NU needs to have answers to a lot of tough questions. That’s why I just avoid banks. It would have taken me forever to even ask the right questions to see what Aphalite saw. And as he/she says, that’s merely one small part of the story.

In summary, banks = yikes.

Bear

Tons. Thank you so much!

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I don’t own MELI either, missed that boat, but my impression (and a quick scan of the 10-K) is that MELI doesn’t have the blow up risk that NU does.

For one, the vast majority of its revenues is tied to platforms and services. If you go to note 9 - segments, MELI discloses its revenue lines - Commerce services, Commerce products sales, Fintech services, Credit revenues, and Fintech product sales. Credit revenues (which includes loans as well as credit cards) in 2023 was 17.5% of total, where for NU interest revenue is 80% of total revenues. So MELI is far more diversified

Secondly, suppose the entirety of MELI’s unsecured credit card assets blows up, unrealistic it’d be anywhere close to 100% but just a thought exercise - at year end that balance is 3.6b. Profit was 1.6b. So MELI would have one bad year, but would be able to “pay” all of that back within 2 years. Compare that to NU, where the balance is 12.4b and profit was 1b. NU would be finished. And that’s before considering point one, MELI would have a small hit to its revenues (probably around 8-9% since the 17.5% includes merchant loans as well, presumably secured by inventory), but NU would have a third of its revenue wiped out as well.

Now this is just worst case scenario, and isn’t to say that NU the stock won’t do incredibly well in some cases. If they continue to expand their customer base, and there are no economic shocks in the near future affecting credit card repayments, they could double their credit loan balances, get to charge 400% APR or whatever it is they’re charging, and continue to grow revenue 50%+ for a few years. Maybe you get to harvest those gains and make out fantastically. Such is the double edged sword of the credit business. It will look great until it doesn’t.

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With the two key risks, inflation and no credit history for many borrowers, it’s understandable to have interest rates very high. Inflation in Brazil was 9.8% in 2021, 8.3% in 2022, and has dropped to 4.6% in 2023. As the credit and inflation risk for consumers wanes, I think the interest rates will drift down as well. I don’t think we are in a Payday loans scenario. I think we are observing the natural maturation of a credit market that currently doesn’t have tools, that I am aware of, like the FICO score.

If this isn’t the case, and we actually are in a Payday loans type of abusive situation, then, yeah, I’d be out too.

Best,

bulwnkl

Long Nu 14.5%

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I too remember Signature Bank as well as First Internet Bank, and I recall a tiny local bank in Indiana (I think) that presented liquidity issues.

I held a position NU, but sold it not long after I bought it. Partly due to being reminded of my past experience with bank stocks. What I remembered most was that I didn’t (and still don’t) really understand banking. At a high level I get it, basically banks rent money. But when it comes to analyzing the business of a bank, it’s unlike most any other company we follow. There are a number of key statistics that I don’t fully understand - for that matter, I don’t even recall specifically what they are. So there’s that. Obviously, banking can be a very good business. It’s not that I think it’s a bad business, it’s just that I don’t really understand it.

And it’s a Latam business. Again, that doesn’t automatically make it a bad business. But the political and economic landscape of a Latam based company makes me uncomfortable. Maybe that shouldn’t be a deterrent as the same might be said of a US company, but size matters. I’m a lot less concerned about the environmentals for a US or an Euro business than I am about a Latam business. We don’t usually discuss macro on this board, but it’s foolish (IMO) to completely ignore it. I admit, I finally took a small position in MELI after watching it for about a year.

Anyway, I didn’t study NU in much depth. I decided that for me, it being a bank in Latam was enough to keep me out of the company. I wish the best for those who have a position. But IMO there’s other companies for which I have more understanding and therefore more comfort.

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Really good thread here. I’ll add my thoughts.

I think NU’s management is world class so I may be a bit biased.

Alphalite did a great job breaking down the numbers. Credit card write-offs have been increasing but my understanding is that NU is really testing their models in the relatively new geography of Mexico. This is the next growth engine so they test their credit models extensively and take slightly higher losses and then those decrease over time.

Loss allowances are fairly subjective so it’s incredibly important to keep an eye on NPLs (non-performing loans) and those seem to be evening out over the past couple of quarters.

If you think extending credit is bad, then I would say definitely don’t invest in this company but my personal belief is that it’s a little more nuanced. When NU extends installment credit to consumers, it is very high APR but often small dollar amounts. The average purchase volume per active customer is around $115/month. That money is going into other businesses, which have employees, which spend money, and circulate into the economy. The question then becomes, how high is too high and people’s preferences might vary.

NU has to charge enough to make money to compensate for the risk. When the risk is high, rates are high. So on one hand, NU needs rates high enough where they don’t go bankrupt but that turns people off because the rates are too high. It’s very subjective so that’s where I think trusting management is very important. Below is a chart that speaks to NU’s superior underwriting vs. competitors. They have built up nearly 100 million profiles across their customers and are constantly refining the rates they give customers based on payment behavior.

The differentiator vs. something like Upstart or Affirm is that NU is the primary bank account relationship for most of their clients. They see how much they get paid regularly, they see their savings account balances, and they get granular data on their financial behavior. This enables much better data for superior underwriting.

But the thing that really sold me on NU was the journey of the company. Founded in 2013, Brazilian GDP is down more than 22% during that time. That might be scary for most people but NU has thrived despite the terrible economic environment. Imagine if Brazil miraculously turns things around over the next decade.

A couple of banks in the US have crumbled with rates reaching 5%. NU has dealt with far more treacherous conditions. And now they are firmly profitable with capital ratios that are 3x the necessary amount.

If you don’t invest in banks, I totally get that. But NU is not a normal bank. They are arguably one of the best run banks I’ve ever seen. And sure, there is always the chance that I’m completely wrong and there are financial risks I’m naively unaware of. If credit card write-offs continue to increase while loss allowances continue to decrease as a % of interest income, that will worry me. However, as the company ramps up Mexico and Colombia that is to be expected. As NU continues to get more granular data on its customers, loss ratios should decrease over time. If that doesn’t happen, I’ll clearly be wrong.

In the meantime, if you don’t understand banking or think lending is net negative for society, I would advise to move on. However, in my opinion, this is a special company with really strong underwriting DNA and efficiency ratios that incumbents simply can’t compete with.

Best,
Fish

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Thank you, @fish13 ! Now I can delete the draft I’ve been working on.

World-class management, indeed!

For those who may never have watched an interview with CEO David Vélez, this Goldman Sachs interview from a month ago (20 min) spends some time at the beginning talking about the macro in Brazil and making your exact point on how they have managed to succeed despite it all.

The stories in the WaPo article are heartbreaking, but my first thought was that I have met many versions of each of those women here in the US, and the systemic problems here (as there) are why both governments are trying to deal with it.

It was also notable to me that, of the three examples in the article, all were women, two of them were teachers, one was a single mom who got in trouble when the father of the child stopped paying, one was fully employed and her employer ran out of money and stopped paying her, and one got ripped off by a friend who went on a spree with her card.

Before those events, all were making payments, despite the high rate (which the article says is more like 190%), and it was the missed payments that spikes the rate to over 400%.

Most borrowers here don’t pay such high rates. It’s when they miss a payment that they get charged the astronomical APRs. By law, a lender cannot charge those rates for more than 30 days before offering borrowers the opportunity to parcel out payments. But the average rate in such cases is still more than 190 percent, according to the Central Bank.

Yes, all those rates are still incredibly high, but the macro is also way out of whack. Brazil obviously needs a Consumer Finance Protection Bureau, like we have; a program to forgive educational debt, as our government is trying to do; and more social support for single moms.

Bottom line, I don’t see that $NU is contributing to the problem. $NU was helping Ms. Chaves to get her education until her employer hit the bad macro and stopped paying her. And, again, I’ve met women in every one of those circumstances right here in the US in every state I’ve lived in (which is 8).

It’s totally possible I’m wrong. But if David Vélez turns out to be an unethical CEO who is gouging his customers–or even turning a blind eye, it will be my most catastrophic failure of judgment of a person ever.

That doesn’t mean failure of the company is impossible. He’s said that in interviews. I forget which one, but he responded to the question of the biggest mistake he saw CEO’s making, he said something like, “Thinking they have arrived.”

JabbokRiver
Long $NU 20.36%

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Nu Bank advertises interest rates of 8.6% per month. Which is quite the incentive to pay it off each month per the link below.

For comparison, the Chase Freedom Visa credit card charges 20.5% to US card holders.

I have to believe at those rates, most card holders would be paying off the card each month.

Best,
bulwnkl

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I wanted to understand this better, and I did some digging – thanks to @fish13 for his help! I will caveat that I still feel like I’m drinking from the fire hose and have more questions than answers with this company, but this slide was pretty helpful:

(This is Brazil only, but since Brazil is most of their business so far, it can be roughly extrapolated to the whole $18.2b credit portfolio.) You can see that their revolving balance (traditional CC balances that are overdue and on which interest is being charged, if I’m understanding it correctly) has hovered around 7% and is actually down to 6% of the portfolio. I see that as a good thing. What’s ballooning is the Installment balance that @fish13 mentions above. My understanding is that this is basically “buy now pay later.” In general I’ve been very against this from a philosophical perspective as I don’t think it’s a good thing to encourage people to buy things they don’t (yet) have the money for. But if it truly is in lieu of increasing revolving CC balances, I’m open minded that maybe it is a viable solution. Certainly it’s better to pay off installments in a short period of time than to keep a balance without an end in sight. IMO, better yet would be to save up and pay for things after you have the money, but that’s easy for me to say, and obviously I don’t have all the answers to how credit “should” look, and this is something I want to learn more about.

In general I think this company is fascinating, and I want to learn more about banking and credit and risk and all of it. I’ve taken a ~1% position. I encourage everyone (especially those with much larger allocations) to ask and seek answers to all the questions that there are to ask about a business this complicated. I’ll be doing so along with you.

Thanks for the lessons in this thread. Esp @Aphalite and @fish13.

Bear

PS

Agreed, my friend.

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BNPL in LATAM has an interesting history.

BNPL has actually been a routine part of Merchants’ business model in LATAM for decades if I understand correctly.

The base scenario is simple: Customer doesn’t have all the money right now, so Customer makes an initial payment, and Customer makes up the balance during the following weeks or months via installment payments. This model predates credit cards.

The outstanding Customers’ balance owed to a Merchant then becomes an asset that can be borrowed against, and Merchants routinely do so, because they have constant cash-flow challenges, in large part due to the necessity of using their own cash to fund BNPL.

In the oligopoly-bank model, the ONLY opportunity the Merchant has to borrow against its Customers’ balance is the relevant oligopoly-bank; naturally, the deal the Merchant got was reliably horrible.

Later on, credit cards came along, but the BNPL model persisted, especially for the large percentage of Customers who didn’t have a credit card or even a bank account.

As described in my previous posts, regulations were introduced that have loosened the oligopoly-banks’ stranglehold such that companies like $STNE, $PAGS, $NU and $MELI can compete for the business of lending against outstanding BNPL balances.

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That’s the credit market in Brazil, though. There is no positive credit scoring agencies. Only a negative one, which one enters if they don’t pay a debt on time. It could be because of $100 or $100,000, a potential lender doesn’t know. It’s risky and rudimentary and no one really wants to change it, because it allows them to charge this cartoonish rates.

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If we replace LATAM with US do we have Upstart?
They are different, but assuming the big oligopolies will not evolve and fight back seems naive to me.

I am Brazilian, btw, living in the US. I encourage you to try your best to leave some pre-conceived ideas at the side (like every business segment is disjointed and fragile to takeovers). Walmart failed in Brazil. Citibank failed, too. The list goes on.
The banking system in Brazil is one of the most advanced in the world. Essentially, any new thing you see in consumer banking in the US has started in Brazil 10+ years ago. The fact the banking system is so advanced and the fact that the credit industry is so incredibly messed up and rudimentary at a first look, gives me the conclusion that is by design, not accident. Which makes me so worried to statements like “A lending disruptor will destroy the big banks in Brazil”.
Lastly, I am considering investing in NU, but after Upstart, I am VERY cautious of any “new and revolutionary” credit platform.

Rod

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