Em Conversa looks to uncover the secrets in Latin America (LatAm) that have caused the fintech market to boom, from being worth less than $50million in 2016, to $2.1billion in 2022. This week we spoke to Marcelo Haddad, head of product at Neon, to understand how digitisation impacted the region and how fintechs, such as Neon, have been able to capitalise on this.
Neon is a Brazilian fintech founded in 2016 whose mission is to unite technology and design to redesign and simplify people’s financial experience, reduce inequalities, showing simpler and fairer financial paths. With more than 15 million customers, including individuals and companies, Neon recently achieved a valuation of $1.6billion after its series D fundraise, in which the Spanish Bank BBVA invested $300M, achieving unicorn status.
In 2021, Neon grew its revenue by 3x and the expectation is that it will more than double its revenue in 2022. As a company that has massively benefitted from the pandemic’s catalysation of digital adoption across the world, we sat down with Marcelo Haddad, head of product at Neon, to get a greater understanding of how the company has managed to find so much success.
Can you tell me about the company and your role within it?
I’m head of product at Neon and have been here for roughly three years. I was born in Brazil, and lived abroad for 20 years, but then I came back and I’ve been in Brazil ever since. I’m a big fan of the fintech industry here: I think what we’re going through is a transformation that has impacted everyone in society.
As head of product at Neon today, my role has slightly changed with the new organisation that we put in place last month last month. In summary, it’s less business oriented and more product oriented in the sense that I no longer prioritise and make business decisions on the basis of what products should be prioritised. Now, I’m building a stronger team and methodology to make sure that our outlook towards product development is at its best, taking into account best practices and how to have data driven decision making processes, testing methodologies, etc.
That’s me in a nutshell.
What does it take to be a neobank unicorn in LatAm?
I think it’s a combination of various factors. You need people with good vision. In our case, we had Pedro Conrade, Neon’s founder that at 27, had the vision of building a more transparent and fair banking system. This occurred due to the personal experiences he had as a student, being left with extremely large fees for overdrafts and other services that big banks used to, and continue, to offer their customers in Brazil.
Secondly, you need resources and need to be well connected. You need to be able to sell your dream and be able to have strategic partners that are willing to invest in your idea, and are aware of all the risks involved, but also understand the niche angle the company wants to take to approach the market.
And third of all, is differentiation – offering a unique product, and that’s getting tougher and tougher as we speak. When the fintech movement started, all you needed to do was offer free accounts to your users, but as time has gone on, companies have had to set the bar higher and higher to be able to not only acquire clients or convert clients, either from incumbent banks or other competitors, but also try to explain and prove why it’s worth having an account at NEON and and using our products.
Are these factors exclusive to LatAm or are they applicable to other regions too?
That’s a good question. I think people, resources and differentiation could be applied to other industries as well as other regions. Depending on the industry you could have some regulatory constraints, which might require you to have more strategic partnerships. But in the end, I think that any business idea or startup really needs those elements.
How would you say financial inclusion is improving in Brazil and where does Neon fit into this?
Well, financial inclusion I think, that topic can be can be looked at through two different lenses when we think about Neon specifically. We have two products today, one of which is a one-stop-shop for SMEs, and the other is an end-to-end financial services platform for personal use
When we talk about SMEs, Neon is working not only to bring in clients to a more formal and digital setting, but also to educate them. Our one stop shop platform for SMEs has everything from the processes needed, through a handful of clicks, to formalise your company, allowing you not only to issue receipts but also open a bank account with your enterprise’s name, separating your personal finances from your business finances. It also offers several collection mechanisms, such as POS or instant payments, QR code, collection mechanisms as well as credit.
When we think about what we are doing for the working class Brazilian, our service not only provides the structure for them to be able to grow their business but it also educates them. Within that one-stop-shop, we have some tutorials to help our micro-entrepreneurs be able to get a hold of their finances and understand how much they can spend, what they’re earning, etc. This may seem like a simple concept, but Brazil’s working class really lacks this.
For personal accounts, I think we’ve seen a very similar movement. We want to reduce inequalities by offering a service that’s readily available for anyone that has a handheld device that can operate within our platform, without the need to go to a branch or pay monthly fees or anything of that sort. We try as much as possible to tailor our experience to our end user’s needs with the right communication, the right touch points, etc.
We’ve seen that has had an extremely positive effect on our customer base, especially during the pandemic which accelerated the digital movement for two reasons. Firstly, you couldn’t go to branches at that time. And second of all, during the pandemic, the government issued some vouchers that were more readily available for customers that did have a digital account. So we saw a big boom with new open accounts during that period.
What has been the reason for the LatAm fintech boom?
I think there are several factors. The first is the nature of the banking sector in Brazil. I think we’ve always had a very highly concentrated banking industry with a small number of players taking a huge market share, charging, probably world-leading spread rates between students and other customers, so we had some of the most expensive credit products in Brazil. This meant new opportunities came up for other players to get a hold of that market with new pricing strategies. If you think about your typical working-class Brazilian, before the fintech revolution he used to go to a bank, wait in line, open an account, pay monthly fees and sign a bunch of papers probably not knowing exactly how much he would be charged for every product. Whereas today, we have a much more transparent offering, with fairer services and, most of the time, free accounts. On top of this, the process to open an account is much easier, especially without the need of going to a branch and having to wait for ages.
The second reason I would say is the pandemic. As I mentioned, during that time, I think many processes were accelerated. It was harder to redeem the vouchers that were distributed, so those that had a digital account were favoured because the vouchers gave immediate liquidity. Whereas if you would rely upon the government bank that issued these vouchers, they would give you a grace period, asking what you wanted to do with the money. To be clear, the voucher was about $150 a month, and you weren’t able to withdraw that immediately. So for the first two weeks, you could only use it to pay accounts or use your debit card, then for the remaining two weeks, you would be allowed to withdraw that in cash. Compare this to if you were using a digital account: you would have withdrawn the money on the first day, so that gave digital account holders an advantage and accelerated the process for residents to open digital accounts.
I think the third factor is Pix, Brazil’s instant payments platform that was launched by the central bank a couple of years ago, and has had a phenomenal adoption rate in Brazil. I think there are only two countries that have more transactions per inhabitant than Brazil. It’s had a very, very quick adoption rate, and because of the nature of the transaction being fully digital, it fits well with the fintech revolution in the sense that it ties in with what we want to do. Not only on a personal level but also on an SME one too.
What does NEON’s road map and growth plan look like?
There are certain avenues that we definitely want to explore. One of them is trying to make our customer base consider Neon as their primary bank account. For them to do that, we need to be able to have reasons for them to have their cash in-house. One way we are trying to achieve this is by building products that will incentivise our client base to, for example, start bringing their salaries here every now and then, or for those using the SME platform to have their POS, whether it be Neon or a third party POS – redirect all those resources to our account.
The second avenue is with regards to credit and this is intertwined with my previous point, because the more cash the client brings in, the better we get to know them, and the more accurate other writing processes can be. If you think about the main reason why consumers in Brazil open accounts with any fintech, it is because they want a credit card. If you look at retention rates for clients, there are two separate worlds: one for those account holders with credit and one for those that do not have credit. So, the number one reason why people get in touch with our customer service centres is to ask why wasn’t I approved for your credit card programme, and the number one reason why they leave is because they weren’t approved. We want the approval process to be as transparent as possible and as inclusive as possible. So instead of just saying yes or no, we want to be able to give alternatives and different paths that will eventually lead you to obtain your credit card. We want to implement this in the second half of the year.
Many people asked me whether Neon has the intention of going abroad. I think it’s a natural question because if you look at Nubank, you see that their executive structure is a lot more international than ours, starting with the founder. Despite this, they have tapped into other markets in LatAm: they have this ambition to really consolidate themselves as a key player in the region. I’ve been asked many times whether or not Neon has that intention and I think that we still see large parts of the population in Brazil remain underserved, and I think our mission is primarily today with the Brazilian working class and entrepreneurs and you know, the population in general. I would say that our focus at this moment is still within Brazil, and to make sure that we are part of the fintech revolution here.