“Pain” and “Change” making Tencent expand into Latam?

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Credit where credit’s due — when we asked whether Chinese Fintech could jump-start Latin American digital finance four months ago, DigFin’s Jame DiBasio immediately emailed us asking “What about Nubank in Brazil?” 

On Monday, China’s Tencent revealed they were asking similar questions, paying $180m total to buy 5% of Brazil’s Nubank. The investment — $90m in stock purchases from existing owners and $90m in new money — values the online-only bank at almost $4b, making it the biggest startup in Latin America.

In addition to giving Nubank a capital buffer to allow it to expand its loan book, the deal gives the digital bank to the know-how behind WeChat Pay, one of the world’s largest digital financial services platforms. Additionally, Tencent’s work on machine learning and managing big data will allow Nubank to use the wealth of information it has about borrowers to fine-tune products for its clients — and maximize profits for itself.

The reaction from China was simple: “Who is Nubank?” (腾讯2亿美元入股的巴西Nubank,是何方神圣?) This is Tencent’s second deal in the region after Argentina-based Satellogic, which Tencent led two rounds of investment in starting in 2015. But while Nubank is bigger, it struggles with what many Chinese investors see in Latin American opportunities — it’s limited to one country. Despite being Colombian, Nubank President David Vélez says he has no plans to expand elsewhere in Latin America. Yet in a country where bank loans to the private sector remain well below 50% of GDP, and incumbent bank margins are some of the fattest in the world, there’s plenty of room for Nubank to grow.

Observers in China also note that the acquisition of Nubank is part of Tencent’s efforts to evolve from a company serving companies to one serving people (腾讯入股巴西Nubank,一场2B2C的试炼). As Tencent president Martin Lau says: "Tencent’s mission has also changed: from a good connection service provider to the most personal digital assistant in all industries."

But the biggest benefit for Tencent may be in showing shareholders its doing something about a share price that has dropped 38% this year, erasing $220b in value. Buying into a new country can show that Tencent is diversifying from struggling core verticals. Or, as was put in an interview with Tencent investment management partner Li Zhaohui, the “pain” and “change” of a new market is necessary (腾讯的“痛”与“变”:从重金频投海外科技金融说起).

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