Tencent (NASDAQOTH:TCEHY) recently invested $180 million in Nubank, a Brazilian fintech start-up, in a deal that values the company at around $4 billion. Let's take a closer look at what Nubank does, and how it could help the Chinese tech giant reach new markets.

What does Nubank do?

Nubank offers a virtual credit card from Mastercard (NYSE:MA) to five million active customers. Its mobile app lets users track real-time transactions, contact customer support, apply for higher credit limits, and perform other services.

Nubank's Mastercard.

Image source: Nubank.

Nubank doesn't charge annual fees for its credit cards, but customers can accumulate points through its Nubank Rewards program, which costs R$19.00 ($5) per month or R$190.00 ($50) per year. The company charges its customers revolving rates which range from 2.75% to 14% per month, which is in line with the industry average of 9.6%.

Nubank digital banking service, NuConta, hosts free savings accounts for over 1.5 million customers. The platform also offers unlimited peer-to-peer transactions, as well as free transfers to any Brazilian bank account.

Nubank tripled its revenues to R$567 million ($150 million) last year as it more than doubled its client base, but it still posted a net loss of R$117 million ($31 million). Nubank states that it's prioritizing the growth of its client base over profits.

Understanding the Brazilian fintech market

Brazil is often considered the weakest link in the BRICS cohort, due to stagflation, an over-dependence on oil, corruption problems in the government, and high crime rates. However, the country also has a growing number of smartphone users (41% of the population according to Newzoo), and over 70% of Brazilians own credit cards. Brazil's central bank reports that credit and debit cards account for over 30% of the country's private spending.

This makes Brazil a lucrative market for fintechs that want to bridge the gap between banking and mobile devices. Conexão Fintech reports that over 300 fintechs in Brazil could disrupt the country's financial sector over the next decade.

Nubank, which was founded in 2013, has a first mover's advantage and a best in breed reputation in this nascent market. However, the company still faces rising competition from Brazil's two largest banks -- Banco Bradesco (NYSE:BBD) and Banco do Brasil (NASDAQOTH:BDORY) -- which both launched zero-fee credit cards last year. The two banks each serve over 20 million clients.

What's Tencent's angle?

Tencent makes most of its money from its online gaming and social networking platforms. However, Tencent's gaming business, which accounted for 34% of its revenues last quarter, recently hit a brick wall due to the suspension of new video game approvals in China.

But Tencent's "other" businesses, which include its cloud and payment units, still grew revenues by 81% annually to 17.5 billion RMB ($2.54 billion) last quarter and accounted for 24% of its top line. Tencent recently restructured its business units to prioritize the growth of those "other" businesses, along with its expanding streaming media businesses, to offset the slowdown in its video game unit.

A woman makes a payment with her smartphone.

Image source: Getty Images.

During the conference call, Tencent's chief strategy officer James Mitchell stated that the company's cloud revenues doubled annually, and that its payments business (WeChat Pay and TenPay) "sustained strong growth" as its offline commercial payment volumes rose 280% and average daily transaction volumes climbed 40%.

Tencent also stated that its mobile payment monthly active users (MAUs), which are tethered to its WeChat and QQ social ecosystems, hit 800 million at the end of June. That platform, which is the second largest payments platform after Alibaba (NYSE:BABA)-backed Ant Financial's Alipay in China, is integrated into a growing number of brick-and-mortar retailers. Both platforms also offer a wide range of banking and fintech services.

Tencent and Alibaba are also both aggressively expanding into emerging overseas markets in India, Southeast Asia, and Latin America to pivot away from the maturing Chinese market. For example, Tencent and Alibaba are waging a proxy war in Southeast Asia's e-commerce market with their investments in Sea Limited and Lazada, respectively. Alibaba has also been creeping across Latin America with government-backed partnerships in Brazil, Argentina, and Mexico.

A logical way to widen its moat

Tencent's investment in Nubank won't move the needle for the company anytime soon. But it's a logical move that strengthens Tencent's fintech ecosystem, bolsters its investment portfolio, and widens its moat against Alibaba on multiple fronts.

 

Leo Sun owns shares of Tencent Holdings. The Motley Fool owns shares of and recommends Mastercard and Tencent Holdings. The Motley Fool has a disclosure policy.