Photo: Neon

Brazilian fintech Neon: the trajectory of a digital bank

Neon presents itself as Brazil’s first digital bank. CEO Pedro Conrade was still in his 20’s when he founded it

While digital bank Neon (formally Neon Pagamentos) his most successful venture, it was not Pedro Conrade’s first one. The Brazilian entrepreneur started his first business when he was just 16. The young entrepreneur launched a bikini shop in the seaside town of Guarajuá, in São Paulo. He sold it to keep up with school. Later, he dropped out of school to keep up with his other businesses. To talk about Neon’s trajectory, the best way to start is with an anecdote that Conrade often tells:

Conrade once went into overdraft due to BRL 1.00. Later on, he learned he owed an outstanding fee of BRL 47.00. That is when he began to question banking fees and services and started to think of different ways to offer the same kind of product, but in a manner that could help people take care of their money.

NEWEST UPDATE ABOUT NEON – Brazilian digital bank Neon spins up $300 million Series D round led by BBVA

He thought of simple solutions that most Brazilian banks still oversee, such as push notifications when customers spend money on their cards or when they get a deposit. Itaú, for example, sends an SMS when customers use their cards. But when they want to check their balance, they still have to log in to their account and check it manually.

Neon bank, in its turn, allows users to organize their spending. For this, Conrade sought inspiration in other digital banks such as Simple, in the U.S., N26 in Germany, and Monzo in the UK.

How does it work?

According to Conrade, Neon bank currently offers the most complete digital account alternative in the Brazilian market. It has all the features of a conventional institution, minus the queues and monthly fees.

Neon bank CEO and founder claims that his company’s success lies in the fact that it was created by a client and designed for the clients. The entire team of Neon is focused on creating products and services that meet the needs of their users, providing them with all necessary tools to take complete charge over their finances.

Neon started as a democratic bank, with no segregation of clients. Because their only product was a debit card that worked almost the same as a prepaid one, there were no ‘Black’ or ‘Platinum’ clients. The service is the same for all users. Neon bank marketing worked through organic conversion, a lot of word of mouth. Clients were referring other clients to Neon because they were happy with the service. 

READ ALSO: Brazilian payments fintech Neon receives BRL 400 million investment

Brazil has a large unbanked population, with 30% of the people with ages over 15 moving cash without holding a bank account. Nearly half of this group are millennials, the same people targeted by Neon bank. While they use mobile phones to communicate and are very much present on social media, traditional banking lacks inclusion — especially when it comes to fees.

Neon bank clients have access to unlimited bank transfers plus the option to use PIX, the Brazilian Central Bank’s free instant payment system. The first withdrawal of the month is also free; then, they are charged BRL 5.90. However, the client that makes 10 card transactions per month unlocks the Neon+ feature, giving them 3 extra free withdrawals — totaling 4. This seems to be more than enough for their client base. Most traditional banks also offer one free withdrawal for their clients in their bundles.

In 2018, Neon bank started issuing credit cards for its clients, competing directly with another hugely successful fintech in Latin America, Nubank.

READ ALSO: Brazil’s instant payments system, PIX already accounts for 78% of bank transfers in the country

Is Neon a bank? Neon’s growth trajectory and a bump on the road

Also, in 2018 Neon had one of the best Series A funding rounds in Brazil, raising a total of $22 million backed by San Francisco’s Propel Venture Partners, Brazil’s Monashees, and Washington D.C.’s Quona Capital. And only one day later came a huge bump on the road. An unforeseen move by Brazil’s Central Bank suspended Neon Pagamentos’ operations.

The fintech processed its checking accounts through partner Banco Pottencial (later renamed Banco Neon SA), a small lender that was liquidated due to “grave violations of legal and regulatory norms” and its “compromised financial situation.” At the time, Neon Pagamentos had 600,000 clients.

Like other Brazilian fintechs, Neon was a payment company (Neon Pagamentos) that needed a bank, a financial institution regulated by the Central Bank, to take custody of its clients’ money. Because of Pottencial’s suspension, Neon Pagamentos was forbidden from signing up new customers, and the app was unstable. Some clients went as far as withdrawing all their money from their accounts in fear that they would lose access to all their funds, which obviously caused trouble because of financial commitments linked to the accounts. Neon Pagamentos found a solid enough new partner only three days later: Banco Votorantim, Brazil’s seventh-largest bank.

In that same year, the number of clients in Neon Pejota, the neobank’s modality for businesses clients, more than doubled. The modality targets small businesses and the ones created by micro-entrepreneurs (known by the acronym MEI in Brazil). These entrepreneurs operate under a specific regulation that allows them to pay fewer taxes and enjoy the benefits of growing a business for companies that are below the limit income of BRL 81,000 per year.

READ ALSO: Neon targets Brazilian micro-entrepreneurs by acquiring the startup MEI Fácil

In November 2019 came Neon’s Series B round, a $121 million funding led by fintech-focused General Atlantic and Banco Votorantim, their banking partner since the previous year. Other backers included Quona Capital, Propel Venture Partners, ‘philanthropic investment firm’ Omidyar Network, and Monashees. Neon then acquired a startup called MEI Fácil, a company focused on helping entrepreneurs to reduce the bureaucracy while opening their small businesses and providing tax and payment products.

From March to September 2020, there was an uptick of 26% in users as the pandemic began to unfold. It was when Neon reached the mark of 9,6 million clients. The Series C round of investment happened in the same month, reaching the impressive mark of $300 million. It was led by General Atlantic, joined by existing investors BBVA-backed Propel Venture Partners, Monashees, and Flourish Ventures. The new investors included BlackRock, Vulcan Capital, PayPal Ventures, and Endeavor Catalyst. Neon bank then made its second acquisition, Magliano, the country’s oldest broker. The plan is to go on and create its own investment platform.

Brazil is currently the largest market of fintechs in Latin America. Far beyond unicorns, Brazilian fintechs are benchmarks and inspirations around the world. They are creating disruption and inspiring startups around the world, across different markets such as real estate, health tech, fintech, edtech, and more.

Neon Pagamentos is a story of insight, crisis management, and how to deal with strict government regulations.