Alejandro McCormack, COO and executive director of N1CO discussed with Emmanuel Daniel how N1CO, a digital bank in El Salvador is leading the financial revolution in Central America by digitising payments service.
Alejandro McCormack, a product and business developer with a track record in finance and technology innovation talked about how N1CO was developed, as an offshoot of fintech functionalities of a delivery app, Hugo.
He shared his plans of exploring business opportunities, not only in El Salvador, but also in the region with 40 million customers. El Salvador has recently made bitcoin a legal tender, but service providers need to build first the customer ecosystem. At present, an average Salvadoran would not yet use bitcoin in buying goods.
He sees opportunities in remittance, as almost all the average Salvadoran household receives it. N1CO provides digital payment and lending services to the unbanked sector. It works to achieve a balance sheet-focused company to avoid committing the same mistakes as other digital banks did.
McCormack previously worked in product management of N26, a mobile bank in Germany.
The following keypoints were discussed:
The edited transcript of the interview:
Emmanuel Daniel (ED): Alejandro McCormack, I'm so happy to have this conversation with you. Alejandro, I wanted to have an in-depth discussion with him because he’s had experience working in Europe with N26.
ED: He is now launching a new digital bank here in El Salvador, N1CO and the history of N1CO is that it's an offshoot or a …
Alejandro McCormack (AM): Yes, it's an offshoot and an evolution from certain fintech functionalities that existed within a platform called Hugo. Hugo is the largest delivery application in Central America. They were very successful in taking over that market that was kind of ignored, let's say by the big Uber Eats and Rappis of this world.
They managed to solidify that market share here. They managed to beat out those bigger, better- funded competitors. One of the things they tried setting up was this fintech, Vertical, whereby they were starting to get their bid, the affiliated businesses to accept payments, via payment links, or QR codes and that little business line, it evolved.
Now, Hugo is selling, they've agreed to sell to Delivery Hero, the big German conglomerate for $150 million. As part of that sale, we've managed to carve out all the fintech functionalities, and those are being rebranded and repackaged and evolving into N1CO.
N1CO has the vision of becoming the first neobank, fully Central American neobank, and really tried to push the envelope in terms of gaining some adoption and financial inclusion. I know you don't really like that term.
ED: The only reason I don't like the term is because it's being used by people who want to build platforms. Financial inclusion is just an excuse for onboarding onto platforms and then monetising. But, that's my little argument.
Introduce digital payment service to the unbanked
AM: We ultimately do see there as being a big opportunity. There's less than 40% of people in the region who have a formal bank account. Nevertheless, you have an average of two mobile phones, smartphones per person so, that to us represents a huge opportunity. People are ready for digital payments. People are ready to start and be able to transact online for example, and there is a clear barrier to that if you do not have currently a bank account. We see ourselves as one of the key pieces in trying to solve that problem for the region.
ED: I want to draw from two things. N1CO, the bank that you're building, and your history.
What is your sense of what's been achieved in digital banking in Europe right now? Where they’ve succeeded and where they’ve failed?
Building a balance-sheet focused bank
AM: There are many digital banks, I can't speak for all of them. There are too many now to keep up with, and everybody's opening a digital bank. One of the key failings that I've certainly noticed is that there hasn't necessarily been a focus on balance sheet. They are to a certain extent, growth machines. You have huge growth. A huge focus on growth, like most of the team is focused on that.
ED: On scaling customers.
AM: Getting more customers, so they become in a way, a bit more of a marketing company than necessarily a bank. You hire based on those competencies that you think you need. If you think what you need is to get more customers, then you end up hiring more marketers, when perhaps what you need is to become more profitable with the customers that you do have.
There may be quite a few that are starting to realise that, but I've at least noticed, and this is looking at it from a distance and a lot of cases where they burnt a lot of money to get to the realisation that maybe we need to focus on the elements of banking not only bring value to the end-user, but also bring value to the bank itself.
ED: I share this value with Alejandro. In fact, my book that is going to be published very shortly by October this year. I'm saying exactly that, “finance is about the balance sheet, it's not about the technology.” The technology facilitates the process, but the real story is in the balance sheet so we had synced up on that one and as you mentioned to me previously, like N26, 10 years, and still the same products, the traditional products that traditional banks also have, and so they have not evolved. They've not brought on the so-called disruptive innovation. I mean, that's my sense.
AM: They are a bunch of very talented people, they've done some amazing things, certainly from a design and user experience (UX) perspective.
This goes for most fintechs, unless you're able to solve the problem of credit, whatever the problem in your market may be, and you're not ultimately bringing the value that users need. You're adding bells and whistles to a chequing account.
That's something that I see as a risk even for N1CO. I'm pushing our team to always be thinking of ways. How do we become more of a balance sheet-focused company, and how do we help solve people's problems in this region, specifically, which is “how do I pay for certain essential goods and services in the short term?” Because that's fundamentally what we're trying to do here?
ED: When we first started this conversation, you were talking to me about making N1CO, or bringing onboard Visa and MasterCard. The moment I heard those names, I said, "Why are you taking us back in time?” I come from a part of the world where we could ignore the Visas and the MasterCards, and go into digital wallets. What is the reality on the ground? What is it that you need to build step by step?
AM: Yes, it's a very interesting thought. It'd be amazing to think of a future, or reality and whereby we're leapfrogging and the traditional rails of finance as they exist today. The real problem here is purely one, access and education so for us to bridge that gap, the first step is getting people used to the idea of paying with a QR code, or using their mobile phone, or being able to transact online. These are very basic things which we take a little bit for granted.
Looking at the ancient model, one could say, “Oh, why? Why do we even need a bank in the middle of it?” The logical first step, at least, that's how we feel for ourselves. What's the next step? Maybe it will be amazing to think of cutting out these big intermediaries?
ED: When you say balance sheet, what are your first feeds, in terms of income for your business model?
AM: The first thing that we'd like to do is credit. In terms of small loans for the underserved and the underbanked, there are many ways one could go about that. Ultimately, we will be issuing a digital wallet with a virtual debit card and a physical debit card for our users. The easiest way for us to give them credit initially will be through that debit card that was issued, so we're going to enable an overdraft and then from there evolve as we get to know our consumers better. The quicker we do that, the better our business will be and the more impact that we’ll be having in the market.
ED: Where do people in El Salvador get their credit now? Are there informal credit pockets?
Providing financial products to get rid of loan sharks and informal credit
AM: There's a big informal credit system here. It's quite predatory, though. The average Salvadoran doesn't have many avenues for credit. El Salvador isn't the only market where we're launching. We're launching first in Honduras, to be honest. We will be a pan-Central American company that is active in all the countries here. These are problems that are common to all of them. You have the banks on one side and credit unions perhaps and then you'll have loan sharks, which are quite common.
AM: You have financial products embedded into retail. So you'll have big retailers that offer you to pay in quotas. But the result is your average person paying twice or three times, the cost of the refrigerator, let's say but they're able to do it over two or three years and what we've noticed is that there is an extreme elasticity, in price when it comes to credit here.
People are willing to pay whatever it is to get credit because it allows them to have goods today that they wouldn't otherwise be able to get, so that's where the real opportunity is and that's where we see the growth. Instead of harping on who did it wrong, it's one of the things that maybe a new bank might have honed in on directly well. From the beginning in Brazil, credit was a real trick.
From a user acquisition point of view, it's a fundamentally different psychological challenge to try and convince someone to download your app and then give you their money. That's what you do when you roll out a debit account. Like, “hey, here you have your wallet, fund it now and put some money in.” Whereas, when you roll out with credit, that's a different proposition. I'm offering you, something that you didn't have before, and so that's where I do see a key important thing.
ED: With digital and with disruptive finance, you can deploy credit, very specific to a point of need, like supply chain, white good purchase. Do you have those in plan?
AM: That is certainly on the plan. We have very ambitious plans. In the near-term, though, we've had to work a little bit with what we've got, and what can we deploy to market soon. Because we can't ignore the fact that there's competition. There are plenty of people trying to go after the same niche that we're going after.
Exploring opportunities in remittance
I won't go into too much details on specific solutions, but one of the areas where I do see a lot of opportunities is in remittance, and using remittance as a way to give people access to credit also. You have your average person. Sabra gets about a billion dollars in remittances a year, which represents, anywhere between 35% and 40% of the economy. That's extremely substantial. Almost everyone in El Salvador, the average person has some form of remittance coming in or knows someone in their immediate circle who’s getting remittance. This is a constant flow of money, it's $400, $500, $1,000 a month, that they're getting. If there's a way that we can read into that information, and give them access to a short loan for them to meet their short-term cash flow needs, and make their life easier until their next cash infusion.
ED: I've seen this remittance story evolve in very beautiful ways in countries like the Philippines and Bangladesh, where the remittance is converted into an asset, so it's funding a property?
AM: Absolutely. That's one of the things that we noticed as well by talking to people who send remittances. One of their biggest issues is the lack of control over what the remittance gets spent on. If you create a channel for that to be spent on something that adds value over time for the person receiving their remittance, that's more in line with what the person sending it is looking to achieve. They don't want it to go towards funding drinking and party and they wanted it to go towards funding a house, as you’ve said, or towards funding a car, or productive assets.
El Salvador as a bitcoin country
ED: El Salvador is a bitcoin country, the world's first country to legalise bitcoin as a currency. Why is that not featuring strong enough in your business model?
AM: There are a couple of reasons, but the main thing is that in the day-to-day, it still isn't a big thing on the ground here in El Salvador like you have a lot of business models that have been built from one day to the next. A lot of foreign companies have come in to set up operations here to supply traditional companies like big supermarket chains. They needed to start being able to accept bitcoin, and from one day to the next. That's a big opportunity for service providers that are out there tackling that problem. But for the average person who's going to the supermarket and buying goods, they're not necessarily transacting in bitcoin that's not their go-to. It’s mainly been something that's been again, going back to remittances, that's been the main channel for the big one that flows from the ground up. You have a lot of investment and a lot of interest in El Salvador from the top down, where you see bitcoin coming into the country but from the ground up, it hasn't had these big grounds well, like maybe a lot of bitcoin maximalists would have hoped.
ED: What numbers are we talking about? How many customers do you think you can onboard, relative to the population of the country which is what, six million?
AM: It’s something like six million, but again, we look at the whole Central American markets.
ED: Yours is Central America.
Targeting 400,000 customers in Central America in the next three years
AM: Central American economy, it's about 40 million customers that we can target. Ultimately, we're aiming to have about 400,000 customers in the next three years. Relatively aggressive if you think of them, each one of them has to have a debit card.
AM: If you look at the pool of unbanked people, it's not super aggressive at all. We already have a thousand shops and restaurants already signed up as partners who are receiving payments. We're not just launching on the mission side of cards, but we're also active in the acquiring side, so receiving payments. We will be launching with a couple of huge partners here in the region, and a couple of biggest retail companies here so that will cement kind of a bit of status and give us a bit of what we call, “people will take a bit more seriously”. Its main potential is this big network of smaller businesses that will now be enabled to receive payments.
ED: Well, that's a whole dimension in itself, which is small business banking going digital. It will be interesting to see how you're going to build this. Alejandro, you also come with this experience and expertise in what has happened in Europe. The mistakes that you will avoid when you're building N1CO, and the reality that needs to be built here in Central America.
AM: Everything has to be trapped in a glass a little bit, what can't just be covered, and set up a very nice European or an Asian model. We want to do something that fits the everyday realities of the people here and that's a big part of our focus.
ED: We're going to be watching you.
AM: Yes, looking forward to it. Thank you very much.