Mar 6, 2020

How MercadoLibre is Revolutionizing SME Lending with Alternative Data and Machine Learning, Airbnb Agrees to Pay Taxes in Colombia, NuBank Launches Nu Card in Mexico, and More from Latin America

By dataPlor • Issue #60 • View online

Other featured stories include: Latin America’s Crypto-Driven Cybercrime Underbelly, China Readies Deal With Colombia: The United States’ Closest Latin American Ally, Colombia-based Fintech Puntored to Invest $6M into Expanding Network of Payment Channels, Elavon to Sell Mexico Operations to Santander in $86M Deal, and Women in STEM in Latin America

By: Emmy Berger

How MercadoLibre is Revolutionizing SME Lending with Alternative Data and Machine Learning

Using alternative data and machine learning, Argentina-based MercadoLibre has gained a competitive advantage in identifying both high-risk borrowers and companies that otherwise would not qualify for credit.

Using data from more than 81,000 sellers in Argentina, MercadoLibre’s internal credit ratings varied significantly from those of traditional credit bureau ratings, based on research from the International Bank of Settlements (IBS).

As illustrated in the chart below, the IBS graphed MercadoLibre’s loans based both on credit bureau ratings and on MercadoLibre’s A-E rating scale.

Graph Courtesy of International Bank of Settlements (IBS)

As demonstrated by the blue line, the average loss rate on loans that credit bureaus would have categorized as “High-risk” was 2.8%. According to the IBS, this average loss rate is “similar to the premium [small or medium enterprise] SME segment at traditional banks” (Ark Disrupt).

Using alternative data, MercadoLibre identified companies at low risk of default that traditional credit bureaus would have rated negative. According to the IBS, “High-risk” borrowers make up 30% of MercadoLibre’s credit portfolio.

As reported by Ark Disrupt,

“MercadoLibre identified high-risk borrowers whom the credit bureau classified incorrectly as ‘Low-risk’ or ‘Medium-risk’, as shown by the outliers in category ‘E’ within the bureau’s ‘Low-risk’ and ‘Medium-risk’ ratings.”

Airbnb Agrees to Pay Taxes in Colombia

Last Wednesday, Airbnb announced that it has come to an agreement with Colombian authorities to pay taxes and keep operating legally in the country. The San Francisco-based company has agreed to pay the value-added tax, which implies that Airbnb will be registered under the country’s fiscal regime.

Prior to being elected, President Iván Duque promised Colombia’s hospitality industry that hosting platforms like Airbnb would need to pay their fiscal dues.

As reported by Contxto, Airbnb’s cooperation is a crucial step to stay in the Colombian government’s good graces. But for Colombian hoteliers and other groups, namely Colombia’s Association of Hotels and Tourism (Cotelco), this is not enough.

According to Cotelco, Colombia’s hospitality industry lost around $24 million within the last three years because of Airbnb and other players who informally take in travelers. The organization requests that Airbnb be more wary of the users who register a property on its platform. More specifically, they urge that they should be logged into the National Registry of Tourism, just as hotels are.

Cotelco argues that these efforts will help reduce child exploitation. The National Registry of Tourism requires hotels to report to information to the government about who is staying there, and also ensures minors are accompanied by a parent or legal guardian.

NuBank Launches Nu Card in Mexico

Brazilian digital bank Nubank is launching its Nu credit card in Mexico: where the unbanked population accounts for upwards of 36 million people.

Valued at $10 billion, Nubank has raised $820 million across seven rounds of investment. The São Paulo-based fintech company has accumulated nearly 22 million customers in Brazil alone.

The company’s Nu credit card is now available to all Mexicans over the age of 18. Prior to launch of the Nu card, Nubank had already amassed a waiting list of 30,000 eager Mexican customers.

According to LABS,

“The strategy of running this waiting list for credit cards’ requests allowed the company to control the growth of its customer base in the country”

Now that the card has been officially launched, consumers can apply for the card in minutes.

“The wait is over: today everyone can apply for the Nu credit card in a matter of minutes and from the palm of their hand,” Nubank published on Tuesday, March 3 in a blogpost.

Photo Courtesy of Tech Crunch

Half of Mexico’s population is under 24 years old and is digitally engaged, but due to the country’s banking oligopolies, only 10% of Mexican adults have credit cards.

As reported by Tech Crunch,

“Nubank believes that Mexicans are ready to take back control of their money with financial services that are transparent, human and simple. A predominately cash-based society and lack of digital savings and lending products makes it harder for people to achieve financial freedom in Mexico. The company hopes its no-annual-fee credit card will help to free Mexicans from the complexity and bureaucracy beleaguering their banking experience.”

Nubank’s CEO David Vélez predicts that Nubank’s biggest customer acquisition channel in Mexico will be word of mouth, as was the case in Brazil. 80% of Nubank’s Brazilian customers were sourced from unpaid referrals, and the company has spent $0 on customer acquisition, Vélez says (Tech Crunch).

Vélez doesn’t think that Nubank’s entry will eradicate the existing Mexican neobanks, but instead believes that banking in Mexico is so defective that startups offering niche services can thrive in this environment.

European digital banks N26 and Revolut have also reportedly been eyeing the Mexican market. Albo, a Mexico-based neobank recently raised a $19 million Series A. While competition is great for customers, a saturated market could potentially raise customer acquisition costs, and make recruitment and growth-stage fundraising harder for fintech players.

Pattern Matching with China

When asked what Nubank was hoping to gain from taking strategic cash from Tencent, Vélez responded “I went to China and I saw the future” (Tech Crunch).

Investors say that due to pattern matching, in Latin America, Asian capital is smarter capital. Globally, Southeast Asia and Latin America have similar population sizes (roughly 640 million), and 18 of the 25 biggest cities in the world are located in either Southeast Asia or Latin America. These congruent geographic patterns and similar population volumes mean that technology solutions- such as digital banking- achieved by startups in China could also function in Latin America.

“It’s been very helpful to be able to go to China and see what our market might look like five years from now,” said Vélez.

Both Mexico and Brazil are on the brink of entering the QR-code payments world, Vélez noted. While governments are pushing regulations on this technology, Nubank said working with Tencent has helped them understand customer satisfaction better, and how to more strategically position their company as the payments leader in its home market.

IPO Plans?

Nubank says that although its credit card product has been profitable since 2017, the company itself is not. According to Tech Crunch, Nubank is leveraging its $820 million in venture capital to invest in scaling its operations and strengthening its technology.

In response to when Nubank will IPO, Vélez says he wants to keep the company private for as long as possible.

Vélez told Tech Crunch that Nubank is lucky to have investors who are long-term oriented, and that going public hasn’t been brought up at a board meeting. He did note that a direct listing is a “real option.” Vélez imagines that when the time is right for an IPO, Nubank would likely go public on an American exchange, a local exchange, or potentially both.

Nubank has more than 2,500 employees from over 30 different nationalities. The company says it is the sixth-largest bank in Brazil and today, Nubank is the largest independent digital bank in the world.

Latin America’s Crypto-Driven Cybercrime Underbelly

In a recent report titled “The Dark Side of Latin America,” IntSights, a platform that monitors cyberthreats, said Latin America is one of the top regions for money laundering. The report adds that this laundering is done in part through cryptocurrency, and such tactics are favored by organized crime.

As reported by Pymnts, this is due to a confluence of “sophisticated hackers” and “extensive schemes targeting banks,” in addition to unregulated (and even illegal) exchanges.

The report added that regulations are “extremely lax”, especially when it comes to Know Your Customer (KYC) and anti-money laundering (AML) efforts.

“Researchers estimate that after cryptocurrencies have been cleaned on exchanges, 97 percent end up in countries that have extremely lax KYC/AML regulations, with Latin American economies topping the charts. Economic struggles, political corruption, internet censorship, and the rise of organized crime in Latin America all contribute to the growth of cybercrime,” the report said.

According to IntSights, there were 453.7 million internet users in Latin America, accounting for 69% of the total population. Digitization of the population expands the potential for threats, especially as retail eCommerce has reached $50 billion.

“As with any new financial endeavor, criminals are taking advantage of unregulated exchanges that do not require registration information and proof of identification for tracking purposes. These illegal exchanges are appealing to criminal groups that are looking to move large amounts of money through untracked channels,” the report noted.

China Readies Deal With Colombia: The United States’ Closest Latin American Ally

China is preparing to sign a deal to strengthen its ties with Colombia as its companies pour billions into rail projects, mines, and other investments in the Latin American nation.

According to Lan Hu, China’s Ambassador to Bogotá, the governments are finalizing an agreement that would include elements of China’s enormous infrastructure program known as the Belt and Road Initiative. The deal would also include agreements on politics, economics, culture, science and technology and sports, Lan said.

According to Bloomberg,

“China has invested heavily in Colombia’s neighbors, including Venezuela and Ecuador, and is now the biggest trading partner of several Latin American nations. Until recently, its ties with Colombia, the closest U.S. ally in the region, weren’t as strong.”

However, the relationship between the two countries is changing fast. Since last year, Chinese companies have committed billions to Colombia, securing bids to build Bogota’s first metro line and a regional rail line, and also acquiring a gold mine.

“Even though we now have more than 40 years of diplomatic relations, until five years ago we didn’t have much in the way of commercial relations. The situation has changed a lot,” Lan said.

Chinese telecommunications companies, including Huawei Technologies Co. and ZTE Corp., are also prepared to build out Colombia’s 5G network, Lan added.

“The question over who will build the next-generation wireless networks has raised red flags in Washington, where officials have warned countries about turning over control of communications networks to Chinese firms,” Bloomberg reports.

Colombia-based Fintech Puntored to Invest $6M into Expanding Network of Payment Channels

Colombia-based Fintech Puntored recently confirmed that it plans to invest around COP $20 billion ($6 million USD) into expanding and strengthening its existing network of 75,000 payment points. Puntored’s financial services make it easier for millions of users to perform banking transactions such as electronic deposits or sending and receiving payments.

As reported by Crowd Fund Insider, Puntored has received funding from impact investor Adobe Capital, a Mexico City-headquartered fund that focuses on making socially-conscious investments across Latin America.

Paula Giraldo, an investment specialist at Adobe, acknowledged that the fintech sector has not yet attracted substantial investments from impact funds.

According to Giraldo, Adobe noticed that while venture capital firms had heavily invested in fintech initiatives, there was still a lot of work that needed to be done. The right funding model could significantly improve and enable greater social inclusion, and promote economic development of entire communities, she said.

Poorly designed or antiquated financial infrastructure and costly electronic payment methods have forced many Latin American residents to be dependent on cash transactions. For those who’ve managed to open a bank account, a lack of physical ATM location inhibits them from performing typical day-to-day transactions.

According to Crowd Fund Insider,

“Puntored aims to transform brick-and-mortar shops and various other retail outlets into payment points, which can process transactions more efficiently for individuals and businesses. The Fintech firm says its business operations are on track to grow by 51% this year. The company plans to add 40,000 new payment points to its network.”

Colombian newspaper La República estimates that Puntored will process $9 billion in payments this year.

Elavon to Sell Mexico Operations to Santander in $86M Deal

Merchant payment services company Elavon has signed a purchase agreement to sell its Mexico operations to Santander. The Atlanta-based company is a subsidiary of Minneapolis-based U.S. Bancorp (NYSE: USB).

Madrid-based Santander Group said it would acquire all shares in Elavon Mexico for approximately $86 million (MXN 1,600 million). The company will be 49% owned by Santander Mexico and 51% by Santander Merchant Platform Systems, which belongs to Santander Group, the company said.

According to Elavon, the transaction is expected to close in the next few weeks, as it is subject to regulatory approval. Currently, Elavon Mexico operates in the country through its strategic partnership with Banco Santander Mexico.

“We are always looking at ways to optimize our existing operations to create value and invest for the future. We have been pleased with the performance of our business in Mexico. This agreement is a mutually-beneficial opportunity that will allow Santander to operate the business holistically and allow Elavon to focus investments in higher growth opportunities in other markets in the United States, Canada and Europe. Recently, we announced the acquisition of Sage Pay in our European market, focused on growth in eCommerce product and distribution,” Elavon CEO Jamie Walker said in a statement.

As reported by BizJournals.com, all Elavon team members in Mexico, as well as operations and customer relationships, will transition to Santander in the deal.

“The acquisition of Elavon México is an important step in the creation of a global merchant services business, which will provide added value to our customers. It will also enable us to unlock value in our Getnet merchant acquiring business and gradually extend our strengths to all our markets and customers through a single platform, open to third-party services. Mexico is the first of our markets to connect to the new platform, with the rest to follow in the near future,” Javier San Félix, head of Santander Global Payments Services at Santander Group stated.

Elavon provides end-to-end payment processing products and services to more than 1.3 million customers in the United States, Europe, Canada, Mexico, and Puerto Rico. The company says it is a leading payment services provider to airlines and a top five provider in the hospitality, health care, retail and public sector/education industries.

In November 2019, Elavon announced it would acquire United Kingdom-based payments processor Sage Pay for $300 million. The acquisition extends its market share in the U.K. and Ireland, particularly for small and medium-sized enterprises. In 2016, the company sold its unprofitable Brazil card processing partnership, Elavon do Brasil, to CitiBank.

Podcast: Women in STEM in Latin America

Women in STEM in Latin America - LatinAmericaReports | Podcast on Spotify

Listen to this episode from Latin America Reports: The Podcast on Spotify. Marcela Torres is the former CEO of Hola Code, a Mexican social enterprise that provides software development training for refugees and migrants who have returned to Mexico after having lived in the U.S. She was recently named winner of the ‘Entrepreneur’ category in the list of Latin America’s top innovators under the age of 35 published by MIT Technology Review. In honour of the International Day of Women and Girls in Science earlier this month, we interviewed Torres about being a female CEO of a tech company in Latin America, a region lacking support and funding for women working in STEM.

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By dataPlor

A collection of the week's best articles about doing business in Latin America

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