Since Latin America’s debt-ridden 1980s, many aspects of business in the region have changed for the better. Other areas, however, have not. The first is the plethora of small businesses, from family-run corner shops and ice-cream parlours to hardware stores, that by and large are as run-down as they were back then, which stubbornly enforce cash-only payments (even if cashiers still struggle to work out how much change you are due). The second occurrence is visiting a bank, which seems just as antiquated.
The two traits reinforce each other. Small businesses fail to modernise because they struggle to tap credit. Oligopolistic banks feel vindicated in not caring about firms stuck in the past.
According to The Economist
, the resulting lack of dynamism among the small and medium-sized firms that account for more than 99% of enterprises in Latin America is a brake on economic activity. With COVID-19 still wracking the region, the vulnerability has become worse. Total or partial lockdowns as well as fear of contagion and a deep recession have put many of the region’s smaller businesses in mortal danger.
Not all, though. Enter MercadoLibre, the pan-Latin American e-commerce and fintech firm, whose market value has doubled to $50 billion during the pandemic as it has provided online sales and payments lifelines to such vulnerable companies. Since it was founded in 1999 by, among others, Marcos Galperin, an MBA graduate from Stanford University, it has become the region’s biggest tech darling, although in 2020 revenues are projected to be just $3.2 billion and it will lose money for a third year running. Profit, though, is for the future. MercadoLibre is part of a wave of digital disruption that may propel smaller firms—which make up about 80% of those using its platforms—into the modern era.
MercadoLibre, which means “free market” in Spanish, has been compared to eBay, the American online marketplace that was an early investor, although it is now worth more than its American mentor. The company shares some characteristics with Amazon (with which it competes, especially in Mexico).
Like Amazon in its early days, it is prepared to forsake short-term profit for rapid growth. It has also been developing a logistics network. But unlike Amazon, it rarely trades on its own behalf; its e-commerce business earns a fee from transactions between buyers and sellers on its platform. In that way it resembles Alibaba, owner of China’s online emporiums. Its fintech arm, Mercado Pago, is loosely modelled on Alipay, Alibaba’s payments system. Plans announced on July 20th by Alipay’s owner, Ant Group, to issue shares that could value it at $200 billion have MercadoLibre’s investors salivating over the prospect of a Latin American equivalent.
What attracts those investors most is the promise of a digital revolution in Latin America. It has been slow to get going. Last year less than 5% of retail sales in the region took place online, compared with 12% in America and 20% in China. Half of all Latin Americans lack a bank account.
Fear of credit-card fraud has held back e-commerce, as have logistical nightmares in Brazil, where MercadoLibre generates more than half its revenues. Yet in a mixture of luck and good timing, the firm had invested in logistics just as e-commerce penetration surged into double digits amid the pandemic. Pedro Arnt, its Finance Chief, says Latin America’s move online has been “fast-forwarded” by three to five years in the past few months. That is true everywhere. But if first-time online shoppers in Latin America make it a habit, MercadoLibre has plenty to gain.
According to Barclays, the value of merchandise traded on MercadoLibre averaged $30 per Latin American last year. The equivalent figure for Amazon in its core markets of America, Europe and Japan was $405.
The potential for payments may be even greater, though this business has had a bumpier ride in the pandemic. Beforehand, MercadoLibre was busily trying to bring offline merchants into its orbit by encouraging them to accept mobile payments via QR codes at bricks-and-mortar outlets. With the closure of restaurants and shops this initiative slowed. But QR adoption as a social-distancing measure may flourish as businesses reopen. Marvin Fong, a brokee with BTIG, says a push by Latin American central banks to promote QR-style digital payments could galvanise fintech platforms in Latin America, such as Mercado Pago.