Latin America’s Digital Shift

There are two primary obstacles to growth for Latin America’s multitude of SMEs, particularly small businesses. The first is a continued reliance on cash-only transactions. The other, which reinforces an inability to modernize, is the difficulty of accessing the credit to do so. Banks see little reward in lending to small businesses and typically leave them to fend for themselves. Because SMEs account for a whopping 99% of all enterprises in the region, these twin forces stymie economic activity. COVID-19 has exacerbated the problem, and now many small businesses face an existential threat.

MercadoLibre is an entirely different story. Its market value has doubled to $50 billion during the pandemic – in part because it has provided the online sales and payments mechanisms small businesses need to stay afloat. While not yet profitable, it is a regional technology star. And with smaller firms comprising about 80% of the users on its platform, MercadoLibre is also part of a wave of digital disruption that could bring smaller Latin American firms into the digital age, according to The Economist.

MercadoLibre is a kind of amalgam of the world’s online giants. Like Amazon, it has been willing to forego short-term profit for the sake of rapid growth. It is also building its own logistics network. But MercadoLibre’s approach to ecommerce is more akin to online marketplaces such as eBay and Alibaba. It rarely sells directly, instead earning transaction fees from buyers and sellers on its platform. In fintech, the Latin American firm follows the lead of Alibaba’s payments system, Alipay.

Investors are especially keen to see MercadoLibre replicate the success of Alipay in Latin America. More broadly, they are banking on the region’s digitization, with wide adoption of both ecommerce and fintech. Despite the shift smaller firms have made to ecommerce this year, Latin America has had a slow start. In 2019 online sales accounted for less than 5% of retail sales in the region. MercadoLibre CFO Pedro Arnt is quick to point out that the move online has been “fast-forwarded” in the past few months. The hope is that shoppers will make it a habit.

There could be even more potential in payments. Prior to the pandemic, MercadoLibre was encouraging offline merchants to accept mobile payments via QR codes. This could pick up once businesses reopen. Marvin Fong of BTIG, a broker, says fintech platforms in Latin America could benefit from central banks’ promotion of QR-style digital payments.

Of course, MercadoLibre faces competitive threats, not the least of which from Amazon, particularly in Mexico. There is also the possibility of COVID-19 driving big physical retailers to build online networks. In payments, competition could come from regional fintech startups or from WhatsApp.

MercadoLibre also has some advantages, such as brand recognition from its ecommerce success. This has helped it sustain its payments business. Increasingly SMEs are turning to the firm for credit as well. This helps build loyalty. And importantly, MercadoLibre is native to Latin America, and has invaluable knowledge and understanding of both the commonalities and difference of the countries within it. This helps it to attract not only customers, but also the best local talent.