May 16, 2024.

MercadoLibre aims to widen the number of users of its off-line, digital payments as well as ecommerce services, by providing digital technology payment and wider fintech solutions. 

We will review the various segments within Mercado Libre marketplace and Mercado Pago, and describe in more detail how their functions mutually reinforce each other to  strengthen the competitive advantages of the company.  There are 6 main ecommerce and digital finance services:

1. The Mercado Libre (ML) Marketplace.

Wide, non-specialized assortment of goods, includes first party sales as well as small business vendors and large brands.

2. Mercado Libre Classifieds

Users list and purchase motor vehicles, real estate and services, for a Listings placement fee.  Classifieds are a major source of traffic to the platform, benefitting both the commerce and fintech businesses.

3. Mercado Shops online storefronts solution

Users manage and promote their own digital stores, hosted for free by ML .

4. Mercado Ads

Businesses promote their products on the ML and MP platforms.  First party data is available to create and target particularized audiences.

5. Mercado Pago (MP) Fintech Platform

Currently, MP processes and settles 100% of transactions on ML marketplace in its largest markets:  Argentina, Brazil, Mexico, Colombia, Chile, Uruguay, Peru and Ecuador, and virtually all transactions in the remainder.

MercadoLibre ecommerce development was challenged by a significant population of persons and small businesses that were underserved by the payment and financial industry and therefore could not liberally participate in ecommerce.  MP was born in 2003 as a fintech solution enabling users to send and receive payments on ML. It evolved to extend its services as an online digital payment app to third party online ecommerce sites. MP digital payments infrastructure enables other ecommerce sites, via MP branded or white label SDKs.  Thus, MP has played an important role in enabling the development of LATAM ecommerce.  It has also provided a second line of revenue, after the ML marketplace, for Mercado Libre.

MercadoLibre has developed “online-to-offline” (“O2O”) products which enable use of financial services in other than online commerce. 

The engine to extending the competitive advantage of MercadoLibre from its ecommerce platform to the brick and mortar financial services market, lies in incentivizing the use of Mercado Pago payment tools for transactions off the Mercado Libre marketplace. Key to this incentive, is the rapid expansion of ML platform users, who adopted MP in order to pay online at ML.

“Online-to-Offline” payments products include:

1. In store payments via MPOS (mobile point of sale) devices and QR  codes.

Generate revenue by sale of devices. MP acts as the merchant acquirer for debit/credit card shopping transactions, generating fees.  Off-line merchants are incentivized to use the MP MPOS device because in this way they capture the expanding number of customers for whom the Mercado Pago digital account or credit card is top of wallet, or in fact their only non-cash payment device. These customers might previously have been unbanked, and therefore limited to less convenient and less frequent cash purchase.

2. An app based digital account for personal digital payments

3. Debit cards to spend from the MP digital account

4. Credit Card, in Mexico and Brazil.

In 2023 Visa branded Mercado Pago Credit Cards launched with rapid adoption in a collaboration which added VISA tokenization among services which enhance transaction security.

5. Insurance such as warranties

6. Savings and investment products

Interest earning savings products bring unbanked persons into the financial system, and attract them to participate in the MercadoLibre network.

7. Cryptocurrency trading , in Brazil, Mexico and Chile.

Mercado Pago, includes Mercado Credito.

Created in 2016, Mercado Credito offers credit to the Mercado Libre ecosystem consumers and merchants, on the MP app and on the ML marketplace. 

Mercado Credito has competitive advantages in underwriting its credit, one which relies on consistent investments in technology to pervasively digitize and harness the data that arises from users of the Mercado Libre ecosystem.  Mercado Libre collects primary data from thousands of user touchpoints within the ecosystem. Machine learning and artificial intelligence generate a credit score based on user/seller behavior in the ecosystem.  Note that for a number of customers, these interactions may be their only salient activity in the financial system.

By leveraging digital user and seller data from the Mercado Libre ecosystem to determine credit scores in internally developed models, MP can provide credit to users and merchants in an economic landscape in which conventional financial businesses have difficulty identifying good credit risks, given the relatively underbanked status of the persons and businesses.  

Mercado Pago has a competitive advantage in distribution, in that it offers credit seamlessly at the point of online sale, priced according to the proprietary scoring system.

Mercado Credito offers credit to users, sellers, and as credit/debit cards.

Sellers Mercado credit extends credit based on sellers historic amount of sales.  Bear in mind that availability of credit to small businesses in Latin American economies is lower than in more developed economies.  Sellers are thus tied to the platform with switching cost.  Interest and principle can be pulled from seller revenue.

For purchasers, Mercado Credito offers a buy now pay later (BNPL) product which can be used on or off the ML marketplace, or at any payment transaction that involves MP.  At checkout, if the user has a credit line, it will allow them to buy on installment by paying interest. Personal loans can be accessed directly through the MP app with the funds deposited into the user’s account. Credit increases user engagement.

Credit card: Mercado Credito enables digital payments for users on and off ML platform, without a conventional bank account.  Proprietary models running in the Mercado Pago cloud control credit issuance.

6. Mercado Envios logistics services

Currently available in Argentina, Brazil, Mexico, Colombia, Chile, Uruguay, Peru and Ecuador. Enables sellers to utilize third party logistics services while providing fulfillment and warehousing services. These services reduce friction between buyers and sellers, integrate the full user experience. Moreover, sellers access shipping subsidies to offer free/discounted shipping. In 2020 Meli Air fleet of delivery aircraft began in Brazil and Mexico and are expanding. The Meli Places network of neighborhood locations to receive and store packages in transit. Buyers and sellers can pick up, send or return packages locally.

Mercado Envios logistics provides better service than national carriers, keeping customers and sellers with the platform. Warehousing enables more efficient inventory turnover, which accelerates sales for sellers. Execution of the strategy has been excellent, approximately 50% of Mercado Envios goods are shipped within 24h, and 75% within 48h. Virtually all Mercado Libre marketplace sellers ship via Mercado Envios.

The Meli+ Loyalty Program is a subscription that enables points, digital entertainment services, offers expanded free shipping.  In addition, it optimizes costs in shipping by allowing buyers to schedule a slower shipping date.  The company groups packages and otherwise uses scale to lower costs. In Q1 2024, approximately 5% of shipping was placed on these slower shipment, user scheduled dates, indicating program adoption, and likely reduced shipping costs (Q1 2024 Earnings Presentation Q/A).    The program was relaunched In Brazil and Mexico in 2023, replacing the previous loyalty program which had proved inadequate. The goal of Meli + is to increase user engagement and this in turn increases seller engagement.

In summary, the Mercado Libre ecosystem includes mutually reinforcing capabilities.  The expanding number of Mercado Libre marketplace users incentivizes brick and mortar merchants to accept Mercado Pago digital payments via credit, debit and wallet. Expanded digital finance services bring previously unbanked customers, to the Mercado Libre ecosystem.  Digital technological cloud assets enable Mercado Libre to leverage customer usage data from its ecommerce platform to sell credit to its relatively novice buyers and merchants, which also ties them to the ecosystem with switching costs.  Efficient logistics services enhance seller sales growth, and this attracts buyers. Growth in ecommerce attracts Ads sales.