The online shopping revolution that took U.S. retailers by storm in the 2010s is just getting started in Latin America, and Mercado Libre is leading the charge.
Since its founding in Argentina in 1999, the company has expanded to 18 countries and evolved from a pure-play e-commerce player into one of the region's biggest fintech providers, commanding a market capitalization of over $90 billion.
Barron's spoke with Martin de los Santos, the company's chief financial officer, about how it's planning to keep expanding in the region.
A condensed version of this interview previously ran in the Barron's Global Signals newsletter. This conversation has been edited and condensed for length and clarity.
Barron's: How would you describe Mercado Libre to U.S. investors who aren't familiar with the business?
Martin de los Santos: Many times they describe us as the Amazon of Latin America. I think over the years we have become a little bit more than that because we have a very large fintech ecosystem, so we are probably more similar to some of the platforms that you see in Asia. We have more than 25 million people who have taken credit with us, most of them for the first time ever. We are doing a lot of financial inclusion in Latin America, not only on the consumer side but also on the merchant side by digitalizing payments.
The fact that we have a fintech solution really helps our merchants on the commerce side because we provide them working capital solutions. It also helps our consumers because we provide them with payment and financing solutions to buy on the marketplace. And the same thing the other way around. All the data that we can capture on the marketplace, we can use to better understand our users and provide them with better fintech products and cross-sell their products into the existing business.
Who is Mercado Libre's key consumer demographic?
It's a very broad base. The main trend that we are riding is the trend of people moving online. If you look at the penetration of digital commerce in Latin America, it's very low, about 15%. So that's half the penetration that you see in the U.S. and much lower than what you see in China.
We're making a lot of progress in terms of including people who have been left out. Somebody buying online without a digital payment solution had a very bad user experience 10, 15 years ago. Today, they have a digital account where they have their money, they can pay with digital currency, they have a consumer credit product. So we are actually eliminating friction for those people to come online, and the same could be said about the merchant side. If you were a small store owner in the inland part of Brazil, 15, 20 years ago, you could only sell five blocks from your location. Now you can sell through Mercado Libre to everybody in the country. And the same thing could be replicated in Argentina, Mexico, and every country where we operate.
Where are you seeing the next leg of regional growth coming from?
We're still investing a lot in the larger countries like Brazil, Mexico, and Argentina. But we are also very excited with the other countries. Our business in Chile is growing very rapidly, 40% year on year in volume. In Colombia and Uruguay, there's plenty of room to continue growing. We don't expect to go beyond Latin America, at least for the foreseeable future, because we have many things to do in Latam.
We will expand our commerce business, which is growing very rapidly, but we can still bring more people onboard. Just to give you a sense, we had 125 million buyers last year, but we operate in a region of 600 million people. There's plenty of room to grow there. On fintech, it's even more. When you look at Mexico, the penetration of credit cards is only 15%. The advertising business is also growing very rapidly. We only have 10% market share in Latin America, growing more than 50% year on year, but still from a very low base.
And then finally, the acquiring business [which provides merchants with payment solutions] continues to grow very rapidly and gain market share. If you look at Mexico, we have more than 1.4 million [payment] devices or merchants that process payments with us. The number of devices that we distribute in Mexico is more than all of the other banks combined.
Why is Mercado Libre having so much success in bringing underbanked people onboard where traditional financial institutions have struggled?
If you look at the past 50 years, the traditional financial system in Latin America was very much focused on a relatively small segment of the population-the higher segments of the population-and the vast majority of people were left out.
This is the type of thing that we're trying to address with our platform. We have a lot of data that we can use to better understand our users and to create products that are more suitable to them. We have the use of technology that enables us to do, for instance, credit risk models-that was impossible to do 25 years ago. We have a relatively lower cost to serve, so we can offer a line of credit of 100 Reais ($19) to somebody, which would have been impossible for a bank to do with the cost structure that they have. So we are able to reach segments of the population that were very difficult for banks to reach.
Why invest in Mercado Libre as opposed to, say, some regional e-commerce or fintech peers in Asia, where fintech adoption is more mature?
We're operating in a very large region. If you put together all the countries of Latin America, the GDP of the combined six, seven or eight countries where we have the largest operation, they are the size of any of the G-7 countries, except for Germany, Japan or the U.S. They are a very large market that, as I mentioned, is underdeveloped in terms of e-commerce and fintech penetration, and at the same time, it's the fastest-growing market. When you look at Brazil, for instance, it's the fastest e-commerce market in terms of growth anywhere in the world.
So it's a very attractive opportunity. Mercado Libre has a very strong position. We are the number one player in every commerce country where we operate. We are one of the top three fintech operators, regional operators in Latin America. And then we have a track record. We have 25 years of dealing with Latin America, building technology and managing a business, a multi-regional business. As you know, Latin America is very volatile.
How are you thinking about the company's margin structure, especially as you're investing in expanding?
We have always managed the company for the long term. When we built our logistics 15 years ago, we're thinking beyond the next quarter's results. In fact, at that time, our margins came down significantly, but we were thinking about the next 50 years of our value.
And the same thing could be said now. Just one example: We're building our credit card portfolio, which is very important to be successful in fintech. That requires investment and that lowers margins, but we think it's the right way to go. We are willing to trade shorter margins to establish our positions and for long-term market creation of our long-term profitability.
Having said that, when you look at Mercado Libre today, we are very profitable. Last year we made $3 billion of profits, and we have 30 consecutive quarters growing more than 30% year on year.
How are you thinking about AI?
For us, AI represents an incredible opportunity. We are a technology company. We have tons of data that we can leverage through AI, and we are already seeing the results. On the development side, we have about 20,000 developers that create the products that we offer to our users. A year ago, AI would help them code. Today, human-written code is the exception. So that's making our developers a lot more productive. I mean, they're shipping products at a faster pace, [and of] better quality.
Our customer service operation is also a lot more efficient today than five years ago, and on the consumer-facing side, we are building agents that are helping our users interact with our platform a lot better. If you're advertising on our platform, we're helping you manage your budget or optimizing your campaigns through AI.
The rate of change has accelerated significantly, and that generates a significant opportunity for us. Just like we saw during the pandemic, in a way, where lots of people came online for the first time and we were able to offer them a good service; that really pushed the use of Mercado Libre [and] Mercado Pago up [Mercado Pago is the company's fintech business]. I think AI will also be a catalyst of growth.
What's on your radar in terms of potential risks or challenges?
Rapid change requires you to be very alert to potential threats or things that happen. There might be some start-ups somewhere down the line that are building something trying to disrupt us and we're very much focused on that. We operate in very volatile macro scenarios throughout Latin America. We have been very used to that, though-we are able to manage that and we have continued to grow despite those types of changes.
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