Mercado Libre has had great success providing financing to millions of people who have struggled to obtain it through traditional lenders, said senior vice president of credit Martin De Los Santos.
From Los Santos spoke with LendIt’s Todd Anderson at LendIt Fintech LatAm 2021, held December 7-8 in Miami, Florida. The two discussed leveraging digital payment data to enable short-term financing.
De Los Santos said Mercado Libre operates in 19 Latin American countries, while its credit business is available in Argentina, Brazil and Mexico.
They lend working capital to Mercado Libre-linked merchants and consumers who use the service. Mercado Libre also recently launched a Visa credit card in Brazil. Since 2016, more than $5 billion has been lent to merchants and consumers.
What hasn’t changed is that the need for capital expressed by SMEs across Latin America has been much higher than what traditional lenders were willing to provide, De Los Santos explained. According to a Mercado Libre survey, while 80% of respondents needed financing, only 20% received it from the traditional financing system.
“We continue to see a big gap between the needs of SMEs and the actual loans they get from the financial system,” De Los Santos said.
He went on to say that traditional lenders have no incentive to lend to much, citing the lack of profit potential. As many participate in the informal economy, there has been a lack of data to score them, based on the traditional seven or eight points they use.
These methods are obsolete, as Mercado Libre managed to take advantage of the strong informational footprint left by merchants and consumers to brand both groups.
SMBs use 1,500 data points, including transactions within the ecosystem, how quickly a product ships, and how quickly a merchant responds to questions from troubled consumers. Raw data is only given a 10% weighting.
De Los Santos said Mercado Libre has funded more than one million merchants. The average loan size is $750. Half of them are sole proprietorships, many of which are just starting up.
The consumer lending side is slightly different, as credit decisions are based on interactions with consumers in the Mercado Libre ecosystem. They found strong demand, as only 15% of Mexican consumers have credit cards. To participate in e-commerce, the remaining 85% of consumers must obtain money offline and return to the web.
With Mercado Libre, many others can buy in installments without a credit card. They are scored based on the many years of purchase data the company has accumulated. Mercado Libre also unilaterally offers a line of credit without the consumer requesting it. It is available to 36 million people in the region, eight million of whom use it so far.
“The way we have such an inclusive product is that we offer lines of credit that are relatively small to begin with,” explained De Los Santos.
Terms can be extended with good performance, he added.
Seasonal sales models
Mercado Libre also works successfully with merchants displaying seasonal variations in the sales model. As they do with consumers, Mercado Libre turns to their data stores to analyze these patterns and offer fixed amount loans over two years and, in some places, loans repaid based on a percentage of sales of each day. Rates are analyzed monthly as new data is produced.
The term “alternative data” is generally a misnomer these days. Most lenders go well beyond the usual seven or eight data points of days gone by to the thousands made possible through machine learning.
This changes a lot for SMEs, because ten years ago they went to the bank when they needed money, brought reams of paper and waited six months for an answer that was most likely “no”. Now they know in real time and are more likely to hear “if” than ever before.
“Today if you look at how our products work…we now have an offer that’s real-time, so today right now we have over a million merchants who have an offer of credit from us who, with a simple click right away, tomorrow they have an offer,” said De Los Santos.
De Los Santos believes open banking can be a game-changer for Latin America, as consumers will have a say in who can use the data they generate in the systems.
The process begins in Brazil, and he’s excited about the opportunities it offers to interact with those outside of the Mercado Libre ecosystem. Mexico is a little further back but is moving in the same direction.
Overall, De Los Santos said he is seeing a continued migration of online consumer behavior in Latin America and Asia.
“Half the people who took a card with us didn’t have a credit card before,” he said. “Data and technology will allow many people to enter the system who have been left out.
“Data will continue to be essential.”
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Tony Zerucha is a longtime contributor in the fintech and alt-fi spaces. Twice nominated for LendIt Journalism of the Year and winner in 2018, Tony has written over 2,000 original articles on blockchain, peer-to-peer lending, crowdfunding and emerging technologies over the past seven years. He has moderated panels at LendIt, the CfPA Summit, and DECENT’s Unchained, a blockchain expo in Hong Kong.