Mercado Libre has seen great success in providing financing to millions of people who struggled to obtain it through traditional lenders, SVP of Credit Martin De Los Santos said.
De Los Santos spoke with LendIt’s Todd Anderson at LendIt Fintech LatAm 2021, held Dec. 7-8 in Miami, Fla. The two discussed leveraging digital payment data to enable short-term financing.
De Los Santos said that Mercado Libre operates in 19 countries throughout Latin America, while its credit business is available in Argentina, Brazil, and Mexico.
They lend working capital to merchants connected with Mercado Libre 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 has not changed is the need for capital expressed by SMEs throughout Latin America has been much higher than what traditional lenders have been willing to provide, De Los Santos explained. According to a Mercado Libre survey, while 80% of respondents required financing, only 20% received any from the traditional financing system.
“We continue to see a big gap between the needs of the SMEs and the actual lending they’re getting from the financial system,” De Los Santos said.
He continued that traditional lenders are not incentivized to lend to many, citing the lack of profit potential. With many participating in the informal economy, there has been a lack of data to score them, based on the traditional seven or eight points they use.
Those methods are outdated, as Mercado Libre has successfully leveraged the strong information footprint left by merchants and consumers to score both groups.
SMEs use 1,500 data points, including transactions within the ecosystem, how fast a product is shipped, and how fast a merchant answers questions from consumers with problems. Raw data only receives 10% weighting.
De Los Santos said that Mercado Libre had financed more than one million merchants. The average loan size is $750. Half of them are sole proprietorships, with many just starting.
The consumer lending side is slightly different, as credit decisions are based on interactions with consumers in the Mercado Libre ecosystem. They’ve found strong demand, as only 15% of consumers in Mexico have credit cards. To participate in e-commerce, the other 85% of consumers have to get money offline and go back on the web.
With Mercado Libre, many more can buy in installments without a credit card. They are scored based on the many years of purchasing data the company has amassed. Mercado Libre also unilaterally offers a line of credit without the consumer applying. It’s available to 36 million people across the region, with eight million using it so far.
“The way we have a product that is so inclusive is because we offer lines of credit that are relatively small upfront,” De Los Santos explained.
Terms can be extended with good performance, he added.
Seasonal sales patterns
Mercado Libre also works successfully with merchants displaying seasonal sales pattern variations. Like they do with consumers, Mercado Libre looks to their data stores to analyze those patterns and offer fixed amount loans over two years, and, in some locations, loans that are repaid based on a percentage of sales from each day. Rates are analyzed monthly as new data is produced.
The term “alternative data” is mostly a misnomer nowadays. Most lenders go well beyond the usual seven or eight data points from days gone by to thousands made possible through machine learning.
That changes much for SMBs, as a decade ago, they’d head to the bank when they needed money, bring reams of paper, and wait half a year for an answer that was most likely “no.” Now they know in real-time and are more likely to hear “si” than ever before.
“Nowadays if you look at how our products work…now we have an offer that is real-time so today at this moment we have more than one million merchants that have a credit offering from us that with a single click right away, tomorrow they have an offer,” De Los Santos said.
De Los Santos believes open banking can be a game-changer for Latin America, as consumers will have a say over who gets to use the data they generate across systems.
The process is beginning in Brazil, and he’s excited about the possibilities it provides to interact with those outside of the Mercado Libre ecosystem. Mexico is a bit further behind but heading in the same direction.
Overall, De Los Santos said he’s seeing a continuous migration of consumer behavior online across Latin America and Asia.
“Half the people that took a card with us did not have a credit card before,” he said. “Data and technology will enable a lot of people to come into the system that have been excluded from the system.
“Data will continue to be critical.”