Brazil’s Interest Rates Pressure Mercado Libre’s Business, but Credit Portfolio Grows

Latin America’s e-commerce leader Mercado Libre (MELI)launched its credit card business in Brazil six months ago. While the country has increasingly raised the basic interest rate Selic - currently at 10.75% - the company said its credit book increased to nearly $1.7 billion in the fourth quarter as it expanded the portfolio to consumer credit loans. Now, it includes loans to merchants online, merchants in-store, consumers, and the credit card portfolio.

The company finished the quarter with over 7.4 million consumers with an active loan. Credit originations were nearly $1.5 billion in the last quarter of 2021. Yet, the credit card business is still a low percentage of the credit loan on the balance sheet, as Mercado Libre says it is still early and the business is scaling. It is starting with low limits and building them up. “So far we see the enthusiasm with our ability to underwrite and service credit”, said Pedro Arnt, the company’s CFO, at the earnings conference.

Mercado Libre says it will build new credit products that have potential across Latin America but states it will do it “with caution”. It expects credit cards to increase engagement in platforms and improve the promoter score.

Meanwhile, Mercado Libre says it saw credit originations in the Mercado Pago app outpacing originations in the marketplace, driven by personal loans in the fintech app. According to the company’s executives, Mercado Pago’s credit consumers tend to be from middle to lower income classes. The company says it is investing in moving how much risk it takes. It also reported that non-performing loan rates improved from 28% to 24%.

According to Arnt, there is a lot of potential in underwriting credit businesses for that segment of the population in Latin America, that couldn’t afford credit before, or underwriting capabilities limited that access. Mercado Libre says it is building those capabilities in-house to deliver credit for a very large population that “historically lacked credit.”

The company’s net loss also grew in Q4 but year-over-year it improved due to the higher interest income given the structural changes in interest rates and high foreign exchange losses, mainly in Argentina.

“Despite the compression due to the interest rate we have seen growth in the credit business”, stated Arnt. Because of those rates, Mercado Libre adjusted the so-called “parcelado com juros” (installments pricing) so it wouldn’t be so hit. It also adjusted the “parcelado sem juros”, interest-free loan prices. “We are passing a lot of incremental interest rate to merchants to eventually decide to pass on consumers because it’s a free installment”, the exec explained.

The e-commerce retailer said that during the last quarter of 2021 it absorbed incremental costs due to the shopping season, but now with 2022 it began adjusting pricing. “We did it in a surgical way, a more intelligent installment engine”, said Arnt. Different installments require different credit but that allows the company to spread compression over the interest rate. That would be Mercado Libre’s strategy throughout the year to beat those rates.

Mercado Libre says it wants to extend credit card personal loans and BNPL (Buy Now, Pay Later) as it sees a strong advantage with those features regarding value proposition to its merchants rather than competitor marketplaces.

It also sees open banking as an opportunity to expand credit through the region, betting on the potential size of credit books, overall consumer demand, and addressable market.

Despite the tightening economic environment, the company says it has an increasing part of its portfolio securitizations funded by third parties. At the beginning of 2021, its third-party securitizations represented 20% and now external securitizations represent 45%.

Besides, for Mercado Libre’s logistics business, the company says it is now focused on an interface product that allows larger baskets, which comes probably with monetization on Meli’s centers so users could place more items on baskets, in terms of greater items per order.

“We have a strong commitment to increasing earnings capacity, and margin increase. Looking to the future, we see the role credit business plays in the entire ecosystem. We want to increase the knowledge about merchants and consumers with several proprietary channels to offer credit,” the exec added.

(Updated to clarify that net loss also grew in Q4 but year-over-year it improved due to the higher interest income given the structural changes in interest rates and high foreign exchange losses, mainly in Argentina)

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