Fintech Services with Andres Anavi, Senior Vice President - Inside MercadoLibre: Investor Relations Podcast

Mercado Pago's Bold Ambition: Becoming Latin America's Largest Digital Bank Hello to our listeners and welcome to the latest episode of Inside MercadoLibre, our IR podcast that brings our management team closer to investors. I'm Richard Cathcart, Mellie's IRO, and I'm delighted to be joined today by Andy Anabi, Senior Vice President of Fintech Services. Andy, welcome and thanks for taking the time to join us. Speaker 2 Hello, Richard. Thank you very much for having me. Speaker 1 So I think what might be useful just at the start here, Andy, is to give our listeners a little bit of context to the conversation. So perhaps you can talk a little bit about your background and maybe also about fintech services at Melly and how this fits into the company as a whole. Speaker 2 Sure. So I've been with Marcal Oliver for over 4 years now. And before joining Marcal Oliver, I was a partner covering financial services and technology at PCG across Latin America. And prior to that, I also worked briefly at Goldman Sachs and at Citigroup. And as you mentioned, my current role at Marcal Oliver is head of what we call Fintech Services. And to provide a bit of context, 2 years ago, we reorganized our Fintech division around 2 business units. One is acquiring where we process payments for all kinds of merchants, big, small, online, offline. And this is the business where we got started as Mercado Paolo and then Fintech Services, where we aim to become the largest digital bank in Latin America, both for individuals and also for small merchants. And when I talk about becoming the largest bank, it's not only in terms of number of users, but also in terms of engagement or relationship debt. So our ambition is to have primary relationships with our users, what we refer to as principality, meaning that we will serve our users across all their financial needs. So daily banking, that's payments and transfers, but also lending, savings and investments and also insurance. Speaker 1 OK. Leveraging Distinctive Capabilities to Achieve Digital Bank Ambition So that's a pretty bold ambition, being the biggest digital bank in Latin America. But we like big ambitions at Belly. So how do we achieve that? And do you think that Ricardo Pago has the rights and the ability to win here to achieve that? Speaker 2 To achieve this ambition, we're convinced that we must have the best product. This has been our guiding force over the past years and has enabled Mercado Power to transform itself from a payments wallet into a fully fledged digital account with more than 70 million active users in the region and more important, with leading NPS in every single of our major markets in Brazil, in Mexico and in Argentina in. So to provide a bit of background, NPS stands for Net Promoter Score and it's a metric that measures customer experience. And I believe that this focus on NPS is something that is quite special about us. It's not shared by traditional banks. At Mehdi, we strongly believe that high NPS in the long term will translate into higher growth and profitability. So at Mercado Paolo, NPS gets a lot of attention from the senior leadership team. It's a key driver of our product road map. We decide how to allocate resources based on NPS and we're constantly prioritizing NPS over short term profit. Maybe the best example is the Cuenta Remunerada when we pass through to the user the yield that is generated by their balances. And, and, and you you refer to right to wing. So in MercadoLibre we don't actually like the term right wing. We don't believe rights. Now we, we are confident that we have several distinctive capabilities and that, you know, if we make good use of those capabilities, then we will achieve our ambition and #1 is that we're a tech company. So this means that we have lower cost to serve better products and those so that we're much more rapid and effective at adopting new technologies, including for instance, AI. Second, we have a distribution advantage. We have a massive user base. When you combine our marketplace and we're acquiring network and our own Fintech services business unit, it's more than 150 million users. We also believe we have an underwriting advantage. We have access to very valuable transactional data, which is very relevant in Latin America where financial inclusion is still very low and would also less developed. So this data that we have, it's very granular, it's high frequency, it's real time. So for example, during COVID, most traditional banks were pretty blind in terms of what was going on in the market, while we could identify early on which sellers were likely to come up stronger and which ones will be hearted by the prices. And maybe the fourth advantage is the culture. This is one of our strongest differentiators. We're long term oriented. We're willing to take calculated risks. I believe our investments in the Quinta Re Monera and in the credit card are a testament to this. As mentioned before, we are very focused on user experience. And above all, I'd say that we have a very fierce competitive mindset. We've become very big as a company and we're still very hungry to grow, to drive impact and to win. Speaker 1 That's great and thank you for correcting me on the right to win. I think it's an important point because one thing that we don't see here at Melee is complacency about any of the advantages that we have. So and interesting in your answer, I mean, you highlighted a couple of points that we've actually heard in some of the other podcast episodes that we've that we've recorded. So Agos Costa talked about the importance of being tech first in our shipping episode, we had an entire episode on culture with Marcos. So great to hear the consistency of the message there. A a couple of points I wanted to dig into in a little bit more detail. Mercado Pago's Ecosystem: A Powerful Distribution Advantage for Fintech So distribution, can you talk a little bit more about our distribution capabilities for Fintech services? Speaker 2 Sure. So Fintech services is part of a of a broader ecosystem that includes a, a leading e-commerce marketplace and those who are very large acquiring merchant network. These two businesses are already very large and will continue growing. And this clearly is a very important differentiator for us, not only because of the scale. So think about the marketplace more than 115,000,000 buyers, but it's not only the scale, it's also that this traffic is very high quality. So these are affluent users with good incomes who can obtain a buy now, pay later, or a credit card or an insurance product during their buying journey with just a couple of clicks. And this last point is very relevant because it protects us from adverse selection. So we're not giving credit to users who are desperately looking for a credit card, but rather to users who are shopping at our marketplace and find our value prop very compelling either because we provide cash back or because we provide more installments. And we have a similar synergy with our acquiring network. So we have sellers that are processing payments through our POS terminals and our QR codes. This users are highly engaged with our platform. So we're very well positioned to cross sell them credits and other financial products. So in summary, we're able to attract high quality users at scale at at almost 0 acquisition cost. And maybe one additional observation is that these synergies with the ecosystem are becoming stronger over time because our value prop is getting better both for individuals and merchants. So this enables us to attract buyers with higher incomes as well as larger sellers, so also very nicely supporting our move up market strategy. Speaker 1 OK, perfect. Strategies for Deepening User Relationships and Driving Principality And I think that's something we've certainly seen in the results from from fintech services over the last 12 months. So you, you talked about the huge audience and that certainly is an advantage. But I think that leads me to a question that I get quite frequently from investors. So to what extent can we build a large base of users with principality rather than just build a large base of users? And how important is it to you for us to achieve high levels of principality? Speaker 2 Great question. So principality is very important for us because it means having a deeper relationships with our users and that will translate into more cross sell, higher NPS, higher retention, lower risk, more profits. So extremely, extremely important today, we have different level of principality across our markets. We have high levels in Argentina, roughly 50% and we're confident that this should continue to rise as we scale our credit card. And we have lower levels in Mexico and Brazil, ballpark of 25%, but growing steadily. Q on Q, So we're still far from our vision, but we're happy with where we are. I think it's important to keep in mind that we've only recently had the current value prop in place with a Cuenta Torinada, the credit card and the loyalty program, right? So it's still very early days for Marcado Pao and now we're working on several tracks to continue driving principality. First is continue scaling our credit card with competitive limits and also with benefits that are hard to replicate, for example, the cash back in the marketplace or more installments. We're also upgrading our UX. We're rolling out a new version of the application across all our markets with a simpler, a more intuitive and more engaging a user interface. We're filing for banking licenses in both Mexico and in Argentina, among other things to enable our users to have their salaries deposited directly in the Mercado Power account. And finally, we are positioning Mercado Paolo or we need to position Mercado Power as a digital bank. Many people still associate Mercado Paolo who have payments wallet or to our POS terminals. We need to continue working on driving awareness of Mercado Paolo as a digital bank. And this track also includes clearly communicating our safety features, which are best in class. So in summary, I would say that given our leadership in NPS, the current momentum that we're observing and the initiatives that we're pushing, we're confident that we'll continue growing principality over the next quarters and years. Speaker 1 That's great. Advanced Underwriting and Disciplined Risk Management at Mercado Pago So let's switch to one of the other topics you mentioned earlier, underwriting in the context of principality. You talked about competitive limits on the credit card. So the better the limit, the more likely the user is to see more Calabar as their principal account. So how do our underwriting capabilities help us to achieve this? And then how do you balance growth and risk in that context? Speaker 2 Sure. So let me first highlight three distinctive elements about our credit underwriting function #1 is that we have access to very rich data from our ecosystem, both on individuals and also on merchants. So let's take individuals. We have full access to their navigation patterns and transactionality at the marketplace down to the SKU level. So to illustrate, let's imagine a traditional bank. They might have a customer that is spending 100 to $100 every month at Marcado Libre, but that's all the information they can collect. The bank won't know if they're buying furniture, electronics, or clothes. On the other hand, we know that this customer is buying healthy food, that is buying vitamins, that occasionally he buys running shoes and fitness equipment, typically after doing some research and comparing reviews. So this is much more data that is feeding our models and this data has a lot of predictive power. In fact, it accounts for roughly 1/3 of the predictive power of our models. The other 2/3 are fintech data and external information from bureaus. That's information that is available to any player. 2nd is that through the marketplace we can learn about the creditworthiness of our users in an extremely efficient manner. We just need to offer a buy now, pay later for a low amount and a small duration. The amount has to only be high enough for the user to be able to afford the purchase, and we can do this practically with 0 acquisition cost. So we don't need to offer a credit card with a very high limit and we don't need to print and ship the credit card. So this allows us to learn very, very efficiently. And once we get to know the user, then we can provide an app sell or we can cross sell a credit card. And so this is really unique about Mercado Bao. And 3rd, we have very strong modelling capabilities. We're a tech company. We've been applying machine learning to credit underwriting for for more than eight years now, so since the very beginning. And we're also very nimble at retraining our models. But you know the most exciting thing is that all these capability will be enhanced by LLMS. So if we go back to my previous example about the customer that is buying healthy food and fitness equipment with the LLMS, we will be able to get much stronger signals from all the information we're currently collecting. So in this case, we will learn that the user has a healthy lifestyle, that he's very disciplined with his habits and that he's a deliberate buyer, a conscious buyer, a proposed to an impulsive buyer. And we believe that this will also translate to its payment behaviour. So now we will be feeding our models not only with transactional data, but also with the data on the user's intent. Now going back to your to the second part of your question about how to balance growth and risk, we're very conscious that if we compromise equality, we won't have a sustainable business and we won't be able to achieve our ambition of becoming the largest digital bank in Latin America. So we're very disciplined in our originations approach. We have profitability and payback targets with a through the cycle perspective with enough buffer built in to make sure that we can absorb negative shocks. Now having said this, I think it's important to clarify that quality does not imply that we should only focus on the lowest risk segments of the population. It rather it means that we need to be very rigorous on selecting and pricing the risk we take. In fact, as you know, we have a very robust and profitable consumer credit business at the very base of the pyramid for many years now. Speaker 1 OK, perfect. And and I think just picking up on that example that you gave Andy, I think there what we're seeing is that somebody is disciplined about taking care of their own health. And so we can then infer that they are likely to be disciplined in taking care of their financial health. Speaker 2 Absolutely. Just spot on. Yeah. Speaker 1 Perfect. OK. And so while we're still on risk here, I think, you know, this is an important issue obviously, What structures do we have in place to clearly define the guardrails on risk for the business and to ensure that risk actually remains within those guardrails? Yeah. Speaker 2 Sure. So as I mentioned before, we have these profitability and payback targets for each of our products to make sure that the originations remain profitable across a broad range of scenarios. But in addition to this, we also have a risk function, a second line of defence that does not report to Fintech that sets severed guard rails in terms of maximum delinquency levels, both for our originations, but also for overall portfolio, maximum exposure under different stress scenarios, including a Black Swan, concentration limits for our more risky and volatile segments. And of course, we have the typical processes in place, the committees where we make sure that we're all the time operating within these boundaries. Also let me add something that maybe it's not so evident that's that we, we run our credits business with much less leverage than traditional banks and also we do not do fractional banking, so we don't lend our deposits. So essentially it's a business model with much lower embedded risk. Speaker 1 OK, perfect. Unlocking a 10X Growth Opportunity with the Credit Card Super interesting. So maybe let's shift a little bit from talking about those competitive advantages to talking about the opportunity. How would you define the scale of the growth opportunity for? Speaker 2 Us, I believe the opportunity is really huge and it's huge even if you only consider our current user base. And the opportunities, of course, differ across the different markets where we operate. Brazil is more penetrated than Mexico and Argentina, but still many people get a poor service. In some cases, we see that our NPS is 2 times better than the one of traditional banks and we still see lots of deposits, 200 billion in savings accounts that only yield 50% of CDI. So we're confident that people will start realizing this and bring their money to Mercado, Palo via pits. Mexico is for sure the most exciting opportunity. It's where Brazil was roughly 10 or 15 years ago in cash still accounts for 90% of the economy. In Mexico, only one out of five people have a credit card. So we believe we have a very attractive opportunity to create the market in Mexico and bring millions of people into the financial system. And finally, Argentina, we're already very, very big in Argentina. We're by far the number one player. We we've recently launched the credit card, which we believe is the last piece that we needed to make people switch completely from banks to Mercado Baro. Speaker 1 Yeah, that's going to be super interesting to watch over the next couple of years in Argentina. You know, the growth opportunity is huge, as he mentioned. Are there any numbers that you can put on this at least directionally? Speaker 2 So I would say that this is a 10X opportunity over the next five to seven years. You simply need to compare our user base in each country, which is very large relative to our market share in the main financial products, which is very small. So Brazil and Mexico, we're very relevant in terms of monthly active users. We're actually numbered. We're the second player both in Brazil and in Mexico. However, our market share of deposits and credit card is still very, very small, low single digit. In Argentina, 80% of the adult population already banks with Mercado Paolo, but our credit book is only 1.3 billion. I'd say we have enormous potential to continue growing very fast simply by winning share of wallet in our current user base. And then on top of this, we have two additional sources of upside. The user base is actually growing very fast, 30% year on year. And also the penetration of financial services in the region is still very low. So there's a lot of room to grow the pie. Speaker 1 OK, no, perfect that, that that's exciting. So I think our investors will be keen to watch out for that over the next five to seven years as you mentioned. Now when you look at that growth opportunity and kind of everything you've said before about principality as well, how important is the credit card to achieving that 10X opportunity as you as you defined it? Speaker 2 It's, it's critical, it's, it's the credit product that has the best value prop for our users. It's a main driver of principality. It also has the best synergies with the ecosystem. We, we already observed that when people take the Mercado Paolo card, they start purchasing more in the marketplace. So although it's a product that requires investment at the beginning because it takes between 12 to 18 months for each cohort who to reach break even, it's a great product for the ecosystem in the long term. Having said this, it's not the only product that it's important to achieve our growth objectives. The Cuenta Remunerada, for example, has been a key driver in attracting users to Barcado Paolo from other banks. Speaker 1 OK. Beyond Credit: Mercado Pago's Comprehensive Financial Product Suite And that actually brings me quite nicely on to another topic. You mentioned Cuenta Remunerada in one of your answers and I think a lot of investors see Fintech services as credit. So perhaps you can talk a little bit more about the broader product offering because there's actually quite a lot that people can do there in the account and also if there's anything missing. Speaker 2 Yeah, of course. So as I mentioned at the very beginning, our ambition is to serve our users across for financial needs. When it's daily banking, that's payments, transfers, that's how we got started. Second is credits, 3rd is savings and investments and 4th is insurance. So let me elaborate a bit on savings and investments. This is also a critical capability especially considering our strategy to move up market. So our Cuenta Remunerada or the Cuenta Turinada is a killer product, has been a major driver of our growth for the past two years because it breaks that the traditional compromise between yield and liquidity. Now if a user doesn't need the liquidity in the short term and can tolerate a bit of volatility, then there are other options that can provide a better yield from fixed income to equity. And This is why savings and investments become so critical as we move up market. So Brazil is today where our offering is more developed. We've launched a marketplace where users can invest in time deposits, investment funds in crypto and also in other tax efficient solutions. But still we have a lot of work to do both in terms of broadening the investment offering and also improving the the user experience. On this last point, we actually believe there's a great opportunity to leverage LLS to simplify all the complicatedness and noise surrounding the investment space and provide real, personalized and unbiased advice for our users. So just think about every single user having their own wealth advisor, regardless of how much money they have. That could be very, very powerful. And then the other pillar that we have is, is insurance, where we're making good progress. We started by offering insurance products linked to marketplace purchases, but have recently expanded the scope to also provide insurance for both the Mercado Power account and to Mercado Power loans. So that's another Ave. with a lot of potential within fintech services. Speaker 1 OK, great. Revolutionizing Finance with the Proactive Mercado Pago AI Assistant The point that I wanted to pick up on and it actually brings us quite nicely to the final question. You mentioned the kind of wealth advisor. So one of the things that I wanted to ask was about AI. We recently launched the Mercado Pago AI Assistant at the end of last year in Brazil and I think just recently in Argentina. So I think you've already given a hint there of what we're trying to achieve. So perhaps you could just build on that and anything that we've seen in terms of early results? Speaker 2 Yeah, definitely. So this is the capability that is generating the most excitement inside Mercado Pago. As you mentioned, we have already launched our financial assistant that can do many things including resolving queries, processing transfers, paying bills, creating saving spots, all this via voice or or through text commands. So always with a conversational interface, the early results are very encouraging. So the financial assistant is already handling and resolving 90% of our customers inquiries and with very high satisfaction levels. Now the next major leap is to evolve this assistant, which is mainly reactive today into a proactive advisor helping users to spend and invest their money more smartly. So think about how much an advisor can create value in a region where financial education is still very low, where many people have their balances sitting idle in a bank without generating yields or paying very high interest rates on overdrafts when they have available funds or can access cheaper funding alternatives. So we believe that this financial advisor can play a key role in enhancing trust and also become a driver of principality for us. So very, very excited about this as well. Speaker 1 Yeah, that's great. I've already used it a few times. And certainly I would recommend any of our investors who are in Brazil or Argentina to give it a try because it's it's really fantastic what it can do even in this very, very early phase. So I think certainly watch this space over the next 12 months. Speaker 2 One of my favorite use cases is to basically submit the account statement of a competitor of a traditional bank and ask the advisor how much money can I save if I switch to Mercado Paolo and the numbers are impressive. You can save a lot of money. Speaker 1 Yeah, that's amazing. I think I've used it for more basic things like asking it to to do a pics transfer. The other thing that I like is I have my other accounts connected to Mercadabagavai open banking. And whenever I've gone into overdraft in one of the other banks, it suggests that you transfer money to to the other account, which as you mentioned, helps build trust, right? Because absolutely we're helping people to spend less money on interest, even though that interest, even though it would be from another bank. So super interesting, Andy, Fantastic. That was a really, really interesting conversation. I think our investors are going to be really interested to hear from you. So such a great opportunity and great to see how optimistic you are. So thanks again for for taking the time to speak to us. Speaker 2 My pleasure. Thank you for having me, Richard.