When MercadoLibre (MELI -0.82%) got its start over 20 years ago, a pesky problem prevented the e-commerce platform from accomplishing its mission of "democratizing commerce." Many Latin American consumers were underbanked and had no way to pay for goods online.

In an effort to help grease the wheels of its e-commerce business, MercadoLibre came up with its own payment platform: Mercado Pago. What started as an ancillary solution has become the centerpiece of an investment in this growth stock.

Rio de Janiero

Rio de Janeiro. Image source: Getty Images.

The view from 30,000 feet

MercadoLibre's core business is still reliant upon e-commerce. Sellers can list their wares on the site and buyers flock to it, creating a powerful network effect. That effect was on display again when the company reported earnings this week: Unique buyers increased 27% to 24.1 million during the fourth quarter, while the number of items sold jumped 28% to over 109 million.

So MercadoLibre is still an e-commerce play. But here's what's different: MercadoLibre's no longer primarily an e-commerce play. Instead, it's a payments play.

What insane growth looks like

One of the key ways to measure the popularity of Mercado Pago is total payments volume (TPV). This number represents the amount of money that changed hands using the tool. For the vast majority of Mercado Pago's history, the platform was simply used to pay for stuff on MercadoLibre's e-commerce site.

But starting in 2015, it became clear there was untapped demand. Reviewing the data it had on hand, management began to realize that merchants all over Latin America -- from gas stations to grocery stores -- might be interested in accepting payments via Mercado Pago. 

What really greased the wheels of this movement was the company's decision to start rolling out mobile point-of-sale (mPOS) devices starting that year. If that term sounds confusing, just think of them as the things you swipe your credit card through at most stores.

Realizing the opportunity to gain market share, MercadoLibre started selling these devices away for as little as they could. While "on platform" payments (those used to pay for stuff on MercadoLibre's site) have shown solid growth, the real story is in off-platform payments -- where Mercado Pago is used to buy things that have nothing to do with MercadoLibre.

Chart of Mercado Pago payment volume over time

Chart by author. Data source: SEC filings.

Let's put this in perspective:

  • On-platform payment volume has increased 36% per year since 2015, and jumped 16% over the most recent year.
  • Off-platform payments have increased 81% per year over the same time frame. What's more, the increase is accelerating. Off-platform TPV was up 113% over the past year.

Mercado Pago is having a huge influence on payments throughout its service area. It could quickly become the de facto payment method in many communities.

That's not a foregone conclusion, however. It's far from the only player in the region; PagSeguro and StoneCo are notable competitors. But Mercado Pago has three huge advantages: 

  1. Brand value: Because MercadoLibre has over 320 million registered users, Latin Americans are already familiar with Mercado Pago.
  2. Diversified revenue streams: While the competition comes from largely pure-play companies, MercadoLibre already has a successful e-commerce business that can allow it to undercut the competition on price to gain market share.
  3. Wider geographic scope: PagSeguro and StoneCo are largely focused on Brazil. Mercado Pago is also available in Argentina, Mexico, Uruguay, Colombia, Chile, and Peru. 

What does this all mean?

I wouldn't blame you for thinking you missed the bus on the bump Mercado Pago has provided. MercadoLibre's stock is up an astonishing 680% in the past four years.

But that doesn't mean there's no room left to grow. The company says that 7.9 million people are now using its mobile wallet, up 29% just from last quarter. And TPV is growing in the triple digits in Argentina, Mexico, and Brazil. 

The runway for growth is still long. While shares aren't cheap, I suggest anyone with a stomach for volatility buy a small starter position. MercadoLibre has grown to 8% of my family's real-life holdings. But given the long-term potential, I don't plan on selling any of it in the near future.