Here's How Solving a Customer Pain Point Became a Multi-Billion Dollar Business

It isn't unusual for a company to address issues that are preventing customers from coming back for more. What's unusual is that the solution might turn out to be a successful business unto itself. It's even rarer that the key to the solving a customer pain point turns into a multibillion-dollar business.

On this episode of Fool Live that aired on Nov. 23, Motley Fool co-founder David Gardner and Fool.com contributor Danny Vena were joined by Federico Sandler, MercadoLibre's (MELI -1.98%) head of investor relations, who explained how a customer pain point turned into the company's most successful and lucrative business.

Danny Vena: Federico, you talked a little bit about how Mercado Pago has become such a big part of MercadoLibre's growth engine. Maybe for our viewers who are maybe a little less schooled in exactly how Mercado Pago works, maybe you could just lay it out for us a little bit.

Federico Sandler: Yeah. Basically, how Mercado Pago started is essentially a way to reduce friction between buyers and sellers, similar to what PayPal (PYPL -1.83%) did for eBay (EBAY 1.01%) in the early days. Essentially, we built a phenomenally large payments business with zero investments in customer acquisition because it was designed to reduce friction between buyers and sellers. Mercado Pago within our marketplace served as an escrow, for example, between buyers and sellers. We can hold the money there until the buyer receive his item, is satisfied with the transaction. If he is not, we can hold it there on escrow, return it to the buyer, and deal with the merchant.

What we saw in the early days was that as Pago penetrated our gross merchandise volume or what we sold, we started to see faster frequency, a higher ticket purchasing, better net promoter scores, which is what we used to measure customer satisfaction. Then subsequently, what we started to do, emulating some of the things that we've seen globally, as we are a company that tropicalizes relatively well what we see globally and adapt to our reality, is we starting processing payments off of MercadoLibre, but online.

As you know there, the opportunity, I think is substantial. Today, a little bit over 50% or close to 60% of our payment volume is already outside of MercadoLibre. It should be multiplies over time, just like PayPal processes multiples of eBay than on eBay.

Then by 2015 also, I think, we inspired a little bit on China. We realized that there is a significant segment of the population that's vastly under-served with financial services. I think the aspiration of Mercado Pago evolved more than just a payments processing business, but rather to be one of the largest or if not the largest, digital financial services business in Latin America, where we can offer to the unbanked and under-banked services like electronic payments, saving money, being able to get insurance, being able to invest their money.

The idea is to use the tremendous scale and distribution capabilities of our businesses to actually better serve those who haven't been served at all, and then move up the merchant base.

I think we have a huge opportunity here in front of us, it's not only to generate financial inclusion, we don't need branches to speak to our consumers, we have this [holds up smartphone]. Generally, financial inclusion, but also to digitalize cash.

Today, about two-thirds of transactions in Latin America, transactions, not volume, occur in cash, and we are very well-positioned to actually do that and digitalize that.

That, I think will help formalize the economy, No. 1, but I think it's also very well viewed by all central bankers. Central bankers want more competition, they want lower costs, and they want to do away with cash. I think we're very well-positioned to execute on those three, and if we do, we will build a business that can be arguably larger than the commerce business, with very powerful synergies still with the Yellow World, with MercadoLibre.

David Gardner: I may have missed this, but Federico, roughly, what percentage of users pay through the Mercado Pago platform?

Federico Sandler: One hundred percent. Let's say on MELI, close to 100%. If you are in Mexico, Brazil, Argentina, Chile, Peru, Colombia, you will pay through Pago. Let me just be clear, Pago is not a substitute to whatever payment method you are using, but rather where you use your payment methods. When you check out, you can use your credit card, you can pay with account money. You can pay with money that we lend you, if you're applicable to credit.

But clearly, the way that we've been able to improve customer satisfaction and grow to the size that we've grown is because we've been able to continue to build on selection, which is instrumental in e-commerce, but then we close the gap on payments with Pago, and then we close the gap on convenience within deals, with logistics.

David Gardner: Wow. I'm just reading the original buy report that we had. Up on the side, Feb. 18, 2009, and we were noting at the time, that at the time, only 10% of users were paying through Mercado Pago; 10%. We are pointing out that eBay had 63% of people paying eBay on PayPal, which has always been wedded to that platform from the beginning, but the gain from fewer than 10% to 100% today over 11 years is a substantial gain and strategy. Congratulations.