This Fintech Is Just Getting Started

Investors love it when companies can execute a successful second act, another business beyond its core that enables it to grow even more. MercadoLibre (MELI -1.96%) is one such company that has built a tremendous "second act" with its fintech business. On a Fool Live episode recorded on June 24, Fool contributors Brian Feroldi, Matthew Frankel, and Brian Withers discuss this Latin American e-commerce leader's other business segment and why investors should be excited about it.

Brian Withers: I'm talking about an e-commerce company from Latin America. Surprise, surprise. I'm talking about MercadoLibre. Again. MELI. Let me share my screen, I've got a couple of slides here. When I picked it on Monday, it was down 25% from its high. But it's crept up a little bit in the last few days, so it doesn't quite make the 25% cut-off, but it's definitely is on sale. You can see from where it was back in early January, It was above $2,000, and it's in the $1,500s right now.

One of the things I'm really excited about for MercadoLibre, I'm not going to talk about the e-commerce business at all for the next few minutes, I'm going to talk about its fintech business. Over the last four quarters, over the last 12 months, TTM is trailing 12 months. It's produced $1.6 billion in fintech revenue. Look at these growth rates, this is the currency-neutral growth rates. [The] last three quarters have been triple-digits. [laughs] The two quarters before that, it was 83 and 86. To produce 117% growth on top of an 83% growth, this business is firing on all cylinders. Let me talk about why.

MercadoLibre is the first mover and leader in the Latin American market. There's 18 countries that they serve, three countries make up most of its revenue: Brazil, Argentina, and Mexico. But look at these populations stats. Six hundred thirty-eight million, 362 million internet users. There's more internet users in Latin America than there are people in the United States. Additionally, they have about the same number of online shoppers as the United States does right now, right around 200 million. There's a gap here too between people that are on the internet and shopping, there's also this big gap between population and internet users. There's a tremendous amount of opportunity going forward for this e-commerce and payments company.

Let's look at the state of payments and banking in Latin America. This is a busy slide, but I'll do the left-hand side first. Bankerized, which I don't know if it's a word, but [laughs] basically the share of adults that have a bank account. In the United States, it's pretty high, it's 99%. Canada and U.K. is 99 percent. Brazil, 70. Argentina, 49. Columbia, 46. Mexico, 37. Their three largest countries, Brazil, Argentina, and Mexico. Tons of its population doesn't even have bank accounts.

The debit card ownership over here on the right is even lower. The U.S. is around 80%. Brazil's at 59. You can see Mexico down at 25% of adults who only own a debit card. So there's a tremendous opportunity for [a] fintech solution that's easy for the population of Latin America to get their hands on.

How has MercadoLibre done in payments? This is just astounding, a 10X rise. In 2015, this total payment volume in millions, so it's about $5.2 billion in payments volume. Last year in 2020, almost hit $50 billion, so a 10X rise in the last five years. This is the number of transactions from 80 million to 1.9 billion, and both of these are growing at triple-digit rates in the most recent quarter.

The other thing that they're doing, It's not just about payments. They're taking payments on their platform, which was originally the reason they got into payments, so they prop up their e-commerce businesses that allow people to buy things more easily, but they have their off-platform payments business is even bigger. It allows cross-border payments, it allows person-to-person payments, they have a mobile wallet.

This is really exciting to me. This word SDK right here means Software Development Kit. That means other software developers can embed MercadoLibre's payment system or their mobile wallet into other people's apps, so this will proliferate MercadoLibre, Mercado Pago is their payment service, Mercado Pago even further. They're doing cash advances, credits, they're extending credit for merchants and consumers, and doing prepaid cards.

Something that's not even here that they talked about last quarter was on platform, they're now offering warranties for electronics, which is a huge business in the United States. That's something that as they're into fintech that they can easily branch out to, so that's really cool.

The other piece that's exciting to me, and this has been in their annual report for a few years now. They envision Mercado Pago not just as a payment service, but "an end-to-end financial technology solutions business aiming for inclusion across the population of Latin America" which is a lofty goal, as well as you go back to all of the different pieces of fintech that they're putting together, which is absolutely in their wheelhouse. I'm excited about MercadoLibre and its fintech dreams, and I would not be surprised to see this business grow at significant rates in the upcoming years.

Matthew Frankel: If I remember correctly, this is both of your top holding correct?

Withers: It was my top holding. 

Brian Feroldi: Depends on the day, but yes. [laughs]

Withers: Yes, Shopify and MercadoLibre are duking it out for me.

Frankel: Okay. I like what you said about the underbanked population in Brazil, it's worth pointing out that in Brazil, up till very recently, the financial ecosystem have been controlled by just a few big banks. Even more so to the extent that here in the government is actually trying to help out some of these smaller fintechs, so that could even be a big tailwind.

Withers: Yeah, I think their reputation precedes them. The fact that they've been in the region since the early 2000s. They're a local company run by local management, and that's appreciated by the governments across the region.

Feroldi: I love how you basically just pitch them as a fintech company and [laughs] just wash over the eBay, the shipping.

Withers: Yeah, they have this other e-commerce business [laughs].

Feroldi: Love it.