The EconomistJuly 25th 2020 Business 53S
ince yourcolumnist first moved to a debt-ridden Latin Ameri-
ca in the 1980s, he has seen many aspects of business in the re-
gion change for the better. Two have not. The first is the plethora of
small businesses, from family-run corner shops and ice-cream
parlours to hardware stores, that by and large are as scruffy as they
were back then, eke out a meagre existence and remain stubbornly
cash-only (even if cashiers still struggle to work out how much
change you are due). The second is a visit to a bank, where, it some-
times seems, the only people who get what they need are those
with a stocking over their head and an Uzi in their hands.
The two traits reinforce each other. Small businesses fail to mo-
dernise because they struggle to tap credit. Oligopolistic banks feel
vindicated in not caring a hoot about firms stuck in the past. The
resulting lack of dynamism among the small and medium-sized
firms that account for more than 99% of enterprises in Latin Amer-
ica is a brake on economic activity. With covid-19 still wracking the
region, the vulnerability has become worse. Total or partial lock-
downs as well as fear of contagion and a deep recession have put
many of the region’s smaller businesses in mortal danger.
Not all, though. To see why, look at MercadoLibre. The pan-Lat-
in American e-commerce and fintech firm’s market value has dou-
bled to $50bn during the pandemic as it has provided online sales
and payments lifelines to such vulnerable companies. Since it was
founded in 1999 by, among others, Marcos Galperin, an mbagradu-
ate from Stanford University, it has become the region’s biggest
tech darling, even though in 2020 revenues are projected to be just
$3.2bn and it will lose money for a third year running. Profit,
though, is for the future. Meanwhile, it is part of a wave of digital
disruption that may propel smaller firms—which make up about
80% of those using its platforms—into the modern era.
Typically, MercadoLibre, which means “free market” in Span-
ish, has been compared to eBay, the American online marketplace
that was an early investor. It is now worth more than its erstwhile
mentor. It shares some characteristics with Amazon, with which it
competes, especially in Mexico. For instance, like Amazon in its
early days, it is prepared to forsake short-term profit for rapid
growth. It has also been developing a logistics network. But unlike
the American titan, it rarely trades on its own behalf; its e-com-merce business earns a fee from transactions between buyers and
sellers on its platform. In that way it resembles Alibaba, owner of
China’s online emporiums. Its fintech arm, Mercado Pago, is
loosely modelled on Alipay, Alibaba’s payments system. Plans an-
nounced on July 20th by Alipay’s owner, Ant Group, to issue shares
that could value it at $200bn have MercadoLibre’s investors sali-
vating over the prospect of a Latin American equivalent.
What attracts those investors most is the promise of a digital
revolution in Latin America. It has been slow to get going. Last year
less than 5% of retail sales in the region took place online, com-
pared with 12% in America and 20% in China. Half of all Latin
Americans lack a bank account. Fear of credit-card fraud has held
back e-commerce, as have logistical nightmares in Brazil, where
MercadoLibre generates more than half its revenues. Yet in a mix-
ture of luck and good timing, the firm had invested in logistics just
as e-commerce penetration surged into double digits amid the
pandemic. Pedro Arnt, its finance chief, says Latin America’s move
online has been “fast-forwarded” by three to five years in the past
few months. That is true everywhere. But if first-time online shop-
pers in Latin America make it a habit, MercadoLibre has plenty to
gain. According to Barclays, a bank, the value of merchandise
traded on MercadoLibre averaged $30 per Latin American last year.
The equivalent figure for Amazon in its core markets of America,
Europe and Japan was $405.
The potential for payments may be even greater, though this
business has had a bumpier ride in the pandemic. Beforehand,
MercadoLibre was busily trying to bring offline merchants into its
orbit by encouraging them to accept mobile payments via qrcodes
at bricks-and-mortar outlets. With the closure of restaurants and
shops this initiative slowed. But qradoption as a social-distanc-
ing measure may flourish as businesses reopen. Marvin Fong of
btig, a broker, says a push by Latin American central banks to pro-
mote qr-style digital payments could galvanise fintech platforms
in Latin America, such as Mercado Pago.The Amazon delta
Mr Arnt admits it would be foolish to savour these “once-in-a-gen-
eration” opportunities and ignore the competitive threats. The
biggest is Amazon, against which his firm has waged a costly battle
in Mexico. So far Amazon has paid more attention to e-commerce
opportunities in India than in Central and South America, but that
could change. The second threat is that covid-19 convinces big
physical retailers of the urgency to build online networks. He calls
this the “empire strikes back” scenario. The third is in payments,
whether in the form of competition from regional fintech startups
or from WhatsApp (linked, perhaps, with the e-commerce ambi-
tions of Facebook, its owner). MercadoLibre executives must have
breathed a sigh of relief last year when they received a $750m in-
vestment from PayPal, a potential rival, to help them expand their
company’s digital payments.
But MercadoLibre also has some built-in advantages. Its e-com-
merce success has given it enough brand recognition to support a
region-wide payments business. Its small and medium-sized
business customers rely on it for e-commerce, payments and, in-
creasingly, credit; that helps entrench their loyalty. And its Latin
American heritage means it understands not just the countries’
commonalities, but also their differences. Locals say it is a colle-
giate company that the brightest people in the region want to work
for—more so than Amazon. If it inspires them to create their own
businesses to sell via its platform, so much the better. 7Schumpeter The wannabe Alibaba
MercadoLibre is shaking up both retail and finance in Latin America