MercadoCredito Cracks The Code On Lending To The Un- And Underbanked In Brazil

The digital compression of 2020 has drawn a wide range of speculation. Has it been ten years of change packed into one, as some have speculated? But maybe the most dramatic and realistic assessment comes from Pedro DePaula, director of MercadoLibre’s MercadoCrédito division. In Mercado’s home nation of Brazil, he describes the last eight months as a “fundamental transformation” in a conversation with PYMNTS’ Karen Webster.

“Brazil at the beginning of last year was a different Brazil, for sure,” he said. “We have seen a huge shift in the penetration of eCommerce. I mean, throughout the Latin American region that has happened, but it has been massive in Brazil. We saw market research a couple of weeks ago that indicates the market evolved about 10 years in eight weeks in terms of increase in penetration. The consumer has learned how to really work with eCommerce.”

Ten years in eight weeks. What 2020 more or less forced consumers to do, he said, is climb over “the barrier of that first purchase” that had heretofore kept them out of the digital-first economy. But with no other choice in many cases, because so much of the outside world shut down, consumers turned to digital and learned that not only was it easier and more manageable than they thought, it was in many ways a preferable way of conducting commerce. And the changes, he said, have been across the board toward digital. Consumers in Brazil, he said, have also found a love of contactless payments. In their digital wallet business, he said, they’ve seen both a rapid uptick in the use of NFC and QR codes to pay.

And these shifts, DePaula said, don’t appear to be transitory responses to a highly unique situation. These behaviors are simply never going to go quite back to what they were pre-pandemic.

A rapidly changing world, he said, meant changes for MercadoLibre as well, particularly in its underwriting business MercadoCrédito. Because, as the pandemic kicked off, they saw the demand for credit from both consumers and businesses rising along with it, and responded a bit differently than other players in the market. While other players pulled back, he said, Mercado pushed forward and accelerated its underwriting business.

It’s a bet, he said, that has paid off in the aftermath for a simple reason. They leveraged data well enough to crack the code on underwriting in an underserved market safely — something that will serve them in 2021 in their home market of Brazil as they move to expand their footprint internationally.

Creating Credit Scores Out Of Data

Brazil, he said, has not historically been an easy market for consumers or businesses to access financial services like credit due to lack of scoring data. The trouble, he said, is so many consumers or businesses have low scores in the sense that U.S. businesses understand them, because there is no local FICO equivalent in Brazil, meaning a large swath of the population can’t get access to credit because there is no good way to evaluate if they’re a good risk.

Since the launch of MercadoCrédito in 2017, however, the firm has lent out 4 billion Brazilian Real (~$785 million USD) to 2.5 million people, 1.7 million of whom would have basically no access to traditional financial services offerings, he noted, simply due to lack of available information about them.

Because what Mercado has, he said, is an abundance of data.

“If you think about the two worlds, the sellers or the entrepreneurs and the consumers, we have a lot of information,” DePaula said. “We know them very well, and we have a machine learning team, basically focused on developing credit models based on that information. If you think about the consumers, we actually do have a lot of information on them in terms of what they buy and how they spend.”

That means that Mercado is uniquely positioned to build accurate credit models for consumers and businesses that makes them able to extend credit far more widely than their counterparts in traditional financial services, but without taking on more loss or risk. Their delinquency range, he said, is within range of the banks, and they are underwriting to a far less-constrained base of borrowers.

“And we improve as we move forward,” DePaula said. “When we began underwriting operations back in 2016, we had a certain level of performance, and we’ve been improving a lot because with more history our models are strong so we can make better credit decisions. And as of now, we have been very successful.”

What Comes Next

The year 2020 has been one of fundamental changes in consumer behavior and preference that are unlikely to reverse course, even when COVID-19 isn’t a constraining factor. Cash isn’t going to go away, and consumers’ outright aversion to money they have to physically handle will pass. But the fondness they’ve picked up for using contactless payment methods and shopping digitally isn’t going to simply evaporate. We do what we habituate ourselves to, he said, and the last year has been all about building a new set of habits for consumers and businesses all round the world.

Which means for Mercado, the only way is forward. That effort most recently has been boosted by the Central Bank of Brazil last month and its latest infusion of cash, and from its ongoing funding partnership with Goldman Sachs. The future, he said, is in growth, both at home in Brazil and beyond.

“We plan to continue to expand our credit portfolio, not only in Brazil, but also in the other countries where we do have a presence — Mexico and Argentina, for example,” he said. “And so yes, we plan to continue to expand strongly our credit portfolio. The credit business is not only a high-growth and profitable business, but also it compliments the eCommerce ecosystem well because you can bring new buyers to the platform. It’s a huge differentiator.”