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  1. Analysis
February 23, 2021

Mercado Pago shakes up Latin American cards market as uncertainty looms

By Evie Rusman

Latin America’s credit card market has a new, fierce competitor in Mercado Pago, writes Ivan Castano

Mercado Pago, the payments division of e-commerce giant Mercado Libre, recently obtained a banking licence in Brazil and has grand ambitions. Not only is it targeting the credit card sector, it aims to become a leading issuer and acquirer.

“Mercado Pago could become the third of fourth largest issuer in Brazil,” confirms industry consultant Edson Santos, adding that the firm already processes 7% of card transactions in Latin America’s biggest economy, where people continue to ditch cheques in favour of plastic.

“They are still processing [payments] through Cielo and Rede, which have 50% of the acquiring market but this could change as Mercado Pago is also becoming a sub-acquirer and in the near future, could also become a full acquirer” or payments processor.

Operating in Brazil, Argentina, Mexico and four other countries, Mercado Pago offers a point of sale (mPOS) service to merchants that operate in its Mercado Libre online retail marketplace, a digital wallet for users make QR payments, a prepaid card and credit offerings to merchants and customers.

Scaling up 

But Mercado Pago’s boss Pedro Castanheira says the Brazilian banking licence will sharply scale up the business. “We have been excited about expanding our fintech business for some time and the banking licence is another step in that direction,” he tells Cards International.

“We plan to accelerate the creation of credit solutions in our portfolio. If you have our app in your mobile, you can now pay for anything at retailers, supermarkets or anywhere that has a QR code.”

Mercado Pago will also enable customers to deposit funds, receive loans and operate debit cards, just like any other bank, says Castanheira, adding that the online retail giant, which has given Amazon a run for its money (it’s set to report a 46.5% jump in sales this year to $20.5bn), plans to roll out similar services across other top markets in Colombia, Chile and Argentina, its home base. It has applied for banking licences in Mexico and Chile, for instance.

Game changer

Mercado Pago’s banking licence will be a game-changer for the firm, at least in Brazil, putting it side to side with leading fintech player Nubank.

“Mercado Pago’s payments solution is very broad and much like any digital bank and also connected to PIX [a Brazilian Central Bank instant payments network that makes all QR wallets interoperable],” says senior fintech consultant Bruno Diniz.

He sees big economies of scale from offering banking services to Mercado Libre’s customers. “They can start giving discounts or special credit offerings to people who use their financial services to buy goods on their platform, giving them an edge against banks that don’t have this capacity,” Diniz explains.

Whatever Mercado Pago does, one thing’s for certain, Brazil’s payments market is becoming increasingly competitive, putting leading issuing banks Itau, Bradesco and Banco do Brasil, which dominate 80% of card issuance, on notice.

Brazilian Cards Show Resilience

Yet business could still be brisk for everyone. According to Santos, Brazilians continue to favour debit, credit and prepaid cards to settle transactions. That’s good news for companies looking to boost market share in a country of 209 million people.

“Brazil is still kind of a growth country where replacement of paper and cheques is still going on. That is why we grew 20% in the past 10 years,” boasts Santos.

He claims the cards markets will grow 4% to 5% this year to BRL2trn (GBP284.4bn) even as the pandemic tears through the economy, expected to shrink 4.4% this year and 3.4% in 2021.

“We won’t grow like in 2019, when we gained 16% but we have recovered, also thanks to growing e-commerce and contactless payments.”

This is a sharp contrast with much gloomier forecasts at the height of the coronavirus lockdowns this spring, which had analysts forecasting a 40% to 50% revenue contraction and spiking defaults.

But as Brazil’s economy reopened in the first half and the government launched a BRL713.4bn stimulus package, the credit picture has improved, helping pare delinquencies.

“Ninety per cent of people pay their credit card bills on time in Brazil. We don’t use finance to purchase goods to avoid paying interest,” adds Santos.

He acknowledges delinquencies are likely higher than in 2019 but like most Brazilians who prefer to focus on positive rather than negative headlines, he expects defaults will start easing next year.

Competition heats up

Competition is also rising in neighbouring Colombia, where banks are stepping over themselves to bolster credit card offerings to compete with Nubank, which recently entered the country, offering to wave annual maintenance fees for new customers.

“Nubank came out with their no-fee offer and the rest of the market started moving,” concedes German Cristancho, research director at leading bank Davivienda, acknowledging that Nubank’s partnership with Mastercard to launch the card was a wise move. “Colombian credit cards have a monthly maintenance fee that won’t be charged anymore.”

Davivienda, which competes tooth and nail with other legacy lender Bancolombia, quickly moved to launch a partnership with online delivery unicorn Rappi to boost its Daviplata payments network. Bancolombia, in turn, launched a Nubank rival called Tarjeta Libre [free card] American Express.

“There is a lot of low-interest and big competition from the fintech phenomenon,” which has taken off in Colombia and also neighbouring Peru and in Chile, as digital payments have accelerated during the health crisis, according to Cristancho.

Government stimulus and bank policies to allow customers to delay payments have helped stave off defaults in Colombia, with 45% of the country’s card balance affected by the provisions, says Cristancho.

The effort saw issuers slash interest rates and/or provide up to six months of payment postponements.

Lingering uncertainty 

Consequently, he predicts the true extent of the nation’s default rate will not be known until next year which will likely bring new challenges amid uncertainty over whether consumers will receive more debt payment extensions.

It is a similar situation in Mexico, where banks are scrambling to structure consumers’ credit card and other liabilities as GDP is set to shrink 9.2% in 2020 although activity spiked in the third quarter as social-distancing restrictions were lifted, allowing retailers, restaurants and other establishments to reopen.

That didn’t help Citibanamex, the country’s largest bank, stave off a 14% contraction in its credit cards franchise during the quarter, however, which general manager Manuel Romo attributed to consumers’ belt tightening.

The Citigroup-owned lender has allowed 800,000 customers to defer payments, according to Romo, who says most are paying on time, thanks to government support to help survive the pandemic. Its default balance stands at 2%.

Mexico tightens credit

Other banks are taking a cautious stance, however, cutting or toughening their credit offerings until the economy turns the corner. That, however, is unlikely to happen until 2023 amid looming uncertainty about how Mexico will emerge from the pandemic, according to Fitch.

In its latest report on LatAm banks, the ratings agency maintained its negative outlook on the sector, noting that regulations to allow businesses and consumers to forebear their debt will expire between December and June 2021, putting renewed pressure on borrowers’ repayment capacity amid high unemployment, rising corporate bankruptcies and the phasing out of government support programmes.

This, the agency concluded, will hurt banks’ asset quality and profitability in coming months.

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