MercadoLibre (MELI 1.14%) and Nu Holdings (NU -1.71%) are top companies based in Latin America and are both reporting incredible growth. Until now, there hasn't been much overlap between them. But MercadoLibre just announced that it's encroaching on Nu's territory, with plans to open the largest all-digital bank in Mexico.
Is this a threat to Nu's business?
Nu is leading a digital-banking charge in Latin America
Nu and MercadoLibre both offer fintech solutions for customers in Latin America. Nu is an all-digital banking app with a full range of financial services, and it operates in its headquarters' country of Brazil as well as in Mexico and Colombia.
The company recently highlighted how Mexico is driving its incredible growth. It added 1.5 million customers in the first quarter for a total of 6.6 million or 5% of the market share. Total deposits increased 53% year over year in the quarter to reach $24.3 billion, driven by activity in Mexico. Deposits more than doubled to $2 billion from the previous quarter in Mexico.
According to Bloomberg, less than 50% of the population in Mexico has a bank account. It's no wonder financial companies have identified it as an ideal place to get a banking license. Nu began the process of getting its own banking license in Mexico last year.
Right now, it has a SOFIPO (popular finance) license, which gives it the ability to offer a lighter tier of financial services. For example, it only guarantees deposit accounts up to about $18,000 per account. To attract high earners, Nu needs a full bank license, which guarantees $180,000.
CEO David Velez pointed out that deposits are the largest profit-generator for incumbent banks in Mexico. These banks typically offer a 3% to 4% yield, while the government rate is 12% to 13%, so there's not much risk. To break into the market, it offers its Cuenta Nu (NuAccount) rate of a whopping 14.75%
Given that approach, it's not surprising that the Mexico and Colombia businesses are yet to be profitable, but Nu in total is extremely profitable, with $379 million in net income in Q1. Brazil is picking up the slack while Nu expands to amplify its brand and capture market share in other countries. As it offers more and better features, it thinks it can still offer the best value while lowering the yield and generating profits. Nu said its goal is "to have the very best deposit value proposition in the country."
Nu acknowledged that there's freedom of money movement, and customers will go wherever they get the best deal and plan. According to Bloomberg, two other foreign operators recently received banking licenses in Mexico, and there are four local operators in the process of obtaining one.
In Nu's favor, management noted that it benefits from a strong network effect. It offers many more services than bank accounts in Mexico, including credit cards and investments. These are all performing well, in fact at better rates than in Brazil when it was at a similar growth phase. Through all of these products, it gets a lot of data that informs all of its operations in Mexico and allows it to understand and meet the needs of customers in a particular region.
Management says there's a low barrier to entry. So it's not surprising that MercadoLibre is taking its first steps here as well.
Where does MercadoLibre fit in?
MercadoLibre is primarily an e-commerce giant similar to Amazon, but it has a fast-growing fintech segment born out of a need for underbanked customers to be able to pay for purchases. Its financial arm, MercadoPago, is a platform for all kinds of payments online. It has expanded to offering credit products as well, which already compete with some of Nu's credit products. Within a year of launch, it has 1 million credit cards in Mexico, behind Nu's 3.2 million.
In Mexico, MercadoLibre is currently considered an electronic payment-funds institution (IFPE). Over the past two years, MercadoPago users in Mexico quintupled. Management says that it has millions of users who already see MercadoPago as their main banking institution, and its goal is to become the "largest 100% digital bank in Mexico."
MercadoLibre said it is not planning to pursue other countries, but that could be short term. Mexico is the low-hanging fruit, so to say, so it's easy to make a play in that region, take some profits, and see if the model can be replicated in other countries.
Is Nu under threat?
It's doubtful that MercadoLibre's entry will upend Nu's business. Nu is very popular, and it will be hard to compete with Nu's deposit rates.
However, it could definitely take some of Nu's market share. MercadoLibre has plenty of its own data, and it won't be entering unprepared. It already has relationships with millions of Mexico-based customers and a proven track record in delivering innovative products. It could also compel Nu to keep its rates high for longer, weighing on its profitability. I wouldn't take MercadoLibre's entry lightly.
Since Mexico is still underpenetrated, there's room for both players and more. This is an exciting development, and it's something for investors to keep an eye on.
