Mercado Pago: Fintech Leverages Interest Rates to Compete with Brokerage Firms

The high-interest rates of central banks position financial technology institutions (fintech) as a serious competitor to brokerage firms, according to Mercado Pago.

“The fact that interest rates are high allows us to give a better yield to our clients. We have the capacity to distribute that product to a lot of people,” said Pedro Rivas, general manager of Mercado Pago in Mexico, in an interview.

Rivas explained that fintech companies have two competitive advantages: the use of technology in the development of financial products and their user base.

“Since we have millions of users who are constantly interacting with our products, we avoid the cost (of reach) that brokerage firms have,” said Rivas.

Mercado Pago currently pays a 10.3% annual rate of return on the savings that a person deposits in his application. In other words, with an investment of 20,000 pesos, the return will be 2,000 pesos.

The money is deposited in a fund managed by Grupo Bursátil Mexicano (GBM), which has more than 1,500 million pesos invested with figures updated to May of this year.

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Fintech investment accounts scale

In a meeting with the media, Tenet Consultores partner, Rocío H. Robles, explained that in the four years of the Fintech Law, more and more people are using these entities to invest.

“The number of investor accounts in crowdfunding institutions has grown more than that of brokerage firms, considering that the latter have been operating for many years,” she said.

According to the most recent data from the Association of Crowdfunding Platforms (Afico), at the end of 2022, there were around 800,000 investment accounts in crowdfunding platforms.

Meanwhile, accounts in brokerage firms are around 6 million, a number that has increased since the pandemic, although such institutions are more long-lived than fintechs.

Mercado Pago evaluates risks due to delinquency

Mercado Pago launched its credit card a few months ago, after last year obtaining authorization from the National Banking and Securities Commission (CNBV) to operate as an Electronic Payment Fund Institution (IFPE).

In an environment of high interest rates, which make access to credit more expensive, the company reviews the risks of default, which affect fintech companies more than traditional banks.

“We are not grabbing the user who we don’t know whether or not he will be able to pay a loan. We have been training our risk models for a long time, we have a lot of information available, around 2,000 variables,” said Rivas.

In order to avoid these problems, the fintech company evaluates the payment habits of the users who are part of its digital ecosystem, to rule out those who could default on their payments.

However, the case of Mercado Pago, the financial arm of e-commerce giant Mercado Libre, is not the same as that faced by smaller entities that are more vulnerable to high-interest rates.

This is an additional product that adds value to a good part of our users, but we are not solely dependent on it. If there is a downturn we do not depend on this to live or die,” said the director of Mercado Pago.

In the first three months since its launch, Mercado Pago has placed 150,000 cards in the Mexican market, equivalent to 10% of the credit cards issued in that period in the country.

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(Featured image by rupixen.com via Unsplash)

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First published in EL CEO. A third-party contributor translated and adapted the article from the original. In case of discrepancy, the original will prevail.

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