Analysis: Mercado Libre and Argentina’s slow divorce

RIO DE JANEIRO, BRAZIL – (America Economia) The relationship between the Argentine unicorn and Alberto Fernández’s government does not seem to be flowing as it did with Mauricio Macri, under whose administration its financial arm, Mercado Pago, took off locally.

The current Argentine administration has created new regulations for fintechs – which the company founded by Marcos Galperín dominates- and has reduced some of its tax benefits. Meanwhile, Mercado Libre’s priorities are directed beyond its country of origin, particularly to Mexico and Brazil.

In the third week of March 2021, Argentina’s Minister of Health, Carla Vizzotti, pointed out that a second wave of the coronavirus pandemic was likely to occur. In a national broadcast message, president Alberto Fernández also conceded to the delay in the arrival of vaccines and urged citizens to respect preventive measures.

In the same week, Marcos Galperín, founder and CEO of the Argentine multi-national Mercado Libre, a current resident in Uruguay, wrote on Twitter “Thank you Uruguay!” and attached the document from the country’s Ministry of Public Health with data on the reserved vaccines against the disease.

The statement was not well received by some sectors in Argentina: “Tax and sanitary exiles, legalized privileges of evaders, bloodsuckers and usurers; the tables are going to turn and the wealthy who crossed the pond are going to have to pay a hundred times what they evaded,” said Juan Grabois, the leader of the Confederation of Workers of the Popular Economy (CTEP) and leader of the political group Frente Patria Grande which has a high representation in the current national government.

Grabois was not the only political figure who opposed Galperin’s company. Argentina’s truckers union leader, Pablo Moyano, son of Hugo Moyano who is considered one of the most powerful political figures in the country, said that Mercado Libre “is a company that has earned, earns and will continue to earn millions of dollars for its business. But at the expense of workers.”

The leader of the bank workers union, Sergio Palazzo -who claimed to be the Hugo Moyano of the financial system- announced: “I am going after Marcos Galperín, the owner of Mercado Libre.”

This is not the friendly environment to which the Argentine unicorn was used to during the previous presidential term. Between 2015 and 2019, Mauricio Macri made no secret of his favoritism for the company and every time he had the opportunity he praised Marcos Galperín as the country’s ideal entrepreneur model. He even joined him at the opening of Mercado Libre’s new headquarters for the region in Buenos Aires.

Galperín was not shy in his support to the president either, since when he was elected, he moved back to Argentina after 14 years in Uruguay, politically campaigned for him on his social networks and participated as a poll watcher during the 2019 elections.

But the entrepreneur’s efforts did not bear fruit, Macri lost the last presidential elections and, at the beginning of 2021, Mercado Libre’s founder moved back to Uruguay. During the transition, it was also announced that Galperin was stepping down as CEO and president of the local subsidiary, passing the torch to Brazilian Stelleo Passos Tolda and Juan Martin De La Serna, as CEO and president, respectively.

“The level of tension between the government and Mercado Libre during 2020 and 2021 peaked and it happens essentially for two reasons: one political and the other economic,” says Santiago Sena, professor at the business school of the University of Montevideo, Uruguay. “And the relationship between the two merits a debate, but it is very difficult to occur in the context of Argentina’s social tension and the deep political rift,” he adds.

The king of the jungle

“The elephant, if there is anything good about it, is that it can knock down everything so that those behind it may pass. If there is something bad about it, it is that it makes a lot of noise and can attract hunters,” says Ignacio Carballo, director of the executive program in fintech and digital banking at the Universidad Católica Argentina and researcher at the center for the study of economic structure at the Universidad de Buenos Aires, referring to Mercado Libre as the pachyderm in the Argentine industry.

In that regard, according to the academic, Mercado Libre had the key role of enabling markets in the country, such as e-commerce and finance. In particular, the latter segment stands out, which, according to its report for the last quarter of 2020, increased 59.9% in revenues compared to the same period last year, reaching US$454.4 million.

With the launch in 2003 of the Mercado Pago financial arm, its virtual wallet and credits in 2017, the company added the democratization of finance to its mission of democratizing commerce. It currently counts more than 105 million active payers, 4.4 million users of the Point card processor, delivered more than US$1.17 billion in credits through Mercado Crédito, and over 9.8 million prepaid cards, a card with no issuance or maintenance fee. In addition, it pioneered QR payment technology for Argentine retailers and offered it free of charge during the first period of its deployment.

According to Minsait’s X Payment Media Trends Report, Argentina is the Latin American country where the use of online payment systems and virtual wallets has increased the most (29%) during 2020, and where the use of payments with smartphones or smartwatches via QR has grown the most (from 34.3% to 54.3%).

The study distinguishes the importance of bigtech and fintech, while it considers that in the region “reactive moves by the banking industry to successful and pioneering solutions, such as the one led in Argentina by the omnipresent Mercado Pago, an Argentine unicorn reminiscent of the Chinese integrated ecosystem model” have just begun in the region.

All this progress was enabled by the lack of interference by the regulator, the Central Bank of Argentina (BCRA) of Mauricio Macri’s government. In 2017, the then leader of the monetary institution Federico Sturzenegger established the policy: “as long as fintechs do not capture deposits, we are not going to regulate them.” But the elephant hunters did not take long to come.

A few months after Alberto Fernández took office, the new BCRA – this time led by Miguel Ángel Pesce – abruptly launched a set of regulations for financial service providers that were not previously covered, such as virtual wallets.

“With the pandemic we realized that e-commerce and the possibility of making virtual payments are fundamental and made our life in confinement much easier,” says Cecilia Rikap, a researcher at Conicet, Paris Descartes University and the University of Technology of Compiègne. “Now, that doesn’t mean that the company has the right to do whatever it wants with our data or that it is not regulated, because just think what our life would have been like without electricity, but that doesn’t mean that these companies have the right to charge whatever they want,” she adds.

With the new regulation, fintechs in Argentina are required to keep users’ funds deposited in bank accounts at all times and they must always be available. They are also not allowed to operate in any currency other than the Argentine peso, nor can they use the client’s money to invest or to finance loans to others.

In addition to the new regulations, old authorizations were repealed, such as the option to pay salaries through e-wallets, something that was possible since April 2018. In April 2020, although it had been announced that digital wallets would be included for the payment of the Emergency Family Income, at the last minute the government decided to backtrack and allowed only traditional institutions to distribute the benefit.

The main bombshell launched by the government was Transferencias 3.0, the standardized electronic payment format created by the BCRA to pay and collect through banking apps or e-wallets by means of immediate transfers. The aim of this new modality was to replace cash and eliminate the hidden costs involved in its use, expand payment alternatives for businesses and increase competition in the provision of financial services.

However, the greatest controversy of this system was that payment methods could not charge commissions to retailers that invoice up to Peso$400,000 (approximately US$6,500 for the February 2020 dollar) per month.

“Let’s put it in context: Mercado Pago managed to have a network of over 1.7 million retailers, it more than doubled the number of accounts in the stock market thanks to Mercado Fondo, it developed an industry of 27 wallets, it brought the QR code and offered it for free for a year and a half and suddenly they force you to open the whole network and make it free,” explains Carballo. “It is logical that this is met with resistance and rejection by Mercado Libre,” he adds.

Counter-offensive

With the onset of the pandemic and the massive confinement, the BCRA paused the development of new regulations for the fintech sector and only resumed it in June. After 30 meetings, an agreement was finally reached for the second version of Transferencias 3.0, in which retailers considered as MSMEs [medium and small businesses] would pay a maximum of 0.8% to their digital payment providers, rather than zero commission, and the implementation of the law will be gradual.

However, during the morning of October 28th, Mercado Pago issued a statement saying: “Hello, we wanted to tell you that you will pay AFIP and provincial taxes every time you receive money from another holder’s bank accounts or digital wallets.

The company was referring to a withholding tax of 0.5% or 1.2% every time a transfer is made from a bank current account (CBU) to a digital wallet (CVU) and vice versa. The “new” charge would fall under the Tax on Debits and Credits, popularly known as “check tax”. But this levy was created as an emergency tax in 2001, was not being enforced and only covered the regulated banking system.

“Coincidentally, Mercado Pago is self-regulating and says it is going to start charging and paying this tax,” says Ignacio Carballo.

What is the impact of these changes? When money goes from one bank account to another, this tax applies. But if it is transferred from one Mercado Pago account to another of the same brand, it does not apply, since all fintech money is in the same bank account and transfers within the network do not pass through an interbank system. So, obviously, it is in the best interest of Mercado Pago users to use only the platform to transfer money among their peers, just as it is in the best interest of a retailer using this virtual wallet to buy from a supplier using Mercado Pago.

On the same day, the company came out to clarify that this was not a new tax, turning the brand into a trending topic on Twitter.

“This was interpreted as saying that he would not budge. He put up a battle to keep his ecosystem closed, they forced him to open up, but neither slow nor lazy, he dropped a bombshell,” says Carballo. “In addition, the whole issue occurred on social media and it was misinterpreted that it was the government that was charging tax,” he adds.

“It’s a superapp logic, as they are extending different business tentacles that allow them to leverage in one to be more competitive in another, either through pricing or the use of customer data. Now, you tell me if it’s right or wrong. To me, it’s a business model: it’s saying ‘I’m going to give more benefits to those within my ecosystem’. That’s what it is and those are the weapons they have,” he says.

In a loophole

In addition to the business model, experts say that one of the main reasons why Mercado Libre was able to grow so quickly and conquer several industries was because it knew how to take advantage of the regulatory loophole, particularly in the financial spectrum.

“In the specific case of everything that is fintech, regulation makes it clear that they are helpless. Because these are not banks and are not regulated as such, but at the same time they operate in many things like banks. So it is definitely unfair competition,” says Cecilia Rikap. “Argentina’s go-to-market is the shortest compared to countries like Chile, Mexico, Paraguay, Peru and Uruguay, and the reason is because it is not regulated,” agrees Ignacio Carballo.

For example, Mercado Libre’s credit arm, Mercado Crédito, has its own personal rating criteria for borrowers. It uses thousands of variables that it analyzes through machine learning, such as the user’s behavior in the Mercado Libre marketplace, the type of cell phone used to interact with the platform, the means of payment and more.

On the one hand, this technology provides services to thousands of unbanked users (in Argentina, approximately 80% of adults have a bank account, but, according to the BCRA, only 48% say they are aware of their financial product). But, on the other hand, fintechs – unlike traditional financial institutions – are not obliged to share their clients’ scoring data in the BCRA’s debtor central, so their users do not have access to products and services from other providers.

“With algorithms and technology, a customer can prove to Mercado Libre that he is a good payer, but not to the traditional system,” Carballo points out. “Beyond the business model or culture, that seems to run counter to this message of democratizing finance,” he says.

If, on the one hand, the company has benefited from the slowness of the political sphere in defining the limits of this new digital industry, on the other hand, “when Mercado Libre is the leader and has no competitors, it has a rather Peronist mentality,” claims Santiago Sena, referring, in this case, to the company’s retail segment. “It’s quite top-down and not very open to making changes to the rules of the game if the marketplace sellers find it abusive in their time or commission policies,” he adds.

In January 2021, it was reported on social networks that Mercado Libre would increase commissions by 2% for marketplace sellers in Argentina. A classic listing would go from 13% to 15% of total sales, while in the case of a product with a premium ad, the amount would go from 28% to 30%. These figures are higher than in countries such as Brazil, where one of the most expensive segments with commissions is 14% for classic postings and 19% for premium, and in Chile the most expensive segments are 14% and 17% per listing.

This is not the only difference in services for Mercado Libre sellers depending on the country they are targeting. A seller in Chile can wait up to 21 days to be paid in their account, in Mexico up to 7 days, while for a seller in Argentina it can take up to 28 days.

“Faced with that, what does a highly regulatory state like the current one in Argentina do? It forces you not to charge commissions. I don’t think that’s the right way. But is what the company is doing on its own without regulation balanced? It’s debatable,” says Sena.

Cecilia Rikap agrees that this discussion is important because successful and fast-growing companies like Mercado Libre tend to create natural monopolies because they are markets where it is more efficient for there to be one company rather than several. For example, it is easier for everyone to buy on Marcos Galperin’s platform, since all suppliers may sell in a single space, instead of having to post on different platforms. It also improves the delivery system, as well as financing, which enhances the capabilities of the algorithms and generates synergy and economy of scale.

Unlike Sena, the economist believes that this situation “requires regulation and control by the State more than ever. Because even with regulations, with more taxes or a rent for data appropriation, these companies obtain a benefit that far exceeds today’s sales by taking over all our data.”

Political signals

Apparently, the government of Alberto Fernández shares Cecilia Rikap’s opinion. In addition to the BCRA’s reforms to fintechs, the central government modified the project to update the Knowledge Economy Law (a legislation that promotes the development of activities of technology-intensive companies through tax benefits) promoted by the previous administration and passed it with a focus on small and medium-sized companies, decreasing the benefits to large firms such as Mercado Libre.

On the other hand, in October 2020, it launched the state-owned platform Correo Compras, an online shopping marketplace where regional producers or official brand distributors can sell their products without intermediaries and use Correo Argentino’s postal service logistics to ship throughout the country.

The project was included in Correo Argentino’s strategic plan in 2015, but did not materialize because “things happened,” complained the company’s CEO, Vanesa Piesciorovski, in reference to the statement by ex-president Mauricio Macri with which he tried to justify the worsening of the country’s economic situation. The platform’s official presentation took place at the Kirchner Cultural Center.

“Decidedly [these measures] are a state response to the expansion of Mercado Libre. The state is neither monolithic nor is it an independent agent of the economy,” says Cecilia Rikap.

On the other hand, Sena believes that the launch of Correo Compras “seeks to lower intermediation costs so that regional producers have access to better clients and subsidize the country’s inefficient and very high logistics costs. At the same time, it is unusual for a state-owned company to launch a platform equal to that of a private company.”

The same week of the launch, President Fernández had lunch alone with the Secretary General of the Truckers Union Hugo Moyano, whom he had previously described as an “exemplary leader.”

In July 2020, this same union disrupted five distribution and courier centers of Mercado Libre, with the aim of recovering the “theft” of 1,200 employees who joined the rival union, Unión de Trabajadores de Carga y Descarga (Loading and Unloading Workers Union). When asked about this conflict, the president said “I am not very aware about what the conflict is.”

The blockade was lifted thanks to a dialogue table promoted by the Ministry of Labor and, on Truckers’ Day celebrated in December that year, Fernández once again praised Moyano as a “great union leader” and thanked God “that we had the truckers to fight against our worst nightmare ever, which is the Coronavirus.”

In February 2021, truckers again cut off the access to a logistics complex of Chazki, which provided services to Mercado Libre. Despite the court ruling ordering the union to lift the blockade, they decided not to comply with the decision and the protest went on for almost two weeks, in a context in which the sanitary decree of “social, preventive and mandatory distancing” was still in force.

Rough times

Argentina’s business climate was not particularly pleasant before Alberto Fernández came to power, particularly with ex-president Mauricio Macri turning to the IMF in May 2018 for a US$50 billion loan, in exchange for reducing the deficit and inflation. But with the August 2019 presidential primary elections, the weather turned from a cloudy day to a storm.

Fernández won the primaries with 47% of the vote, compared to 32% for the Macri administration, establishing itself as a de facto government but without formal power until the handover in December that year. This five-month transition created a governance limbo in which the then president had no authority to continue his project, and hit the economy hard: after the elections, the peso devalued 25%, some stocks fell more than 50% and bonds about 15% and the country risk exceeded 1,700 points (record in a decade).

Currently, Argentina scores 59 points in the Doing Business 2020 index prepared by the World Bank, narrowly surpassing the average for Latin America and the Caribbean (58.8), and is ranked 129th in the world, while the most outstanding countries in the region are ranked 59th (Chile), 60th (Mexico), 65th (Puerto Rico) and 67th (Colombia).

On the other hand, Argentina is the country in the region where most taxes are paid, with a tax rate of 106.3% on profits, while in none of the other countries exceeds 100% (in Bolivia the rate is 83.7% and in Venezuela it is 73.3%).

In this context, more than twenty companies left Argentina or disinvested in the country in 2020 and in the first quarter this year. The exodus began in February last year, with the announcement of the official and definitive closure of LAN Argentina, a LATAM subsidiary, and was followed by the early closure of Chilean holding company Falabella’s stores.

In the case of Mercado Libre, despite the tensions with the current government, the company maintains its head office and its positions in its country of origin, although it recognizes that the importance of its business in Argentina has decreased.

“If [Argentina] lost relevance it was not due to its own demerits, because it continues to perform very well, but rather because the growth rates in other places are spectacular,” said Juan Martín De La Serna, the new CEO of Mercado Libre Argentina, in an interview with the newspaper El Cronista.

In fact, according to the financial report for the first quarter of 2021, Argentina was the country with the highest revenue growth for the company with a 223% year-on-year increase, followed by Mexico (148%) and Brazil (139%). On the other hand, Argentina represents only 37.8% of Mercado Libre’s revenues, second to Brazil (52.6%).

The truth is that Argentina is no longer the number one priority for its largest company that, at the start of the year reached a market capitalization of over US$100 billion, representing approximately a quarter of the country’s Gross Domestic Product, and that recently posted a 158% growth in net revenues in the first quarter of 2021 compared to the same period last year, reaching a total of US$1,378 million.

According to Mercado Libre’s 2020 sustainability report, the company opened eight new warehousing and distribution centers in Mexico, Brazil, Chile and Colombia, hired more than 3,500 new employees, added new aircraft fleets to its logistics arm in Brazil and Mexico, and accelerated the growth of its electric car fleet in Brazil, Mexico, Chile and Uruguay.

In April, the company announced that it would double the size of its team across the region and, for the first time, Argentina would no longer be the country with the most employees, as both Brazil and Mexico would be above it.

Investments outside the parent company do not stop there. In Chile, the company defined an investment plan for US$100 million in logistics for 2021 and 2022 and, for the first half of this year, eight new distribution centers in Chile are expected to start operating.

In the case of Brazil, Stelleo Tolda said that the company plans to invest a record US$1.8 billion, aiming mainly at expanding its logistics network, while for Mexico an investment of US$ 1.1 billion was announced, an amount that exceeds the sum of investment there of the last four years.

“Mercado Libre is a company that has very pragmatic managers. They don’t care if they smile or not at the government office, what matters to them is if the business is good at the bottom line. If you have a better bottom line in another country where they offer you the same deal, you go where you maximize your profits,” says Santiago Sena. “That said, like all companies in Argentina, they are going to wait for the political winds to improve: when the times are rough, they will try to ride the wave as best they can and, when they can capture more value, they will do so,” he adds.

Source: America Economia