One of Latin America’s leading digital companies is MercadoLibre. The firm is an ecommerce company which has excellently adopted the double play business model. It has a payment unit, MercadoPago, which is anchoring huge growth with payment transactions up 72% year on year, to a total payment value of $5.3 billion. But the biggest news: the offline payments are now overtaking the online on-platform payment. This company built a payment operating system, making it a solid preferred choice for brick-and-mortar retailers to adopt MercadoPago as the payment solution of choice.
And that’s reminding some analysts of how PayPal, which was originally purchased by EBay in 2002 and used as its payments service, wound up being more valuable than its parent company, analysts at both Susquehanna and BTIG noted in separate reports. PayPal separated from EBay in 2015 to concentrate on expanding its electronic transactions business without being shackled to the slow-growing online marketplace. “We remind investors that PayPal, once just a piece of eBay, is now worth 3 times more than its former parent,” BTIG’s Marvin Fong wrote in a note.
Simply, MercadoLibre is no more just an ecommerce provider in Latin America. It has since evolved as a payment and fintech company. It has a clear double play just as Alibaba has on Alipay. You can also include the old eBay which had Paypal before the latter was spurn out.
I explained in the duality element that digital products which thrive are typically both products and platforms. It would be hopeless to build modern digital products without having a moat through platforms. Interestingly, the greatest digital ICT utilities have double plays in their business models: if Amazon decimates many brick-and-mortar stores, it would welcome many online to sell them cloud services. Alibaba welcomes you to its marketplace platforms, and you certainly have signed up for its (partly affiliated) payment processing solutions (Alipay) which command commissions.
It seems there is a clear correlation between ecommerce success and payment in emerging markets. From Alibaba to Alipay, MercadoLibre to MercadoPago, there is something inherently powerful why successful ecommerce companies in emerging economies have built or acquired solid payment infrastructures. Indeed, you cannot have an ecommerce without a functioning payment system.
Largely, once these firms begin, they quickly realize that the payment business is doing better than the ecommerce unit. Latin America’s MercadoPago has seen offline payment overtaking online in-platform payment as people seem to thank the company for the payment solution over the ecommerce platform. From every angle you look at it, the real ecommerce business is truly payment in emerging market. It is something to seriously consider as you write a business plan on the next ecommerce startup.
Yes, I am beginning to think Zinox Group, owner of Konga, should acquire/merge with one of the leading payment startups in Nigeria to unlock more value. The Konga platform provides the oasis while the payment fintech opens new territories. Yes, I do know that there is KongaPay but that is not a category-leading fintech unit. The likes of Paystack and Flutterwave will be optimal for Konga.
Comment: Perhaps the next phase of the fintech evolution will be M&As between e-commerce and fintech. I however think that unlike other markets, e-commerce companies in sub- Saharan Africa (with the exclusion of South Africa) still has to grapple with distribution at the last mile and hence unable to unlock real value. I’d rather like to see M&As between logistics providers and ecommerce in the short to medium term while M&As with payment platforms as a medium to long term strategy.
We know for a fact that payment for now is largely cash based. Once the market friction due to last mile distribution is addressed by ecommerce companies, they’ll be able to bring real value to the table during M&A discussions with payment start-ups. From a market valuation perspective (using funds raised from VCs), payment start-ups are valued way higher than ecommerce companies and that can influence discussions should e-commerce companies try to merge with payment start-ups now.
My Response: That is a really brilliant analysis, Kunle. You summarized it here “I”d rather like to see M&As between logistics providers and ecommerce in the short to medium term while M&As with payment platforms as a medium to long term strategy”. Yet, my thesis is that I do not expect any last-mile logistics company in Africa (exc SA) in the next decade because no one can afford to do that. It is extremely capital intensive and it is not really a startup job. So local ecommerce companies are not going to be in positions to acquire or merge with such entities. Only national postal services or big brands like Amazon can execute such if they show interests in Africa.
Comment: I was about to mention eBay/PayPal acquisition, until I saw it in the report; so it’s a trend. Ecommerce and payment platform are becoming interrelated and interdependent of each other.
When you look at it critically, it is more or less about covering the flanks, making sure that you do not leave sizeable money on the table. Also reinforcing the one oasis strategy.
Again, when it comes to payment seeming to outshine the ecommerce itself, it’s simply natural. Almost each and everyone of us with disposable income do more of payments than purchases on weekly or monthly basis. You can make one or two purchases weekly, while on the other hand, more than twenty payments tasks have been carried out, ranging from transfers to all kinds of transactions. In other words, money exchanges hands more than goods, the ratio could be in the region of 7:1 in some cases.
So when you see Fintech companies springing up here and there, it’s partly due to the magnitude of monetary exchanges humans conduct on daily basis. Of course not every player in that space has given deeper thoughts as to the whys of the proliferations.