Mexico's unbanked population 'now big enough to count' for fintech companies

By Elijah Megginson

Susquehanna says trio of fintech firms are the 'best ideas to participate in the compelling emergence of fintech in Mexico'

An underbanked and heavily cash-based economy offers fertile ground for a trio of fintech-oriented companies offering mobile financial services in Mexico, according to analysts at Susquehanna Financial Group.

In a note earlier this week, they identified dLocal Ltd. (DLO), MercadoLibre Inc. (MELI) and NU Holdings Ltd. (NU) as their "best ideas to participate in the compelling emergence of fintech in Mexico." Susquehanna has positive ratings on all three stocks.

The report noted that the three companies have become key players in Mexico's e-commerce market. Meanwhile, data shows only 49% of adults in Mexico have access to a bank account, leaving around 66 million unbanked customers, Susquehanna noted (see chart below).

Historically, Mexico has been a cash-dominant country, with cash making up 38% of point-of-sale, or POS, transactions, the analysts said. Cash can also be used for online transactions via Oxxo, a retail chain with 20,000 stores that offers a post-pay payment method using vouchers. Oxxo accounts for around 21% of payment transactions, Susquehanna said, while other popular payment methods include cards that run on domestic credit/debit network Carnet.

And while Mexico is Latin America's second-largest e-commerce market by gross merchandise value, the online opportunity remains largely underdeveloped. Payments data implies that e-commerce made up just 8.6% of total spending in Mexico in 2023, compared with 15.6% in the U.S., they noted.

Citing data from FIS, the analysts said e-commerce spending in Mexico is set to grow at an 11% compound annual growth rate through 2027, versus a rate of just 2% for POS, boosting e-commerce to an 11.6% share of total spending.

The analysts expect a shift away from cash to continue.

"The point is that Mexico adoption is now big enough to count," the analysts wrote.

dLocal

Mexico has consistently been a top grower by revenue in recent quarters for dLocal, a Uruguay-based fintech that operates in 40 countries, connecting emerging market consumers to global merchants. Mexico accounted for 18.2% of revenue at dLocal in 2023, up from 16.2% in 2022.

Susquehanna calculates that if dLocal should take 1 percentage point of incremental market share, total revenue may rise by around 2.7%.

MercadoLibre

Argentina's MercadoLibre operates the largest e-commerce platform in Mexico, according to some measures, and specializes in operating online marketplaces focused on e-commerce and online auctions, Susquehanna noted.

MercadoLibre has been operating a mobile wallet for years, but now the company is seeing traction with a new credit card. It may have an approximate 5.3% share of credit card volume, Susquehanna analysts said.

Susquehanna estimates that if credit-card penetration rises by 1 percentage point, MercadoLibre's Mexico total payment volume might rise around 25%.

Nu Holdings

Nu Holdings, parent company of Brazil-based financial technology firm Nubank, arrived in Mexico in 2019 in its first international foray. After launching a credit card in 2020, Nubank saw an approximately 77% compound annual growth rate through 2024, the Susquehanna analysts said.

They calculate the platform has a market share of around 8% of customer accounts among those who qualify for a Nubank bank account. Susquehanna also estimates that should credit-card penetration in Mexico rise by 1 percentage point, Nubank's total payment volume could rise by around 26%.

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06-06-24 1737ET

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