Mercadolibre Inc

NASDAQ:MELI

Earnings Call Transcript 2021-Q3

[Operator]

Good day, and thank you for standing by. Welcome to MercadoLibre Third Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions]

I would now like to hand the conference over to your speaker, Lisa Schreurs, Investor Relations Officer.

[Lisa Schreurs, Investor Relations]

Hello, everyone, and welcome to the MercadoLibre Earnings Conference Call for the quarter ended September 30, 2021. I am Lisa Schreurs, Investor Relations Officer for MercadoLibre. Our Chief Financial Officer, Pedro Arnt, will be leading today's prepared remarks. Joining him on the line is Chief Executive Officer of MercadoPago, Osvaldo Gimenez, who will be available during today's Q&A session.

I remind you that Management may make forward-looking statements relating to such matters as continued growth prospects for the company, industry trends and product and technology initiatives. These statements are based on currently available information and our current assumptions, expectations and projections about future events. While we believe that our assumptions, expectations and projections are reasonable in view of the currently available information, you are cautioned not to place undue reliance on these forward-looking statements.

Our actual results may differ materially from those included in this conference call for a variety of reasons, including those described in the forward-looking statements and Risk Factors sections of our Form 10-K for the year ended December 31, 2020, Item 1A-Risk Factors in Part II of the Form 10-Q for the quarter ended March 31, 2021, and any of MercadoLibre Inc.'s other applicable filings with the Securities and Exchange Commission, which are available on our Investor Relations website.

I will now turn the call over to Pedro.

[Pedro Arnt, Chief Financial Officer]

Hi, everyone, and thanks for joining our earnings call this quarter. I'll start with a few notes regarding our operating environment. Fortunately, we've seen a consistent easing of mobility restrictions across our region in the last few months, with signs that we are approaching a new phase in our response to the COVID-19 pandemic. This is great news as only a year ago, we had experienced the peak of severe lockdowns and government financial aid interventions in the third quarter of 2020. On the business side, these positive trends also mean that this is the quarter of toughest year-over-year growth comparisons for our main metrics.

Having spent over a year working through difficult macroeconomic and healthcare conditions throughout Latin America, we are starting to take stock of our role and our impact in commerce and financial services businesses throughout this time. In September, we released the results of a study titled Impacts That Matter conducted by Euromonitor that assessed our contribution to the socio-economic environment and ecosystemic effects in our key geographies over the past year.

We are proud to see that our mission of creating sustainable prosperity in our region through the democratization of commerce and access to financial services is coming to fruition. Our platforms have enabled the main source of income for over 900,000 families in our region and we generated six new jobs per hour during 2020 -- directly or semi directly -- through our ecosystem.

As we expanded our credit business, over 40% of our SMEs accessed their first loans ever -- most of which were geared towards investing in working capital for their businesses. Overall, we have enabled our merchants to grow their operations well beyond their cities and amplified their reach into a larger economy, becoming an even more important source of revenues during the challenging year of 2020. The full Euromonitor report summary has been uploaded to our website and we encourage you to have a look at it.

As a result of what we believe to be these lasting contributions to financial inclusion and the democratization of commerce through an improved experience for our users, our volume growth rates continue to demonstrate a solid trajectory over the long term. We have once again reached new records in gross merchandise volume, payment volumes and credit portfolio size, which demonstrates resilience and strength across all parts of our ecosystem. Moreover, we see our engagement and satisfaction improving sequentially for both commerce and fintech services, which is particularly encouraging given the user base expansion that we have driven over the last year.

Let me dive deeper into the third quarter results, starting with our commerce business. For the first quarter, we achieved a new record in GMV of over $7.3 billion, posting a growth of almost 30% on an FX-neutral basis. This represents an increase of over $1.4 billion compared to the same quarter last year. We also see consistency on a two-year CAGR growth in FX-neutral GMV of 73%, very similar to the 74% achieved in both Q1 and Q2 of this year.

We sold almost 260 million items in the third quarter, growing over 26% year-over-year. This growth is fueled by continued increases in our commerce user base. We reached 38.6 million unique buyers on the commerce side alone and our buyers are demonstrating higher levels of engagement, with increasing transactions per unique buyer sequentially. We are still seeing higher levels of new buyers to our platform compared to the periods before the pandemic and of equal importance, we are maintaining better retention levels, as well.

Taking a look across our geographies, the first that stands out in terms of growth is Brazil. With an FX-neutral growth of 28% in GMV, Brazil reached almost 138 million items sold during the Q3. These growth rates are above what we had experienced prior to the pandemic and the 51% two-year CAGR is flat compared to prior quarters with 53% in Q1 and the same 51% in Q2.

In Mexico, gross merchandise volume grew over 34% on an FX-neutral basis, accelerating compared to Q2 and growing unique buyers sequentially. Argentina reached almost 37% of GMV growth on an FX-neutral basis. And all three key geographies improved in transactions per buyer versus the previous quarter and net promoter scores are also trending to their highest levels yet in several of these key geographies.

We attribute the sustained and continuous increase in buyer engagement to several initiatives that we are running in parallel. First, our developments in product assortment and depth of product can be linked to this change in behavior towards higher frequency. Our marketplace is increasingly filled with well-recognized brands in the fashion, beauty, consumer electronics and consumer packaged goods industries, not only from marketplace sellers, but also through the development of our first-party assortment.

Just as an example in the last few months, items from Nike, Enjoei, Nivea and PlayStation can be found in our marketplace in Brazil, as well as Apple, Samsung and Asics that have been added to our platform in Mexico. Particularly for our grocery strategy, we have taken an additional step to expand our assortment with our first pilot programs for fresh items.

In São Paulo, we started operating with Mambo, a local food retailer to offer their fresh selection and we are setting up similar partnerships for the coming quarters in both Buenos Aires and Mexico City. During these early days of moving into the supermarket category, we have observed that supermarket buyers not only have a higher purchasing frequency, but also are demonstrating better user retention rates.

Second, we continue to enhance our tiered loyalty program, which not only builds strength on the commerce side, but also ties in our fintech services. With the strong partnerships we have developed with our content providers, we believe the benefits and discounts offered through the loyalty program are among the best in class. More recently in September, we started giving users the option of purchasing access to our highest loyalty tier, offering our most comprehensive benefits with the highest shipping and content discounts to these paid users.

Finally, the consistent results of the last year proved the great importance of reliable, fast shipping to remove barriers to ecommerce. We made significant investments in the continued roll-out of our managed logistics network during the third quarter.

So, turning to Mercado Envios, the advances in speed and execution on the network are transforming the commerce experience throughout the region. In Q3, we shipped almost 248 million items and developed more capabilities to expand fulfillment throughout key geographies. Our managed network penetration reached 86%, up from 64% in the same quarter last year. Within that network, fulfillment by Mercado Libre is propelling growth, having reached 37% penetration. We launched two new fulfillment centers in Brazil this quarter and converted two existing fulfillment centers into centers that are now fully-managed by us.

In Mexico, an additional fulfillment center was implemented and will be expanded in the coming months. Argentina, Colombia and Chile, we see more sellers and items moved into our fulfillment centers. Overall, we have now 16 active fulfillment centers throughout the region, enabling our delivery times to improve every quarter.

Faster shipping is also coming through our cross-docking network, which represents over 40% of shipments. We are improving our service levels within cross-docking as we scale and mature the various nodes of this extensive network. As part of this expansion, we signed an agreement to acquire a specialized logistics technology company, Kangu, in the third quarter after having developed a strong partnership of accelerated growth and shipping capabilities with them starting in 2019.

Operating over 5,000 pick-up and drop-off points, Kangu has created a differentiated value proposition for logistics in Brazil, Mexico and Colombia. It is asset-light and technologically-integrated. This network, which we call MELI Places is now part of our logistics assets, allowing us to increase our network's capillarity, reaching more sellers and buyers at faster speeds and growing the model based on our geographical and service expansion opportunities.

One example of this is that over 60% of the MELI Places are already enabled for pick-up functionality for buyers who have opted not to receive their purchases at their home address. In Mexico, we are already using some of these places to receive returns -- an experience we will roll out to other countries shortly. We can also count on our Flex solution to improve shipping times for shipments travelling within the same urban area. Flex is already operating seven days a week for all sites where it has been deployed.

The Flex technology is also running part of the hybrid shipping model for supermarket items. While dry goods are being shipped from our fulfillment centers, fresh products shipped directly from store to the buyer leveraging the capabilities of the Flex network. Flex represents almost 10% of our shipments today and has developed particularly quickly in Argentina, Chile, Colombia, and Uruguay so far, while also delivering the fastest times on our network.

Combining all of these flexible shipping capabilities, we are achieving our goals to run a faster and more reliable delivery operation. In the third quarter, almost 80% of all items were delivered within 48 hours, while consistently increasing the number of free items shipped. We are developing more specialized capabilities to take on a variety of categories within our network. The continuous improvement around our shipping solutions goes hand-in-hand with our category development expansions. Our strategy to create the proprietary technology and infrastructure around logistics continues to open new strategic doors for us and has become one of our key assets and strengths for our ecommerce operations.

I'd like now to spend some more time delving deeper into our fintech business, which we are extremely excited with. We are encouraged by signs that we have reached a level of product maturity in certain parts of the fintech business and simultaneously, we see vast opportunities to keep developing our reach into a large market of unbanked and underbanked users throughout Latin America.

We are focused on fueling these next growth engines by taking our new upcoming fintech products to market. In light of this, we have transitioned the organization to approach solution based on the end-user and not the product offering and are therefore dividing our products and services into two organizational units: Merchants and Individuals. This should allow for better cross-selling opportunities and also a more consumer focused go-to-market strategy.

A more integrated view of each segment of merchants will enable us to provide more customized solutions within our product portfolio. On the individuals' side, our strategy is to drive deeper relationships with our users and offer them a greater array of services through the digital account. To illustrate our efforts under this framework, we will begin disclosing our TPV with an additional breakdown of Acquiring TPV and Digital Account TPV from now on.

Together, Acquiring TPV and Digital Account TPV add to our consolidated total payment volume in the region, which reached $20.9 billion in the third quarter, growing 59% on an FX-neutral basis. This represents over 865 million payment transactions in the quarter, growing 55% year-over-year. Now let me give you a more detailed update of the third quarter performance for our Acquiring TPV, which encapsulates On Platform payments, as well as merchant services for Online Payments, the mobile point of sale business and QR payments.

Acquiring TPV reached $15.4 billion, growing 46% on a consolidated FX-neutral basis. Within that, On-Platform TPV reached $7.5 billion at a 29% FX-neutral growth, in-line with our On-Platform GMV growth. Online payments outside of our platform had a similar growth level of 32% on an FX-neutral basis, though with a more accentuated deceleration compared to Q2 as expected since physical retail started to reopen during this period and the year-over-year comparison steepened.

The leading highlights in terms of growth were MPOS and QR payments during the third quarter. We were happy to see strong payment volume figures in both of these segments as individuals and merchants are now back to safer mobility in the region, with Point TPV growing 78% on a consolidated FX-neutral basis and with 1.3 million in device sales this quarter. Equally important are the advances of the QR payments for our merchants, which have accelerated in growth this quarter in all geographies.

The new Digital Account TPV encompasses the individual payment services available in our Wallet as well as all card payments, including debit, prepaid and credit. But we are excluding unmonetized transfers other than peer-to-peer between MercadoPago accounts.

Digital Account TPV reached $5.5 billion in the third quarter with a 101% growth on a consolidated FX-neutral basis. The Digital Account is also the platform that hosts multiple additional services for users beyond the payments reflected in TPV, such as the adaption and management of a consumer credit line, hiring of insurance policies and certificates and the typical bank transfers to other outside accounts.

Though not reflected in our reported payment volume, these other services have increasingly better user interfaces and integration with our full ecosystem. We believe these other accessory services are key to maintaining users' trust and engaging with ample financial services available in the MercadoPago Digital Account as we increasingly vie for the principality in financial services of our user base.

And while I'm on engagement, I would like to introduce our new methodology of counting and tracking Unique Fintech Active Users. Within our full Mercado Libre ecosystem of almost 78.7 million active quarterly users in Q3, we have a subset of users that are employing a MercadoPago fintech product, which we call Unique Fintech Active Users. We count a user as a Unique Fintech Active User if they have engaged in at least one of the following services within the quarter: wallet payment online, in-app or in-store; transfers; withdrawals; consumer or merchant credit borrowers; card users; fintech sellers; and fintech active products such as asset management and insurtech users. We had 31.6 million Unique Fintech Active Users in the third quarter of 2021 alone, a growth of 13% compared to last year's similar quarter.

Until the last quarter, we had been giving a lot of attention to the number of Wallet Payers, which continue to trend upwards during the third quarter, reaching 16.8 million wallet payers, up from 15.1 million in the second quarter. Yet, given our increasing attention to serving individuals beyond the payment facilities offered in the Wallet, we believe that the Unique Fintech Active User metric better reflects our user base that is engaged with our Digital Account. We are looking forward to sharing more around this metric as our products continue to mature and the number of features per user presents growing trends.

A key extension of our fintech services that supports our merchant and individual user bases is our credit business. We have exciting developments taking place in this part of our ecosystem and we believe it will be a core server to users that are entering basic financial services in our region. Our credit business took another significant step in Q3, surpassing the $1 billion mark in total portfolio size.

The $1.1 billion credit portfolio is the result of originating over $1 billion during the quarter. Our consumer credit book is leading the growth with our two main products: personal loans and credits for purchases on our platforms. While credits for purchases is still the main product, personal loans for possible uses outside of our platform are accelerating and achieving a greater presence in the consumer credit book.

At a country level, our consumer credit book is growing at high triple digits across all countries. Overall, we have reached almost 36 million consumers with pre-approved credit lines at their disposal, up from 27 million in the second quarter.

In the merchant credit portfolio for both online and offline merchants, we see continued expansion in our merchant base opting for a credit line. We've made improvements to the product interface and collection processes that create a seamless and effective experience for our merchants. We developed repayment methods so that merchants can now settle their loans on either a fixed installment over time or opt to settle through a percentage of their transacted volume with us. At the country level, we saw a spiked increase in credit loans in Argentina, Brazil, and Mexico.

Considering our full credit portfolio, non-performing loans are stable compared to the previous quarter. Overall and at the individual portfolio level, we are encouraged to see our ability to score and manage risk as we extend more credit lines to our users and all of our credit books were profitable during the third quarter.

Building on our credit capabilities and our ambition to extend the services attached to the digital account, we are excited by the first waves of implementation of our credit card -- for now only rolled out in Brazil. We expect the credit card to be one of the key features of our digital account to unlock future payment volume growth, as well as a means to increase user engagement and retention.

In Q3, we were focused on new features for the credit card product and understanding our user behavior better. There are several encouraging signs that we are headed in the right direction for the credit card. Net promoter scores for MercadoPago credit card holders trended significantly above our MercadoPago averages during the third quarter. Secondly, over half of the credit card transactions are occurring outside of our marketplace and payment platforms, which is significant in our road map to drive the principality of our digital account.

We also have a long waiting list of users, demonstrating interest in accessing our credit card, which we will begin to score and unlock in the coming months. By stitching together our credit products with our payment and commerce services, our ecosystem is becoming increasingly more robust. We are seeing greater depth in our relationships with merchants and users that begin to engage with several touch points throughout our ecosystem. The credit business has the ability to fuel these increased connections between consumers and merchants, unlocking higher conversion rates and overall, more financial inclusion.

With that overview, now let's go over our financial results for the third quarter quickly. We had a record achievement in quarterly revenues, surpassing $1.8 billion on a consolidated basis, growing 66.5% in U.S. dollars and 72.9% on an FX-neutral basis. In Brazil, revenues grew 69% on an FX-neutral basis, while Argentina and Mexico posted even higher FX-neutral growth rates, with 83% and almost 76% respectively.

Revenue growth is driven by consistent growth in our third-party and first-party merchandise as well as payment volumes and the expansion of our credit business while maintaining the consistent monetization levels seen in the previous quarter. These strong results occurred despite revenues being negatively impacted by continuous rises of interest rates in Brazil, which compress spreads on our financing businesses that are reported net of funding costs.

During the quarter, we were able to partially offset this impact by implementing initiatives that diversify funding sources and through pricing. For the third quarter, gross profit was almost $807 million at a margin of 43.4%, very similar to the 43% margin in Q3 2020 and to the average of the first half of the year. We face some bottom-line headwinds as we expand our first-party business and incur more operational costs while expanding our own logistics network, but these effects are partially offset by cost reductions on our payment collection fees and leveraging our customer service costs as we reach scale. As we do every quarter, we've included a detailed breakdown of these margin effects in the slides accompanying this presentation, as well as the OPEX margin evolution.

Regarding our operating expenses, which represented 34.8% of revenues, we see sustained operating leverage from the scale and efficiencies over the last year and an improvement of 80 basis points on a year-over-year comparison. Operating expenses were $646 million, with higher bad debt expenses as we grow our credit book that are offset by efficiencies in other marketing initiatives and G&A expenses.

Consequently, we booked $160 million in EBIT in the third quarter, at a margin of 8.6%. It's important to note that at this quarter, our Argentine subsidiary's eligibility under the knowledge-based economy promotional regime was approved, which we have described further in our 10-Q filing. The tax benefits granted under the promotional regime are retroactive to January 2020 and will also apply to our future results. We have recognized this retroactive effect in full in our Q3 financial results.

In terms of net income, in Q3, we reached over $95 million at a margin of 5.1%, including these one-off impacts. On an adjusted basis, correcting for savings that are non-recurring in nature, net income margin would have been closer to 2% for the quarter.

Before my final comments, one announcement I'd like to make on our leadership structure. We'd like to share the news that after 22 years working with us, Stelleo Tolda has decided to leave his full-time role as President, Commerce Business, effective on April 1 of next year. Stelleo has been a key executive at Mercado Libre from the beginning of our journey, having had multiple roles during these years. Words really fail to describe the impact that Stelleo has had during this time. We are all incredibly lucky and grateful to have been able to count on him over the years. Fortunately, Stelleo will remain closely linked to Mercado Libre as a formal advisor to the company and its Board of Directors, allowing us to continue to benefit from his continued advice in the future.

As we previously stipulated in our company's executive succession planning process, we are also very pleased to announce that Ariel Szarfsztejn will take on the role of Executive Vice President, Commerce. Many of you already know Ari from his time leading our Strategy and Corporate Development teams, and more recently, he has been the driving force behind the build out of our logistics network -- a key differentiating aspect of our business today. Ariel has been working closely with Stelleo for the past few years and will continue to do so in the future.

This is a bittersweet feeling that I have making the announcement. But on behalf of everyone at Mercado Libre, we will miss having Stelleo involved in day-to-day operations and are at the same time pleased we can transition this leadership position through an in-house process, highlighting the depth of internal talent we have at the organization. We are all very confident that under Ariel's leadership, our commerce operations will continue to thrive.

In closing, I'd like to reiterate that our mission to democratize commerce and financial services in Latin America remains at the forefront of our minds, even as we begin to see positive indications that we are exiting the gravest part of the pandemic throughout the region. We continue to include and care for the communities around us through the expansion of our business.

We had another quarter of consistent, robust results and in parallel, we continue to plant seeds for our next growth avenues across the business and geographies where we are present. We are excited about the opportunities we have in front of us that will allow us to both build upon our current accomplishments and further innovate as we focus on our long-term growth strategy.

And finally, I'd like to mention that we have 27,000 employees that are making all these achievements possible along with our increasingly connected network of partners. I'm grateful to see the consistent level of execution and coordination within this ever-growing group of talents. And I am also very proud that despite the hard work we demand of them, they continue to rank us highly as an employer, having ranked us among the Top 25 Best Employers Globally according to Great Place to Work.

Thanks everyone for joining us on the quarterly conference call to follow our progress and as always we are now happy to take your questions.

[Operator]

Thank you. [Operator Instructions] Our first question comes from Bob Ford with Bank of America. Please, go ahead.

[Robert Ford, Bank of America]

Thanks very much. Congratulations on the quarter and thank you for taking my question. Pedro, how big is your exposure to PACS? Or how much did it impact payments in the quarter, if at all? Or I guess, how is it impacting payments day-to-day and how are you solving for that? And are chip shortages resulting in any scarcity of replacement MPOS units? And just with respect to supply chain issues as well, are you seeing any impact on platform inventory going into year-end? Thank you very much.

[Osvaldo Giménez, Chief Executive Officer, MercadoPago]

Hi, Bob, this is Osvaldo. So, with regard to PAC, one of our five suppliers for POS and so far, we have not found anything to be concerned about the POS that we sell or the smart devices we sell. So we continue to work with them normally. And then with regard to chip shortages, I'd say, so far, we have been able to continue selling all of our devices. We do have some concerns around smart POSs, there is some shortage there. But our expectation is that we will sell less devices than we will be able to sell it, There was no shortage, but at that point, we would not be able to continue selling devices. So I'll say that will be our concern.

[Pedro Arnt, Chief Financial Officer]

On inventory, Bob, I think the global reality is well-known to everyone. What we've done on our end is we've started working with our merchants and the 1P business also additionally allows us to try to identify inventory gaps and try to step in as merchants to record ourselves. And we started working with them towards the holiday season a lot earlier than we ever have before -- I would say, at the beginning of this quarter. So, the situation is the one well-known to everyone. What has been under our control, we've tried to front-load a lot of the preparation inventory step in with 1P and we like the amount of selection and the depths of selection we have for the upcoming shopping season, given the overall reality.

[Robert Ford, Bank of America]

That's very helpful. Thank you very much.

[Operator]

Our next question comes from Richard Cathcart with Bradesco. Your line is open.

[Richard Cathcart, Bradesco]

Hi there. Thanks very much for taking my question. Just one on the Digital Account TPV that you've disclosed for the first time here, but I think that's pretty aligned with the Wallet TPV previously. For the last few quarters, it's been running between $3 billion [ph] and $3.5 billion this quarter -- a big jump to $5.5 billion. So, perhaps you could just give us a little bit more information about what the driver of that big jump quarter-on-quarter? Thanks.

[Osvaldo Giménez, Chief Executive Officer, MercadoPago]

Richard, we started to disclose the Digital Account TPV. It is similar to what we were disclosing in the past, but it has to [indiscernible]. First, it includes all of the Wallet payments but not QR code payments. QR code payments we are disclosing on the acquiring side of the equation. So, we did for acquiring. And then what we are adding is card transactions. So, TPV was $5.5 billion, as you said and it's growing, butt over 100% year-on-year in local currencies.

[Lisa Schreurs, Investor Relations]

Does that answer your question, Richard.

[Richard Cathcart, Bradesco]

Yes. Thanks very much.

[Operator]

Thank you. Our next question comes from Stephen Ju with Credit Suisse. Your line is open.

[Stephen Ju, Credit Suisse]

Okay. Thank you so much. So Pedro, I think you mentioned in your prepared remarks an increasing percentage of items on free shipping. I just wanted to see if I can get some clarification on that comment. Do you mean that there's just a greater number of SKUs on a site which qualify for free shipping or that you're underwriting, I guess, a greater amount of free shipping subsidies? And just taking a step back a little bit, as you look at the all-in cost to the consumer relative to some of your competitors who offer all-you-can-eat shipping. Do you think your offering is efficient to effectively disincentivize users from signing up for that upfront monthly or annual subscription fee? Thanks.

[Pedro Arnt, Chief Financial Officer]

Great, Stephen. So first of all, I think the remarks point to the fact that the volume of purchases made on MELI without the consumer having to pay for shipping hit an all-time high of over 70% of all volume. And when we look at items that can be shipped through Mercado and Vios [ph], that number is almost 80%. So, we actually view that as probably the most widespread free shipping program available without the need for the consumer to pay a subscription. We now also offer a paid subscription for consumers that potentially are looking for even more free shipping than that. But our understanding still is that for our markets, with consumers with potentially less disposable income, the fact that nearly 70-plus percent of volume is done on free shipping without any subscription cost, is actually a tremendous value proposition to users.

[Stephen Ju, Credit Suisse]

Got you. Crystal clear. Thank you.

[Operator]

Our next question comes from Marcelo Santos with JPMorgan. Your line is open.

[Marcelo Santos, JPMorgan]

Hi, thank you for taking my questions. I have two. The first is the reacceleration of active payer additions. I know you're focusing more on fintech users now, but the metric you used to have with the active players. And there was a big jump this quarter. So could you just talk a bit of what's happening [ph]? What have you done to -- for that to happen or comment on the market? And the second question is regarding the potential impact of new regulations in Brazil regarding prepaid cards. Is that a negative to you? Or could that be a positive because you spend less? How could we frame that?

[Osvaldo Giménez, Chief Executive Officer, MercadoPago]

Hi, Marcelo, let me start with the second question. You gave us asked that. And with regards to the potential change in regulation but as you know, what's happened is, the Brazilian Central Bank is analyzing putting a cap on interchange fees for prepaid cards. We do issue prepaid cards and this could have an impact. There are two different items that they're talking about. On the one hand, this cap that could reduce the interchange we collect for those transactions. And then the second effect they're considering is shortening the payment period from 26 days to 2 days, we already pay most of the bad majority of the contacts at 2 days because those are off-line transactions all transactions will pay later. So that would not have an impact in working capital. It would have, yes, an impact on the financial side. But on the other hand, as an acquirer and as a process of transactions, we will be paid earlier and will pay a lower merchant discount rate or interchange depending if we are an aggregator or where you see our own gateway for those transactions. So I think those effects will be of similar magnitude. So at this point, the calculations that don't make us concerned. We believe that those things will be of similar impact and the total effect will not be material. That's our expectation.

[Pedro Arnt, Chief Financial Officer]

On wallet, first of all, I think, as you pointed out in the question, we do increasingly encourage you to look at the active fintech users of nearly $32 million. It's a better metric to understand users across our entire financial service offering. But having said that, you're accurate in that there was an acceleration in wallet payers, and it's actually driven across the different use cases. We see a pickup again in QR payments from wallet, in part driven by gradual reopenings as consumers are able to use the wallets in physical stores increasingly. But also as gradually our wallet becomes better distributed, we also see a nice pickup in peer-to-peer transfers within the wallet and also growth in utilities and cell phones. So I think it's a gradual acceleration with core underlying metrics that are strong on the wallet which is great news, but also the number of overall fintech users is about twice that large.

[Osvaldo Giménez, Chief Executive Officer, MercadoPago]

And one more thing. We are seeing increased engagement more transactions per user.

[Marcelo Santos, JPMorgan]

Perfect. Thank you very much.

[Operator]

Our next question is from Andrew Ruben with Morgan Stanley. Your line is open.

[Andrew Ruben, Morgan Stanley]

Hi, great thanks very much for the question. My questions relate a bit to the macro backdrop specifically in Brazil. First, on consumer credit, can you talk through what gives you comfort in continuing the high levels of growth of the consumer credit book mid a backdrop that appears to be coming a bit more difficult? And then related with interest rates in your spread-based businesses, could you provide a bit more color on how you think about the ability to ultimately pass through higher pricing? Thank you.

[Osvaldo Giménez, Chief Executive Officer, MercadoPago]

Hi Andrew, with regards to consumer credit, we have had a very good quarter, I think for all of the credit products. I think our credit products, all three of them have been profitable in all three markets. So in the nine different markets we're in, we were able to have good profitability. We have also been able to significantly increase not only the portfolio but the number of loans outstanding and the number of offers outstanding. There is 6 million people with offers for credit during the quarter. So far, we are very optimistic with how the product is evolving.

[Pedro Arnt, Chief Financial Officer]

Sorry, Andrew, on Brazilian interest rates, we are a company that will strive to not have to pass on increased fee structures to consumers where possible. So the first steps we're taking is how do we try to improve our funding costs. And in that sense, the financial institution license that we've been granted in Brazil has been instrumental because it does really give us access to cheaper funding sources from that financial institution. So I think the idea is, first and foremost, to try to improve cost structure and to avoid as much as possible, passing on increased fees on the marketplace to merchants. We might have to around the edges on certain types of credit passed on some of that cost. But again, we will do whatever we can to avoid the impact of passing that on to consumers, while at the same time, trying to manage our bottom line goals.

[Andrew Ruben, Morgan Stanley]

Very helpful. Thank you guys.

[Operator]

Our next question comes from Irma Sgarz with Goldman Sachs. Your line is open.

[Irma Sgarz, Goldman Sachs]

Yes, maybe just piggybacking on the last question, if you could expand a little bit on the funding strategy for Creditor, how you see that evolve from here? I think Oswald already commented on that earlier this year, but I was just curious that given that Kaleido's been growing even faster than expected, how you see sort of off balance sheet versus on evolving in the different sources that you're using and maybe how you see it evolving into 2022. And yes, thank you for disclosing the fintech users. It's very helpful. I was curious not sure if I'm thinking about this the right way. But if you could talk about the intersection that you have between the 31.6 million fintech active fintech uses and the overall Meliusers -- or sorry, and the active buyers that you have, which I think were 37% or 38%.

[Pedro Arnt, Chief Financial Officer]

Sure, Irma. So on credits, I think we continue to execute on the plan we've had all along. We've signed incremental deals with some of our banking partners in different markets for the SPVs. The Fujiki that we use to fund that. We're on track to exit the year within our objectives of having almost half of the credits already coming from third-party funding. And going forward, given the immense potential in the credit book. And you can see the Q-on-Q and year-on-year growth in the size of the credit book, it's phenomenal. We will continue to open outside windows for funding. Additionally, and tying into the previous answer, the financial institution in Brazil also allows us to issue Letras Financieras, Stebe and whatnot, which are also very, very efficient way to fund the credit book as it continues to grow. So I think things are evolving positively in terms of overall cost, which is helping spreads, and we will continue to work to make sure that we have multiple windows available to continue to fund the credit book also off of our own balance sheet. In terms of the user metrics, I think what we're trying to do there is to give you metrics that do not have too much overlap.

So marketplace Pago users, users who use Pago to purchase on the marketplace, we are not including in that unique fintech active user base. So you can add them both to get to an overall sense of actual total payers that have engaged with Mercado Pago either on the marketplace or off the marketplace, which then becomes a sizable number of, I think, something close to probably $70 million.

[Osvaldo Giménez, Chief Executive Officer, MercadoPago]

Probably one other thing that we are not included in the metric we are including the metric, as we mentioned, those who are paying with either the wallet or payment of land in app or in-store tons as we draw consumer merchant credit the car users, fintech sellers and fintech active products such as asset management. What we are not included in the metrics is people who are paying at the POS we own or people who are paying the checkout as a guest and not logging into their credentials tearful. So the number -- the total number of players from Macao Par would be higher, and we're not including those.

[Irma Sgarz, Goldman Sachs]

Thank you.

[Operator]

Our next question comes from Deepak Mathivanan with Wolfe Research.

[Unidentified Analyst]

Frank on for Deepak here. So I wanted to start, can we talk a little bit about fulfillment in Brazil? You talked about new fulfillment centers, but we're curious where we're at with regard to the ideal model. Looking for what kind of areas you have to build out and how we should think about some of the monetization plans from sellers? And then beyond that, can you talk a little bit about your expectations for investment levels in the holiday season, both on the -- in regards to stepping up spend on marketing or other customer acquisition programs and then as you mentioned before about kind of looking to work with vendors ahead of any supply chain issues, what kind of incremental investments that could incur?

[Pedro Arnt, Chief Financial Officer]

Great. So, the more we see the power of our logistics network in terms of fast, reliable and ideally free shipping. I think the more conviction we have to continue to build out the multiple nodes within the shipping network and to build those closer and closer to the consumer. So I think we will continue to build out more fulfillment centers, also fulfillment centers to be able to accommodate for a growing type of inventory. We've added bulky fulfillment center inventories. At some point, we will continue to grow and expand our supermarket and fresh offering. And I think equally important in terms of the long-term stickiness and loyalty of our users, we are now beginning to roll out our logistics network in some of the MDM countries that ideally will ignite significant growth there. We've already begun to see that in Chile, and hopefully, Colombia will follow suit as well as continuing to build out the logistics network in Mexico, Brazil and Argentina. So I think, again, we are building out what we think is one of the best-in-class networks in the region, and we will continue to grow the nodes on that network.

In terms of Q4, as you know, we like to not give too much forward-looking comment. In general, it is a quarter where marketing spend and customer acquisition increases. We then see those users retained, and we can benefit from them in the upcoming year. Typically, overall shipping costs as merchants send more inventory to our fulfillment centers at times also increases. And so from a margin perspective, it typically is a weaker quarter. And then in terms of incremental cost in working with merchants, I don't see that there's any material cost aspect there. I think the way we've tried to manage around that has been to work with the merchants from a lot earlier on to try to plan and secure inventory. And then, yes, it's very likely that we will step in with more of our 1P business in the fourth quarter and the 1P business at the scale it's at now, which is phenomenal improvement if you look at year-over-year and how fast that business has grown. But at this scale, from a margin perspective, it still is detrimental to margins versus a 3P sale. And so as mix naturally tends a little bit more towards 1P in the fourth quarter that also typically delivers a structurally weaker margin during that quarter.

[Unidentified Analyst]

Thanks so much, Pedro. Congrats on the quarter.

[Operator]

Our next question comes from Jamie Friedman with Susquihana. Your line is open.

[Jamie Friedman, Susquihana]

Thanks, Pedro, Osvaldo. When you said before on the credit product, you had $36 million approvals up from 27%. Is that -- does that mean they've been approved and drawn or just approved?

[Osvaldo Giménez, Chief Executive Officer, MercadoPago]

James. When I mentioned, we had 36 million approvals. Those are the number of users to which we approved a credit line. Of those 6 million using it or use it during the quarter. So what I mean is we have been able to -- and this number was, if I'm not wrong, 27 million the prior quarter. So we increased by 9 million, the number of people with the credit offering just in the last quarter. So we are very excited by that. And also very excited about how we have grown our portfolio. We have grown our portfolio ForEx in the last year.

[Jamie Friedman, Susquihana]

Okay. And then and then just a more general question. I appreciate the changing characterization of the fintech and the unique fintech active users, that's really helpful. When you said at the beginning Petroabout ecosystems of merchant and individual in your go-to-market. Could you elaborate on that what's that -- What's that about? Like why are you decomposing merchant and individual on the fintech side?

[Pedro Arnt, Chief Financial Officer]

Sure. So I think as a product and technology company that we are, we place a lot of focus on the quality of the products and the user experience. What -- as we've grown out the portfolio of payments products, what that was leading to was a less cohesive go-to-market and sales strategy because we had a lot of product focus. As we try to shift to dividing merchant and individuals within how we view the market, the idea is to be able to think from the consumer backwards and to be able to more effectively and efficiently cross-sell the entire product within the Mercado Libre universe, which could also include marketplace and content offerings that we have based on the consumer segment and less so on the individual products.

[Jamie Friedman, Susquihana]

Got it. That makes sense.

[Operator]

Our next question is from Marvin Fong with BTIG. Your line is open.

[Marvin Fong, BTIG]

Great. Thank you for taking my question. Just two for me. Just one on fintech. It looks like the take rate might have compressed a little. So was that due to the spread compression that you were alluding to Pedro. And if so, could you maybe talk about with a little more granularity, which revenue line might be more impacted than others? And then second question, just on the third quarter, it looks like it was a bit of a bit of an improvement in the COVID conditions towards the back half of the quarter in Brazil and Mexico. Just curious if you could comment on how that might have affected your GMV trends throughout the quarter.

[Pedro Arnt, Chief Financial Officer]

Sure. So just on the fintech take rate, you're absolutely right. What we see is we see continued improvements driven by credit revenues, about 10 incremental basis points Q-on-Q. But then with the increase in financing costs and my previous comment that we're trying to not have to pass all of that on to consumers, we saw about 20 basis points of contraction on take rates because of the higher cost in financing. So that's kind of how the key drivers play out on that.

[Osvaldo Giménez, Chief Executive Officer, MercadoPago]

And then, with regard to [indiscernible]. As you mentioned, I'd say there has been more of a normalization of commerce during the last quarter with increased fascination rates and lower contagious rate -- And so what we have seen is probably a reacceleration in the use of QR code and increase in the use of POSs and probably comparisons for online payments and the marketplace itself suffered a little bit because a year ago was -- we were right in the middle of the big boom driven in part by lockdowns and in part by Oilergenial and government payments. So stats were probably tougher this quarter than the prior one.

[Pedro Arnt, Chief Financial Officer]

Just one thing here. Osvaldo is correcting me, retroactively, accurately correcting me. So on the unique user metric, what I meant to say is when we measure the unique metric user, that the number of users that we report as fintech users does not include payments on the marketplace. Now if one of those users also use the marketplace, he could appear on the marketplace metric if we are to disclose that. So we're not deduplicating the users. My intention was to say that those nearly 32 million users are users that only fall into that bucket because of fintech usage. So that was regarding to Ermos question

[Marvin Fong, BTIG]

That's it for me. Thank you.

[Operator]

Our next question comes from Jen Thompson with Autonomous.

[Jen Thompson, Autonomous]

I think you mentioned earlier that fulfillment as a percentage of total deliveries was at 30% in all markets. I know that Mexico typically leads that in Brazil somewhere in the middle. Do you have the breakdown by country, again, like you've given on previous calls by chance.

[Pedro Arnt, Chief Financial Officer]

Yes, I think what we've disclosed this time around is the overall level. I think your assumptions are fairly right, but we didn't give out any of the country-by-country fulfillment levels. Fulfillment continues to trend in the right direction. And hence, that's also tied to my comment on the continued conviction behind investing in more warehouses as more and more inventory comes in. I think what we didn't answer there was the monetization part of that question. We will introduce gradually and cautiously, but we will introduce incremental monetization to sellers using our fulfillment services because we feel that there's significant value add to these users. And the level of penetration and the feedback we're getting from our merchants allows us to start sometime next year, introducing monetization on items that are stored in our fulfillment centers. And part of that is that we continue to see good traction and adoption of our fulfillment offering.

[Jen Thompson, Autonomous]

Perfect. I actually grabbed this up, and I see it on slides up and now, so I should not ask with my lips, I should ask my eyes, I guess, next time. Sorry about that.

[Operator]

Okay. Next question is from Caio Prato with UBS. Your line is open.

[Caio Prato, UBS]

Thank you for the opportunity for asking question. So my question is more related to the quality business. So I just would like to have a sense for you, which is the line that's gaining more traction looking to the consumer side, if this is a preacute product or if this is by an operator offering? And if you could share the penetration level of the bowel projects in each geography in the third quarter as well. Thank you.

[Osvaldo Giménez, Chief Executive Officer, MercadoPago]

The consumer side of our credit business, we have two main products. The first one is how similar to pay later. What we offer is purchasing loans. These are loans where people pay in installments, typically between two installments and 12 installments, and we usually charge an interest for those. Only in Mexico, we have started offering the first 30 days for free. So if you want to pay 30 days later, you're going to do it for free. But it's basically by opalater loan where we charge interest given the iterate conditions in Latin America. And to that, we have recently added personal loans, which is money with deposit into the wallet in the colo or valent and users are free either to use it anywhere or to withdraw it to their bank account or through an ATM. So those are the two products we are very excited with the growth of the second one, but we are not at this stage disclosing specific percentages or country details. On top of those two consumer products, the third one is a credit card, we launched a credit card a couple of quarters ago, and we are excited with the initial growth.

[Operator]

And sir, I'm not showing any further questions in the queue.

[Pedro Arnt, Chief Financial Officer]

Great. So thank you, everyone, for listening in. We look forward to giving you a full year and a wrap-up of Q4 when we announced those numbers. Until then, happy holidays to everyone at Mercado Libre, we will diligently be working through the holiday season to make sure everyone's parcels arrive in time and almost certainly with free shipping. Thank you.

[Operator]

Thank you. And this concludes today's conference call. Thank you for participating, and you may now disconnect.