Description

Background

DLO is one of the most attractive ways to gain exposure to rising electronification of payments & eCommerce penetration in emerging markets, with the ability to compound top line at 40%+ per year for the foreseeable future. Through their one direct API, referred to as the One dLocal model, the company enables global enterprise merchants to get paid (pay-in) and to make payments (pay-out) within emerging market countries powering both cross-border & local-to-local payments. Their solution is payment agnostic, enabling global merchants to connect with over 600 local payment methods across 29 countries including Mexico, Argentina, Colombia, and Chile in Latin America; India and Indonesia in Asia; and Egypt, Nigeria, and South Africa in Africa, for client such as Amazon, Netflix, Google, Microsoft, Spotify, Facebook, Nike, Uber, and Visa. Notably DLO does not act as the acquirer of record in most cases, but instead is connected to hundreds of local acquirers, allowing dLocal to offer a smart routing solution that maximizes acceptance and conversion rates and reduces fraud risk.  

DLO’s clients span 8 key verticals including retail, streaming, ride hailing, financial institutions, advertising, SaaS, travel, e-learning and gaming. In 2020, on average DLO merchants used DLO’s platform in 6 different counties across 44 payment methods, up from 5 countries & 35 payment methods in 2019. While DLO sales cycles span 6 months to 1 year from commercial agreement to operational implementation & connection, this serves as a moat vs. local players who are benchmarking providers across (i) Pricing (ii) Conversion Rates (iii) Fraud Risk (iv) Client Services & (v) Platform reliability / UpTime. DLocal has had 0% merchant churn since inception, with 171% net revenue retention in 2020, 159% in 2019, and 185% in 3Q21 (196% in 2Q21 and 186% in 1Q21). 

Given the macro tailwinds, complex product & sales-cycle, network effects & regulatory licensing / moats, DLO is one of the more unique assets in all of paymnets, with the market overly focused on '22 & '23 numbers. 

Market Opportunity 

DLO pegs their current TAM at $1.2T of addressable TPV ($0.4T pay-ins; $0.8T of pay-puts) which consists of the total eCommerce volume in the countries they serve (ex-China), expected to grow at a 27% CAGR from ‘20A-’24E.  Of the estimated US$428 billion pay-in volume for 2020, 86% corresponded to local-to-local transactions, and only 14% corresponded to cross-border transactions. Overall, pay-in volume is expected to grow to U$1.1T by 2024. 

EM macro tailwinds are beyond the scope of this write up but in the DLO S1 they highlight that according to the IMF in ‘19 emerging markets represented 57% of aggregate global GDP up  from 43% in 2000 & EM’s are expected to continue growing faster than developed markets overall. Yet, global merchants face numerous challenges trying to enter these markets. Banking penetration remains low across these countries, falling below 20% of the adult population in some cases. 

As opposed to developed economies where card-based transactions relying on international card schemes are prevalent, local card, bank transfer-based payment methods, digital wallet, and cash-like payments, such as using Boleto in Brazil or UPI in India, and making payments at Oxxo in Mexico, are the predominant payment methods for end users in emerging markets. Furthermore, in order to gain access to emerging markets, merchants also need to:

• adhere to local compliance, regulatory, and tax frameworks,

• offer transparency and security for their end users,

• address inherent fraud risk while maximizing acceptance and conversion,

• gain insights from their transaction data, and

• identify and engage with partners that can scale as their emerging markets operations expand.

According to AMI, local payment methods dominate the EM ecosystem representing ~83% of total e-commerce expenditure in 2020 vs the US/Europe where credit/debit are widely held & used. They studied Brazil (one of DLO’s largest markets) which showed internationally-enabled credit cards only represented 10% of the aggregate e-commerce payment volumes, whereas domestic-only credit cards & cash-based methods represented 55% / 13% of the aggregate e-commerce payment volumes in ‘20, & the remaining 35% were alternative payment methods. In India, internationally-enabled credit cards  represented 30% of the aggregate e-commerce payment volumes, whereas debit cards and bank transfers represented 19% and 14%, respectively. In Nigeria, internationally-enabled credit cards only represented 13% of the aggregate e-commerce payment volumes in ‘20, whereas debit cards and bank transfers represented 28% and 27%, respectively. The prevalence of these local payment methods creates a fragmented payment system in emerging market countries, which hampers global merchants’ ability to expand in these new markets. 

DLO highlights several macro tailwinds including:

• Increasing globalization of commerce- According to Bloomberg, cross-border trade involving developing or emerging economies constituted 53% of global trade in ‘17, a ~10% increase over the past 20 years. As global merchants broaden their geographic footprint in search of greater scale and growth, they are faced with the challenge of operating in a multi-jurisdictional environment where they must ensure appropriate compliance with local regulatory, FX, and tax frameworks, and deal with the diverse set of available or preferred local payment methods of end users. Maintaining compliance with these regulatory and market standards can be costly, burdensome, and often hard to address without the help of a partner such as dLocal with the adequate know-how, technology, and level of connectivity to the broad local payment infrastructure.

• Continued rise of the digital economy- In 2020, smartphone penetration levels for Turkey, Brazil, and Mexico reached 61%, 80%, and 75% respectively. According to AMI, 80 million Nigerians are estimated to come online in the next five years. As a result of these growing trends, e-commerce penetration has experienced an accelerated expansion. eCommerce among the core emerging countries DLO operates in, grew 27% in 2020, while global GDP contracted 3.5% during the same year. 

• Middle Class in EM Expansion- On the back of continued economic growth, the middle class in emerging markets has been increasing its level of spending and online transaction frequency. Citing research by Next Big Future, DLO cites the global middle class was expected to surpass 4 billion people by the end of 2020, & is growing by 120 to 160 million people every year, mostly in emerging markets; expected to reach 5.3 billion people by 2030.

• Cross-Border ​​payments in emerging markets are fragmented and poised for growth- Although eCommerce e-commerce is mainstream, cross-border transactions present unique challenges due to low approval rates, poor predictability of timing, low transparency, volatile exchange rates, dynamic regulatory requirements, and significant complexity that comes from having to settle transactions across multiple parties and currencies without a consistent regulatory and tax framework or an integrated payments infrastructure, as EM countries lack  a coherent interoperability between regulatory and technical payments systems. This requires integrated payment solutions to replace legacy disparate players operating in silos, requiring incremental connection between participants which further increases friction in the payments value chain.

• Global enterprise merchants are establishing local presence in selected emerging markets- Once global merchants are established locally, they need to facilitate pay-outs to local vendors, employees, and contractors, and pay-ins from local customers via their preferred method of payment.  

• Highly complex and evolving local regulatory and tax environments- The increase in fraud and cyberattacks continues to push regulators to increase scrutiny across the payments value chain. Regulators have also been concerned with the higher cost of services charged by legacy payments providers driving the creation of new APMs such as the PIX in Brazil. Ensuring adherence to and compliance with these regulatory and tax requirements are costly and burdensome for global merchants, often deterring or limiting their entry to certain jurisdictions, particularly in emerging markets. This presents an attractive opportunity for service providers such as dLocal that have local expertise to offer robust, up-to-date, and integrated capabilities that comply with regulatory, FX, and tax frameworks across emerging markets.

DLO Product Overview / Growth Algorithm

DLO operates as a payment service provider that offers merchants and PSP partners payment processing, FX management, fund collection, fund settlement, fund disbursement, and additional value-enhancing features including fraud prevention, reports and analytics, regulatory, compliance and tax withholding management through a single API. 

DLO offers numerous features to minimize friction for merchants, increase conversion rates and reduce fraud including: 

• Fraud management tools built on machine learning algorithms and rules-based technology to help identify potentially problematic activity and execute transactions with increased levels of security

• Tax & compliance capabilities that streamline regulatory compliance by helping merchants stay up-to-date with complex and frequently changing local laws and regulations

• FX management and multi-currency collection and settlement capabilities to address their needs in cross-border transactions

• Comprehensive merchant dashboard that gives clients visibility into key information and provides valuable tools that can be accessed through a secure, individually-tailored interface