Fintech

dLocal: A diversified fintech for emerging markets

Published

10 months ago

13 May, 2024

dLocal: A diversified fintech for emerging markets

Approximately 85% of the world’s population lives in what are commonly referred to as “emerging markets”. This giant ecosystem contains 158 countries, all distinctly different places to operate. The fifth largest country in the world, Pakistan, is very different from the sixth largest, Nigeria. Both represent nearly half a billion customers.

If you are the owner of a large multinational brand, it makes sense to sell your products in as many jurisdictions as possible. In each country you will need to accept and process payments using your preferred payment methods. Understanding each culture from scratch would be a nightmare. Why not find someone who has already built a payments platform that supports the world’s largest emerging markets? This is dLocal (DLO).

Our unique direct API payments platform enables global businesses to reach billions of customers, accept payments, send payments and settle funds in emerging markets.

Credit: dLocal

Credit: dLocal

Short end of the stick

Several years ago, dLocal shares were beaten and battered after a brief report accused them of various indiscretions, something we talked about in a piece aptly titled: “dStock premises demolished by a short report.” After two independent investigations and after existing major shareholders increased their investments, we have finished that there probably wasn’t much merit in the report. dLocal’s client list includes names like Amazon, Microsoft, Uber, Meta, and Spotify. Companies of this caliber are likely to scrutinize service providers, especially for anything related to finance.

With growth continuing unabated, it appears these brief accusations are now behind the company. A nail in the grave of the short thesis was the announcement of the previous one MercadoLibre CFO Pedro Arnt left his employer of 25 years to join dLocal as co-CEO. Leaving an $88 billion e-commerce company to join a $4 billion payments company requires a leap of faith, and DLO shares surged as much as 49% on the news. Three months after Arnt joined, dLocal’s chief financial officer resigned. Today, Arnt is the sole CEO and last month hired a new CFO who spent 30 years at General Electric. If there was some accounting mess going on, it was probably discovered, rectified and buried with the departure of the old CFO.

Metric key

A tenured executive like Arnt knows the importance of KPIs, and his company now provides three for which investors will receive guidance. (TPV stands for Ttotal Ppayment vlight.)

Credit: dLocal

The company says, “we are including TPV guidance this year, as we believe this is the most relevant operating metric for the company and the clearest indicator of market share.” This is because TPV simply measures the amount of money flowing through the dLocal platform for which it takes a cut – also called a “withdrawal rate” in industry parlance – and this becomes the company’s revenue. In 2023, dLocal saw $17.7 billion flow through its platform, raising $650 million in revenue, an acquisition rate of approximately 3.7% (down from 3.96% in the year previous). By not providing revenue guidance, the company does not have to commit to a target acquisition rate, although we can expect it to continue to decline according to the statement below.

Our expectations for TPV and gross profit assume an increased mix from “Tier 0” merchants as we continue to enhance those global relationships, driving incremental TPV and wallet share from the world’s leading technology companies, but at lower withdrawal rates.

Credit: Nanalyze

The bigger dLocal gets, the more it can afford to lower prices to potentially capture more market share, as long as it continues to grow volume at a strong pace. As for the second metric for which we are provided guidance, “gross margin”, it is not expected to grow as fast as TPV, indicating cost pressures. The third metric, “Adjusted EBITDA,” indicates the company’s expected profitability. Our focus is on TPV as a proxy for market share gained. Last year dLocal reported positive operating cash flows of $166 million, bringing its cash balance to $326 million. If they can maintain this trajectory, raising capital will become a thing of the past, unless, of course, they look to grow through the mergers and acquisitions that the CEO talked about in the last earnings call.

We will continue to look at three potential vectors; one is commercial distribution; the other is product innovation; and the third is geographic footprint. Ideally, we will combine all three of these.

Q4-2023 Local Earnings Call

Growth of emerging markets

One use case stands out in dLocal’s 2023 deck. An unnamed “global Internet satellite service provider” needed a quick and easy way to expand into LATAM, APAC, and EMEA with the goal of “becoming a public utility” in every locale. Using dLocal, they integrated 11 countries in one go, launching them all at the same time in less than a month. The unnamed client is now planning to launch in over 20 countries using the dLocal platform. The following tweet buried in the dLocal 2023 investor deck indicates that Starlink is a customer, and likely the one the use case was referring to.

Credit: dLocal

The irony is that the more people connect to the Internet via Starlink, the larger the potential customer base becomes for companies using the dLocal solution. When we look at TPV growth in each location, we see countries like Brazil, Mexico, and Nigeria experiencing extraordinary growth, driving dLocal’s revenue growth to 55% last year.

The Argentine peso has deteriorated at a significant pace, impacting Argentina’s revenues – Credit: dLocal

Some of the world’s largest companies believe these markets are the low-hanging fruit when it comes to selling goods and services to 85% of the world’s population. Diversification of revenue across all markets will help dLocal weather the inevitable storms that will arise in these volatile and unpredictable environments.

Assessment

When a company becomes profitable, it can benefit from different valuation methods such as the price-to-earnings ratio. Even if dLocal is profitable, we will still use ours Ssimple vassessment Raction (SVR) so that we can examine its relative evaluation over time. The last time we added stock was with an SVR of 5.6, lower than our catalog average of 6.3. Here is how dLocal’s SVR has performed over the last year.

Credit: Nanalyze

With a current SVR around 5, dLocal appears to be reasonably priced considering the tremendous growth they have experienced and the opportunities that lie ahead. The company plans to invest heavily this year and increase headcount by around 50% (mostly in engineering), which means they are likely working on being able to scale and address a population of 2 billion potential customers a which are sold to 600 merchants and growing.

In the past, people in emerging markets had to jump through hoops to purchase products and services that developed markets enjoy. VPNs, prepaid cards, virtual phone numbers, and virtual addresses are all methods you no longer need to use. dLocal’s platform is solving pain points on both sides of the transaction, and some of the world’s largest companies can’t seem to get enough of it.

Conclusion

dLocal now serves 5 of the 6 largest technology companies in the world. A net retention rate of 150% means that existing customers are using their platform more every year. A tenured leader at the helm helps alleviate any remaining concerns that emerge from the brief report. It all looks good on paper, but experience tells us that this volatile stock will overwhelm investors regardless of how “fair” we might think it is. Just when you’re convinced you’ve found the perfect growth stock, company-specific risk thwarts your plan. With earnings just days away, let’s hope dLocal’s growth streak continues.

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Fintech

US Agencies Request Information on Bank-Fintech Dealings

Published

8 months ago

30 July, 2024

FinCrypt Staff

Federal banking regulators have issued a statement reminding banks of the potential risks associated with third-party arrangements to provide bank deposit products and services.

The agencies support responsible innovation and banks that engage in these arrangements in a safe and fair manner and in compliance with applicable law. While these arrangements may offer benefits, supervisory experience has identified a number of safety and soundness, compliance, and consumer concerns with the management of these arrangements. The statement details potential risks and provides examples of effective risk management practices for these arrangements. Additionally, the statement reminds banks of existing legal requirements, guidance, and related resources and provides insights that the agencies have gained through their oversight. The statement does not establish new supervisory expectations.

Separately, the agencies requested additional information on a broad range of arrangements between banks and fintechs, including for deposit, payment, and lending products and services. The agencies are seeking input on the nature and implications of arrangements between banks and fintechs and effective risk management practices.

The agencies are considering whether to take additional steps to ensure that banks effectively manage the risks associated with these different types of arrangements.

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Fintech

What changes in financial regulation have impacted the development of financial technology?

Published

8 months ago

30 July, 2024

FinCrypt Staff

Exploring the complex landscape of global financial regulation, we gather insights from leading fintech leaders, including CEOs and finance experts. From the game-changing impact of PSD2 to the significant role of GDPR in data security, explore the four key regulatory changes that have reshaped fintech development, answering the question: “What changes in financial regulation have impacted fintech development?”

PSD2 revolutionizes access to financial technology
GDPR Improves Fintech Data Privacy
Regulatory Sandboxes Drive Fintech Innovation
GDPR Impacts Fintech Data Security

PSD2 revolutionizes access to financial technology

When it comes to regulatory impact on fintech development, nothing comes close to PSD2. This EU regulation has created a new level playing field for market players of all sizes, from fintech startups to established banks. It has had a ripple effect on other markets around the world, inspiring similar regulatory frameworks and driving global innovation in fintech.

The Payment Services Directive (PSD2), the EU law in force since 2018, has revolutionized the fintech industry by requiring banks to provide third-party payment providers (TPPs) with access to payment services and customer account information via open APIs. This has democratized access to financial data, fostering the development of personalized financial instruments and seamless payment solutions. Advanced security measures such as Strong Customer Authentication (SCA) have increased consumer trust, pushing both fintech companies and traditional banks to innovate and collaborate more effectively, resulting in a dynamic and consumer-friendly financial ecosystem.

The impact of PSD2 has extended beyond the EU, inspiring similar regulations around the world. Countries such as the UK, Australia and Canada have launched their own open banking initiatives, spurred by the benefits seen in the EU. PSD2 has highlighted the benefits of open banking, also prompting US financial institutions and fintech companies to explore similar initiatives voluntarily.

This has led to a global wave of fintech innovation, with financial institutions and fintech companies offering more integrated, personalized and secure services. The EU’s leadership in open banking through PSD2 has set a global standard, promoting regulatory harmonization and fostering an interconnected and innovative global financial ecosystem.

Looking ahead, the EU’s PSD3 proposals and Financial Data Access (FIDA) regulations promise to further advance open banking. PSD3 aims to refine and build on PSD2, with a focus on improving transaction security, fraud prevention, and integration between banks and TPPs. FIDA will expand data sharing beyond payment accounts to include areas such as insurance and investments, paving the way for more comprehensive financial products and services.

These developments are set to further enhance connectivity, efficiency and innovation in financial services, cementing open banking as a key component of the global financial infrastructure.

Sebastian Malczyk

General Manager, Technology and Product Consultant Fintech, Insurtech, Miquido

GDPR Improves Fintech Data Privacy

Privacy and data protection have been taken to another level by the General Data Protection Regulation (GDPR), forcing fintech companies to tighten their data management. In compliance with the GDPR, organizations must ensure that personal data is processed fairly, transparently, and securely.

This has led to increased innovation in fintech towards technologies such as encryption and anonymization for data protection. GDPR was described as a top priority in the data protection strategies of 92% of US-based companies surveyed by PwC.

Arid Islam

Financial Expert, Sterlinx Global

Regulatory Sandboxes Drive Fintech Innovation

Since the UK’s Financial Conduct Authority (FCA) pioneered sandbox regulatory frameworks in 2016 to enable fintech startups to explore new products and services, similar frameworks have been introduced in other countries.

This has reduced the “crippling effect on innovation” caused by a “one size fits all” regulatory approach, which would also require machines to be built to complete regulatory compliance before any testing. Successful applications within sandboxes give regulators the confidence to move forward and address gaps in laws, regulations, or supervisory approaches. This has led to widespread adoption of new technologies and business models and helped channel private sector dynamism, while keeping consumers protected and imposing appropriate regulatory requirements.

George Blandford

Co-founder, UK Linkology

GDPR Impacts Fintech Data Security

A big change in financial regulations that has had a real impact on fintech is the 2018 EU General Data Protection Regulation (GDPR). I have seen how GDPR has pushed us to focus more on user privacy and data security.

GDPR means we have to handle personal data much more carefully. At Leverage, we have had to step up our game to meet these new rules. We have improved our data encryption and started doing regular security audits. It was a little tricky at first, but it has made our systems much more secure.

For example, we’ve added features that give users more control over their data, like simple consent tools and clear privacy notices. These changes have helped us comply with GDPR and made our customers feel more confident in how we handle their information.

I believe that GDPR has made fintech companies, including us at Leverage, more transparent and secure. It has helped build trust with our users, showing them that we take data protection seriously.

Dr. Rhett Stubbendeck

CEO & Co-Founder, Leverage Planning

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Fintech

M2P Fintech About to Raise $80M

Published

8 months ago

30 July, 2024

FinCrypt Staff

Application Programming Interface (API) Infrastructure Platform M2P Financial Technology has reached the final round to raise $80 million, at a valuation of $900 million.

Specifically, M2P Fintech, formerly known as Yap, is closing a new funding round involving new and existing investors, according to entrackr.com. The India-based company, which last raised funding two and a half years ago, previously secured $56 million in a round led by Insight Partners, earning a post-money valuation of $650 million.

A source indicated that M2P Fintech is ready to raise $80 million in this new funding round, led by a new investor. Existing backers, including Insight Partners, are also expected to participate. The new funding is expected to go toward enhancing the company’s technology infrastructure and driving growth in domestic and international markets.

What does M2P Fintech do?

M2P Fintech’s API platform enables businesses to provide branded financial services through partnerships with fintech companies while maintaining regulatory compliance. In addition to its operations in India, the company is active in Nepal, UAE, Australia, New Zealand, Philippines, Bahrain, Egypt, and many other countries.

Another source revealed that M2P Fintech’s valuation in this funding round is expected to be between USD 880 million and USD 900 million (post-money). The company has reportedly received a term sheet and the deal is expected to be publicly announced soon. The Tiger Global-backed company has acquired six companies to date, including Goals101, Syntizen, and BSG ITSOFT, to enhance its service offerings.

According to TheKredible, Beenext is the company’s largest shareholder with over 13% ownership, while the co-founders collectively own 34% of the company. Although M2P Fintech has yet to release its FY24 financials, it has reported a significant increase in operating revenue. However, this growth has also been accompanied by a substantial increase in losses.

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Fintech

Scottish financial technology firm Aveni secures £11m to expand AI offering

Published

8 months ago

30 July, 2024

FinCrypt Staff

Aveni, Investment Management, AI, NLP, UK

By Gloria Methri

Today

To come
Aveni Assistance
Aveni Detection

Artificial intelligence Financial Technology Aveni has announced one of the largest Series A investments in a Scottish company this year, amounting to £11 million. The investment is led by Puma Private Equity with participation from Par Equity, Lloyds Banking Group and Nationwide.

Aveni combines AI expertise with extensive financial services experience to create large language models (LLMs) and AI products designed specifically for the financial services industry. It is trusted by some of the UK’s leading financial services firms. It has seen significant business growth over the past two years through its conformity and productivity solutions, Aveni Detect and Aveni Assist.

This investment will enable Aveni to build on the success of its existing products, further consolidate its presence in the sector and introduce advanced technologies through FinLLM, a large-scale language model specifically for financial services.

FinLLM is being developed in partnership with new investors Lloyds Banking Group and Nationwide. It is a large, industry-aligned language model that aims to set the standard for transparent, responsible and ethical adoption of generative AI in UK financial services.

Following the investment, the team developing the FinLLM will be based at the Edinburgh Futures Institute, in a state-of-the-art facility.

Joseph Twigg, CEO of Aveniexplained, “The financial services industry doesn’t need AI models that can quote Shakespeare; it needs AI models that deliver transparency, trust, and most importantly, fairness. The way to achieve this is to develop small, highly tuned language models, trained on financial services data, and reviewed by financial services experts for specific financial services use cases. Generative AI is the most significant technological evolution of our generation, and we are in the early stages of adoption. This represents a significant opportunity for Aveni and our partners. The goal with FinLLM is to set a new standard for the controlled, responsible, and ethical adoption of generative AI, outperforming all other generic models in our select financial services use cases.”