dLocal: Sharing Customer Anecdotes

Sharing dLocal customer anecdotes and giving my thoughts on what we can learn about the business as investors.

I was doing my daily web-crawling/scouring exercise to try to continually learn more (it’s not an obsession okay, it’s called doing research) and I happened onto an incredible post on dLocal. I felt compelled to share.

I found this post on ValueInvestorsClub (VIC), an excellent forum started by Joel Greenblatt who is an incredible investor — the Gotham fund returned over 40% anually for more than a decade. The information quality on VIC is very high and is always an excellent starting point for me in conducting research. I want to give full credit to the author of the write-up listed in the Appendix (1) as the VIC author did the heavy-lifting of reaching out to dLocal’s customers.

The write-up I found shares many customer anecdotes and helps to reveal many interesting insights about dLocal as an investor in the business. This helped me to understand competitive dynamics, take rates, and more.

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Competitive Positioning

“dLocal would be about 10% cheaper than EBANX, and they would be about 15% cheaper than like PPRO or allpago, a little cheaper now also against PayU, probably 5% to 10% cheaper. They are really the cheapest payment provider for high-volume processing in the region overall”

“[For local-to-local transactions] Adyen was much closer to DLO in terms of price. They, I recall, were in the 4.5% range in Thailand versus around 4% for DLO.”

For many of dLocal’s smaller markets, they are actually the lowest cost provider and will stay the lowest cost provider. dLocal is well-positioned to compete against Adyen, EBANX, and others in smaller markets where Adyen is not able to justify setting up full-stack acquiring.

These smaller regions (exclude India, Mexico, and Brazil) account for almost $15 trillion in total GDP calculated using 2023 numbers. dLocal performs well in India, Mexico, and Brazil but the competitive advantage is really in these smaller markets with less competition.

Recall that in these markets, the largest player has a sustainable cost advantage given they are able to negotiate contracts with local acquirers based on the aggregate demand in the platform.

Increased Processing Volume → Lower Cost of Acquiring → Lower Prices

Understanding the Customer

“We weren't optimizing for how much we pay the provider. Obviously, we were mindful of it, and we took care of [company] expenses around this, but we really, really cared about advertisers. We really cared about how many advertisers we've got on our platform because we knew that once you were in and you were advertising and you saw the value of it, you would continue to advertise on [company]. So the cost of acquisition is so high that if I'm paying dLocal 2%, 3% or 4%, I mean, yes, 4% is a lot, but it's nothing compared to how much I'm getting from an advertiser.”

This customer is primarily focused on a single thing — access to local acquiring to increase conversion rates. This is critical because without local acquiring, many customers are unable to pay and this results in lost revenue.

dLocal’s integration with local acquiring is worth a significant price premium for customers because it translates directly into increased sales. The alternative is paying lower take rates but getting 30% less revenue due to lower conversion rates.

• Q: So it's interesting. I thought I was seeing some numbers I thought suggested 2C2P [a competitor], for example, in Thailand was charging like 1.5%.

  • A: It was around 2% from what I recall.

• Q: And what was dLocal charging in that same region?

  • A: dLocal's were, I believe, in the range of 3.5% or 4% in Thailand. It was double if I recall correctly.

• Q: And even still, you guys wouldn't use 2C2P there, why?

  • A: It's the issue with the integration, Thailand wasn't a big enough market for us to justify having a point vendor be there…

This is another interesting anecdote and something I can speak on in my professional career as a software engineer. These integrations are very expensive for companies to maintain:

1. Legal and compliance process to do diligence on the payment provider

2. Technical integration

3. Testing and ongoing support work

4. Separate dashboards

For global businesses, setting up an integration like this across many different markets is simply too difficult to implement and maintain over time. This customer was willing to pay a 100% price premium to avoid having to taking on the work I have outlined here.

“Yes. Number one, frankly, was regulatory compliance. Two was around flexibility in payment option. And third was around price. And as I evaluated the options that existed here, found that as my team was going through a more detailed analysis of those three. And assessed them through a quant research overall as well as qualitative research from some of their customers as we were talking to them over time, found that dLocal had a chance to beat the rest primarily on the first two. Price, they were mostly competitive, if not a little bit more expensive, but they beat the others on the first two.”

As previously discussed, integration into the local banking system with local payment methods results in higher conversion rates. This is very important to customers as it directly translates into more revenue.

Take Rates

“I think all-in costs was not that different by market. I believe I'm recalling in the range of like 2.5%, maybe 3% to 7%, depending on the market of the transaction.”

• Q: And I'm assuming the 7% was in like Egypt and Morocco?

• A: Yes, exactly, super challenging market. That's correct.

dLocal is able to charge significantly higher take rates in smaller and less developed markets. This is an excellent place for dLocal to operate as there is both higher margins and less competition.

Takeaways As Investors

These customer anecdotes help to clearly outline what dLocal’s “secret sauce” is — focusing on solving merchant needs in smaller markets. This strategy is highly lucrative as we have seen that smaller markets have reduced competition and significantly higher take rates.

dLocal is built to excel in these small markets — both these customer anecdotes and the exceptional TPV growth over the last 8 years show this clearly. I expect that dLocal will be able to maintain this leadership position as they have a sustainable cost-advantage and an excellent reputation that will continue this snowball effect.

I continue to believe that dLocal is an overlooked gem and I believe that significant upside is to come in the next few years.

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If you enjoyed this and would like to learn more about dLocal — read my full thesis:

Appendix

• https://valueinvestorsclub.com/idea/DLOCAL_LTD/4720760162

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