DLocal, the emerging markets payments darling, just posted their Q1 2024 results. The headline? Record-breaking Total Payment Volume (TPV) of $5.3 billion, a near 50% year-on-year surge. Impressive, right? But beneath the shimmering surface, a whisper emerges, a subtle shift in the sands of their financial landscape, one that might be foretelling a broader trend in the emerging markets payments arena.

The whispers originate in Egypt. While DLocal celebrated the explosive growth of their Egyptian operations throughout 2023, a recent devaluation of the Egyptian pound has thrown a wrench into the works. The formerly wide FX spreads that bolstered DLocal's margins have tightened, transforming Egypt from a profit engine into a potential headwind for Q2 and beyond.

Now, Egypt isn't a massive piece of DLocal's pie, representing less than 10% of their 2023 business. However, its story echoes the recent trajectory of another key market for DLocal: Argentina. Throughout 2023, Argentina went through a similar cycle, witnessing its currency devalue and FX spreads compress, ultimately impacting DLocal's profitability.

Could this be a sign of things to come across the wider spectrum of emerging markets? Are we on the cusp of a shift where the lucrative FX arbitrage opportunities that fueled DLocal's growth in the past are becoming increasingly ephemeral?

Let's delve into the numbers. In Q1 2024, DLocal's gross profit remained flat year-on-year, despite the impressive TPV growth. This can be partially attributed to the renegotiated pricing with a major global merchant, a factor DLocal believes is isolated to large clients. But the shrinking FX spreads in Egypt and the anticipated impact in Q2 paint a more complex picture.

If this trend continues, DLocal will need to adapt. Their impressive 80% year-on-year growth in the local-to-local processing business demonstrates their potential to succeed beyond FX arbitrage. Furthermore, their expanding payouts business, particularly in remittances, offers an avenue for generating liquidity and improving pricing, potentially offsetting tighter spreads in other markets.

But the question remains: is DLocal's experience in Egypt and Argentina merely an idiosyncratic blip, or a harbinger of a broader trend towards tighter FX controls and currency stabilization in emerging markets? If the latter proves true, it would necessitate a fundamental shift in how payments companies like DLocal approach these markets. Reliance on FX arbitrage would need to give way to a stronger focus on volume growth, product diversification, and cost optimization.

One intriguing strategy for DLocal is their growing license portfolio. By securing licenses in key markets, they're enhancing their vertical integration, gaining access to new verticals and flows, and bolstering merchant confidence. This could be a crucial differentiator as regulatory environments in emerging markets become increasingly complex.

While the Egyptian whisper may be subtle, it deserves careful consideration. DLocal's journey in Egypt could provide valuable insights for the entire emerging markets payments industry. It underscores the need for a long-term, strategic approach, one that prioritizes volume growth, product innovation, and regulatory compliance, ensuring sustained success in the dynamic, and sometimes unpredictable, world of emerging markets payments.

Hypothesis:

Emerging markets are increasingly moving towards tighter FX controls and currency stabilization, reducing the opportunities for payments companies to profit from wide FX spreads.

This will necessitate a strategic shift for payments companies operating in these markets, with a greater focus on volume growth, product diversification, and operational efficiency.

Companies with strong local processing capabilities, diversified product offerings, and a robust license portfolio will be best positioned to succeed in this evolving landscape.

Key Numbers:

Egypt's contribution to DLocal's total revenue in 2023

Less than 10%

DLocal's gross profit growth in Q1 2024

Flat year-on-year

DLocal's TPV growth in Q1 2024

50% year-on-year

Growth of DLocal's local-to-local processing business in Q1 2024

80% year-on-year

Number of markets where DLocal secured licenses and registries in 2023

10

Gross Profit Comparison (Hypothetical)

This chart illustrates a hypothetical comparison of gross profit from different regions, showing how fluctuations in FX spreads can impact profitability.

"Fun Fact: DLocal's headquarters in Montevideo, Uruguay is located in a free trade zone! This strategic location offers numerous advantages, including tax benefits and simplified customs procedures, allowing DLocal to operate more efficiently in a global environment."

References