Good morning,

I am pleased to welcome dLocal founder Sebastián Kanovich and CEO Pedro Arnt for a Stratechery Interview.

At Stratechery I interview both startup and public company executives, but the process is a bit different: in the case of public company CEOs, I already know a lot about their business, and that guides the interview. When it comes to startups, though, there isn’t nearly as much public data, so my focus is different: I want to give the founder an opportunity to teach me about their company and sell their vision.

dLocal is a public company: the emerging markets payment provider went public in 2021. It’s not, though, a company that I knew a lot about. I’ve talked to Kanovich a few times about the business, which I find very interesting: dLocal partners with large multinationals, including several of the biggest American tech companies, to provide payment solutions in emerging markets. The core of dLocal’s offering, which they call “One dLocal”, is “one direct API, one platform, and one contract”; the idea is that a company seeking to sell in emerging markets doesn’t need to build a solution for every market, but rather can integrate with dLocal once and have all of those details abstracted away.

This week Kanovich announced he is stepping down from the co-CEO position that was created when Arnt joined the company, making Arnt the sole CEO. To that end, this seemed an appropriate time to have this conversation, which, given my relative lack of knowledge, is much more akin to a startup interview. To that end we cover the dLocal growth story, the challenges the company has had in the public markets, and why it makes sense to make this leadership transition; again, my goal with this interview was to learn, and I think it’s a very interesting story.

That noted, dLocal did release earnings after our conversation, and they were disappointing thanks to a combination of lowered earnings due to an Argentinian devaluation, and projected higher spending on research and development going forward. Fortunately, I think that our interview did, in both direct and indirect ways, touch on both.

As a reminder, all Stratechery content, including interviews, is available as a podcast; click the link at the top of this email to add Stratechery to your podcast player.

On to the Interview:

An Interview with dLocal Founder Sebastián Kanovich and CEO Pedro Arnt

This interview is lightly edited for clarity.

Starting dLocal

Sebastián Kanovich and Pedro Arnt, welcome to Stratechery.

Sebastián Kanovic: Ben, it’s great to be here. Thanks very much for having us.

Pedro Arnt: Thank you so much.

Sebastián, let’s start with you. Tell me about your background. Where did you grow up? How’d you get started with technology?

SK: Born in Uruguay, been living in Israel for the last eight years. Technology was absolutely by chance. I started this journey when I was 21 and this is what I’ve been doing for the last 12 years. To me, it all came from a problem that we found, which was payments weren’t working in Uruguay, where I come from, and that’s how I got into technology. But it was by chance, I’m an economist by training.

What was the specific moment where you realized this is a problem to be solved and you think that you could do it?

SK: I love the NBA, as we’ve discussed in the past, and I couldn’t buy my League Pass and I couldn’t buy anything online, and I was borrowing a credit card from people around the family and all of my friends were doing the same, and that wasn’t the way things worked in the US and Europe. I wasn’t the only one going through that, so there was no “Wow” moment because payment is never “Wow”. But there was, “Okay, there’s something broken here”.

How did you get started? You mentioned you were an economist. How did you get a team together, take this on? What’s the origin story here?

SK: I met two of my partners who are older than I am, and they were assembling the initial team, and I decided to join. I was much less conscious than most on what I was getting into. The idea was, “Okay, we have this small company/kiosk that we are solving a problem for one customer, let’s see if we can make it a little bit bigger”. I wasn’t getting into the startup world, I wasn’t getting into the VC world, then coming from Uruguay, and twelve years ago, that wasn’t that obvious that those opportunities were out there, so I joined. I was working at Santander Bank. This seemed to be a more exciting thing to do, I didn’t have to wear a suit, and I went for it.

You mentioned there was a single kiosk. What was the first problem that dLocal was solving? And how did you go from there to serving large multinationals as you do today?

SK: The first product we had was in Brazil with a thing called Boleto, which was a cash method, it’s now replaced by Pix. The previous iteration of that, people used to pay in Brazil with a cash slip, the solution we found was users were now able to, when they went into the checkout with the cashier, they were now able to issue one of these Boletos and then they would go to a bank or a kiosk and literally pay in cash. We thought we had solved every problem in life. We said, “Okay, this is the solution for everything”.

Then we realized that it wasn’t only Brazil, it wasn’t only about Boleto, it was all across LatAm, it was all across Africa, it was all across Asia and people have not one way of paying, they have thousands of way of paying. But the initial idea of what we did, which is users want to pay with local payment methods, it’s exactly the same today as it was 12 years ago.

So if you start out with Boletos and the local grocery store and kiosk, or whatever it might be, I’m still trying to understand, what’s the path of getting from there to working with say a Microsoft or an Airbnb?

SK: You start small. What we found was that as we started going, we always dreamt of having these US customers. Facebook was a dream customer for us, or Google was the thing and what we realized when we first went there was that they told us, “Yes, we have a problem.” It’s not that they didn’t know about this problem, but for a few years at the beginning they would tell us, “Look, it’s interesting, but international for us means Europe, so I’m not going to go and have any solution around Latin America or Brazil.”

Over time what happened was two things. One is that emerging markets became more relevant for global companies, so everyone would have a strategy at Facebook and Google and Apple and Netflix thinking of where to find growth, and at the same time we stopped being one payment method and we went on to aggregate over 600 payment methods, so the value proposition started to compound. We are not just solving Boletos in Brazil, we are solving every payment method in Brazil, but under the same API, we’re going to do Mexico and we’re going to do South Africa, and we’re going to do Nigeria, and we’re going to do Indonesia and suddenly that conversation becomes much, much easier. Two things happened, the underlying trends and we building a much more comprehensive product.

What was your first big customer in the US that wanted to use you to go abroad?

SK: GoDaddy.com. I still remember those visits, it was incredibly painful because back in the day we tried to be B2C before being B2B, so we had a prepaid card with a brand of ours, and GoDaddy told us, “Look, it’s beautiful what you do, but no one cares about your brand. Give us the payment methods, so just go from the payment method to the cashier.” We were a little bit offended at first because, again, we’re trying to build a brand. But they were right, we were better suited to be an infrastructure player, and GoDaddy essentially helped us build the product that then all the others bought.

One API

So today the core value proposition of dLocal is your primary customers are mostly American companies, large companies, they want to do business in emerging markets. They go to you, you have one API, and you’ll take care of all the details. Is that the proposition?

SK: Yes. Small caveat, Ben, it’s not only American companies, it’s any global companies. We do a lot with Chinese companies, so the likes of Shein and Alibaba going international, a lot of European companies, and obviously the big American ones. Essentially, anyone who wants to do business in emerging markets today is speaking with us or using our services.

We are behind the scenes a pure infrastructure play, we don’t have any agenda whatsoever around owning end customers. But we want to build infrastructure. Part of what we did, we started from a bank, which is what I was describing before, a user buying from a company. But then Uber came and said, “I need to pay out to my drivers, can we also do that?” And then Shein came and say, “Okay, now I need a marketplace because I need to onboard thousands of servers.” So the evolution of the dLocal has been, “How do we cater to these global merchants and how do we solve more problems for them in emerging markets”?

You start in Brazil, that’s your first product there, what gave you the inspiration or impetus or drive to expand this to markets? Was that because GoDaddy needed that or wanted that, or what led to that? How did you get to that stage?

SK: Ben, two things. Number one is that we are Uruguayans, so we started in Brazil being Uruguayan. So for us to go to Brazil or to Mexico or to Chile was fundamentally the same, there was no reason why Brazil was more comfortable to us than any other place. The other thing is that we decided to serve global companies, and global companies need many solutions at the same time. If we just sold Brazil, that wasn’t a unique value proposition. So from the get-go, we were launching all across Latin America and trying to build that infrastructure. We really early on understood that the more problems we could solve on the same API, the more valuable our proposition would be, so that was the reason.

How did you build up teams in all these different markets? Just from a internal perspective, your whole proposition is you’re solving these very difficult problems for multinationals that don’t want to do that. What gave you the confidence to do that or let you do that in an efficient way?

SK: I wouldn’t say confidence, but we knew we had no option. We made a thousand mistakes, but we knew that when we — the first time we did business in India, I flew back and I said, “This is a nightmare, but it’s a nightmare we want to go after, it’s what we do for a living as a company. We need to set up an entity there, we need to find the right talent. We need to move into those countries and do it ourselves.” I personally lived in China, our president and COO moved to Africa, we’ve had people moving all around the globe because key markets are places where doing business, it’s hard, otherwise someone else would be doing it.

We’ve moved a lot of people around. We have a very tight culture where we are very clear about what we like and what we don’t like. I think most importantly, these are not nice-to-haves. I know you covered Adyen and Stripe, those are two incredible companies, but emerging markets are “Nice-to-have” for them. Yes, one day down the roadmap they’ll go to one of these markets. For us, that’s not how it works, that’s what we do for a living and whenever things get tough in one of those markets, we double down because if it’s hard for us, it’s going to be hard for everyone else.

Being Public

So you grew pretty quickly, and you IPO’d in 2001. What led you to feel like that was the right time to go public? Was it that you needed the money? Was it the market was hot? What was the decision-making that went into that?

SK: The company was bootstrapped from 2016, and therefore profitable, so we never needed the money and it was the way because there wasn’t an alternative, or at least a real alternative back in the day.

2021, we found two things. One, the window was open. We had to learn what an IPO was, we didn’t know what it meant to go public and we learned that. We said, “Okay, this is interesting to us.” Why? Number one, because payments companies we believe are better suited to be public. There’s incremental transparency, scrutiny, controls that when you’re serving global companies and they’re trusting you with billions of dollars of theirs, it’s good for you to be public and be out there. The opportunity was there, and for us it was a marketing event, dLocal had some before and after from a growth trajectory from the moment we went public, we really managed to differentiate and while the journey as a public company wasn’t easy, for sure it wasn’t, I would do it all over again tomorrow morning and if you want to compete in the big leagues, that’s where you are building, and that’s pain you need to go through before or after.

Well, I was going to ask you if had regretted it. One of the problems of coming out when the market’s very hot is then the market goes down, that was the first challenge. But you still think it was worth it to go at that time.

SK: Yes, because it’s a company, it’s not the stock price. You’re trying to build a company for the long run, and we got the trust. We grew 5x since we went public, from a TPV [total payment volume] standpoint, which is how merchants bought. So absolute no-brainer. Then the stock price one day will reflect the reality of the business we are building. I love this idea of saying, “Okay, where are the best companies built? They’re in the public markets”, and therefore, “Where should we be?”. We want to be benchmarking ourselves against — we don’t want to be the best in Uruguay, we don’t want to be the best in Latin America, we hopefully want to compete at a global level and win.

One of the issues of being public and transparent is people will dive into your books. You had pretty serious allegations leveled against you by a short seller about accounts not reconciling, some questionable loans, issues around — basically, allegations of either significant incompetence or fraud and there’s still an outstanding shareholder lawsuit around that. What was that experience like, and what’s your position a year and a half on from that happening?

SK: The experience was terrible. It was, at a personal level, at a company level, it was extremely stressful. We didn’t know what a short seller was, so we had to learn the game, and at the same time be ready to answer. We’ve answered extensively around all of those allegations.

I think there’s a big benefit, Ben, that our business has, which is the fact that our merchants understand exactly what we do and merchants, we not only didn’t lose one customer, but doubled from them.

It was painful, the company took a lot of lessons, particularly around communication. I was always of the idea that you build a business and nothing else matters, and you don’t need to communicate it and we learned that that wasn’t the right decision. That having been out there and being better at communicating and being more available was fundamentally important. I don’t think we’ve changed anything from the way we run the business, but yes, we took a lot of lessons on what it meant to be a mature public company. Lots of learnings, not something I wish on anyone, but it made us stronger.

CEO Pedro Arnt

Well, so you’ve changed nothing about you run the business, but actually this was going to segue to you Pedro. I’d say the biggest bounce back in the stock since then is when you came on board as co-CEO. What was your perspective coming in from the outside? Let’s first talk about you, tell me about your background, your years at Mercado Libre. You were there for, I believe, 25 years. Is that right?

PA: That’s right. How do I come to technology? I was working in the late 90s as a management consultant in São Paulo, and we had spent a year telling telcos basically this new thing called the Internet is about to happen, and it will be an absolute game changer. We realized that we were preaching to the wrong people, and that we should grab all those wonderful business ideas and go do them rather than tell some old large and stodgy telco what it should be doing, and that happened.

I remember at my firm, I think 80% of the consultants left to join startups, and I ended up at Mercado Libre and spent 25 years there building out what is today one of the largest retail and digital wallets globally. I had seen the digital wallet space from the other side, and I remember we used to try to pitch this wallet we had to global enterprise customers, and we couldn’t convert. Most of the flow we had was actually coming to us from dLocal and there’s an obvious reason for that — you may have the alternative payment method, but you don’t have the API and you don’t cater to enterprise merchants because it’s a B2C business.

So that’s how I found out about these guys, and how I began to understand the enormous opportunity that existed in serving global merchants across emerging markets.

What’s your perspective then? Again, coming in last fall, years of experience, CFO of a very large company, clearly the market perceived your entrance as a very positive sign. How do you interpret that?

PA: First of all, I think to be extremely, extremely fair, two things happened. Most importantly, Q2 was when dLocal showed the world that the punch that they had taken across the face because of the short seller had not affected their business, and that their merchants were still there. When you look at the Q2 numbers that were released, they were stellar, to say the least.

And then on top of that, I always say that I had a slight arbitrage. I’ve been living in Uruguay for five years now, I’ve known these guys for some time. Obviously, the short report was the talk of the town, this is the Uruguayan unicorn, the most successful company to come out of the country ever, I would say, and I knew the context. If you look at the fintech space, all the great companies in fintech that were generously valued because of what great companies they were had short theses around them just because the market was poised for some correction.

Yep, 2022 was brutal in general.

PA: Yeah, exactly. And I can run the list, and there are a lot of great companies out there that also had short theses targeted against them. But I was able to do my work, I did the diligence, and there’s simply nothing there.

It always caught me by surprise. The first time I read the short allegations, the report seemed to me — what’s the word I’m looking for here? It was just peppered with so much colorful language, and that’s because there wasn’t really substance behind it. I can throw a whole bunch of accusations against the window and see what sticks. So for me that was a great opportunity. I knew the business, I knew the size of the opportunity, I knew the founders and it was the logical next step for me in terms of what I wanted to do with my career, which is to build something again as I had one time around with MeLi.

Is there an aspect where, when you heard you had nothing to change, do you think there was a bit — because I can look at it zooming out without getting into the specific allegations, you have this thesis, which I think is very compelling, “We have one API, you’re a multinational, you sign up with us, and we will solve all these problems all over the world in all these markets that you don’t want to do because it’s really hard.”

So there’s two issues with that. Number one is it’s hard, and so you can anticipate that there will be issues that come up or mistakes that will be made. But then you have number two, that in the process of doing that very rapidly, it could be possible that mistakes were made, issues came up, maybe internal controls were not what they should have been. Is it fair to say there was nothing there? Because I can certainly see how things could be overstated, but also maybe things could have been done better.

PA: As in any company that has been as successful as this company, absolutely. I think that’s also part of where I come in. You don’t hire someone who’s been a CFO over a long part of his career if there isn’t an element of internal foundational company building that you’re looking to strengthen. But I think there’s a huge, huge chasm between we need to continue to scale and improve the company, to the kind of allegations that were leveled. And so, again, if you look at any company that’s seven years old, has grown as much as this company has, and there’s always going to be room for improvement. But as I always say, this is a regulated company across multiple jurisdictions with central bank or regulatory oversight of it, and we haven’t really had any issues with regulators.

Managing Currencies

One of the big challenges to emerging markets is exchange rate issues, generally currencies that can be devalued. This is obviously a pain point for a multinational that dLocal can help take care of. How do you do that at a high level? How do you actually manage to work across these different currencies? Is that a big part of the premium that you can gain because you’re figuring this out? How does that work systematically?

PA: There are multiple ways we help our merchants deal with currency. First of all, in many cases we have treasury feet on the ground who understands local instruments, local hedging instruments, have a good sense of where the dynamics of all this are going. Second, as Sebastián said earlier, we have both flows of funds. So we have money that needs to leave countries, we also have money that needs to come into countries. Many times that generates an opportunity for us to be extremely, extremely efficient in terms of FX pricing. So when you put that together, which is local know-how, which allows us to give them multiple products or ways of hedging or thinking through FX, and then the ability to be aggressive on quoting FX is what makes us very different from your typical simple credit card or payment method processor locally.

How does the absorption of risk for that happen? That always comes up on big company earnings calls, “We had this currency effects, XYZ, and it impacted our earnings in this direction, that direction”. Are you handing it off completely to them, or is there some internalization of that risk to you that’s happening as well?

SK: I think the point is after all these years we understand how FX risk works, we know how to price it, and we’re happy to price it.

I think FX is interesting, so I’m curious to understand more.

SK: We have two flavors, if you will. One which we call “FX-at-transaction” and one which we call “FX-at-transfer”. This is all inside the cross-border world, which where we are going to be exchanging currency. Roughly 50% of our volumes today do not include FX, so we’re collecting pesos and settling pesos.

In the world where we are converting currency we have two things. FX-at-transfer means we’re going to collect local currency once a day, once a week, whatever settlement period we agreed, we are going to exchange those to dollars, we are going to help you navigate those and we are going to give you the amount of dollars that we get from the source. The risk there sits with the global merchant. It’s their decision, we are okay with that FX risk.

Then there’s what we call FX at transaction, which is when we take the payment from the user, you the merchant might tell us “I want to receive $10 and I don’t care what happens, there might be a 50% devaluation, there might be a 10% revaluation, I want to receive 10 bucks.” In that case we are taking the FX risk, that’s what we know how to price.

Got it.

SK: We have both flavors. We have merchants more and more — historically, our merchants thought of dollars, so they said, “I Netflix want to receive $9 for my subscription, and whatever happens with the FX, make sure that you keep hedging your positions and keep moving that each transaction has an FX rate attached to it”. We are not quoting at the weekly level at an API level, we’re quoting per transaction, and that’s what we know what’s going to happen in the future. What we are also not about is being in the business of taking currency risk, and let me explain this. Whenever we are taking an FX position, we are hedging it. We are paying a lot of money to hedge those positions, and that’s what I meant when we know how much that risk costs.

Got it.

SK: We are never going to take a position for the sake of it and say, “Okay, we think the currency is going to trade in this direction”. We are a transactional business, we don’t want surprises. Over the long run, our FX profits should be exactly what we agreed, which is the cost that we have to hedge those positions plus our mark-up.

Got it. So is that just priced then as part of the transaction fee? So the transaction fee includes normal transaction costs, but then there’s a premium for this hedging cost, and your premium on there. Is that how the pricing works?

SK: Yes, the merchant gets to choose what flavor of our product they want to use.

Then the other comment I want to make is, the amount of complexity that goes into expatriating a transaction, it’s massive. So in a country like Brazil where we are central bank regulated, we need to report at the transaction level to a central bank. It’s millions of transactions that we are sending before we get FX approval. All of that complexity we’re obscuring.

When I say complexity in emerging markets people think, I don’t know, a politician, it’s on the way the market operates. In fact, there’s a lot of reporting, there’s a lot of back and forth, and that’s what we’re helping abstract. We are a payments company. Yes, absolutely. At the end of the day what we do, it’s a payment, but for that payment to happen the way it happens in the US, there’s all these complexities that we need to abstract before a transaction goes through.

PA: The other area of complexity that we abstract is the pace of change. As Seba was saying, not only are FX transactions across emerging markets complex, regulatory environments are constantly in flux and so that’s what we deal with day-to-day. If you’re a treasurer sitting somewhere in Palo Alto or San Jose, and these markets for you are not exactly 10% of your revenue each, we abstract all that constantly in flux regulatory environment for you and just solve it all for you.

Scaling the Business

So from a COGS perspective, or less COGS, more your below-the-line costs, I think the regulatory point is a really good one. Regulations change, you have to report all these transactions, the FX thing. How do you make this into a scalable business? Doesn’t that just require a lot of boots on the ground in Brazil to sort through all those sorts of things? How do you get scale on these? I get the scale point when you’re selling to the consumer, or to the multinational, “We take this all away”. But as far as building a sustainable company over time, you need to get leverage over your costs, how do you avoid those per-market costs from overwhelming you?

PA: I would say there’s a lot of operational leverage in that. Yes, you need to have boots on the ground, but the number of boots on the ground doesn’t increase with your TPV. The regulatory complexity, the market know-how is fixed, and then you start flowing more and more TPV and revenues on top of that and actually, if you look at the business model today and the financial model we run, it shows how attractive it is. Because you’re able to, once you’ve set up all that operational know-how, it significantly scales as you gain share of wallet from your existing merchants and you add new merchants.

SK: Ben, the other thing on that is that if you are good at technology, and we are, once you face — so taxes, there are only so many taxes. Yes, there might be digital VAT, a fixed amount or partial amount, but once you generated that once and your technology’s able to reflect that, then it’s about an input. Which is, “Okay, what changed?”. But the infrastructure itself, it’s always the same.

Take cash, I spoke about Boleto. We integrated Fawry in Egypt, which is a cash method there. It’s the same logic, it works exactly the same way. Yes, it’s a different country, but once you’ve tackled asynchronous payments, so you have a message and then another message that comes. Once you’re good at it, it’s very easy to continue to compound. All of those complexities, while extremely complex by definition, they repeat themselves, and once you see them again and again, the technology adapts. So what you need, it’s a boots on the ground to tell you what changed. But it’s not that you need to go and build it all from the ground up again.

Obviously, all this complexity lends itself to being a moat. If you’ve done all this work, it’s work that the multinational doesn’t have to do. But is the threat that at some point some of these markets get large enough that they’re just like, “Fine, we’ll do it ourselves.” Or is the threat that another payment processor is going to offer a lower rate? What is your competition today, and what do you anticipate being your threats in the long run? Go ahead, Pedro, you’re the one looking at the long run.

PA: I’ll take a first stab at that. I think on paper both of those dynamics are part of the competitive mechanisms we need to deal with. But really what’s been happening when you look at a Brazil or you look at Mexico, our two largest markets, is that even when our merchants begin to have enough of a business in these markets that you would think maybe this is the moment where they eliminate that abstraction layer that we’ve become, and try to go more direct into local processors and local payments. That’s not what’s happening. The fastest growing part of our TPV is the local business and the reason for that, is that there’s immense value-add in two things.

Sorry, what do mean by local business? You said that’s your highest growing TPV.

PA: What you said, it was one of the risks that at one point one of these global merchants say, “You know what? I’m now going to start myself building local pipes in Brazil or in Mexico or in India.”

Oh, got it. So they will build a local entity and then you end up plugging into that as it is.

PA: Right, in theory. But when we look at what’s actually happening is they still continue to use our API, and they continue to use us for orchestration, and I’d say there’s a few reasons for that. One of them is that we have proven to deliver better conversion rates and extremely competitive cost, just because of how nuanced we are in an understanding of each of these markets. So it’s not that they eliminate a middle man.

How big is this for conversion rates? I assume that is a really big deal given all these different things?

PA: You have to look at it merchant-by-merchant, and it varies by merchant. But when you look at many of the merchants that are driving local-to-local growth with us — and remember, we do a lot of alternative payment methods which are not credit cards. So maybe for credit card volume they might say, “I’ll do it myself”, many don’t. But then when you start getting into the multiple alternative payment methods, cash, wallets, it’s much more difficult for a merchant that globally typically has teams that deal with credit card and credit card performance to deal with all these alternative payment methods.

The second thing that happens is there’s a lot of value in what I call operations. That is, when you look at the emerging market payment stack, it’s typically a stack that has a lot more of legacy technology. It’s been under-invested in by many of these local players and so simply put, things go wrong a lot more often than with your processors in developed markets, and that speed to react to fix dealing with issuers, dealing with acquirers, dealing with APMs [alternative payment methods], is something that we have built out these teams, we can leverage these teams across all of our merchant base, versus one single merchant who would try to replicate that locally for one of these markets.

So even in the Brazils or the Mexicos, when they start to set up local operations, what we’ve learned is that we are still keeping most of that TPV because of the service we offer even without the cross-border component.

Is that correct then that you are doing a good job keeping it, but the main threat is them going direct, as opposed to there being another direct alternative in the space that you’re in?

SK: Ben, that is what we were afraid of back in the day. We thought, “Okay, one day these customers are going to get huge and they’ll do it themselves”. That hasn’t happened, we haven’t lost a customer to localization. If they go local, we’ve had a few examples, they use us in a different flavor of that product I was mentioning before. They don’t ask us to exchange currency for them, but we still process the payment.

When you look at what Adyen and Stripe do in the US and Europe, fundamentally credit cards in Europe and US, it’s a solved problem, and they’re still gaining share, and they’re still better than others. I think that same dynamic applies to emerging markets. So reconciliation fast, do you want to get them standardized or you want every week to look differently? How are your conversion rates going to look? Are you good in fraud prevention? All of those small nuances continue to compound.

The other thing that has happened is that we won local merchants, which never thought we would. The biggest search engine in the world we won local in Brazil and from then we went cross-border, so we went through the opposite dynamic than what we expected. So local-to-local is by far the fastest growing business in our platform and to us, that’s good news.

Ben you ask, what’s going to happen with competition over the years? Net take rates in our business go down, that’s what happens in payments businesses across the world. What does happen as well is that they become huge and that’s the trend we are hoping to see in our business, and we are already on the early end. We are now a much, much bigger business at a lower net take rate, but with many more dollars available to us to reinvest. That’s how we think of it, we don’t care about the percentage. We care about, “Are we going to get more dollars, free cash flow dollars that are going to flow through our platform?”, and if the answer is “Yes”, we should definitely go for it.

The Future

Just out of curiosity, thinking about myself personally, the worst anecdata given the scale you’re operating at, but when I came to Taiwan twenty years ago, everything was cash, and you had to always have cash on hand. Now you have an aspect where credit cards are very widely dispersed and again, because it came along late, it’s quite advanced. You can use your phone for basically everything these days.

To what extent do you see similar trends around the world? Will credit cards take over in the end? Or is there a bit where, obviously we saw China go straight to more wallet solutions, I’m just curious on a broader trend. The US and Europe, we’re all familiar with that. But what trends do you see worldwide as far as payments? Are credit cards going to be a thing, or is it going to stay a mishmash, or is there something else that’s going to win the day?

PA: Yeah, sure. It’s super interesting. One of the things that’s happening is in many emerging markets you’re seeing some of the most interesting innovation around non-credit card rails, and that’s because if you look at things like Pix in Brazil, or UPI in India, or these digital wallets, they actually offer a better experience, and the rails are typically cheaper than what Visa and Master have built globally.

That’s another reason why we’re so bullish on the long-term opportunity here is that we actually think, and we’re seeing it in many of these markets, you see the emergence of payment mechanisms that start decreasing the reliance on cash. Now mind you, cash for most of our markets is still more than 50% of transactions, but they’re not migrating to credit cards as the Taiwan example you gave us, they’re migrating elsewhere. Real-time payments, central bank clearing houses, digital wallets with massive market share, like the Chinese example. I think, really, that’s what we’re seeing across the global south.

Do you still have kiosks?

SK: Yes, in many places, Ben. One thing we learned very early on, because obviously we don’t like cash, we prefer any — we are payment geeks, we like UPI, Pix much better than a cash kiosk, but you don’t educate the users, we are not in that business. We are in the business of offering whatever payment method users want to pay with. So if it’s cash in Egypt, which we don’t love, that’s what we got to offer, otherwise, we’re leaving 50% of the population.

Pedro was referring to conversion rate as, “Okay, how many more bips I get on a credit card transaction, or what higher percentage rate?”, for us, conversion rate means also, “Okay, you’re going to get access to 50% of the population that wasn’t even able to pay you because they went to do the checkout and they couldn’t find a payment method”. So it needs to be really inclusive, independent of what we think of the payment method itself.

Over the long run, cash should go away, credit cards are there to stay, but there’s also credit cards which are enabling installments, so that’s a local flavor. So it’s still credit cards, but they behave slightly different. Debit cards are becoming more and more relevant. If anything, we’re seeing payment methods becoming more fragmented, the world of payment methods, it’s less consolidated than it was before.

You mentioned that you’re starting to get more into the remittances business, which turns the flow of cash in the opposite direction.

SK: Absolutely, yes.

And so, how does that work? You mentioned you don’t want to go direct-to-consumer, you’re a B2B brand, so how do you — remittances is the most, it’s like C2C in some respects.

SK: Yes, but there are nine or ten key remittance players that process over 80% of the market. The same way we serve Facebook, Google, Netflix, Apple, Amazon and Microsoft, we want to serve those same nine or ten on the remittance space. We are not going to be competing with them, that’s a huge advantage. We’re going to be serving them and using the rails that we built for others for that use case.

That required us to step up our compliance function and monitoring function to make sure we understand who our counterparts were from a remittance standpoint, we stayed away from that space forever. But when you look at what’s going on in that space and where the GDP of the Internet is going from, or going and coming from, remittances, it’s definitely a place where we decided that we want to have way more exposure and we have all the competitive advantages. We already have the flows, we already have the infrastructure, the licensing. We in many cases have the opposite flows, as Pedro was saying before, so it’s a no-brainer for us to be able to compete in that space and have a better solution.

Is this a situation where ideally you leave money in a market so you’re not even doing currency transfers at all? So to the extent you can balance ins and outs in each individual market, then you’re just moving some numbers on a ledger instead of actually doing conversions.

PA: That’s exactly it, where it’s permitted by regulation, which is in most of these markets. If you think about it, the remittance providers are looking for two things, speed and cost, and that kind of just moving money on a ledger, but where there’s no actual money transition, gives us an incredibly competitive offering in terms of those two things, which is speed and price.

The reason to have the talk this week, you are announcing — we’re having this interview before earnings, it is embargoed until after then, so I don’t know what happened in your earnings, that’s why I’m not asking you about it yet, but I believe you’re announcing that you are no longer doing the co-CEO thing, that was a temporary thing. Sebastián, where are you going?

SK: Going nowhere, going to the board. Ben, I love this company too much, I’m going to still be around. I’m going to be leading where we’re establishing a commercial and M&A committee that I’m going to be leading. But it’s time for me to step down as CEO, it’s been a huge ride and an incredible one but as a public company and looking ahead, I think Pedro is in much better position to do it. I’m going to be supporting the company, but from one step behind, which is a place I feel a little bit more comfortable with as well.

Pedro, did you know this was going to happen when you came onboard last fall?

PA: Obviously, like we’ve always said, Seba is the one who came looking for me. I think we’ve run this with a really interesting blueprint of how to make a very difficult transition not only from a CEO to a CEO, but from a founding CEO to the guy that’s brought in, which is always quite difficult.

I think the transition period, the fact that I’ve been able to spend a lot of time with Seba, seeing how he managed this, how he built this, he’s also been incredibly constructive about biting his lip when he’s seeing I’m doing something in a different way, but allowing me to gradually step into the position. So yes, this has always been the plan, this has always been the way we thought it through. We didn’t put any specific dates to our plan, because we wanted to see organically how it played out and at least in terms of the actual transition, I think both internally and externally, this is a phenomenal way to do it. Now it’s up to me to deliver the way he’s delivered over the last seven years.

There were reports late last summer, Sebastián, that you were potentially looking for buyers and this came on the heels of these challenges over the last 16 months, is a way to put it. Was this a situation where you stepped back and decided, actually, “This company should keep going down this road, we just need new leadership”? What was your thought process through there?

SK: Ben, the reports that we were looking to get bought, we were never looking for buyers, those were the reports and obviously they weren’t real, otherwise we’re not here.

Ben, I started this company when I was 22, I’m now 33, close to 34, one kid-and-a-half at home. I felt that starting in Uruguay, getting to the public markets, three years in the public markets, delivering on what I believe to be an incredible story and the business is in a very unique position. There’s a lot of moats, there’s a lot of things that are very unique to what we built, and at the same time, building a public company is a different skill. I never thought we would get Pedro, it was impossible to get Pedro, Pedro is a superstar of this market of ours.

You spoke about the market reaction when Pedro joined, I had the same reaction when I first thought of the possibility of getting Pedro to join. I wouldn’t be leaving this company to anyone, I’m not leaving the company, but I wouldn’t be leaving the leadership to anyone. As Pedro was saying, I just care too much about this, I sweat every single centimeter of growth that we’ve had. I really feel that we have the right team, the right person in charge and I’m also very excited to see what we build next.

Sometimes it’s like a kid that grew up and I want to see where it continues, and I want to be hopefully helping in as much as I can. Kids sometimes don’t want to listen too much to the old guy and I’m not an old guy, but I also need to understand that. But again, it’s a very happy day for me today, that I can tell you.

What’s next, Pedro? What are those plans? What are the things that — again, I get the core proposition of dLocal. There’s a lot of details I don’t get, which is kind of the point, you take care of all the details for us dummies sitting in developed worlds. But where do you see this going and what do you see driving growth continuing going forward?

PA: What’s great about where we’re at right now is, what you’ve just referred to as the core proposition gives us significantly leeway for growth. Just by offering our existing merchant base more geographies, and then also growing their share of wallet in the geographies where we’re already processing for them.

Remember that in many cases they don’t have a single provider, they may have two or typically what happens is that they’re still processing international credit cards, which is more expensive and less efficient for them, and as they grow comfortable with our value prop and what we’re offering, more of that flow goes to us and less of it is done through an international credit card transaction.

So just from adding share of wallet and new geographies to the existing merchant base, there’s significant tailwinds. Overlay that with new merchants that we offer the same core set of products we have today, and that’s another significant growth driver for us. When we think of what’s happening with the digital revolution and all the new digital services that are coming up, and that eventually emerging market consumers will want to access and will have to pay for.

Snd then the third piece is we continue to innovate on products. Always very close to our core knowledge, which is payments, but there’s whole verticals we haven’t attacked yet. Can we help banks be faster and cheaper with the way that they deliver small scale international money transmission? Absolutely. SWIFT is still a legacy system that’s still expensive and still relatively slow. What can we do in terms of helping global treasuries with invoicing and accounts receivables and accounts payables? So we do have a pipeline of new products that will eventually hit market, and we sell those things to existing merchants and new merchants. When you think about it, the way we’ve phrased all this is we will grow by growing share of wallet of our existing merchants by adding new merchants and by overlaying new products.

How do you balance that with shoring up the foundations? Again, just tremendous growth for a decade with tremendous complexity, that’s the bit I keep coming back to, the exact value proposition, that core proposition is so compelling, but it also is really hard and hard to get right. How do you strike the balance there?

PA: I think great companies are the ones that are able to avoid the trade-offs that not-great companies come up against. What I’ve been telling folks here is, “Look, we’re a great company, you guys are great managers of this company, and we need to be able to run and chew gum at the same time”. That means we need to be able to capture all this growth that we have ahead of us, and at the same time, we need to build solid foundations so that we can manage all of that incremental volume on behalf of our merchants without hiccups, and I think it’s fair that you ask the question, because we don’t like easy, easy is boring. But I don’t think it’s necessarily a trade-off where either you grow or you build scalable internal systems and processes, the good companies like ours will figure out the way to do both.

If we talk again in three years or five years, what are the markers? What am I looking at to say that you pulled it off, it’s even greater than we expected?

PA: All the internal stuff is the stuff we shouldn’t talk about. At the end of the day, that’s just building the foundations so that we can have more TPV, which means that our merchants are increasingly choosing us.

So the markers are, “Have you sustained your TPV growth over a multi-year period?”, which when you start compounding makes for an enormous growth story. “Are you still delivering best in class margins?”, which means that not only do you have a high growth business, but you have a high growth business with a really attractive financial model which is very high in margin and delivering operational leverage, and spitting out cash the way we do our cash conversion from net income is above 100%. So when you think about it, we’re doing two things at once, we have a really interesting purpose, which is making sure that billions of emerging market consumers are able to access the digital revolution, that won’t happen without companies like ours, and at the same time, we can generate significant value to our shareholders because we combine growth with margin and cash generation. All the internal stuff is just to allow that to happen.

How important is it going to be to capture not just multinationals but local companies? You’ve had big growth in things like car services, which are multinationals to an extent, but it’s more internal circulation to a company. Do you think you’ll always be from developed markets to emerging markets, or are some of these markets going to become more self-contained over time?

PA: We’re really good about understanding where we add value. Do we add that much value to a large Mexican retailer who only has a business in Mexico? Probably not. The concept of a single API, the concept of interesting FX products and helping you navigate FX complexity resonates a lot less with that merchant. So we typically don’t really target a merchant unless he operates in two, three, or more markets and the addressable market there is just gigantic as globalization occurs. When that Mexican retailer says, “You know what, I now want to add Costa Rica and Peru, because we’re going international,” that’s where we become relevant to them. The guys that are just very large in one market, sure they’ll knock on our door and we might show them what we can do for them, but that’s not who we’re focusing on.

Have you ever thought, ever wondered, Sebastián as you look back, maybe we should just stuck with Latin America, that would’ve made it easier? Or does this have to be a global product?

SK: Absolutely not! Africa and Asia today represent over 20% of our business. They’re going to be way, way, way more than that. We started in Latin America because that’s where we are from, but when you see the challenges that someone has to process a payment in Nigeria, it’s exactly the same from what we saw in Brazil ten years ago. You have crazy valuations and it looks complex and Brazil today, it’s commoditized, if you will and when we first process a payment in Brazil, it was impossible to do.

We get excited about that, we are very excited about Bangladesh and Pakistan, which are two extremely complex markets from a payment standpoint but the future of our company, it’s to abstract as many complexities as possible. Staying only in LatAm would’ve been a very, very bad mistake for us and I’m extremely excited and happy that we did it. It wasn’t easy, but we should continue to invest there.

Well, I’ll have to ask you the same question, now that you’re Pedro’s boss, or grandfather, or whatever the analogy was. What makes you feel satisfied in three to five years when you look at what’s happened? What do you want to see occur?

SK: (laughing) Ben, partner, not boss, not grandfather, partner. Absolutely. Look, I think a good thing about the local strategy that it’s easy. We spoke about it with Pedro, it’s not rocket science from a strategic standpoint, everything that Pedro described, I would sign right below it. The execution of it is extremely complex, I think we know what we need to build, we know where we need to build it, it’s going to be extremely complex. You need to continue to have the right culture, continue to stay very humble, continue to stay very hungry, and build a company that can be transformational.

One of the challenges we’ve always had is that we are bad communicators and I hope that as we get our story out there more and more, people will be able to recognize how unique what we are building is. Merchants do recognize it, and that’s why we get the trust of those. But I think in the next three to five years you’ll see us becoming a company that’s much bigger, but most importantly having a much bigger impact, because there’s plenty of space with it.

Well, it’s certainly been quite a story, quite a run. Congratulations, Sebastián on a decade. Congratulations on surviving the last couple of years in particular and Pedro, it’ll be interesting to watch and see how things go.

PA: Thank you.

SK: I really appreciate it.

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