dLocal's $5 billion valuation shows investors' fervor for cross-border payments

Many fintechs already saw profit in linking buyers and sellers in different markets, and the value of the service is accelerating along with the broader growth of digital commerce worldwide.

dLocal on Tuesday announced $150 million in new funding, boosting the Montevideo, Uruguay-based firm's valuation past $5 billion and providing capital to expand its reach in Latin America, Africa and other emerging markets.

It also demonstrates the value of removing processing steps for payments that travel between nations and face different regulatory, banking and currency requirements. Ripple over the past few years has gained traction by showing blockchain could remove time and fees for international supply chain finance. Other firms have either jumped into the cross-border digital payments technology market or have expanded existing products.

That has drawn investors who see potential exits from IPOs or acquisitions by large banks or other technology companies as the cross-border digital payment industry matures. And the technology companies have moved into some of these markets faster than incumbent financial institutions or payment processors, providing an upper hand for the challengers.

"The big banks have become beholden to the fintechs in this area," said Richard Crone, a payments consultant, adding a bank acquisition of one or more of these fintechs would provide a route to match business loans with B2B and international digital payments, since most of the fintechs don't have banking licenses. "Every fintech in this space is looking for a liquidity event, and a likely buyer would be a top-10 international bank."

dLocal and Alkeon Capital, the lead on dLocal's investment, did not comment to PaymentsSource by deadline. dLocal, which connects international merchants to local markets in developing countries, in the past six months has added partnerships with Verve to reach African countries; enabled Google Pay for merchants in emerging markets; and partnered with the fintech Dinie to power buy now/pay later for retailers in Brazil. dLocal this week also hired former JPMorgan Chase head of fintech Sumita Pandit to be chief operating officer. dLocal's current COO, Jacobo Singer, will be president reporting to dLocal CEO Sebastián Kanovich.

Pandit has worked in investment banking for more than two decades with clients including payments, challenger banks, financial and insurance technology companies. dLocal said Pandit's experience in helping fintechs scale globally would fit well with dLocal's strategy.

"Adding a former banker with that experience makes [dLocal] look good for an eventual IPO or if they are going the SPAC route," Crone said, adding bank expertise could also be helpful in gaining regulatory approvals for additional financial services.

The value for firms such as Verve and Google in partnering with dLocal is streamlining entry into new markets or tapping new payment flows without having to set up relationships with processors in different countries, or manage different acquirers depending on the payment corridor.

It's a strategy that's also worked for dLocal rivals such as Rapyd, which recently passed the $2.5 billion valuation milestone after a $300 million investment. Rapyd positioned that infusion as a way to buy market share in Brazil and Asia/Pacific, which have seen strong growth in digital adoption during the pandemic. Flywire, a Boston-based fintech that focuses on international tuition payments, drew $120 million from Goldman Sachs and other investors last year to fund its diversification, which includes health care payment processing and the development of payment software.

Beyond dLocal, other fintechs that support cross-border payments have also drawn recent investment. In Latin America, eBanx and PPRO have used VC funding, APIs and national digital payment schemes to reach merchants in Mexico and Brazil. PPRO in January 2021 raised $180 million, boosting its valuation past $1 billion.

Airwallex in January 2021 raised $100 million to reach a $2.6 billion valuation following its construction of a cross-border payment rail for small businesses — including an integration with cloud accounting program Xero and incentive marketing for small business. In a smaller deal, cross-border payment company Routefusion in February secured a $3.6 million round to build software that supports cross-border payments for payroll companies, challenger banks and digital marketplaces.

“Developing cross-border payment tech is extremely important and has been a focus for years because it has historically been a timely and costly undertaking for both consumers and businesses," said Rachel Huber, an analyst at Javelin Strategy & Research. "If I look at new tech, such as instant payments, blockchain, or digital currencies, the first use cases almost always are addressing cross border payments for those reasons."