3 companies leading payments in emerging markets

November 22, 2020

Payments has proven to be one of the major growth businesses in the digital era. The following companies benefit from some of the same tailwinds: developing markets with a large cash base, shifting to using card and digital payments, with a growing middle class and a shift toward e-commerce.


Thesis - Stone is a high-growth payments provider in Brazil, focusing on small and medium sized businesses. They started their business by providing a point of sales device to small businesses, but have expanded into a broader payments and finance provider including APIs to take online payments, digital accounts for businesses to pay bills and credit offerings. They are often compared to Square in the US. The company made waves when they went public in 2018 after both Warren Buffett (Berkshire Hathaway) and Jack Ma (Alibaba) bought shares. In order to grow, Stone have 350 “hubs” - local distribution centres in Brazilian towns where they have a team of sales reps and support operators who are able to sell their solutions and helps merchants. This is part of their strategy to be a customer-first business, providing the best experience for a financial company in Brazil. Since it’s IPO just a year and a half ago, StoneCo has tripled in valuation.

Leadership - StoneCo is founded by André Street and Eduardo Pontes. The two have been jointly working in the payments business in Brazil for many years. André started his first payments business at 15 years old, transferring money between buyers and sellers on Auction sites. He’s since gone on to start 3 more payments businesses, before forming StoneCo. In between, he graduated from Stanford business School. Eduardo Pontes joined André later as part of Arpex Capital, where they both invested in payments in Brazil. It was during their work at Apex that they saw the opportunity to build a truly customer-first payments business in Brazil.

Financials & Performance - As of Q3 2020, Stone has 582,900 merchants clients, 357,100 digital banking accounts and 73,000 businesses using their credit lines. After a reduction in business during the initial coronavirus disruption, the business seems to be recovering well. They gained 63,500 new clients in the quarter, even though hubs are at 60% capacity. Stone make their money through a combination of business lines: interest on credit lines, transaction fees on payment volume and then subscription and rental fees. Total payment volume grew to R69.7bn (Brazilian real), up 113.8% year on year (47.6% excluding coronavouchers, the Brazilian gov assisted payment support program). The company is profitable, recording net income of R$287.9m, up 42.6% year on year and have gross margins of 50-60%.

Risks - Brazil is a burgeoning market that comes with some risks. The currency often fluctuates relative to the US dollar. It also has weaker institutions and the founder André Street has commented that it can be a difficult environment for entrepreneurs, although he insists it is becoming better. Finally, payments is becoming a competitive space. MercadoLibre (mentioned in edition 9) is growing across the LatAm region, as well as legacy credit providers and also newer companies, like Pagseguro…

stoneco tpv growth


Thesis - PagSeguro is another payment upstart, having IPO’d before StoneCo as one of the hottest IPOs in Brazil. The business is primarily owned by Universo Online, one of the most popular websites in Brazil and was formed as their financial platform. It started by providing a payment solution via email, for websites that didn’t have e-commerce capabilities. It’s since expanded into multiple business lines, providing low-cost point of sales solutions as well as Banking solutions (PagBank). As you can see, PagSeguro and StoneCo operate across similar business lines and geographies. They differ somewhat in distribution, with PagSeguro focusing on micro-businesses (freelancers and individuals) which they reach directly, whilst StoneCo focuses on SMBs via their hub strategy. Still, there is definitely some crossover. PagSeguro has also posted some impressive growth numbers, which underlines the movement to cashless payment in the region.

Financials & Performance - In their last quarter, PagSeguro announce an all-time high total processing volume of R44.9B, up 53% year on year (44% ex-Coronavouchers). Active merchants grew to 6.3m. The lower TPV but larger merchant base reflects they strategy of focusing on smaller businesses, individuals and freelancers. Total Revenues was R$ 1.8B, growing 22% year on year. A significant difference here is the margin profile, with gross margins at the moment of 15-20%.

Risks - The risks are mostly equivalent to the above. The region is uncertain and the competitive environment is harsh. Whereas StoneCo has really surged since its IPO, PagSeguro has been more volatile and generally moved sideways. Payments is a large industry and as Visa, MasterCard, Paypal and Square have shown in the US, there is room for many competing players. PagSeguro will want to increase its margin to gain a better valuation relative to its peers.

pageseguro stock chart

Sea Ltd

Thesis - I first mentioned Sea Ltd in edition 1 of this newsletter, when it was valued at $50b. In just 4 months it has almost doubled in value. Sea is a high-growth company focused on South East Asia, with verticals in gaming and e-commerce.

Update - The third pillar to its business is Sea Money, its digital payments business. Having grown its e-commerce platform, Sea Money was a natural next step, enabling its customer to use its native payment processor. Last quarter, 30% of gross orders on Shopee were paid using a Sea Money mobile wallet. As Sea continues to grow its gaming and e-commerce divisions (both experiencing 100% growth), Sea Money will likely process an increased volume of payments. They have applied for a full digital bank license in Singapore and are on the shortlist for two licenses available this year.

Financials & Performance- Looking specifically at SeaMoney, total payment volume reached $2.1b last quarter, with over 17.8m paying users for the mobile wallet. Currently, SeaMoney only accounts for around 10% of Sea Limited’s revenue. But whilst it is the smallest part of the business, it is also the fastest growing. Only the gaming division is currently profitable, but with total revenue growth of 99% and growing market share, the future financial profile seems positive.

Leadership - Sea Ltd’s CEO and founder is Forrest Li. Forrest studied engineering in Shanghai, then did an MBA at Stanford. He believes in order to succeed in South East Asia, the products should be localised in each market. For example, the Free Fire game (from Garena, their gaming division) was build for low internet environments. Furthermore, it includes local landmarks so that players can see their own cities in the game. This approach is helping them to win market share in a region that has large markets like Indonesia, Taiwan and Thailand.

sea payment volume

Written by Stevan Popovic, growth investor, web developer and founder of this site.