Emerging markets promise higher returns but behind every number are risks managed, transferred or simply priced in — currency, credit, counterparty, and settlement. One firm is offering global investors a stake in future card payments to Brazilian merchants and says it has engineered the usual credit risk out of the trade. Joining us is Jason Dehni, Co-Founder and CEO of BlackOpal. Jason, welcome to the show.
Thank you for having me on the show.
BlackOpal’s pitch is emerging market yield without emerging market credit risk. You have said you do not underwrite merchants. Where does the credit risk go?
Investing in emerging markets does not always need to carry emerging market risk if it is structured properly. In the credit card receivable asset class — which is a $25 billion asset class in Brazil — we buy receivables as true sales. Every consumer in Brazil has the option to pay in instalments — up to 12 months, average around 6 to 7 months. 43% of transactions at the national level are paid in instalments. Merchants sell those receivables to credit providers. We buy those receivables — they have already been approved on the system and verified. We take them off the merchant’s balance sheet and become the beneficial owner on a system called CIRC. When those receivables settle, we get paid directly from the system to the acquirer bank. We do not rely on the merchant to pay us back. We rely on the payment network — Visa, Mastercard, acquirer banks.
Brazil’s policy rate is just under 14% and your investors earn 8 to 12% in dollars. What are investors being paid for?
Our products are priced to the local lending market, not the policy rate. It is not unheard of for a small business owner in Brazil to get a bank loan at 40 to 60% APR. We buy receivables at a discount — we charge the merchant a monthly fee that is considerably less than what banks charge — and we buy very large volume. We fully hedge those assets to the US dollar using non-deliverable forwards. What investors are buying is an asset class ultimately backed by Visa and Mastercard’s balance sheet, providing consistent returns fully hedged to the US dollar. This structure does not exist anywhere else. Brazil is historically hard to access as an emerging market because of capital controls, tax, and language barriers.
What does the hedge protect — and what happens if the real falls sharply?
We cover the hedge and the rolling of the interest on the assets — a full cover on a 30-day rolling basis. Non-deliverable forwards are the instrument for countries with capital controls — no physical exchange of currencies, we settle offshore at the end of 30 days. If there is a massive drop in the real, investors are fully covered. Going forward the hedge will probably reprice and be more expensive — there will be compression on the net spread — but in terms of principal protection we cover not only the principal but the rolling yield on the assets.
Which counterparty failure would hurt investors most?
Our effective counterparty is the acquirer bank — the entities that own the point-of-sale machines where consumers swipe their cards. Under Brazilian central bank Resolution 522, in the event an acquirer bank fails, Visa and Mastercard are unconditionally liable to make whole all processed payments. So ultimately the residual risk goes back to the Visa and Mastercard balance sheet.
Can anything go wrong between the card swipe and the payout?
Three points of failure. Chargebacks — fully absorbed by the merchant, we do not take chargeback risk. Consumer risk — 100% with the issuing bank, not us. And systemic fraud — where merchants could devise a plan of fraudulent transactions, which would not be covered by Resolution 522. However, we have strict concentration rules: maximum 2% exposure per merchant, diversification by sector, acquirer, and originator — plus a junior pool that absorbs any tail risk. You can never remove risk, but you can structurally manage and limit it.
Jason, it has been a great pleasure having you with us. Thank you.
