Wise: Moving Money Around the World

Sector

FintechPayments

Background

James Revell is an investor at TDM Growth Partners. We cover how Wise offers an alternative to the broken system of correspondent banking, who its competitors are, and whether cross-border money transfer is ultimately a commodity business.

Cover

Date

March 1, 2023

Episode Number

99

Business Breakdown: Wise

Background / Overview

Wise, founded in 2011 as TransferWise by Estonian entrepreneurs Kristo Kaarmann and Taavet Hinrikus, is a cross-border money transfer platform designed to address the inefficiencies of traditional correspondent banking. Headquartered in London, the company operates as a licensed financial institution, not a bank, focusing on retail payments for individuals and small businesses. Unlike traditional remittance players like Western Union, Wise is digital-first, avoiding cash handling and targeting bank account transfers. By 2025, Wise serves 6 million customers (5.5 million personal, 320,000 businesses), operates in 80 countries with 50 currencies, and employs 5,000 people across 28 global offices. The company listed on the London Stock Exchange in 2021 via a direct listing, achieving a market capitalization of GBP 6 billion.

The founding story underscores the company’s mission: Kaarmann and Hinrikus, frustrated by high fees, slow transfers, and opaque pricing when moving money between the UK and Estonia, devised a peer-to-peer system to bypass cross-border inefficiencies. This evolved into Wise’s closed-loop system, where domestic accounts in multiple countries facilitate transfers without actual cross-border money movement, delivering speed, transparency, and cost savings.

Ownership / Fundraising / Recent Valuation

Wise’s direct listing in 2021 was unconventional, raising no new capital but increasing liquidity for existing shareholders and enhancing brand awareness. The decision reflects the founders’ focus on customer alignment over short-term profit maximization, with Kristo Kaarmann emphasizing broader ownership to build trust and awareness. The current market capitalization of GBP 6 billion implies a valuation multiple that balances high growth (70% total income growth) against a unique mission-driven model targeting zero-fee transfers. Specific transaction multiples or private funding rounds are not detailed, but the direct listing aligns with Wise’s culture of transparency and customer-centricity.

Key Products / Services / Value Proposition

Wise’s core value proposition revolves around four pillars: price (10x cheaper than traditional banks), speed (50% instant, 90% within 24 hours), transparency (clear fees, no hidden FX markups), and convenience (user-friendly digital platform with a 71 Net Promoter Score). The company offers three primary products:

1. Wise Account (Personal): Enables users to hold, send, spend, or receive money in multiple currencies, promoting a “borderless” account concept.
2. Wise Account (Business): Tailored for small businesses, with features like invoicing and business cards.
3. Wise Platform: A white-label solution allowing neobanks (e.g., Monzo) or software providers (e.g., Xero) to integrate Wise’s transfer infrastructure into their offerings.

These products leverage Wise’s closed-loop system, where money moves within its network of domestic accounts, avoiding the costly and slow correspondent banking process. The value proposition is unique in its focus on eliminating inefficiencies, with a long-term goal of free transfers (Mission Zero).

Segments and Revenue Model

Wise operates two main customer segments: personal (70% of transfer volume) and business (30%). The revenue model primarily derives from:

• Cross-border transfer fees (80% of revenue): Charged at a 65 basis point take rate on an average transfer volume of GBP 5,000 per customer per quarter.
• Other revenue (20% of revenue): Includes debit card interchange fees, domestic transfers, and investment products (Assets, e.g., ETFs).
• Net interest income (10% of total income): Earned on GBP 10 billion in customer deposits, yielding GBP 50 million in the last quarter due to rising interest rates.

The closed-loop system is the economic engine, enabling Wise to charge significantly lower fees (0.65% vs. 6.5% industry average) while maintaining profitability through operational efficiency.

Splits and Mix

• Customer Mix: 5.5 million personal customers (92%) and 320,000 businesses (8%), with businesses contributing disproportionately to volume (30%).
• Geo Mix: Operates in 80 countries, with 2,500 currency routes. Key markets include the UK, where Wise is fully integrated with real-time payment systems.
• Product Mix: Cross-border transfers dominate (80% of revenue), with emerging streams from debit cards, domestic transfers, and investments.
• Channel Mix: Digital-first, with 66% of customers acquired through referrals, reflecting low customer acquisition costs (CAC) and a strong word-of-mouth flywheel.
• Revenue vs. EBITDA Contribution: Cross-border fees drive the majority of revenue and EBITDA, with net interest income boosting total income but not fully retained due to plans to return it to customers.

Historical mix shifts show growth in non-cross-border revenue (from negligible to 20% in five years) and increasing net interest income, though the core transfer business remains the primary driver. Forecasted shifts depend on Mission Zero’s impact, potentially reducing cross-border fees to zero and increasing reliance on ancillary streams.

KPIs

• Transfer Volume: GBP 100 billion annually, growing at >40% year-over-year.
• Total Income Growth: 70% year-over-year, driven by volume and net interest income.
• Customer Growth: 6 million active customers, with 66% acquired via referrals.
• Pricing: 65 basis points, stable but with quarterly adjustments for volatility.
• Speed: 50% instant transfers, 90% within 24 hours, up from 0% instant four years ago.
• Net Promoter Score: 71, indicating high customer satisfaction.
• Regulatory Licenses: 63, reflecting operational complexity.

These KPIs show acceleration in volume, income, and customer acquisition, with no signs of deceleration despite scale.

Headline Financials

• Revenue Trajectory: From GBP 1 billion in transfers in 2014 to GBP 100 billion in 2025, revenue has scaled to nearly GBP 1 billion, with a 70% CAGR driven by volume growth, stable pricing, and emerging net interest income.
• EBITDA Margin: Maintained at 20% through disciplined cost management, with potential to spike to 40% if growth spend (33% of gross profit) is curtailed.
• FCF: Not explicitly detailed, but low capital intensity (digital infrastructure, minimal physical assets) suggests strong cash conversion. Net working capital (NWC) is likely minimal due to real-time settlement and no significant inventory.

Value Chain Position

Wise operates midstream in the cross-border payment value chain, between customers (individuals/small businesses) and financial institutions (banks, payment networks). Its primary activities include:

• Inbound Logistics: Managing liquidity in 80 countries via domestic accounts.
• Operations: Processing transfers through a proprietary platform, with 85% of 20,000 daily customer applications reviewed within one hour using AI and automation.
• Outbound Logistics: Disbursing funds to recipient accounts domestically.
• Marketing/Sales: Leveraging referrals (66% of customers) and disciplined paid marketing (3-month payback).
• Service: Providing transparent, real-time updates and a high NPS (71).

Wise’s go-to-market (GTM) strategy is digital-first, targeting tech-savvy individuals and small businesses through a user-friendly app and website. Its competitive advantage lies in vertical integration with national payment systems (e賢e.g., UK’s real-time payments), reducing reliance on intermediaries and lowering costs. This positions Wise as a disruptor, capturing value by bypassing the inefficiencies of correspondent banking.

Customers and Suppliers

• Customers: 5.5 million personal users (e.g., expatriates, freelancers) and 320,000 small businesses. Personal users drive 70% of volume, businesses 30%, reflecting higher per-customer volume for businesses.
• Suppliers: Primarily banks and payment networks for domestic account access and occasional international money market transactions. Wise’s vertical integration reduces supplier dependency over time.

Pricing

Wise’s pricing is a fixed 65 basis point fee on cross-border transfers, transparent and 10x cheaper than the 6.5% industry average. Key drivers include:

• Mission Zero: Aiming for free transfers, with quarterly price updates reflecting volatility or cost changes.
• Transparency: A comparison tool shows competitors’ rates, even if cheaper, reinforcing trust.
• Contract Structure: No long-term contracts; transfers are transactional, ensuring flexibility and low switching costs.
• Price Elasticity: High elasticity due to price sensitivity in the remittance and small business markets, driving volume growth as fees remain low.

Bottoms-Up Drivers

Revenue Model & Drivers

Wise generates revenue through:

1. Cross-border Transfers (80% of revenue):
• Volume: GBP 100 billion annually, growing >40%, driven by globalization, migration, and e-commerce.
• Price: 65 basis points, stable but with potential downward pressure from Mission Zero.
• Drivers: Low pricing, high speed (50% instant), and transparency drive volume. Referrals (66% of customers) reduce CAC, amplifying growth.
• Mix: 70% personal, 30% business, with businesses growing due to invoicing and card features.
2. Other Revenue (20% of revenue):
• Debit Card Interchange: Earned on transactions, growing with account adoption.
• Domestic Transfers: Small but increasing as borderless accounts gain traction.
• Assets (ETFs): Emerging investment product, appealing to users holding balances.
3. Net Interest Income (10% of total income):
• Volume: GBP 10 billion in customer deposits.
• Price: Yield tied to rising interest rates, generating GBP 50 million quarterly.
• Drivers: Passive balances held in conservative accounts, with plans to return profits to customers via lower fees or investment options.

Absolute Revenue: Approaching GBP 1 billion, with cross-border fees as the core driver. Mix Shifts: Increasing contribution from non-transfer revenue and net interest income, though the latter’s durability is uncertain due to Mission Zero.

Cost Structure & Drivers

Wise’s cost structure is lean, enabling a 60% gross margin and 20% EBITDA margin:

• Variable Costs (40% of revenue):
• Bank/Partner Fees: Incurred for domestic account access or international money market transactions, minimized through vertical integration.
• Contribution Margin: High due to low variable costs (e.g., $5 per $1,000 transfer vs. $40 for Western Union).
• Drivers: Economies of scale reduce unit costs as volume grows; AI optimizes liquidity to avoid market fees.
• Fixed Costs (33% of gross profit):
• Sales/Marketing: Low CAC due to referrals (66% of customers), with paid marketing yielding a 3-month payback.
• Technology/Infrastructure: Investments in AI, machine learning, and a single codebase platform. Automation handles 85% of customer applications.
• Regulatory Compliance: Managing 63 licenses, with increasing costs post-GFC.
• Operating Leverage: Fixed costs scale slower than revenue, driving margin expansion potential (e.g., 26% EBITDA margin in 2021).
• Gross Profit Margin: 60%, reflecting low COGS (primarily bank fees) compared to Western Union’s 40%.
• EBITDA Margin: 20%, deliberately managed by allocating 33% of gross profit to growth. Absolute EBITDA growth is driven by 70% revenue growth and fixed cost leverage.

FCF Drivers

• Net Income: Not specified, but 20% EBITDA margin suggests strong profitability post-tax and interest.
• Capex: Low, as Wise is digital-first with minimal physical assets. Maintenance capex supports platform upgrades; growth capex funds new market entries.
• NWC: Minimal due to real-time settlement, with a short cash conversion cycle (likely <30 days).
• FCF Margin: Likely high, given low capex and NWC requirements, though not quantified.

Capital Deployment

Wise prioritizes organic growth, with 33% of gross profit reinvested in marketing and technology. No significant M&A is noted, reflecting a focus on a single platform (99% organic growth). The direct listing avoided dilution, preserving capital for reinvestment. Excess net interest income (e.g., GBP 120 million annually) may be returned to customers via lower fees or investment products, aligning with Mission Zero rather than traditional capital allocation (e.g., buybacks).

Market, Competitive Landscape, Strategy

Market Size and Growth

The cross-border payment market is vast, with GBP 100 trillion in annual volume. Excluding enterprise/government transfers, the addressable market includes:

• Personal Transfers: GBP 2 trillion, growing at 5% annually.
• Small Business Transfers: GBP 9 trillion, also growing at 5%.
• Revenue Pool: GBP 100–200 billion in fees, with average fees declining from 9% in 2008 to 6–7% in 2025, partly due to Wise’s disruption.

Growth Drivers:

• Volume: Globalization, migration, e-commerce, and international trade.
• Price: Regulatory pressure (e.g., UN’s 2030 goal of 3% fees) and competition drive fee compression.
• Industry Growth Stack: Population growth, real GDP growth, and inflation contribute, with tailwinds from digital adoption.

Market Structure

The market is fragmented but consolidating:

• Banks: 66% of volume, charging 6–7% fees, reliant on correspondent banking.
• Money Transfer Operators (MTOs): 10–20% (e.g., Western Union, MoneyGram), charging ~5%.
• Fintechs/Neobanks: <10%, with players like Wise (4% personal market share), Revolut, and Remitly.
• Minimum Efficient Scale (MES): High due to regulatory complexity and infrastructure costs, limiting competitors. Wise’s 63 licenses and global account network create a high MES, deterring new entrants.

The market is mid-cycle, with fee compression and digital adoption offsetting volume growth. Regulatory scrutiny (e.g., AML, G20 focus) and financial crime concerns add complexity.

Competitive Positioning

Wise positions itself as a low-cost, transparent, and fast alternative, targeting price-sensitive personal and small business customers. Its matrix positioning:

• Price: Lowest at 65 basis points vs. 5–7% for competitors.
• Target Market: Individuals (expatriates, freelancers) and small businesses, avoiding enterprise or unbanked remittance markets.

Risk of Disintermediation: Large players (e.g., Visa, Mastercard) with global networks could compete, but their higher-cost models limit price matching. Neobanks like Revolut may use free transfers as a loss leader, cross-subsidized by subscriptions.

Market Share & Relative Growth

• Market Share: <4% in personal transfers, negligible in business transfers, reflecting significant headroom in an GBP 11 trillion addressable market.
• Relative Growth: Wise’s 40% volume growth and 70% income growth far outpace the market’s 5% growth, driven by low pricing and referrals.

Competitive Forces (Hamilton’s 7 Powers)

1. Counter-Positioning: Wise’s closed-loop system bypasses correspondent banking, offering 10x lower fees (65 bps vs. 6.5%). Banks cannot match this without cannibalizing high-margin FX revenue.
2. Scale Economies: Shared with customers via lower prices, driving a flywheel of volume growth, unit cost reduction, and reinvestment. Fixed costs (33% of gross profit) scale slower than revenue, enhancing margins.
3. Process Power: Expertise in entering new markets, securing 63 licenses, and integrating with national payment systems (e.g., UK real-time payments) reduces costs and barriers to entry.
4. Branding: A trusted brand with a 71 NPS and 66% referral rate, critical for a non-bank financial institution. Regulatory missteps (e.g., Abu Dhabi fine) pose risks.
5. Network Effects: Limited, as transfers are transactional, but the Wise Platform creates indirect network effects by embedding Wise’s infrastructure in partner offerings (e.g., Monzo, Xero).
6. Switching Costs: Low due to transactional nature, but high NPS and convenience create stickiness.
7. Cornered Resource: Proprietary platform and regulatory expertise are difficult to replicate, though not unique.

Porter’s Five Forces:

• New Entrants: High barriers (regulatory licenses, global account network, brand trust) limit threats, but fintechs (e.g., Revolut) and card networks (Visa, Mastercard) are viable.
• Substitutes: Digital currencies (stablecoins, CBDCs) and interlinked payment systems (e.g., Singapore-India) could disrupt fiat-based transfers.
• Supplier Power: Low, as Wise vertically integrates to reduce bank/partner dependency.
• Buyer Power: Moderate, with price-sensitive customers driving volume but limited bargaining power due to Wise’s low fees.
• Rivalry: High, with banks, MTOs, fintechs, and potential social media players (e.g., Meta) competing on price, speed, and trust.

Strategic Logic

Wise’s strategy hinges on:

• Mission Zero: Driving fees to zero, forcing competitors to lower prices or lose share, while expanding ancillary revenue (e.g., debit cards, investments).
• Scale Economies Shared: Reinvesting cost savings into lower prices, marketing, and technology, fueling a flywheel.
• Vertical Integration: Deepening ties with national payment systems to reduce costs and enhance speed.
• One Platform, One Mission: A single codebase and focused culture minimize complexity, enabling agility despite 5,000 employees.

Wise avoids diseconomies of scale by maintaining autonomous, cross-functional teams (100+), ensuring alignment with Mission Zero while preserving operational nimbleness.

Key Dynamics and Unique Aspects of the Business Model

Wise’s business model is a masterclass in counter-positioning, leveraging a closed-loop system to disrupt a fragmented, inefficient market. Key dynamics include:

1. Closed-Loop Arbitrage: By maintaining domestic accounts in 80 countries, Wise avoids cross-border money movement, incurring only domestic transfer costs while charging cross-border fees. This structural efficiency allows a 65 basis point take rate (vs. 6.5% industry average) while achieving a 60% gross margin and 20% EBITDA margin. For example, a $1,000 transfer yields $6.50 in revenue, with $5 in costs, compared to Western Union’s $50 revenue and $40 costs, highlighting Wise’s lean cost structure.
2. Flywheel Effect: Low prices, high speed, and transparency drive volume growth (>40%), which reduces unit costs. These savings are reinvested into marketing (3-month payback), technology (AI for liquidity forecasting), and lower prices, perpetuating growth. The 66% referral rate minimizes CAC, making customer acquisition self-sustaining.
3. Mission Zero Paradox: The commitment to free transfers challenges traditional profit maximization, potentially eroding the core revenue stream (80% of revenue). However, it forces competitors to lower fees, consolidating market share, while ancillary revenue (20%) and net interest income (10%) provide diversification. This strategic bet assumes the GBP 11 trillion market’s growth will sustain profitability even at lower margins.
4. Vertical Integration: Over 10 years, Wise has integrated with national payment systems (e.g., UK, Australia), reducing reliance on intermediaries and lowering costs. This process power, combined with 63 regulatory licenses, creates a high barrier to entry, as competitors struggle to replicate global infrastructure.
5. Cultural Alignment: Autonomous teams, a single platform, and an obsessive focus on Mission Zero align 5,000 employees, avoiding bureaucratic slowdowns. This “high alignment, loose coupling” structure, inspired by Reed Hastings, ensures scalability and innovation.

Unique Aspects:

• Non-Bank Status: As a licensed financial institution, Wise avoids banking regulations but faces challenges in managing net interest income (e.g., returning GBP 120 million annually to customers).
• Transparency as a Weapon: Public price comparisons and quarterly updates build trust, differentiating Wise from opaque competitors.
• Wise Platform: White-label partnerships with neobanks and software providers extend reach without direct competition, creating a pseudo-network effect.
• Regulatory Expertise: Managing 63 licenses globally is a competitive moat, though it introduces risks (e.g., fines).

Standout Interviewee Insights:

• James Revell emphasizes the closed-loop system as a “loophole” exploiting correspondent banking’s inefficiencies, highlighting its structural cost advantage.
• The flywheel’s power, where scale economies are shared with customers, is described as “paradoxical” yet fundamental, distinguishing Wise from profit-maximizing competitors.
• Mission Zero’s potential to destroy the core revenue stream is framed as a “marmite/vegemite” debate, reflecting investor polarization on whether Wise is a commodity or a durable growth engine.
• The cultural focus on “one mission, one platform” and autonomous teams is an untold strength, enabling Wise to scale without losing agility.

Valuation and Market Overview

Wise’s GBP 6 billion market cap reflects a high-growth fintech with a unique model. Assuming GBP 1 billion in total income and GBP 200 million in EBITDA, the implied multiples are ~6x EV/Revenue and ~30x EV/EBITDA, reasonable for a 70% growth business with 20% margins and significant market headroom (<4% share). However, valuation is tempered by:

• Mission Zero Risk: Potential fee elimination could compress margins, though ancillary revenue and net interest income mitigate this.
• Regulatory Risks: Fines or compliance failures could erode trust and brand value.
• Disruption Threats: Digital currencies (90% of central banks researching CBDCs) or interlinked payment systems could reduce demand for fiat transfers.
• Net Interest Income Uncertainty: Its GBP 120 million annual contribution is non-core and may be returned to customers, reducing earnings durability.

The GBP 11 trillion addressable market, growing at 5%, offers decades of runway, but fee compression (from 9% to 6–7%) and competition from fintechs, card networks, and social media players intensify rivalry. Wise’s low market share and high growth suggest it can capture significant value, but investors must weigh the sustainability of its low-price model against disruptive threats.

Conclusion

Wise’s business model is a disruptive force, leveraging a closed-loop system, vertical integration, and a customer-centric flywheel to challenge correspondent banking’s inefficiencies. Its low pricing, high speed, and transparency drive 40% volume growth and 70% income growth, with a lean cost structure yielding 60% gross and 20% EBITDA margins. The Mission Zero commitment, while risky, positions Wise to consolidate share in an GBP 11 trillion market, supported by ancillary revenue and net interest income. Hamilton’s 7 Powers—counter-positioning, scale economies, process power, and branding—underpin its competitive moat, though digital currencies and regulatory risks loom. Wise’s unique blend of technological efficiency, cultural alignment, and strategic paradox makes it a compelling case study in disruptive innovation.

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