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

Wise's competitive advantage lies in its lower fees, faster transfers, transparent pricing, and exceptional user experience. The focus on getting to “mission zero” and reducing fees is counterintuitive because it cannabalizes Wise’s business (similar to how Vanguard cannabalized itself by cutting fees). I have done a quick Hamilton Helmer’s 7 powers analysis below (you can also check out my review of the book separately).

A balancing act in user experience and competitive pricing - Wise's success lies in offering a better user experience while maintaining a lower take rate compared to traditional players. Prioritizing user satisfaction and continuous improvement of the service leads to sustainable growth and customer loyalty.

Key Learnings

1. Disruption of Traditional Banking Models: Wise's success lies in its ability to disrupt the traditional correspondent banking system, which is slow, opaque, and expensive. By leveraging technology and creating a closed loop system, Wise offers a faster and more cost-effective alternative for cross-border money transfers. This disruption highlights the potential for new entrants to challenge established financial institutions and capture market share by addressing customer pain points.
2. Focus on Digital and Scalability: Wise's digital-focused approach enables efficient operations, lower costs, and greater scalability. By operating solely in the digital realm and handling bank account transfers, Wise avoids the complexities and costs associated with physical cash handling or card payments on foreign websites. This emphasis on digital infrastructure has allowed Wise to expand its services to 80 countries and 50 currencies, catering to millions of customers.
3. Importance of Transparent Pricing and Customer Experience: Wise's founding story highlights the importance of transparent pricing and delivering an exceptional customer experience. The founders recognized the hidden fees and lack of transparency in traditional banking systems, which frustrated customers. By offering clear and upfront pricing, efficient transfers, and excellent customer service, Wise gained a significant competitive advantage.
4. Value of User Experience: While the act of money transfer itself can be considered a commodity, Wise's competitive advantage lies in offering a superior user experience wrapped around the transfer process. The customer-centric approach and focus on user satisfaction differentiate Wise from traditional banks and other competitors.
5. Importance of User Referrals: A strong user referral system can significantly impact customer acquisition and growth. Providing a remarkable user experience that prompts customers to refer the service to others can create a powerful flywheel effect, reducing the reliance on traditional marketing channels and driving organic growth.
6. Interest Earnings and Customer Value: Wise's ability to earn interest on customer balances presents an opportunity to enhance customer value and potentially increase profitability. However, the challenge lies in finding innovative ways to return these earnings to customers or reinvest them to further improve the customer experience, maintaining the company's customer-centric approach.

Key Takeaways and Business Model

1. Wise (formerly TransferWise) is a cross-border money transfer business that offers faster and cheaper international transfers compared to traditional banking routes. It focuses on retail payments, catering to individuals and small businesses transferring money across borders. Wise operates digitally, handling bank account transfers rather than cash or e-commerce transactions.
2. The founding story of Wise is interesting and highlights the problem it aimed to solve. The founders, Kristo Kaarmann and Taavet Hinrikus, faced challenges with expensive and opaque cross-border transfers while working in different countries and being paid in different currencies.
3. Wise's financial performance and market presence demonstrate its success and scalability. Since its founding in 2011, Wise has experienced remarkable growth. By 2014, it had already processed GBP 1 billion in cross-border transfers. Currently, Wise is on track to handle around GBP 100 billion in transfer volume, with a gross profit margin of 60%. The company has a market cap of GBP 6 billion and serves 6 million customers, including 320,000 small businesses, across 80 countries and 50 currencies.
4. Economics and Profitability: Wise's business model allows for high profitability, with EBITDA margins exceeding 25%. In comparison, traditional remittance players like Western Union operate at lower margins. Key margin factors include organic referral networks, vertical integration with national payments bodies, technological infrastructure, and leveraging machine learning for liquidity management.
5. Revenue Model: Wise generates revenue primarily through cross-border fees, which account for 80% of total income. Additional revenue comes from debit card interchange fees, domestic transfers within the borderless account, and investment products. Net interest income from customer deposits is also emerging as a significant revenue stream. While Mission Zero may erode Wise's primary revenue stream, the company aims to expand engagement with customers through ancillary revenue streams like debit cards and investments.
6. Hamilton Helmer's 7 Powers: Wise's competitive advantage can be analyzed using Hamilton Helmer's 7 Powers framework. Notable powers include counter-positioning with a superior and efficient model, process power through seamless entry into new markets and integration with local payment systems, brand trust built over time, and scale economies shared with customers.
7. Competitors: Wise faces competition from various players in the financial services space. Apart from traditional banks, competitors include money transfer operators like Western Union, card networks such as Visa and Mastercard with their cross-border transfer products, fintechs like Remitly and neobanks like Revolut, and potential threats from social media players like Facebook and Twitter.
8. Float and Net Interest Margin: Wise's customer deposits, which are held as liquid funds, have started earning interest as interest rates rise. Wise has a significant amount of customer balances (around GBP 10 billion) that were previously idle. The net interest income has become a new revenue stream for Wise, with the company earning GBP 50 million in the last quarter alone. It may not be appropriate to apply the same earnings multiple to this revenue stream as the core business. The durability and long-term value of these interest earnings depend on the interest rate environment and Wise's ability to deploy the funds effectively.
9. Risks and Tail Risks: There are several risks associated with Wise's business. One significant risk is the potential paradigm shift in the way money is transferred globally, such as the rise of digital currencies or modernized payment infrastructures that interlink different countries' real-time systems. Another risk is the increasing regulatory burden, particularly in the areas of anti-money laundering, counterterrorism financing, and compliance. The complexity of managing multiple licenses and regulatory nuances poses a challenge for Wise.

Transcript