Wise (LSE:WISE) – Unlocking the Future of Global Payments and Currency Exchange
Wise is a financial service firm and platform that specializes in international money transfers and cross-border payments. Wise earns a fee on currency conversions, interest on balances, and card transactions. Wise is growing revenue 20% per annum with operational leverage and is valued at a modest earning yield. The market is presenting an opportunity to buy a rapidly growing, highly profitable, high quality company at a fair valuation.
Business Operations
Wise is a financial service firm and platform that specializes in international money transfers and cross-border payments. Founded in 2011, Wise aims to make global financial transactions faster, more transparent, and significantly cheaper than traditional banking services. It operates primarily through its online platform, which leverages real exchange rates and low fees, allowing users to send, receive, and hold money in multiple currencies. Wise has a number of direct payment connections and local partners that comprise their network.
Wise currently has 11.4M active customers, customer holdings of £18.5B, and annual cross border volume of £129.6B. Wise is an asset light company, requiring little to no capital to grow. Growth is being funded through the income statement and is still very profitable.
Wise has expanded its offerings to include multi-currency accounts for individuals and businesses, debit cards, and a platform for partner banks and institutions to use Wise’s infrastructure. Wise has 3 main products: Wise Account, Wise Business, and Wise Platform. Wise’s aspirations is for the company to be a truly international bank for its customers.
Wise Accounts and Business are online multi-currency accounts designed for individuals and businesses to manage money across borders with ease.
Multi-Currency Holding: Hold and manage money in over 40 currencies within one account.
Local Account Details: Provides local bank details for multiple regions, such as the US, UK, and Europe, allowing you to receive payments as if you were a local.
Low-Cost Transfers: Offers fast, low-fee international money transfers at the mid-market exchange rate without hidden markups.
Debit Card: Can be used for spending globally at favorable exchange rates.
Integration with Businesses: Wise for Business adds features like batch payments and integrations with accounting tools.
The Wise Platform is a technology solution that enables banks, businesses, and financial institutions to integrate Wise's international money transfer and currency exchange services directly into their own platforms.
Seamless Integration: Partners can use APIs to embed Wise's payment infrastructure into their own apps or websites.
Fast and Low-Cost Transfers: Provides access to Wise's network, offering international money transfers at the real mid-market exchange rate with transparent fees.
Customizable Solutions: Tailored to suit various industries, including banking, fintech, e-commerce, and more.
Enhanced User Experience: Allows partners' customers to send and receive money across borders efficiently without leaving their existing platform.
Wise is approximately growing revenues 20% annually, currently has 11.4M active customers, customer balances of £18.5B, and annual cross border volume of £129.6B. Wise estimates personal currency volume movement at £2T annually and SMB (small and medium businesses) at £12T annually, with both markets estimated to be growing. Wise has a market share of 5% for personal volumes and 1% for SMB volumes.
Wise earns revenue on currency conversions, card transactions, and interest on customer balances. Wise earns interest on customer balances from money market funds, government securities, and bank deposits. Wise intends to retain all interest earned up to a 1% yield. For everything above the 1% yield, Wise intends to retain 20%. The remaining 80% of interest earned above 1% is intended to be paid to customers as interest. Currently, not all of this interest being earned is being returned to customers mainly due to regulatory reasons. Because of this, Wise makes a distinction between its actual income and its intentions with regards to paying back 80% of interest above 1%.
Wise main competitors are banking institutions who regularly charge their customers around 2% - 3% for currency conversions. These fees are usually not transparent and the process can be cumbersome and long for the customers. For example, a bank may say there are no fees for the conversion but inflate the exchange rate by 2%-3%. Wise is able to offer very competitive rates that are 3-5x cheaper, with a better user experience, and faster funding (see appendix for an example).
Wise also competes with other fintech currency conversion services and platforms. A notable one is Revolut who has a similar business model but with differences. However, we think the primary competition and market share gains will be at the expense of traditional banking institutions.
Currently Wise is able to transfer 63% of funds instantly, 83% with an hour, and 94% within 24 hours. Wise aims to be the lowest cost, fastest, and best provider for currency conversions and international payments. A testament to their product is around 70% of new customers are referrals from existing customers. High rates of referral would suggest that their customers value their service highly. It also allows Wise to keep their customer acquisition cost (CAC) low.
Wise’s Growing Moat
Economies of Scale
Economies of scale are cost advantages that a business can achieve by increasing production and reducing unit costs. Businesses that can achieve economies of scale are able to produce goods or services at a lower cost than their competitors.
Wise intends to be the lowest cost provider of currency conversions and global payments. They understand their customers value ease of use, quick transactions, but most importantly lowest cost. In a commoditized business, the lowest cost producer is the one that will command an outsized market share and beat their competitors.
The more customers and transactions they can process over their infrastructure, the more they can spread their cost around. With increased scale, Wise’s fixed cost can be spread across a larger pool of transactions and customers reducing unit costs. Wise continually works on efficiency gains in their network and partnership to continually reduce costs.
To further reduce costs and improve their network, Wise is continually working on establishing direct connection to payment networks in all jurisdictions. A direct payment connection allows faster and cheaper payment processing.
Network Effects
A network effect is a phenomenon where the value of the product or service increases as more people use it. Every new user adds value to the product to all other users of the product or service.
For example, on instagram for every additional new user on the platform, there is a value add to everyone else on the platform. Users are better off when someone joins the network. Whether the user is a content creator or consumer. With increased value of the platform, this encourages others to also join the platform, spurring more users.
Companies with strong network effects tend to dominate their industry or the markets they serve. With a winner-takes-all market not uncommon. Alternatively, there may be only a few competitors taking an outsize proportion of the market and profits. Competitors to incumbents will have a difficult time attracting users to their subscale platform.
At this point in time, we think Wise has a weak network effect, not a strong network effect. However, we can see the potential for a more powerful network effect forming in the future. Currently, we think Wise could strengthen their network effect through:
Wise payments, specifically from Wise to Wise accounts. Transfers are instant and no fee if sending and receiving in the same currency. The more Wise users the greater the value of the network.
Wise platform, more banking partners would create more Wise users. More Wise users would make the network stronger. A stronger network would make banking partnerships more valuable, drawing in more banking partners.
But, it’s still early days and we could be mistaken. Overall, we think they are missing some products or features that could create powerful network effects. We believe management is well aware of this and have been really focused on being the lowest cost provider and expanding their product offering. If Wise is able to grow and establish a strong network effect combined with their economies of scale it would create a massive economic moat, a powerhouse of a company, and extreme growth.
Economic Flywheel
Wise is continually reinvesting back into its business creating better, cheaper, and new products and features their users want. As time passes, their competitive position will continue to strengthen. Making it increasingly difficult and costly for competitors to compete.
Increasing scale allows Wise to lower the cost of their product while retaining (and growing) profitability. Lower cost puts pressure on their competitors, attracting more customers to their network, in turn reducing costs and increasing profits. Those profits can be reinvested again into their products and marketing driving further incremental improvements and growth, increasing scale. The cycle then continues to repeat increasing their competitive advantage of the business. This is the economic flywheel that Wise is using.
Even before researching the company as a potential investment, we were constantly hearing about Wise from their customers recommending the service. It was not a surprise when we later found out that 70% of their new customers are referrals from existing customers. While the product or network is not perfect, it is constantly being measurably improved. A testament to their product and network is their strong cohort retention overtime.
We have been impressed with Wise management's disciplined approach to their growth and business model. As well as their focus on their infrastructure and creating valuable products for their customers. They continue to operate the company profitably with excess earnings while continuing to grow the business revenues 20% per annum. They have been disciplined about growth, for example, they paused onboarding new business clients so that they could properly scale their infrastructure. We see this as a positive overall, as you do not want to outgrow your capacity and potentially harm your reputation.
Valuation
Wise business model benefits from strong operating leverage. Wise has a high amount of fixed costs which give it a large degree of operating leverage. As Wise grows revenues, cost will grow but at a slower rate than revenues. While Wise is growing revenues around 20% per annum, EBIT and Net Income will compound at higher rates. We are calculating growth in earnings power of between 45% to 55% from HY2023 to HY2024. We are cautious about trying to predict the degree of operating leverage and earnings growth, but are confident earnings growth will be materially higher than revenue growth over the long term.
Wise makes a distinction between its actual revenues and net income and its intentions with regards to paying back 80% of interest above 1%. We will be referring to the metrics that back out this “excess income” by calling them “underlying”. See the notes for the differences between our underlying metrics with Wise’s.
The “normal” metrics are what Wise is currently earning. With “underlying” representing what Wise would be earning if it were completely following the above interest framework.
For the last twelve months (LTM) ending Sep 30, 2024:
At first glance and in isolation these multiples do not appear to be cheap on an absolute basis. However, what we see is a great business growing revenues at 20% per annum and earnings at an even higher rate. The company has a strong competitive advantage that is only growing stronger as they continue to iterate, develop more products, and achieve greater scale. The earnings they are generating now are being accrued to their balance sheet in addition to the growth rates. Putting this all together, we think Wise is very cheap at current prices.
The biggest risk to this investment thesis is incorrectly assessing Wise’s competitive advantage. That could mean Wise is more at risk to competitive forces impacting growth and profitability. A shrinking or deteriorating Wise would have a disastrous impact to Wise’s earnings, as operational leverage works both ways. As well, a misjudgment of Wise management capital allocation and operational abilities could be a material risk.
Conclusions
The market is presenting an opportunity to buy a rapidly growing, highly profitable, high quality company at a fair valuation. Wise is growing revenues approximately 20% per annum with a modest earning yield and operational leverage. Wise earns revenue on currency conversions, card transactions, and interest on customer balances. Wise has a strong product offering with strong competitive advantages that are getting stronger day by day. We believe these factors will drive superior returns for shareholders.
ColdBerry Capital is a global value investment fund whose investment philosophy is inspired by Warren Buffett and Charlie Munger. To find out more you can contact us here.
Notes
Price of WISE was £8.50 per share as of writing this article.
Financials and figures were taken from Wise’s most recent annual reports, quarterly reports, and investor presentations.
All £ are GBP unless otherwise stated.
Wise trades on the London Stock Exchange (LSE)
We have adjusted how we are aggregating “underlying” numbers versus how Wise reports them. Wise does not include the 20% of interest being earned in excess of 1%, in its underlying metrics. We have included the 20% of interest being earned in excess of 1%, into our “underlying” metrics.
Disclaimer
The thesis expressed above contains forward-looking statements and is intended for informational purposes; it is not a recommendation to buy, sell, hold, or otherwise trade the securities of the referenced issuer. The authors/their affiliates do not hold a position with the issuer such as employment, directorship, or consultancy. The authors/their affiliates currently own a position in the referenced issuer's securities; however, that position may change at any time and without notice.
Appendix: Wise vs. Traditional Bank
