Wise is a strong performer in our fintech equity research universe. Wise wants to drive the cost of remittances and cross-border transactions to zero, granting a strong pricing advantage vs. competitors plus, a strong barrier to entry. But how can Wise do so, profitably, when most of its peers can not?
How does Wise work?
For Wise, what matters is for cross-border transactions to be cheap, fast, convenient, and transparent. To that end, the firm has adopted a set-up in which money never crosses borders in about half of the cases.
As depicted in the chart below (company source), whenever a money transfer is requested from, let’s say the US (USD) to Thailand (THB), Wise itself puts at work its own accounts in both countries and currencies.
How Wise’s infrastructure works
Apart from this setup, Wise’s core business is about KYC, AML, compliance, licenses, regulatory approvals and relationships, and, ultimately, integrations.
In fact, for every transfer order it receives, Wise makes sure that the transaction is not fraudulent and is legitimate. It is all that its end-to-end software is about, at least for its core business, and then, on top, comes the various applications built upon the infrastructure and FX management.
The key to profitability: integration into local schemes
In order to be cheap, fast, convenient and transparent, Wise needs to be integrated into local schemes (understand payments infrastructure such as SEPA in Europe, ACH in the US, etc.). Otherwise, the firm needs to rely upon bank partners, which comes at a price: settling transactions and the underlying time taken by partnered banks to settle these.
The key to Wise’s competitive plus lies in that, in order to connect to schemes, it takes any candidate a considerable amount of time. As an example, it took 3 to 4 years for Wise to connect fully to the UK’s local scheme and save on the cost of partnering with banks. It is such a lengthy exercise because anyone willing to connect to schemes needs to show guarantees of well-functioning software, strong KYC/AML processes, a strong balance sheet and control of working capital requirements.
The ultimate goal is worth it, though. When Wise fully connected to the UK’s scheme, it was 9-10x cheaper to service a transfer.
The value of sustainability
We believe that such an infrastructure deserves a strong premium as it is built sustainably and is the key to Wise’s strategy rollout: cutting the price of cross-border transactions as much as possible.
In fact, as described, connecting to local schemes enables Wise to shrink its underlying cost to process cross-border payments which gives the firm an immense lever to decrease the end cost to customers, creating a barrier to entry to new entrants and putting further pressure on existing peers, which are far from deploying a similar set-up.
A couple of FinTechs have indeed tried to align with Wise’s low prices, some offering even cheaper rates such as Revolut. However, to our knowledge, Revolut is only directly connected to SEPA and the UK’s Faster Payments system (while Wise is connected to both but also to Singapore’s, Hungary’s and has a fair integration in Australia). For other currencies offered, Revolut pays top prices which we believe is unsustainable given the looks of its accounts.
As such, Wise gathers a time and infrastructure advantage over any potential entrants and existing competitors.
The conclusion is the same: Wise is attractive, beyond its cash flows.
How much is this worth?
We believe that around £800 Million is hidden within Wise’s infrastructure and it is only destined to grow and should be part of your fintech investment. That’s why we believe that it is a stock to watch.
To know how we arrived at this valuation and Wise’s IC, contact firstname.lastname@example.org
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