International payments provider Wise (WISE), formerly known as Transferwise, has set its sights on handling £1 trillion of cross-border payments annually compared with £118 billion last year.
While that might appear ambitious, nine years ago the firm handled just £7 billion of cross-border payments which means the business has grown at a compound annual rate of 33% per year.
Despite this strong growth, Wise has only just scratched the surface of the global market opportunity.
The company believes it has garnered less than 5% of the annual £2 trillion of cross-border payments moved by individuals, a market which has grown by 19% in each of the last two years.
On top of that, Wise holds less than a 1% market share of the SME (small and medium-sized) businesses market which is worth £12 trillion annually and has grown by 9% compounded over the last two years.
We believe Wise has built a strong customer-centric proposition enabling it to capture increasing market share from traditional banks.
Co-founder and chief executive Kristos Kaarmann believes this approach is fundamental to every company’s long-term success.
‘We’ve been very clear to ourselves, the more value we create for our customers the more valuable is the company we’re creating,’ explains Kaarmann.
COST ADVANTAGE
Wise makes moving money across borders cheaper, faster and more convenient for its customers. The firm’s average fees across all routes are around 0.64% with major currencies costing less than 0.3%.
This is a huge advantage over incumbent banks who often see international transfers as an add-on service rather than a core competency. This means they typically charge 2.7% for major currency transfers and nearly 10% for less mainstream currencies.
Because Wise knows which banks its customers used in the past, it can quantify the money it has saved clients. At last count, the company estimates its customers have saved between £1.6 billion to £2 billion annually.
SCALE BENEFITS ARE SHARED
One unique aspect of Wise’s business model which we believe is fundamental to its continued success is that as the business scales, efficiency gains are passed on to customers.
This sharing of scale benefits with customers creates a virtuous circle, ensuring customers keep coming back, while also widening its cost advantage or ‘moat’ over competitors.
A further cost advantage of Wise’s model is that two thirds of new customer growth is through word of mouth.
It might be tempting to assume incumbents are fighting back, but as Kaarman explains: ‘The same opportunity we worked on five years ago hasn’t moved much. Consequently, we are very much at the beginning [of expanding our market share].’
Perhaps surprisingly, many banks have actually been encouraging their customers to use Wise which has led the company to develop the ‘Wise platform’ offering banks and institutions the same experience as retail customers.
It is a win-win for customers, banks, and Wise, claims Kaarmann.
DIRECT LISTING
Wise became the largest UK direct stock market listing in 2021, priced at 800p per share and valuing the business at £8 billion. This means no money was raised and no existing shareholders sold any shares.
It is also worth noting the dual class structure which gives the founders enhanced voting rights.
The board is reviewing the optimal listing arrangements for the company, which could lead to the shares joining the blue-chip FTSE 100 index, and an outcome is expected in the coming weeks.
‘The infrastructure we’re building up, or that we have built and will build, puts us in a unique position where no one else can move funds with such efficiency globally,’ adds Kaarmann.
Infrastructure is becoming a significant competitive advantage for Wise, which now has six direct connections to domestic payment systems across the globe, the latest being the Philippines.
Wise is also the first non-bank to be approved to join Japan’s Zengin payment system. In the UK, banks on the Wise platform enjoy significant benefits such as a nine-times reduction in transaction costs, post integration.
WHAT DO THE FINANCIALS LOOK LIKE?
The business generates high gross margins of around 70% and healthy underlying pre-tax margins. In the first half to September 2024, underlying pre-tax profit increased 57% to £147 million representing a margin on income of 22%.
Increased investment in pricing is expected to see the full-year margin move closer to the company’s target range of between 13% and 16%. In 2025 and the medium term, the company expects to grow underlying income between 15% and 20% a year.
In short, we believe Wise’s relative scale advantage, best-in class infrastructure and strategy to share scale efficiencies with customers should make it a sustainable winner in cross-border payments.
These articles are provided by Shares magazine which is published by AJ Bell Media, a part of AJ Bell. Shares is not written by AJ Bell.
Shares is provided for your general information and use and is not a personal recommendation to invest. It is not intended to be relied upon by you in making or not making any investment decisions. The investments referred to in these articles will not be suitable for all investors. If in doubt please seek appropriate independent financial advice.
Investors acting on the information in these articles do so at their own risk and AJ Bell Media and its staff do not accept liability for losses suffered by investors as a result of their investment decisions.
magazine
