Wise: Taking the Entire $190T International Payments Market.
Update
Wise was first recommended to me by , an alumni of my Tech Stock Goldmine course. He said it was a perfect instance of the kind of company I teach folks to spot in my course.
And he was absolutely right. Thanks for the excellent recommendation, Eric.
I also recommend you check out his work, which is of excellent quality.
Edited by Brian Birnbaum.
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Wise has meaningful odds of taking the entire $190T international payments market and then evolving into one of the planet’s largest asset managers.
At an $11B market and trading at just over 6 times sales, Wise is a serious contender for a spot in my portfolio.
The most important question that arises from studying Wise is: how many financial services companies have evangelical customers? 70% of Wise’s new customers come from word-of-mouth, up from 66% two quarters ago. This metric best summarizes Wise’s ability to delight customers in a way that I haven’t seen from any other financial services company. Companies of this sort tend to radically outperform over time, and this is why Wise is worth a deep look.
Wise is a world-class implementation of the Costco algorithm, only applied to international payments rather than wholesale foodstuffs and other household goods. Wise profits handsomely from making it increasingly cheap and easy to send money abroad while compounding goodwill with customers. They reinvest these profits into making international payments easier and cheaper, yielding a prominent flywheel that’s only getting started. Wise currently has market share of just under 5% and 1% for international payments from individuals and businesses, respectively.
To be clear, Wise’s primary activity is facilitating international payments exclusively. This sets it apart from other financial services companies.
As you can see in the graph below, Wise is a textbook example of a company sharing economies of scale. Gross margins and instant payments as a percentage of total payments are trending up, while the take rate trends down. They are on a mission to deflate the international payments market and take all of it. By providing a better service at decreasing cost, they’re tapping into massive organic growth while making it harder for others to imitate their unit economics.
This gives them a relatively frictionless runway to take the whole market. As their flywheel continues spinning, it makes increasingly little sense for customers to use anything else for international payments.
Wise’s moat is fundamentally similar to that of Palantir, Spotify and Hims. Any large tech company could in theory replicate their payments infrastructure from an engineer point of view. But combining the tech expertise with the ability to navigate the stringent regulatory environment, while simultaneously delighting customers, decreasing prices, and increasing profitability is hard to replicate–particularly once a competitor that’s accomplished such has also reached scale, which Wise has. It requires years of exclusive focus on the task, solving countless problems small and large–the hallmark of a process moat.
Wise makes payments easier and cheaper by tapping directly into national payment systems. They do all the tedious backend work to deliver a seamless experience. Obtaining the trust of local regulators across a broad range of nations to enable easy international payments is intensive and time-consuming work. Competitors would need to repeat this process and gain the trust of each country before they can even begin to compete.
Meanwhile, Wise is improving its playbook. They’re getting better at negotiating with regulators and doing the boring work to yield a delightful customer experience on the other end. Their progress is speeding up the pace at which they connect directly to more national payment systems, making the operation harder to replicate, with the power of word-of-mouth driving exponential growth.
Wise’s key value proposition for end customers is price. Without another option that provides greater value, there is no other sensible option. Their focus on furthering a cost advantage is generating externalities that multiply Wise’s long term potential. Users are so delighted with the payment experience that they are happy holding cash balances on the app. Wise has leveraged this advantage into the Wise Account, which enables users to manage their money directly on the app.
In the graph below you can see what Wise’s pricing looks like compared to banks. I personally became aware of this difference recently and was positively stunned by Wise’s service. Below you can see the average price of making an international payment via a bank, versus doing do via Wise.
Customer holdings have increased from £2.9B in H1 FY2021 to £18.5B in F1 FY2025. The percentage of individual users adopting Wise Account is 53% in H1 FY2025, up from 44% in Q2 FY2024. During the same period, adoption from business users is up to 60% from 58%. Wise’s cost advantage is thus enabling them to become an asset vortex. The long term potential here is unfathomable as they continue to compound customer goodwill. A decade or two hence, and Wise could be one of the largest asset managers on the planet.
Wise’s cost advantage also enables them to act as a platform, providing the rails for banks to generate transmissions. The number of partners running on Wise Platform is up to 85 as of Q4 FY2024, from 60 in Q4 FY2023. However, the power of their platform is best evidenced by the partnership with Nubank. Nubank has recently launched an offering dedicated to catering for the needs of high income individuals, called Nubank Ultravioleta. It runs on Wise Platform and enables customers to operate a global account to hold and manage euros and dollars. It also enables them to use a credit card with more than 200 different currencies.
Nubank is one the more promising neobanks on the planet at the moment. Choosing Wise as the foundation for the asset management of their high income customers says a lot. Reviewing their public remarks about Ultravioleta, it seems low prices represent the key value proposal for the global account:
The Global Account is already available to customers who have signed up for early access and is gradually being released to the remaining Ultravioleta customers. It allows users to instantly convert balances in reais to dollars and euros directly through the Nubank app without needing to manage another app or transfer money between accounts.
In addition, it offers an exclusive exchange rate of 0.8%, regardless of the value of the shipment, which is the lowest in the segment, with a favorable exchange rate using the commercial dollar or euro, and a reduced IOF of 1.1%, with no maintenance fee.
As Wise keeps profitably lowering the cost of its rails there remain fewer and fewer reasons for banks to look elsewhere. Wise’s path to exponential growth lies in operating at the lowest price points. For now, their trajectory is appealing, indicative of considerable process power. Their quarterly earnings call transcripts are littered with examples of Wise finding ways to deliver more value to customers at a marginal cost and implementing them quickly.
Co-founder and CEO Kristo Käärmann is quite bullish. When asked how the tier one bank pipeline was doing for Wise Platform, here’s what he replied:
I mean, eventually, all the large banks are going to be there. It’s just a matter of time.
For example, in Q2 FY2025 they figured out that 25% of Wise business customers were getting paid by individual Wise customers. They made it easier in the same quarter for businesses to invoice their customers via QR codes on a system called Quick Pay. Easy invoicing only bolsters their flywheel, makes Wise more convenient for individual and business customers alike, and compounds even more goodwill and word-of-mouth.
While I can’t predict how Wise will continue to deliver lower prices, it seems apparent to me that the constant pursuit of lower costs is part of their genetic composition. In my view, their cost advantage will likely strengthen over time, giving way to the aforementioned externalities: the potential rise of Wise as a gigantic asset manager and as a banking platform. I’m quite impressed with Kristo’s leadership and, so long as he remains in charge, the odds of Wise capitalizing on their cost leadership are quite good.
Kristo’s words during the Q2 FY2025 earnings call best summarize my view about the company:
So we covered earlier our phenomenal growth over the first four years, tripling the size of the cross-border business. When we zoom out, like this looks just like a beginning of a much, much bigger opportunity.
So the things that we’re building today that I talked about, we’re building infrastructure to move trillions. We’re building apps to serve hundreds of millions of customers
And we expect we’ll be able to support banks all around the world, who are switching over from the current foreign correspondence to Wise Platform. So in this context, we’re really just here getting started.
The growth he mentions can be visualised in the chart below. Active customers, cross border volume, customer holdings, and underlying income and profit before tax are all rising spectacularly. Underlying income consists of revenue from customers for all activities not related to interest rates plus the revenue from the first 1% yield of interest income. Wise does this because as customer holdings have grown and rates have risen, they’ve been making lots of money from high interest rates.
Rates may fluctuate over time, so underlying income is a more accurate representation of the fundamental progress made.
Wise’s deflationary approach makes it particularly immune to the Innovator’s Dilemma. And the focus on profitability gives them cash to invest heavily if/when better rails emerge.
The major risk for Wise is a cheaper and faster payments competitor. However, given the agile and deflationary nature of the organization, the threat of cheaper and easier rails decreases as they print more cash, since more capital enables Wise to make the necessary investments to pivot to a newer and better technology–particularly so, given that their business centers on creating a newer and better technology.
As you can see in the graph below, Wise produces ample cash from operations at nearly half their market cap in the twelve trailing months. However, it must be noted that 84% of cash from operations in the TTM comes from interest revenue. Regardless, their performance stems from profiting on every service they provide to customers.
So internally, the way we think about U.S. economics is every action, every customer, everything that we do for customers should be profitable on its own.
-Wise CEO Kristo Käärmann during the Q2 FY2025 earnings call.
Naturally, the crypto space is fertile ground for potential disruptions. But, on nearly all earnings calls since IPO, management has harped on the fact that they plan to capitalize on every opportunity to incorporate or mutate into the best tech. CTO Harsh Sinha’s remarks about this topic during the Q4 FY2024 earnings call are highly insightful and show why one would bet not on Wise’s current rails, but rather its underlying ability as an organization to deliver faster and cheaper payments over time:
Okay, so on the blockchain and alternative methods of moving money, so, yes, I think we definitely are nimble enough and fast enough that if this actually came to a place where it was cheaper to use another technology, whether it's using a specific crypto or coin to move money and move ownership of funds across borders, or if there was some other way we could use blockchain, we could easily integrate that into our system.
I mean, actually, if this were to come to fruition, it first of all has to be cheaper, much cheaper than what we are earning today, moving from fiat to fiat.
And that's what we've seen as not really happening yet. But if it were to happen, practically it would be just adding another asset class to Wise Account for consumer[s]. And then you would be able to transfer that ownership to anybody else. So it's pretty standard stuff we could do.
Sinha’s comments add to my sense that Wise can be relied upon to continue delighting international customers over time. In turn, their ability to deploy additional financial services is best evidenced by the graph below. You can see how the adoption of Wise Account grew steadily from H1 FY2017 to H1 FY2023. Combined, the ability to delight customers and increase average revenue per user via new financial services is likely to make Wise more profitable over time, affording them more capital to reinvest.
Throughout my analysis, I’ve yet to come across a KPI that’s not moving up and to the right. Wise seems like an organization with extraordinary process power. Its strengthening cost advantage together with its ability to deploy subsequent financial verticals is likely to drive Wise toward becoming a much bigger company in the decades to come. While success is not guaranteed, Wise is a textbook asymmetric bet that I will be watching closely from now on. I am not buying this company at present.
At a price to sales ratio of just over six, the market is not beginning to discount the company’s extraordinary ability to deflate the market, delight end users, and print cash.
Until next time!
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Wise is a favourite company & product of mine but I'm not invested either, a slight concern would be within the short term the company is just going to acquired before it has time to really compound, like what often happens with the UKs exciting growth companies. Prime example Darktrace last year
Costco algorithm in play!