State of Moat: Wise plc.
Wise plc is a top dog fintech company that provides international money transfer services and we will review if Wise has created a moat in this growing competitive industry.
The article constitutes my personal views and is for entertainment purposes only. The main goal of this article is to log my personal views. Nothing in this article or these posts in this blog should constitute an investment advice. The projections and estimates provided here should be considered as purely speculative. Do your own model and projections. Please refer to the disclaimer at the end of this article for more details.
Wise plc is a top dog fintech company that provides international money transfer services in a growing and large industry. It is a leading company in this space. As such it fits the first criteria of a Rule Breaker company. Wise is a new position for me after studying more deeply this company.
Moat was always something that worried me for lack of studying more deeply this company since Wise is operating in a highly competitive market. So I decided to go through my list of moat criteria.
After studying the company more closely I see a lot of similarities with Adyen. Strong founder, fast innovator, Europe based, no acquisition, fast growing industry, disruptor to legacy players.
Wise uses a peer-to-peer model to facilitate international money transfers. Instead of transferring money across borders, Wise matches users who want to send money in one currency with users who want to receive money in another currency. This allows Wise to avoid traditional banking fees and offer lower prices to its customers. They basically build their own technology rails to avoid the SWIFT banking system as much as possible.
They probably still use the SWIFT system and the forex market to rebalance currency accounts in large transaction if more money leave a certain country in favour of another country during a period. This is probably not as simple as one could thought as there are a lot of moving parts, including. currency fluctuations, country to country imbalance and so on.
Similar to Adyen, they also have gone to the extra pain of getting direct connection (without partners) to the banking system in 6 different countries.
In UK, Wise plc via Wise Payments Limited is authorized by the Financial Conduct Authority (FCA) as an Electronic Money Institution (EMI).
This license is crucial for Wise's operations in the UK, as it allows them to Issue electronic money: This is fundamental to their service, as it allows them to hold and manage customer funds electronically for the purpose of making transfers.
In Hungary, Wise has been granted direct access to Hungary’s payment infrastructure, a first in the European Union for the company. The Central Bank of Hungary has provided the company with a settlement account, allowing it to become a direct participant of Hungary’s payment schemes, including the new instant scheme, and the local clearing house,
In Japan, Wise became the first non-bank to be granted approval to join Zengin, Japan’s domestic payment network - enabling instant transfers to and from Japan once integrated. Wise also became one of the first international financial services companies to receive a Type 1 Funds Transfer Provider licence, allowing the removal of the 1 million JPY per transfer limit, enabling larger transaction volumes.
In Brazil, Wise secured a Payments Institution licence, enabling it to connect directly to the Brazilian Instant Payment System PIX, facilitating faster, more seamless payments.
In Australia, Wise gained an Australian Financial Services License, expanding its capabilities to support investment services, further enhancing its range of solutions for institutional clients.
In Philippine, Wise has been granted direct access to InstaPay, the Philippines’ real-time payment system, and can also directly settle with the Bangko Sentral ng Pilipinas’ (BSP) real-time gross payment system, PhilPaSS Plus.
Changes to the Moat Criteria
First, I made 3 changes to the original 21 Moat criteria which were applied to Adyen. I added the aspect of technology platform.
Is the Company main product a technology platform?
A technology platform can provide a very wide moat, as your technology becomes an enabler for other companies to develop and market their solutions. The most important technology platforms today ranked by my own assessment are ARM (dominance in CPU), AWS (dominance in hyperscaler), Apple IOS (dominance in APP), Oracle database and Android (dominance but open source) in my opinion.
I have removed the gross margin question and the RoIC capital question which are not related enough to moat.
Wise moat under these 20 criteria.
Is the operating margin relatively high compared to another business or other companies operating in the industry?
As a comparison, some peers operating in the same industry:
Western Union’s core service is to send money quickly to friends and family around the world, often in situations where the recipient may not have a bank account. They have a huge network of physical agent locations (like in grocery stores and convenience stores) where people can send and receive cash.
Remitly Global, Inc. provides digital financial services for immigrants, their families, and other citizens in the United States, Canada, and internationally. It primarily offers cross-border remittance services through mobile application and website.
As such, compared to peers, Wise plc has much higher operating margin than peers. Please note that the current operating margin is inflated by the fact that Wise cannot pay interest to UK account holders since Wise is not a bank. PayPal is also a competitor but do not disclose the international payment transfer operating margin.
Has the Company increased market share over the recent years. What is the company market share versus the companies operating in the industry?
Yes definitely. As shown below, the company has been growing at 20% volume wise in recent years, while the market is growing at 10% for personal and 3% for business. The company is definitely taking some market share.
Is the Company benefiting from a cyclical tailwind in demand in the industry? This actually might be temporary and might lead to new entrants and may bias high operating margin.
I do not believe to be a temporary cyclical tailwind, but international money transfer is growing quickly at a 10% CAGR for personal accounts. As such this is an attractive market to be in and this attracts new competitors.
Is the operating margin increase due to an increase in industry wide scarcity of the product sold?
No, scarcity is not possible in the context of fintech industry.
The Company is making acquisitions outside its market. Horizontal broadening?
Wise has not done any acquisitions and as such all Software is internally developed. We seem to have found another successful case similar to Adyen.
Is the management concerned more about the long term of the business and is capable of suffering in the short term? Is management incentivize to perform over the long term or the short term.
Both founders Kristo Kaarmann (current CEO) and Taavet Hinrikus (Notorious Ou) still own 18.23% and 5.12% respectively of the company. As such, they are incentivized to grow the company over the long term. Kristo still runs the company. Taavet has started a new startup however.
The customer is customer centric. In terms of capacity to sustain short term pain, I would say that item 11 - passing savings to customers to increase market share is indicative.
Is the Company enriching its offering by offering add-on to strengthen its relationship with customers?
The company has offered add-on services like :
Multi-currency account: Hold and manage money in 50+ currencies with local account details in 10 currencies (USD, GBP, EUR, AUD, NZD, CAD, HUF, RON, SGD, TRY).
Debit card: Spend money with a Wise debit card in over 200 countries, with automatic conversion at the mid-market rate.
Direct debits: Set up direct debits in multiple currencies to pay bills and subscriptions easily.
The debit card is very popular and critical for moat protection in my opinion. Once you started to use Wise debit card, it is very difficult to start using a competing product. Wise also becomes a daily consumption product.
Is the Company passing some of the savings to its customers?
As shown below, the company is relentless at passing cost savings to customers by reducing cross border rate. One frustration the company has is its inability to provide interests to cash account in UK since it is not a bank - only an electronic
Are the products continuously improving and innovating? How is this improvement compared to the competition?
Besides reducing take rate as shown below, one key aspect to improve the experience is the speed of transfer. Similar to Amazon, the company is constantly looking at ways to increase speed of transfer. This is continuously reported by the company.
Is the Company reducing its dependency on suppliers through vertical integration?
The Company relies on banking partners in most countries. By going direct in now 6 countries, they reduce this dependancies.
Is the Company making acquisition to reduce competition by consolidating companies operating in the same segments?
No.
Is the Company main product a technology platform?
The technology payment rails that bypass the SWIFT system can be viewed as a technology platform. Similar to what has been done by internally developed AWS, Wise has made available these payments rails to bank operators and money managers across the world. Notable partners using Wise platform are Nubank, Google, Microsoft and Morgan Stanley.
The recent partnership announced in Dec17th 2024 with Morgan Stanley is particularly exciting. Morgan Stanley is a giant in the asset management with more than 1.46 Trillion in asset under management.
Is the product protected by Intangibles (brands, patents, regulatory capture)? Is this widening?
Limited except the 6 direct connection in UK, Europe, Japan, Brazil, Australia, Philippine.
Is there a HIGH Switching cost for a customer to switch from the Company‘s product to another competitive product? Is this widening?
The use of debit card and multi-currency accounts are narrow switching cost.
Is there a Network effect, meaning that the more the product is attracting buyers the more the product has value. Marketplace like ebay is a good example. Is this widening?
I believe so. The more people uses the technology rails implemented by Wise, the large number of transactions reduce the risk of country to country temporal imbalance.
Is the Process to fabricate and provide the product benefits from a scaling factor as low cost producer?
The cost of maintaining and developing the technology rails is amortize over a larger number of people. The incremental cost of adding a new customer is insignificant.
Is the Company operating in a Niche - too small for big player to enter and with a significant market share in the niche?
No. This is a very large and growing market of Trillions of dollar.
Are we seeing a lot of new entrants in the industry?
I would say Remitly has good traction.
Is there a product disrupter (innovator dilemma) in the horizon offering a simplified (incomplete) product but priced at a lower price level?
The stablecoin is a potential product disruptor. However, the on-ramp mechanism to buy and sale stable coin is still cost prohibitive especially in countries that do not use the US dollar. This is a space that I am very aware, having be one of the early adopter of stable coin and defi, and I do not expect stable coin to beat the current 0.59% average take rate if you include stable coin transaction cost and on-ramp and off-ramp cost.
Is there a Company offering a replacement product with a different product positioning?
I am not aware of. Current company is really the top dog in this space.
Quick view on valuation
Since this is a new position, Wise current valuation in terms of EV/operating income is very reasonable at 16x EV/EBIT. The recent rise in price is actually fine with me. Sometimes good momentum if price reasonably is often a good leading indicator. There is good amount of backtesting showing that value play with good pricing momentum overperform the market. in 2022, the stock was priced at 50x EV/EBIT. In 2023, it was around 30x. At 16x it is trading at a lower ratio than expected growth.
One caveat is that net interest income is larger than what the company wants as the Company would like to take only a 1% take rate and refund the rest to the customers. However, due to regulatory constraints the company cannot pay interest to its customers since it is not a bank in UK. If regulatory would change in UK, interest income would plummet but at the same time assets under management would skyrocket in my opinion.
Summary of the moat
Wise plc scores exceptionally well in terms of
passing savings to customers - religious about lowering take rate as cost goes down, similar to COSTCO. They even have a target operating margin of 13-16% which is being over shoot currently since they cannot gave interest to UK customers due to regulation constraints.
Scaling factor - the more customers are using their proprietary payment railway the better the can provide fast and cheaper solution as currency imbalance is minimized.
It also has in my opinion wide moat in operating margin and market share expansion, Lt focus, product innovation, reducing dependancies via direct connectivity with banking system, being a technology platform and network effect. This is truly a top dog.
Or the negative side, it is operating in a very big and competitive industry, with some unknown risk related to disruptor like stable coin - but not with a high probability as explained. It doesn’t have a strong brand like amazon used to have or Netflix, and switching cost is small.
Comparing Wise with Adyen - 2 top dog fintech
As stated earlier, I see a lot of similarities with Adyen. Strong founder, fast innovator, Europe based, no acquisition, fast growing industry, disruptor to legacy players.
Adyen scored a little bit higher in terms of moat, both are very close to wide moat in most criteria. The market share gain and operating margin of Adyen are truly exceptional as well as management long term focus and capability to suffer in the short term. I think Adyen has achieved escape velocity, in terms of someday dominating the industry with Stripe. Wise plc is still much younger and much smaller. It is not as well known, but the Morgan Stanley deal is a testament that they do have a trustworthy platform. It is also trading at a much lower multiple than Adyen.
In a final word, I would invite you to set up a Wise account to do your own due diligence. Go to wise.com and initiate the onboarding and let me know how was the process to synch with your bank account. Mine was painless. Like Adyen, Wise has team up with Plaid to link with my bank account. San Francisco based Plaid is still private, but will surely look to buy a few shares when it comes public.
Cheers,
thanks for this breakdown. got my eye on them as well.
Nice write-up though check list. Did not know about this company - name awfully close to the infamous Wirecard :) When thinking about the moat of this company, I am worried about stablecoins-over-defi being a growing alternative to SWIFT and basically bringing margins of the industry to zero when it comes to inter-country payments. The regulatory framework in the USA for the next 4 years seems conductive for this alternative to flourish. I know you know the crypto industry very well - what is your take on this?