[Research] Wise's Second Act

Price loweroooor?

Then Jesus entered the temple and drove out all who were selling and buying in the temple, and he overturned the tables of the money changers and the seats of those who sold doves. 13 He said to them, “It is written:

‘My house shall be called a house of prayer,’
but you are making it a den of robbers.”

Matthew 21:12-13

Some years ago Jesus the Nazarene ‘cleansed the Temple’ (of Solomon) of corrupt money changers who exchanged foreign currency into temple money (perhaps one of the first recorded instances of spread income). This immortal act of violence/rebellion against the extractive practices of an outdated religious elite seems to resonate with every consecutive generation in one way or another.

So goes the story with Wise (once known as TransferWise). Some years ago the founders experienced first-hand the extractive and opaque money changing practices of their respective commercial banks in the United Kingdom and Estonia. In a moment of spontaneous rebellion, Kristo Käärmann and Taavet Hinrikus executed an ad hoc P2P netting transaction that obviated the correspondent banking system. In 2011, they started a company looking to scale this experience.

The rest of the story is decidedly well known now. Starting with wealthy ex-pat “corridors” (global remittances are not a “network”; they are a collection of point-to-point channels, and sometimes these channels must be built in both directions), Wise built a cost-effective and often instantaneous remittance business. Costs were driven by gaining critical mass in certain currency pairs using the initial netting insight, but in time they were able to lower their take-rate on transactions by integrating with national payments infrastructure, scaling AML and KYC functions, and by continually reinvesting in their own infrastructure.

Payments (defined broadly) is a business defined by entropy (take-rates march down over time). This is generally observed (except in a few instances like the rails). The modern remittance companies (Wise, Remitly, once upon a time Xoom, Visa to an extent, amongst many others) are the rare example of market participants explicitly driving their take rates down over time, as opposed to companies like Stripe and Adyen that only begrudgingly negotiate on take to capture share in adjacent markets. These markets are viciously competitive, defined by a never-ending stream of venture dollars looking to fund the next fintech, and national regulatory regimes which explicitly look to encourage competition and drive prices lower.

In 2021, when the company listed publicly in the UK, the debate over whether or not Wise would be a successful P2P remittance company was unsettled. Perhaps Facebook would take another swing at building its own payments business off of its failed stablecoin project? Could Wise be competitive outside of the channels it dominated in Europe and across developed economies? This particular argument seems to be settled now. Kristo’s focus on ever lower P2P transaction costs (defined early in their first earnings call as “Mission Zero”), a greater penetration of instantaneous transactions, and greater trust (a derivative of the first two) have been a winning combination. Even the most cursory observer would note that every time the company pulls the reverse pricing lever, immense transaction volumes follow shortly thereafter. As the company looks to scale beyond the “relatively” limited TAM of its initial market, and into the “serious” business of B2B financial infrastructure, they face a number of challenges, recently illustrated by its application to create a national trust bank in the United States being denied by regulators.

Read on for an exploration of this new(er) opportunity set in front of Wise and its concomitant risks.

I. The Perils of Payments