Chit Chat Stocks - How Wise Is Disrupting The Cross-Border Payments Market, with Luke Hallard (Ticker: WISE)

Episode Date: February 2, 2023

Wise provides cross-border money transfer services for personal and business customers. The company was founded in 2010 and is based in London, UK. Listen as Brett and Ryan ask questions about the company, its business model, and valuation. Enjoy the show! ***************************** This episode is sponsored by Stratosphere.io, a web-based terminal for financial data, KPIs, and more. Try it out for FREE or use code “CCM” for 15% off any paid plan. Sign up here: https://www.stratosphere.io/ ***************************** Want updates on future shows and projects? Follow us on Twitter: https://twitter.com/chitchatmoney  Subscribe to our Substack to receive free show notes and charts that go along with every episode: https://chitchatmoney.substack.com/ Interested to see more of Luke's work? Check out their Twitter here: https://twitter.com/7LukeHallard?s=20&t=37KV-d1179kMwAdDSBDZXg Contact us: [e-mail] Timestamps Wise | (2:37) Upstart Competition | (11:48) COVID Impact | (36:10) Disclosure: Chit Chat Money hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Brett Schafer and Ryan Henderson are general partners and portfolio managers at Arch Capital. Arch Capital and its partners may hold securities discussed on this show. Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Chit Chat Money. My name is Ryan Henderson, and I'm joined by co-host Brett Schaefer. Today is our Thursday deep dive episode where we interview an analyst to discuss a single stock. And today we have on Luke Heller to talk about Wise, the business that was formerly known as TransferWise. Luke is a leading advisor for 7investing. Luke's awesome. He's always fun to talk to. He has a lot of experience with Wise's various products, and his British accent is just very enjoyable to listen to. So that makes for an easy interview. Anyways, before we get to that, today's episode is presented by Stratosphere, the best web-based research terminal for company specific metrics like KPIs and segment revenues. Stratosphere has clean data for KPIs, segment data

that is triple checked for accuracy and beautiful data visualizations, helping save you the time and frustration that it takes to dig through SEC filings. We've mentioned this before, but Brett and I use Stratosphere every single day. It is our own investing home screen, and you can use it too for free just by going to stratosphere.io. I really can't express this enough. We love the platform. We're speaking from the heart when we say that we think you should at least check it out. But it's stratosphere.io, and the link is in our show description. If you're more interested in the platform, stick around after the episode. We've got a three-minute interview with Stratosphere's founder, Brayden Dennis. Anyways, without further ado, here's our interview with

Luke Hallard. Welcome to Chit Chat Money. On this show, hosts Ryan Henderson and Brett Schaefer interview industry experts and riff on the world of investing. As a quick reminder, Chit Chat Money is a CCM Media Group podcast. Ryan and Brett are also general partners at Arch Capital, and Arch Capital may have positions in the securities discussed in this podcast. Anything discussed on Chit Chat Money by Ryan or Brett or any other podcast guest is not formal advice or recommendation. Now, please enjoy this episode. Today, we are welcomed by Luke Hallard.

He is a lead advisor for our friends at Seven Investing. This is also a perfect time to shameless plug that we still have a code going on, code money at Seven Investing. If you're interested in checking it out, if you love this pitch and are compelled to see any more of Luke's research, feel free to use that. But Luke, welcome to the show. We're talking about Wise today. Maybe give us a little bit of background. I know we just talked about it before the show, but how did you come across this? Ryan, good to talk to you and Brett again. And thanks for the invite back to the show. Yeah, I ran into Wise, Wise PLC, and it's the ticker.

It trades on their London Stock Exchange under WISE, W-I-S-E, but there's also a couple of ADRs and one of them is W-I-Z-E-Y, if you want to buy it in the US. I ran into this because they're a real specialist in international transfers and international banking. I joined 7investing actually almost a year ago today. So making, I think, my 13th stock recommendation this month. and we needed to figure out a way for Seven Investing to pay my company in the UK for my time and the simplest most convenient way to get set up was to create an international business banking account with Wise and with that we'll talk a bit more detail today about how it worked basically I now have a US checking account effectively I've got a US bank details

super easy, super straightforward, the seven investing to pay my salary to me through that bank. And I love the business account. It was dead easy to set up, really cost-effective to use. So I created a wise personal account. I now do my kind of international banking personally with wise. And then I started digging into the company. I thought, wow, this is quite an interesting proposition. And I think it's a pretty compelling investment opportunity. We can talk about why today. And for those listening to the show, you may have just, you might not have noticed, but Luke just held up his wise card, which we'll talk about here in a sec, but let's talk about the core money transfer business. I think this

is a part that probably a lot of people don't know how it operates. So could you maybe explain how wise this core money transfer business works compared to the legacy system? Yeah. So let's start with, this is the other way around. Let's talk about why my legacy international transfers are expensive, complicated, potentially take a lot of time. So quite hard. Let's say I want to send some money to you guys for some reason, and we've got a UK bank account and you've got a US bank account. Unless we both bank with the same kind of international banking entity, which maybe we do sometimes, but maybe we don't, it's difficult for me to get money to you. So I tell my bank, okay, send $1,000 to Ryan.

my bank will potentially engage with what's called the sender's intermediary bank. So you've got like an extra third party. And then that intermediary may not have a direct connection to your bank. So they'll have to then connect with the receiver's intermediary bank. And then the receiver's intermediary bank will connect with your bank. So actually these thousand dollars are flowing. They're actually transferring from the balance sheet of one bank to the intermediary to another intermediary, maybe many steps to your receiver. And each of those steps takes time, it's complex, and incurs fees. And actually, you can end up in really weird situations sometimes where the fees are a little bit unexpected, and maybe you receive less money than I intended to

send you because the fees amount up. So sometimes businesses have to send a secondary payment to make up the lost money that's been sent. So it's complex, but that's the legacy banking system. that's what's been sort of born many, many decades ago. What Wise did is just kind of revolutionized the whole thing really very simply. And it kind of seems obvious in retrospect, I suppose, but I think they were the first guys to do this, is they just have local pools of liquidity. So there's like a Wise US account, which has billions of dollars in it. There's a Wise Sterling account, which has billions of pounds in it. And if I want to send a thousand bucks to you. Well, Wise basically adjusts their spreadsheet. My entry in the US book goes down by

$1,000 equivalent. The entry in the Wise book in the US goes up, and then Wise can send the money directly to you because they're connected to local payment rails in each of the countries they operate in. So what it means is actually no money really transfers. There's just these two separate transactions in the local countries. And Wise can do this stuff much faster, much cheaper, more conveniently, much more transparently than legacy banks. It sounds, it is funny because you mentioned that system and it sounds so like, well, why don't they start that way? But it was such a novel concept, I think, when Wise introduced it. Can you explain, I guess, how Wise makes money? And then obviously,

as we kind of alluded to with the card, they have other products. So can you go through some of those as well? Yeah. So they make money in a bunch of ways, but what they try to do, and actually part of their mission is to get to zero fee transfers. So they really pride themselves on transparency. So say you want to do a bank transfer with a MoneyGram or some other, maybe a traditional bank, and often market and say zero fee transfer. But what they're really doing is maybe there's no fee, but you've got this hidden cost in the exchange rate they actually offer you. So what Wise pride themselves on is the transparency. If you go to Google and you say how many dollars you get for a thousand pounds, Google will give you the mid-rate. Wise give you

that same mid-rate. And then they apply a transparent fee to that. So they make a fee on the transfer. And it's a very cost-effective fee. But they also make money on customer deposits. So one of their other products, apart from just the transfer product, I showed you my card just now, is the Wise account. There's a Wise account for personal customers. So the Wise business account. It's really convenient. A guy has one Wise account with the... They actually have essentially like local bank account number, like a checking account number in 10 different countries. And in countries where I can't have a checking account equivalent now, I can still make payments. I can still hold kind of notional balances in my wise account.

And so that's the sort of transfer product, the accounts product. They've just introduced an assets and interest product within the accounts. So they don't have a full banking license in most of the countries they operate in. Actually, that's a little bit restrictive. It means they can't pay interest, they can't make loans. Well, loans isn't part of their business model, but they do want to return money to customers. They're trying to really make it repeat on cost, make it a really cost-effective proposition versus really any other way of storing or transferring FX. So they're doing that now. they found workarounds by offering things like cashback on balances and the ability to invest

money. So actually just a few days ago, I've taken my business account balance. I've invested it in the MSCI World Index through Wise. They make a small fee on that investment and now my money's invested. I still have all the flexibility. I can spend that money and they'll manage the kind of investment because again, they've got this kind of pool of invested funds across all customers that they're acting as a custodian for. Then there's one other product they offer, which isn't end-customer facing. I think it's a real crux of the business model. This is something they call Wise platform. You could imagine this as being kind of… Wise have got this incredible network for doing high-speed, low-cost, transparent transfers.

If you're another business, you can white-label that. Through an API, you can plug into Wise's infrastructure, and then you can offer your own customers exactly the same capabilities. There's a number of really quite big headline customers they've got, and they're increasing the number of partners on Wise platform quite rapidly. But a number of national banks, I think in the US, one of their first partners was Stanford Federal Credit Union. They've got other local banks in many countries around the world they've partnered with. in the UK, Monzo. They're starting to add a lot of payroll and HR partners in the last six months, companies like Deal, First Base, WageStream, Xero, the accounting software.

So by all these different firms, by plugging into Wise, they can offer their customers a better, cheaper proposition. But also, that's potentially a big accelerant to Wise, as they're getting all of those customers' international volumes through their platforms. It's quite an interesting part of the business model. No, that is. And we're going to talk about that later, I bet. But when you mentioned their strategy, it seems their overarching strategy is to be lowering fees all the time as much as they can. And they said over the long term, they want to get them to as close to or at zero, which at first, if you're an investor, you say, okay, well, they're disrupting their own business model. How are they going to make money? what do you think of this strategy do you is there going to be enough scale for them to make money through these other initiatives like cards whatever and do you think that gives them scale advantages where no one would be able to offer the same thing to the customers which kind of

insulates them from any upstart competition yeah maybe maybe i think time will tell because um Yeah, they are effectively driving the race to the bottom on fees. And as you say, they're very transparent. Their mission is to reduce fees so that it's eventually free. You'll get the mid-rate on a transfer with no fee on top. So you would say, okay, well, they're not a charity. How are they going to make money? So I think their strategy seems to be around building the most cost-effective and convenient transfer product for the customers.

and then just having a ton of convenient but on services where they can generate additional revenues. So a couple of examples today, but I'm sure, you know, they're going to find other things as the business model matures. If I use my Wise Debit card, if I draw more than 200 pounds a month, pay a 1.75% fee for cash withdrawal. So like that would be saying, okay, so I wouldn't use my Wise Debit card domestically,

which is my bank account, there's no fee on any size of withdrawal. But if I'm traveling internationally, that 1.75% fee is still actually cheaper than using my regular bank because even if there's no fee or a smaller fee on a bigger volume of transfer of withdrawals than the ATM and paying their opaque VEX rate, so it's cheaper for me to use my wise card anyway. In some countries, particularly some countries in Europe, it's actually quite traditional to have fees on domestic payments so Wise can make some income there. Interest income has become quite a big part

of their business model recently. So actually, now that more and more of their customers, personal and business customers, are holding Wise accounts, they're holding a credit balance. And I think as of the most recent half-year reporting, which was September last year, Wise are holding just over 9 billion sterling

in customer balances, which is up 87% year-over-year. So it's grown quite substantially. And that meant they earned net interest income of £43.5 million in the last quarter. That's quite significant. It's probably actually uncomfortably too much for them. So if you listen to Matt Ryers, the CFO on the most recent earnings call,

looking for ways to return some of that interest income back to customers. um uh they they do they do earn fees on um uh on account balances uh for wise accounts and wise business accounts um and then for ways to return those to customers um and then um uh yeah so so you know as a you know broadly lots of sort of smaller ways of earning fees as they really push the wise account and increase those customer balances. And that's just going to be kind of a bigger pool of money

to leverage and to earn income on. And I think they're certainly not done yet in terms of finding other ways to generate revenue. Yeah, it'll be interesting too, because they are already at such a big difference between the fees at Western Union, MoneyGram, and all the traditional players. And they've taken market share, which today,

and I don't remember if this was at the latest quarter, so update the numbers for me if this is incorrect, but they have about 4% to 5% of personal cross-border transfers for the market share just globally. And then they're at less than 1% for small businesses. So the theory is that they're going to have a bigger chunk for, say that you had that anecdote earlier for you at 7investing, they're going to get from 1% to much higher because of the low fees they have. Let's say, let's put a scenario out there that five years from now, they're at 10% market share for personal transfers and say 3% for businesses, which for any listeners, that would lead to higher revenue, higher earnings, higher net interest income. So it'd be

a much bigger business. How do you think they get there? And what maybe we don't have to give a ton of numbers, but what kind of earnings potential or revenue potential is there at that scale. So first of all, how do they get there? It is just a very compelling proposition, zero cost transfers, right? Particularly if you travel a lot or you do a lot of international banking. And word of mouth, it's going to be all about building additional customers and then getting more and more kind of wallet share as those customers, as they do more and more transfers through Wise. Then they'll earn various fees and income on those transfers. So word of mouth is quite a significant advantage for Wise. They don't spend a huge amount of money

on marketing. They actually get 70% of new customers just through referrals from existing customers, like even me waxing lyrical about the company now. I've been just pitching it to friends and family. My wife's now got a Wise card, so have a bunch of my friends. It means that their marketing spend, they get a lot of leverage on that. And I think if they look across their entire customer base, their blended payback on marketing spend is three months. So that's getting a lot of return on a small amount of marketing investment. So they're going to grow organically, think nicely and consistently, and that's going to build scale. We mentioned Wise Platform though. I think as they add more partners, because if you're a national bank, but some of your

customers still want to transact internationally, they're international businesses or they travel a lot, it's complex for you as a sort of smaller national bank like Stanford Credit Union who have the sophistication and the banking licenses and the partnerships to be able to offer anything approximating the speed and the convenience and the cost of partnering-wise. So that's why I think we're seeing more and more. these smaller partners coming onto the Wyze platform. I think I said 60 partners today, and that's growing pretty rapidly. I think that's going to become... Unfortunately, Wyze don't break out the volumes that they do through partners versus directly through their

own website. I think we can see that behind the scenes, that's quite an accelerant to increasing their scale. And then how else do they grow? Possibly moving up into larger business banking over time. They typically, like their personal customers, they segment into smaller customers transacting I think less than 10,000 pounds, $10,000 per quarter versus larger customers. But in the business world, it's typically smaller businesses that use Wise, not big multinationals. But if they can offer this capability and you can plug into them through an API, was quite easy for a bigger bank or a bigger business

to maybe engage with Wise for some subset of their managing their finances. So I think these are all good levers that could help them grow quite significantly over the long term. And just for the listeners, what's the revenue look like today?

Because I think people see big numbers on the volumes, but just what size business is this? It's a little hard to get into the numbers because I know you guys are big fans of Stratosphere. I'm a fan of YCharts. When you go look at Ys on some of those platforms, actually the numbers are a bit of a mess. I think a lot of these providers are kind of misunderstanding how Ys account for custom balances.

You look at crazy negative EV figures and garbage figures of free cash flow. If you go and look up Wise's own numbers, it's a UK company, so they only really give proper accounting every six months. But in the most recent quarter, so just actually this week, about four or five days ago, they issued a quarterly set of numbers. So over the quarter, they've done volumes of just over 26 billion sterling in total transfers, which I guess is how you get to the 4% to 5% of personal transaction volumes. On that volume, they generated revenues of 225 million pounds.

But their total income, I know we'll get into the numbers a bit later in the discussion, the total income was actually higher than their revenue. So income was 268 million pounds. That's because they're earning as interest income, which they're looking for ways to return. Okay. And then on the, I guess one trend that we've kind of seen throughout the business is that they're seeing more penetration with their active customers. Why is this occurring? And then how do you think this impacts the business? Is this theoretically more profitable if you're getting engagement out of the existing ones? I'm going to answer this with a couple of personal anecdotes, but you can probably extrapolate those to probably the experience of many banking customers. Where are they today? We're talking about penetration of the number of Wise's customers that actually have a Wise

account. They're using them for more than just transferring money, they're actually holding balances. That's the crux of the business model, it's where it's the types of accounts where Wise make the most of their income. So today, just over 51% of business customers have a wise business account, and 30% of personal customers have a wise account. Quite a lot of opportunities still to grow that, but those numbers have increased quite rapidly.

And the question is, why are they getting that increasing penetration? The easy answer is, it's just more convenient, much more easy, and more compelling proposition than legacy banks. So here's my two anecdotes from really quite recently. So I'm in Lake Tahoe at the moment doing a ski season, and I wanted just to ship over some kind of walking around money to get my season started. I was sending like $5,000 from my HSBC UK account

to my HSBC US account. And I did the math on different ways of transferring it. If I transferred the money out of HSBC to HSBC with their no fee transfer, it would have cost me 114 pounds more than what I did, which was transferring the money from my UK account to my Wise account, doing the FX there, and then transferring it Wise to my HSBC US account. You might ask, why have I even bothered getting a US account? For personal legacy reasons, I happen to have HSBC credit cards in a few different countries,

and wise don't yet offer a credit card i suppose there are some additional consumer protections that's why i'm not using that's why i'm using my hsbc card but i'm using wise to get the money there and then another random anecdote um so uh i've had some property in spain for a couple of years and for legacy reasons for like two decades or so that a bank account with uh bank sabadell and just a pain in the backside to deal with if I'm really awful, if I'm really honest. They charged me 50 euros a quarter just for very basic banking, so it's not cheap. And I actually had a hilarious experience about a month ago when I tried to close my Sabadell account, but now using Wise for my Spanish banking. So I had to get my account

balanced to zero so that they could execute the kind of account closure workflow. And I miscalculated the fees because it was so complex. And I transferred the money to my Wwise account. I was left with 30 cents. And in a one-hour conversation with customer support in kind of broken English, Spanish, they couldn't do anything with that 30 cents. They couldn't donate it, couldn't strike it. I had to transfer like 10 euros. And then I had a spreadsheet to figure out exactly how all the fees added up, get it to exactly zero, and then they could close the account. So just an interesting example of these sort of legacy, complex processes that aren't very

customer-friendly, but a lot of the traditional banks have and why they've been able to start from really a clean sheet. It's just a much more effective, transparent way of doing banking. Yeah, that's an anecdote, but I think almost every listener will agree that the legacy banks, They are providing a fantastic opportunity for someone with better customer service. I think maybe... We talked about the advantages of regulation where getting up to WISE's scale for international transfers is very difficult for someone like... Your example was Stanford Credit Union, but that can apply to thousands of other institutions. What is preventing them from becoming a bank themselves? Do you think that's their goal? And because you mentioned

that they aren't able to offer something like a credit card yet. Do you see a world where they could consolidate, say, for example, yourself out of HSBC to be a Wise customer and cut them out completely? Like me personally, it's quite a close call in making that transition and just kind of doing everything on Wise. So I think they're not trying to be bank, but they do want to offer bank-like products

to customers. For example, on the earnings call the other day, they're very clear. They don't ever want to get into making loans, and that's kind of a core part of a traditional banking proposition. So they're trying to be smart about the various regulatory licenses that they're applying for in hundreds of different countries so they can operate because it's complex and it's expensive to get these and maintain these licenses. So they have found interesting kind of workarounds. So right now, you actually need, I believe you need a full banking license to be able to pay interest. Or why is it found kind of helpful? I suppose that it's kind of in the implied mode right now, where in the UK, they're essentially paying interest by allowing

you to sort of invest your money in either a government bond, sort of low risk end, slightly higher risk end, you can invest your money in the MSCI World Index. You're earning income on those funds. In the EEA in Europe, they're piloting giving cash back on balances. It's essentially interest, but by a different term. I guess they found some language within the banking license they have there that enables them to do that. They've just recently launched a 1% cashback on debit card transactions. If you're a business customer in the UK, certainly the UK is their core market, but they're looking for ways to sort of pile up these various new products and add-ons and capabilities

and then roll them out as far as they can. But certainly the plan isn't to become like a full banking service in every country. three specifically around stuff to do with international transfers, because that's really their kind of raison d'etre. Real Canadian Superstore has everything you need this back-to-school season. Save on lunchbox savers like Ziggy's sliced deli meat products for always $3.75 and get Life Brand Pure Vita shampoo or conditioner for $8 each. At Real Canadian Superstore, when you're ready, we're ready,

with a whole world and more. Who are the competitors in this space? and because there's a lot and probably there's one in particular that I'm thinking of that I imagine you'll mention. Do you think there's any chance that Wise just gets bought out

by a competitor or some sort of a bigger financial institution? Yeah, great. Well, I definitely hope not as a customer and as an investor. I hate to see my really interesting investments get acquired before they can really reach the kind of scale that's in my mind in terms of the investment thesis. But who are their customers? So if you're listening to the podcast, I'd

encourage you to just go check out wise.com. And I don't know if this is like genius or insanity, but literally on their homepage, when you pop open the page, they show just the default transfer of $1,000 to euros. And then they just rank and stack who's the cheapest. And they're not the cheapest. On their own homepage, they're like, today, they're in third place behind Remitly and MoneyGram. If you transfer that $1,000 with Wise, it's going to cost you about, I think, $12, €12 more. This is their transparency in action. If you play with those currency roots and amounts, you'll pretty quickly intuit that Wise are pretty much always up there in the top three or four, sometimes first, sometimes second. Unless you're doing a very consistent currency

route, maybe you're working overseas and you're remitting money back home, you might pick a broker that is very cheap for that particular route. But if you're doing international banking and you're always doing different stuff, it's a bit of a no-brainer to pick Wise because it's just simpler are having it all in one place. And you know, they're always going to be, you know, almost the best, if not the best, but they do have a bunch of competitors. And if you, if you look at that wise.com, you'll see the list of competitors. So who are the key ones in my mind? Um, probably the behemoth, PayPal, um, you know, massive customer base, 400 million accounts. Um, but if you look at the cost of PayPal, I go check out the comparison of the rates on wise.com or

just Google, PayPal, and figure it out yourself with a calculator. It's kind of mind-boggling how expensive they are if you do. It's horrible. We know that pain. We know that pain as well. Yeah, it's disgusting. Western Union and MoneyGram, also competing for this market, and a different business proposition. They've got a really large physical footprint. You can't go into a wise branch. To take money, you have to find an ATM and withdraw it. So I suppose Western Union and MoneyGram are perhaps naming more the needs of the unbanked, but I know MoneyGram are kind of pivoting to more of a digital model, but there's competition there. I mentioned Remitly. They're very cost-effective for certain routes. I think their customers are more, it's more about

sort of overseas workers sending money from a number of developed countries back to developing countries. So they've optimized their model to make some of those routes cheaper, which is why they're cheaper than wise for some transfers, but certainly not for all. eLocal, another kind of competitor that's more focused into the business world, providing transfer capability to global merchants, more in emerging markets. One you might not have heard of, that's a little more UK-centric, but in my mind, perhaps, is the bigger threat to Wise, is a bank called Revolut. So I think very similar proposition to Wise. I mean, arguably, actually more mature. They've been around for a bit longer. It's more like a traditional bank account with lots of other

banking capabilities. But I think if you look at how you use the account, if you start to do bigger transfers, the fees start to mount up a little bit. I think there's additional fees if you send more than £1,000 a month with a route. If you transact at a weekend, there's an additional 0.5% or 1% fee, I think. So it could be a better proposition depending on how you do your banking. But if you're doing slightly bigger transfers, Wise is probably the the sort of superior option and then the other the other main competitor are just all of the traditional legacy banks you know the HSBCs and the smaller banks that um that are potentially offering the same thing um but to me you know it's a highly fragmented market and our Ys are

still small and growing but just an incredibly compelling proposition so um you know they have got competition but i think they've really doing quite a leading spot right now yeah and this may seem like an obvious one but does the does their focus and it kind of reminds me and maybe netflix is on the brain because their report was earlier of how focusing on one thing and having that being your priority versus your competitors being your fifth priority do you think that is an advantage for them and is why they're succeeding and do you see that continuing in the future because the one i guess in my mind the one concern would be and i don't think this has happened is if the legacy players kind of get their act together quicker than maybe people assume and they level the

playing field but do you think that likely is impossible because of that lack of focus like i spent 25 years working for global bank for working for hsbc i said that elsewhere um it's quite hard uh for one of these big global banks you think they have these enormous capital reserves and um you know it's enormous customer base to lean on it's incredibly complicated to be agile and to really serve your your modern customers needs an effective way like even something stupid if i want to connect with say i have some sort of issue like a fraud alert, or I just want to talk to my bank, it's quite difficult to talk to HSBC. If I'm overseas, I've actually phoned them.

I try and do stuff through the online portal. I can't get a lot done because there's not the right level of authorizations. You have to phone them. I have to phone them internationally. The phone call, I can't talk to them over WhatsApp. I can't video them. When you get a smaller player, all of the fintechs, but Wise included, they've been able to kind of redevelop their model from the ground up for modern consumer needs, and

it's just much more flexible. And the traditional banks are mired in regulation and complexity. It's very hard even just to keep the lights on, keep the bank operating. This certainly isn't unique to HSBC, it's across the industry. Just complying with the rapidly changing regulatory environment in all the countries in which operate. It's very complicated. It's very expensive. It doesn't really give you much of a chance to think about, actually, how do we make the customer experience better? So many of these banks would like to start with a clean slate and launch their own kind

of neo-banks. I think that's an initiative that's sort of succeeding in potted ways. But I think Wise, well, they almost invented this model of transfers without actually transferring the money. And then that's given them quite a head start. And maybe we sort of take that loop back to, I think, the question you asked a minute or two, Ryan, about could they be a buyout? Could one of these other legacy banks want to kind of snag them? I'm sure it's quite attractive. But if you look at the sort of ownership structure, Wise was founded by by Tavit Henricus and Chris O'Carman. Tavit's no longer formally with the company, but between them they own pretty substantial stockholding, I think over 25% of the company. They've got

a relatively strong controlling interest right now, so that'll make it more difficult for another firm to get in and snag them, including the founders who were on board with that idea. Okay, this question has just now come to mind, but how was WISE impacted by COVID? My kind of thought here is that in international travel kind of ground to a halt and that as we, and we've probably seen already to some extent, international travel kind of revives that we would see more and more adoption. Has that played out in any way? Well, their revenues have grown pretty consistently, and their income. They've only been a public company since 2021, so probably can't give a really clear picture through the pandemic period. I think what you're leading into there is there is a risk. We're out of the pandemic now. I guess, potentially, we're going into a recessionary environment. And if we do go into a full global recession, well, that's probably going to hurt

Wise and the whole banking sector. People will be spending less, traveling less, transacting less. So that could be an impact in the future. What are the most common corridors, I guess? Is it mostly inside of Europe transfers or is it UK all the way to the US, like in your example? They don't break it out, but depending on exactly which product you're looking at, you can have a bank account in formal banking details, I think in 10 different currencies. You can hold money, I think in 70 or 80 different currencies, and then you can send money, I think 170, 180 different currencies. It went down a little bit actually because the situation in Ukraine and some sanctions against Russia. So actually a number of,

well, plus the industry, a number of currencies have been delisted, but it's pretty comprehensive. They don't share details of which are the higher transacting routes, but you can probably guess it's going to be euro, dollar, sterling, Aussie dollar, that sort of thing. Right. And they do have, for anyone interested on their presentations, they have a good chart of what their more mature product offerings are across the world. And you can see that I believe the UK is the most mature and they're working to have places like the United States get closer over time. But if you're in the United States, you actually don't have as much capabilities as you would in the United Kingdom yet. Exactly. But they're adding stuff, like I think in the most recent quarter, they've just added physical debit cards in the US,

whereas you could just have like a virtual card. So they're definitely pushing to try and have a more entire proposition in all the countries they operate in. Right. And one more thing before we get to the management, and I think anyone listening will talk about that issue that the founder had as well. But one more small thing. How much of an impact do interest rates have on this business? Because you talked about the benefit of higher interest rates, but I just wonder about the positives and the potential negatives there. Are they a bit subject to what the central banks do, or is it just kind of a smaller part that investors shouldn't care about too much? It's become important in the most recent couple of quarters. I think they've been surprised by how much interest income they're earning.

It's now actually quite material to their earnings, that 43 million sterling in the last quarter. It was very hard for any bank to make any money in the incredibly low interest rate environment we've had for the last decade almost. All banks were kind of skirting along. If you listen to their CFO's commentary just a year ago, he described interest income as not being kind of core to their mission. Suddenly we're in a higher rate environment, which could persist for a while. So all banks, including Wise, suddenly are making interest income on their deposit.

Wise are striving to return those to customers in some way. Quite a nice comment from Matt Bryars on the earnings call this week. A kind of throwaway comment in response to an analyst question. He said, we charge what we need to, not what we can get away with. And I think that's quite a very sort of clear insight into his thinking about that transparency and that kind of customer-centric approach and the mission that, you know, win by offering the lowest cost, most convenient product to their customers. Yeah, they're going to have so much consumer surplus for sure. If you look up the management online, if you just Google their management team to try to do some research, you're going to see that the founder, and I don't know if it's confirmed or allegedly, but you can explain it, evaded taxes. Do you think this can have an impact on the business?

Are you watching that? Do you think it's important? Yes, to all of those. So what do we know? Because it's still actually a bit of an open investigation. What do we know? So co-founder Christo Kármán was fined £365,000, so a personal fine, nothing to do with the company, and that was for deliberately evading tax in 2017, 2018. team. There's probably a couple of possible interpretations here. We don't actually know the true answer, but the investigation is still ongoing.

One thing the UK regulator did, it's an incredibly strong regulator, they took the additional step of naming and shaming him as a deliberate defaulter. There's actually a list, you go to the FCA website, and you can see the most heinous examples of tax evasion. This is normally a list of wholesalers of dubious goods and secondhand car dealers. Christo Kármán was on that list for a period of time. You've got to wonder why they did that. Either he has deliberately, materially misstated his personal income, or possibly, and maybe this is the most sort of happy interpretation of the situation, he's just been incredibly disorganized and has failed to submit his tax returns properly, despite presumably multiple warnings. So

either incredibly disorganized back then, or he's been unethical. Neither of them are good, but clearly, if you look at it ethically, it's much more significant for the company that he's the CEO. Now, we've got to remember, Wise wasn't a public company at that time. That was three or four years before they went public. It's not out of the question that he was managing his finances and his tax returns personally. One of the steps the company has taken is to ensure that he has a personal accountant. So maybe the implication of that is that he didn't before, I don't know. But the FCA are looking into this. So it's not that the fine has been paid. The company were hoping to move on, but about six months ago, the UK regulator opened their own

investment into the matter, and they're seeking to determine, is he a fit and proper person to serves as a CEO of a publicly listed company. They do have the power to force him to step down as CEO. If they determine that there was something unethical or they're just not happy with the way the matter has been handled, they could force him to step down. That could be significant for the company because he's the remaining philander. I think their CFO is incredibly strong. um and they've also recently recruited david wells who's the cfo of netflix um and i think you know between the cfo and david wells you've got a actually a very strong team there anyway there's no arguing if if christo carmen was forced to step down that would be an impact

yeah i was about to ask about that was because it kind of pops out i think anytime you see someone who worked in the executive suite at Netflix, it's usually a bright spot just given sort of what people know about the culture there. What do you think about that move? What do you think it kind of brings to the table? And do you think it's, I think I probably know your answer, but do you think that's a positive sign

for wise shareholders to take away? No doubt in my mind, actually, in some ways, almost a key part of the investment thesis, because I think it says something about the company's aspirations and their potential that they were able to secure someone of David Wells' caliber. If we think back on what he did with Reed Hastings, a ton of experience operating and scaling disruptive companies. In partnership with Reed, they built Netflix from an $8 billion to a $400 billion company, like a 50x, during David Wells' tenure as CFO.

So the guy's got the chops. He's got the experience to scale a company like that. The fact that Wise have gone after him, I think, tells us that they have similar aspirations. And the fact that he took the job, he's been a non-executive director of the company since 2019. He's now the chairman, as of about a year ago. So I think that is quite interesting in terms of where he thinks they could get to. Now, we haven't talked about the market cap yet or the valuation.

We want to hit this quick. I know it's tough for a company like this that's still growing quickly and maybe isn't at their full margin potential. But if I'm looking today, Yahoo Finance could be wrong, but their market cap is about $5.8 billion, and that could be in pounds as well. But what do you think about the valuation? what sort of, I guess, how do you look at it as someone, you know, they're investing for a long runway for growth, but how do you look at it as an investor? Great. It is a little bit tricky.

So the market cap is about 5.8 billion sterling, which is just over $7 billion. And it's a bit hard to kind of unpick the enterprise value, but kind of price to sales about meat. So it's hard with any small growth company like this that's really quite early in its story. If we think about less than 5% of personal customer volumes, less than 1% of business customer volumes, with such an incredibly compelling proposition, I do think they've got significant growth opportunity ahead of them. They manage the company very prudently. So they're already the net income generated $269 million of net income in the most recent quarter, up 80% year over year, substantial growth, and it's early in that story.

Then in this week, they also increased their forecasts for this current full year, which ends next quarter. expecting total income growth of about 70%, and driving a north of 20% in the EBITDA over the medium term. I have high confidence that they'll achieve that. They're running the company in a very prudent manner. It's a little difficult to make strong forecasts about whether that's a fair valuation. I think they almost certainly are fairly valued at the moment. But I think with that growth potential, and it seems to me quite a relatively lower risk investment, even the maturity as a company, it's still quite a young company.

Yeah, I have a pretty high conviction in this one in my own portfolio. Okay. Last questions. The question we always try to end with, which is the pre-mortem. How could an investment in Wise go wrong with these prices? So a couple of key concerns, I suppose, and we've touched on a few of them already. If we go into a recession, that is going to hurt their numbers. They've got a ton of their own money, quite well capitalized. I think something like over £400 million of their own money, not just customer deposits, and not a huge amount of debt. They've got plenty of room to absorb the recessionary environment, but that could impact growth

over the medium term. We touched on the actions against the CEO. If Carmen is forced to step down, that could hurt the culture, could set the company back, albeit maybe that's mitigated to some extent by the rest of the leadership team. We're in a quite volatile macro environment. guys do have to hold these local liquidity pools. They've got their own allocations of various currencies. If they get that wrong, they could be caught short by rampant FX movements. That could damage their profitability. I think, in fact, it's actually helped them over the last couple

of quarters, but that could turn the other way. And then it's actually difficult to get the banking licenses they need. So it is expensive and complicated. They're pursuing that. But in some countries, it's quite hard to access the national payments infrastructure. So regulators don't make it easy for new entrants. And they might just find that some countries, they can't get the licenses they want to be able to operate the proposition they want. So maybe growth, the terminal growth, might be a bit closer than they would hope. But, yeah, but if I look at all of this in the round, together with the sort of caliber of the team, the financials, and where they are against their, you know, that potential and the TAM, this kind of adds up for me personally, as a pretty strong kind of risk versus reward play. okay i think that's all the questions brett and i have um we we always try to give listeners a

way to follow uh our guests so what's the best place to do that i know i'm gonna go ahead and shameless plug again seven investing because you have your recommendation each month um but any other resources if you want to find me directly i'm uh spend most of my time on twitter so i'm at seven luke allowed um and then we've also got our own podcast series on the seven investing podcast i'm running a regular fortnightly series with a colleague christoph where we just talk about kind of everything and anything poker investing ai technology related so if you're interested in checking that out and hearing a bit more from me go find me at the seven investing podcast or youtube channel awesome all right well that's gonna do it uh we should end this thing

And with the disclosure, we want to remind listeners that Brett and I are not financial advisors. Anything we say or discuss here on Chitchat Money is not formal advice or recommendation. We are, however, general partners at Arch Capital, so clients may have positions in the securities discussed in this podcast. Thank you all for listening. Thank you, Luke, once again for coming on the show, and we'll see you all next time. Okay. I'm welcomed by the founder of our exclusive sponsor, Stratosphere.io,

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of the product just for free, just to figure out how can I overlay 10 years of financial side by side up to 35 years we have now? And how can I actually build out a proper database of company KPIs that are not just revenue, but if you're looking at Costco, how many warehouses do they have? How many paid members are in our Costco members? Or if I want to do a comp against the streaming? How many Netflix subs versus HBO Plus, Discovery Plus, Disney Plus? How do I build out proper comps of those? Because those are the metrics that actually move the business. Those are the ones that actually move the needle more than any gap financial metric you'll find. And so it started off as just purely a passion project. And I figured, let's just make the leap

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coverage as well like a firm will be like here we want these 10 names in our coverage and in your coverage and then you'll have basically our entire universe that we're looking at which is great right because like earning season comes around and we have it updated within 15 minutes when netflix comes out with their net subscriber ads like it's right there in one place uh especially easy to handle around the peak of earning season that that matters a lot for these people and so we have a premium tier for that as well that's the that's the three plans that are available today. And now a perfect time to shameless plug our code. If you use CCM, you get 15% off any of the paid plans, but I think that covers it pretty well. If you're

interested, please go ahead and check out stratosphere.io. We'll, we'll have a link in the description as well, but thank you, Brayden, for joining us. Ryan, keep it up. I really like what you and Brett are doing and I'll be listening along.