Wise’s fee cuts are a cautionary tale for fintech fans
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When it listed a few years ago, Wise made clear its long-term mission: get cross border payment fees to zero. Perhaps the market hadn’t listened closely. On Thursday, Wise surprised investors at its full-year results with a bigger than expected fee reduction. That will mean lower earnings, causing investors to take flight. Its share price tanked, finishing down 13 per cent.
Payments businesses over the past couple of years have grappled with commoditisation fears. A race to the bottom for fees would undermine high valuations for these fast-growing disrupters. Better economic conditions, however, have stimulated volumes and eased competition concerns.
Wise is bidding for volumes and market domination: it explicitly states nil fees as its long-term goal. Even assuming it wins the battle against rivals, shareholders should expect a bumpy ride along the way.
The confusion around Wise’s earnings outlook wasn’t helped by recent tweaks to its reporting. Higher interest rates have generated meaningful amounts of cash on balances in customer accounts — money that under its licence Wise can’t pay out as interest. Ebitda soared but, with interest rates already falling in Europe, these ancillary earnings won’t last.
The fintech has alighted on a new explanatory metric, underlying profit before tax. This will exclude the portion of those interest earnings deemed unnecessary for reinvestment and growth. That could mean cleaner and less volatile numbers for investors as interest rates fall.
The change muddied the outlook for Wise investors, partly explaining the share sell off. The company now expects an underlying profit before tax margin of 13-16 per cent over the medium term. This is in line with the previous targets for ebitda margins. Lower revenue growth this year, however, will also push earnings expectations down.
Investors already knew that Wise was reworking its metrics — and that rival banks are moving to protect their share of the profitable cross border payments business. HSBC announced a push in January with app Zing.
Wise’s rich valuation at more than 20 times forward earnings — a source of inspiration to the UK’s crop of fintech IPO wannabes — was vulnerable to a hit as the cutting started in earnest. But the expectation of steadily advancing earnings from a fintech bent on world domination through price cutting was also misplaced. That’s something to bear in mind as other fintechs come to market.
