Fintech
Wise’s commission cuts are a cautionary tale for fintech fans
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When it went public a few years ago, Wise made clear its long-term mission: to eliminate fees on cross-border payments. Perhaps the market hadn’t been listening carefully. Thursday, wise man surprised investors to full-year results with a larger-than-expected reduction in commissions. This will mean lower profits, prompting investors to flee. Its share price plummeted, finishing down 13%.
Over the past two years, payments companies have faced fears of commoditization. A race to the bottom for fees would undermine the lofty valuations of these fast-growing disruptors. Improved economic conditions, however, have boosted volumes and eased concerns about competition.
Wise is aiming for volume and market dominance: it explicitly states zero commissions as a long-term goal. Even assuming he wins the battle against rivals, shareholders should expect a bumpy ride along the way.
Confusion over Wise’s earnings outlook hasn’t been helped by recent changes to its reporting. Higher interest rates have generated significant amounts of cash on customer account balances — money that, under his license, Wise cannot pay as interest. Ebitda has soared but, with interest rates already falling in Europe, these ancillary profits won’t last.
Fintech has adopted a new explanatory parameter, profit before taxes. This will exclude the portion of interest income deemed unnecessary for reinvestment and growth. That could mean cleaner, less volatile numbers for investors as interest rates drop.
The change muddied the outlook for Wise investors, partly explaining the stock sell-off. The company now expects underlying earnings before tax of 13-16% over the medium term. This is in line with previous targets for EBITDA margins. Lower revenue growth this year, however, will also push earnings expectations lower.
Investors already knew that Wise was reworking its metrics and that rival banks were moving to protect their share of the lucrative cross-border payments business. HSBC announced a push in January with the Zing app.
Wise’s rich valuation of more than 20 times forward earnings is inspiring the UK group of fintech IPO hopefuls — was vulnerable to a hit when the cutting began in earnest. But the expectation of steadily rising profits from a fintech intent on world domination through price gouging was also misplaced. This is something to keep in mind as other fintechs come to market.