Inside the rise of $5 billion money transfer fintech Wise, which has been profitable for years and is exploring an IPO

Kristo Käärmann CEO Wise

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Wise, the $5 billion fintech success story, started life as TransferWise in London 2011.

The premise was simple: Major banks made a killing in fees and FX rates when people transferred money from one currency to another, and this startup wanted to change that.

Like most entrepreneurs, Wise founders Taavet Hinrikus and Kristo Kaarmann experienced the problem they sought to solve.

Kaarmann, Wise’s CEO and previously a management consultant, explained in 2019 that he’d had the lightbulb moment after transferring his £10,000 Christmas bonus back to his native Estonia, and getting stung with a £15 fee and a further £500 thanks to a poor exchange rate.

“Back in the day there wasn’t anyone challenging the banks,” Kaarmann told Insider this month.

The company originally pitched itself as the Skype of currency exchange, and over the years has racked up millions of users equally frustrated with high fees.

Wise estimates that the cost of sending £1,000 ($1,400) into euros could range from £50 to £100 depending on whether a customer used their bank or a money transfer service like Western Union. The startup charged a mere £4.50 for the same amount and, a decade after its founding, believes it saves customers over £1 billion a year in fees. 

Now with a $5 billion valuation under its belt and a potential IPO on the London Stock Exchange, the firm has grown into a diversified business with revenues coming from money transfers, business banking, and its fintech platform. It powers cross-border payments for fellow fintechs such as N26, GoCardless, and Xero.

TransferWise’s story coincides with the wider fintech explosion within Europe, with London at its center. According to a report by venture capital firm Atomico, fintech is currently the biggest sector by investment in European tech, attracting nearly $10 billion in capital in 2020.

PayPal paved the way for trust in online payments

Post 2008, trust in banks had been eroded by the financial crisis, and disruptors like PayPal had demonstrated that sending money over the internet was more than viable.

As CEO Kaarman tells it, investing in Wise was a comparative no-brainer for its earliest backers, who included institutions like IA Ventures, but also high-profile angels like PayPal cofounder Max Levchin.

“We have been a fantastically successful enterprise for our entire history,” Kaarmann said. “Our only difficult fundraising was our first one, in Europe there was no history of bank disruption and funding was taking so long. Taavet and I flew out to meet Roger Ehrenburg [managing partner at investor IA Partners] in New York for dinner and managed to get it sorted.” 

Robin Klein, one of London’s most notable venture capitalists, saw Wise pitch at a Seedcamp event initially before investing.

He asked his son, Saul, an industry veteran who had worked with Wise’s then-CEO Taavet Hinrikus at Skype, whether the idea was worth backing.

“Saul said he would back Taavet blindly,” Klein told Insider. “Our philosophy is about backing founders, we knew the market was huge but with small margins. Their belief was that it should cost no more to send money than an email and that’s still the case today.”

Hinrikus, Wise’s first CEO and Skype’s first employee, was widely cited as the initial draw for investors.

“This was a young market but we thought Taavet was really special and that the things he worked on would have big outcomes,” Reshma Sohoni, founding partner at original Wise investor Seedcamp, said.

Hinrikus subsequently handed the CEO reins over to Kaarman in order to focus on investing and recently launched a new investment fund.

Teething problems in the evolution to wider payment services

When Wise first started out, it was reliant on the very banks it was trying to disrupt to provide its underlying payment infrastructure.

Though regulated by the UK’s financial watchdog from the beginning, it took the firm a number of years to build out its own infrastructure — or payment rails — to offer services without these bank partners.

Back in these early days, Insider understands that one bank, believed to be Barclays, sent a notice letter to fintech operators on its rails to halt operations within 30 days over compliance fears.

The bank was thought to be concerned that young companies like Wise were not performing extensive know-your-customer (KYC) checks which could allow money to be laundered. Wise confirmed that a letter was sent but that there was no follow up, and no action taken.

Regulation ended up playing a a key role in helping Wise move away from using bank channels.

In 2015, the UK’s payments regulator announced that it was pushing for more competition in the supply of indirect access to payment systems, a $75 trillion market. That opened the market up to more players, though at that point Wise still required a banking partner.

The changes permitted payment processors like FIS and Vocalink, as well as smaller bank players like Metrobank and Raphael’s Bank, access to the Faster Payments Scheme (FPS), an improved payments rail which sped up UK money transfers. 

In 2016, Wise became the first tech firm to gain access to faster payments through a partnership with Raphael’s Bank.

And in 2018, Wise went on to become the UK’s first non-bank payment service provider with a license from the Bank of England.

The Bank of England moved to continue the UK’s payments innovation by removing the requirement for a partner, such as Raphael’s Bank in Wise’s case, allowing non-banks to compete on a more level playing field with other financial institutions. 

“This was a big step for Wise and the company has always been very forward-thinking on the infrastructure side of things,” Sarah Kocianski, head of research at challenger consultancy 11:FS, told Insider. “Access to 24/7 payments made things faster and cheaper for them and allowed them to offer this service to third parties.”

These innovations have fueled Wise’s current position as a platform, rather than just service provider, for other businesses.

“When they started it was a very bold move, there was no PSD2 [open banking regulation], nothing to force the banks to change, they had to work on banking rails and they were vulnerable,” Seedcamp’s Sohoni added. 

“Now they have first-mover advantage in this market because no one else did this as early as them.”

Wise Platform is live with banks in 10 countries across four continents. Fellow fintechs such as Monzo now use its platform to enable customers to send cross-border payments.

Wise Platform sits alongside the company’s borderless account and accompanying debit card, and Wise Business, a multi-currency business banking account, which the company claims has more than 325,000 users. 

TransferWise founders Kristo Kaarmann and Taavet Hinrikus Wise is profitable

Wise reported its fourth consecutive year of profitability in 2020, with a 70% increase on its 2019 revenues from 8 million customers. 

The firm has to date raised $1.1 billion in private investment, and says it has sometimes turned down further raises to stay disciplined in its growth. That approach is unusual in startups, where a growth-at-all-costs mentality sometimes prevails.

“People shouldn’t be surprised that we haven’t done things conventionally,” CFO Matt Briers told Insider. “Convention is a problem in the industry. Investors said ‘why don’t you spend loads of money on marketing, hire more people, drop fees further to get more customers’  and we had to explain that our focus is on running a sustainable business and that takes a lot of discipline.”

A decade on from its founding, Wise has enabled some of its employees and early backers to cash out by selling their shares in 2019 and 2020. In both cases, the firm was coy on an IPO.

Now a float is strongly rumored to be on the horizon, with Sky News reporting that Goldman Sachs and Morgan Stanley will jointly coordinate one of the most hotly anticipated listings of the year. 

While Wise’s execs would not comment, its early backers may see an IPO as the next logical move.

“We like companies to go public,” early investor Klein said. “It’s part of the process of growing up and becoming well-adjusted as a business. We see it as a funding round on the way to building a long-lasting major company.”

The Wise network

The company’s branding shift to “Wise” implies this longer-term view and reflects the firm’s evolution into a platform beyond just money transfer.

The name change has been in the works for a while, and was first mooted during a company-wide all-hands meeting where different teams were asked to present a vision of the business in 20 years’ time.

One team, wearing space costumes, dubbed the event “WiseCon” and the name resonated.

“Wise set out to do one thing well and have now morphed into a broader range of services which compliment what they started off doing,” 11:FS’ Sarah Kocianski said. “They have been slow and steady in their approach but also adaptable. The company has three strong product pillars and a growing global footprint.” 

Despite being domiciled in the UK, the global market is where Wise will look for growth. Remittance volumes are still strong despite the pandemic, with Wise charging an average fee of 0.68% against a World Bank average estimate of 6.79% for global money transfers.

The company now has 16 offices worldwide with around 2,100 employees. 

“I hope the business looks very similar in 10 years time and think we have decades to go,” Briers said. “In the future, we will say that TransferWise was the first business built on the Wise network.” 

SEE ALSO: Money-transfer unicorn TransferWise is now worth $5 billion after some employees and early investors cashed out

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