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With Wise Losing 60% of its Value, is The International Payments Industry at Risk

With Wise Losing 60% of its Value, is The International Payments Industry at Risk | Fintech Finance

Less than a year ago, Wise (formerly known as TransferWise) shattered records as it became London’s largest-ever tech floatation. Debuting with an initial value of £8.75 billion ($11 billion), Wise brought new hope to the market and buoyed London’s hopes of attracting new technology companies looking to go public on the LSE (London Stock Exchange).

For those unfamiliar, Wise is a fintech company that has set out to transform the international payment industry by eliminating the markups that banks and foreign currency dealers apply to transactions, allowing for inexpensive, rapid, and transparent cross-border payments. The Wise service also allows users to create accounts in multiple currencies, enabling them to receive payments and even their salaries in up to 50+ currencies without paying exchange fees. 

However, while Wise’s first three months as a publicly listed company were encouraging for investors and stakeholders, the stock’s value has since dropped by a whopping 60%.

What caused Wise’s sharp drop in value?

Wise’s early success in the stock market helped both of its founders to become Estonia’s first-ever tech billionaires. However, things took a turn for the worse in late October as the shares fell below the initial listing price for the first time. 

While it’s difficult to pinpoint one individual factor attributing to this slump, there were certainly several key events that seemed to shift the sentiment around Wise’s stock.

To begin with, co-founder Taavet Hinrikus offloaded $110 million worth of shares at a discounted price as he prepared to diversify into new ventures. This implied that one of the original minds behind Wise was moving on to another project, but it also meant that the share price was being artificially depressed. Second, CEO Kristo Käärmann was fined more than $500,000 by UK tax authorities for intentionally failing to pay his tax bill, raising concerns about his integrity.

Rising competition from major European banks and other players in the tech space also caused concern amongst investors. Around the same time (October 2021), Facebook confirmed its plans to launch a digital wallet application that facilitates no-fee, instant transfers, putting the tech giant in direct competition with Wise. To top it all off, Wise’s second-quarter results on Oct. 19 fell short of analyst expectations, fueling concerns about the company and the future price action of its stock.

What does this mean for the rest of the international payments industry?

With Wise firmly among the top 10 apps in the international payments industry, it begs the question of whether the sector is in jeopardy or if this incident is uniquely isolated to Wise themselves. Well, from most viewpoints, the latter statement appears to be true.

First of all, it is important to recognize that Wise was, in many respects, the architect of its own demise. With both co-founders becoming the focus of unfavorable news stories, investors were bound to react adversely and initiate a sell-off. Furthermore, increased competition in the market should be regarded as a healthy sign for the sector, particularly for consumers. After all, as more players enter the fray, competition for consumer dollars spurs innovation while placing downward pressure on prices. This increases the quality of products and services while delivering more value to customers.

Moreover, a McKinsey report found that the global payments industry is currently experiencing significant growth, despite the turbulent events that took place over the past couple of years. In fact, with both international and domestic travel grinding to a halt in many parts of the world, demand for global payment services continued to increase. These factors are driving volume growth as well as record market valuations for a rising number of payment specialists, including Currencycloud (recently bought by Visa), Banking Circle, and of course, Wise (before the sell-off).

What value do fintech firms bring?

For a long time, international payments have been monopolized by major banks and a few individual providers. However, thanks to rapid advancements in technology, an abundance of fintech companies have entered the market, threatening to massively disrupt the industry. 

Beforehand, customers had little choice except to use their banking provider when moving payments across borders. Unfortunately, banks were well aware of this, so they typically offered poor exchange rates with inflated fees (and often sub-par customer service). 

For example, for consumers and small- to medium-sized businesses (SMBs), which are usually the parties that transfer smaller sums of money, the common pain points revolve around transaction times that could take days, unreasonable costs, as well as the inability to obtain a clear understanding of payment timelines. In fact, the World Bank reported in 2020 that the average cost of transferring $200 across borders using legacy systems was 6.5 percent ($13).

In light of this, most fintech providers in the internal payments sector look to offer consumers a solution to these issues by facilitating faster, cheaper, and more transparent payments. So, how can they do this? 

Well, the first method is to develop a cross-border payment infrastructure that does not rely on traditional payment networks. Two of the most popular companies that utilize this tactic are Wise and Ripple. 

The second method fintech companies use is to build upon the traditional banking system before offering consumers tech solutions that allow them to connect with legacy bank rails (such as SWIFT) more efficiently. For instance, popular fintech companies Payoneer and Rapyd rely on traditional banking systems while offering customers an improved user interface, user experience, and compliance framework.

Wrap up

Despite Wise losing over 60% of its value in just nine months, the future looks bright for the global payments industry. With demand growing (especially as the prevalence of remote work continues to rise), it will be interesting to see how much of the global volume fintech companies can capture from the traditional banking system and what reaction it will spark. With that said, if the fintech companies continue to disrupt the market at their current rate, it will be no surprise to see the major banks develop their own solutions before ultimately becoming interconnected and reaching a state of coopetition in the near future. 


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