Remitly vs Wise: The Remittance Battle

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2:19All right, folks. Welcome to Investing for Beginners podcast. Today, we have our friend Brett Schaefer back. And today we're going to talk about Remitly versus Wise, the two remittance giants. And we thought we would discuss the companies, their strengths, their weaknesses, how they compete, and maybe some competitors against them and whatnot. So this is one of Brett's largest positions in his portfolio. I, for full disclosure, do not own either of the companies, but am intrigued beyond belief because, of course, I'm a payments geek. So there we go. So with that, Brett, thanks for coming back to the show again from Chit Chat Stocks.

2:55And let's talk about wise and real what? Yeah, let's do it. As a disclosure, Remitly is a stock that I hold in my portfolio. Wise, I don't, but I like both businesses. And if you look at your favorite financial data provider of choice, such as Fiscal AI, which I have loaded up right here, the growth rates of these businesses from both payment volume adoption, revenue, and now increasing earnings power should get you excited to research why these businesses are growing so quickly, why they're taking market share, and whether they could be good stocks to own in your portfolio. Oh, yeah, that's great.

3:34So who are they taking market share from? Let's start with that. Okay, well, remittly and wise are a little bit different. So wise is digital only remittances. And for anyone that doesn't know the terminology, remittances just means cross-border transfers. So, for example, you are someone from the United States and you want to send money to someone in Europe, in France. WISE easily enables you to do that for a fee. Now, Remitly is also a remittance provider, but unlike WISE, Remitly is, so from the sending person, they are digital only. So, mainly, you know, from a smartphone or from your computer, but they do digital receiving or physical receiving, which is popular in lower income countries that they target, such as Mexico, India, stuff like that, where many of the people there still want physical cash payouts from their local banking or financial services provider.

4:35Now, who are they taking market share from? With Remitly, it's much easier to understand. They are taking market share from the traditional legacy players, such as Western Union, MoneyGram and then there's also some such as PayPal that actually have high fee international transfer services and one interesting thing you can do is look at Western Union versus remit lease either revenue or payment volume. I don't know if Western Union discloses this so you can use revenue but their payment volume from North America or revenue from North America has been converging where Western Union is declining and remit lease is rising.

5:12so there's a lot of market share getting taken there now wise is more of a european player they're united kingdom company it started by i think two estonian guys at least one estonian that was living united kingdom that was the inspiration for starting the business and they're more say higher income not necessarily some worker that is living in for example the united states sending money back to mexico columbia or india but someone that's living in another country wants to spend it in another country or send money to themselves, business partners, stuff like that, digitally only. And they're disrupting, I think, more of the traditional banking system for international money transfers, which are extremely high fee.

6:00Also services such as PayPal, kind of the legacy digital players. And they're trying to reduce fees for customers. That's their bread and butter. Now, Remitly focuses more on, you know, servicing the remittance core customer, like a worker, you know, a technology worker sending money back to Asia or something like that, where Wise is going for reducing fees as much as possible for those digitally native customers and trying to get them to switch from the traditional banking services to Wise. And there are many more products that they're working on to try to build each of them financial services ecosystems for international payments.

6:35But I think that's where we should start and why these companies have grown in the last decade. And they've grown quite quickly. It's been pretty amazing to see the growth for both businesses. I guess a question that I have about both of them is, Wise is definitely going after the banking segment. For somebody who worked in the banking industry, I know WIRE transfers very intimately. I became the WIRE guy at the branch that I worked at because I was lucky enough to successfully complete a lot of them. And so I got the joy of having to, you got to do a WIRE? Go talk to Dave. And they were lots of fun.

7:18But they are slow and very, very expensive. And so WISE has definitely gone after that segment. I'm curious how Remitly has gone after more of the physical, you mentioned that, like the actual taking of money. Is that something they are kind of focusing on? So, and you mean like disbursements in the receiving country? Yeah, so like a perfect example is, you know, a worker here sends money to India. And so the person in India can physically take out the cash. Where otherwise they don't do that. But with Remitly, they can do that? Yes, exactly. So, Remitly is targeting those customers. They market specifically in the United States on billboards and areas where these communities are congregated and they try to get, say, technology workers, agricultural workers, construction workers that want to send money back to these home countries.

8:11and they essentially want to replicate the payout network that Western Union has through banking partners in all of these countries. I don't have the stats in front of me, but I think they have hundreds of thousands of payout partners. One example they like to give is that even in a place like the Dominican Republic, where I think maybe for safety issues, I'm not sure exactly why they have this in that country, but there's home delivery for remittances. Maybe, I'm not sure why it's there, but Remitly was, you know, smart enough or wanted to invest to replicate that product from competitors to offer that to the receiving customer.

8:51So they essentially want to replicate what Western Union has. They're going to have lower fees than them. And that's going to convince the sender from, say, the United States, Canada, or what have you. It could be any country sending, you know, it could be reverse. It could be someone sending from Brazil to the United States, something like that. they want to replicate that with lower fees to convince people to switch. Now, they're not going to have on the whole as low of fees as Wise because Wise doesn't have to deal with physical payouts and that's always going to come with higher costs. But Remitly is going to have better fees, really easy to use mobile app, and that's why they've been stealing market share from the likes of Western Union.

9:29And I think probably can for at least the next five to 10 years. Yeah, for sure. I'm curious how Remitly's tech works in that how does the money exchange hands? So if I send money to you in Brazil, how does that process work? I can explain it for wise, but I'm not sure how it works with Remitly. well why don't you explain it for wise and i can maybe just say before you do that that remitly i believe and you know they don't fully disclose this to investors it's kind of trying to read through the tea leaves a little bit i think they are trying to replicate what wise does but they're not entirely there today that's one advantage wise has is from the digital infrastructure and payout perspective they are at least today superior than remitly and remitly trying to catch up to them with that okay all right so from all my research and trying to and i've had ai kind of dumb it down for me a little bit so i could kind of understand it so the easiest way that i can explain it is let's say that i'm sending money to brett and brett is in brazil i would the money would be and i'm doing it over the wise platform what would happen is wise would take a hundred dollars out of my wise account whatever i have connected if i have a bank account or if i have a card with wise they would take a hundred dollars out of my account they would put it in their local bank here in the united states in brazil they would send an electronic message to a a regional bank wherever brett was located that he would be banking at and they would basically send a message saying, take$100 worth of Heice out of this account and deposit it into Brett's account.

11:22This all happens very quickly in seconds, in some cases, five to 10 seconds. It can be very, very fast. So the money doesn't actually cross the border between the United States and Brazil until a later date. So the way the system works is it takes the money from me and it takes the money from and puts it in their account here. It takes the money from an account in Brazil and gives it to Brett. So the money doesn't actually exchange hands at this point. Later on, either through the SWIFT system or other systems, they will do a ledger balance where they will do a bulk amount of money from the United States to Brazil and then withdraw money from Brazil and send it here to the United States so that everything would balance.

12:09And so that's how they choose to send money throughout the world. And that's how they do it. Now, the difference is, again, it goes directly to the account. So there's not actual cash that is sent to Brent. But he has the$100 in Hay Ice in his account that he can use however he wishes to pay for it. Yep. I believe, and again, it's hard to get the nitty-gritty in all those payments infrastructure. So I'm not sure an investor needs to understand every little thing that goes on. But essentially, I think that is what they're doing. And when it's digital, it's much, much easier to do that. And over time, you know, I think part of the maybe concern some investors have with Remitly is that over time, you would expect payouts to go fully digital.

12:58But from what they're doing and working on, it seems like they understand this. I would believe that the management team, the founder, all the employees really understand that. And they are working to replicate a lot of Wise's products to try to become more like them in the future. And these products are much, much earlier. Wise is a lot more experience with them. But that's one way they're going to try to do that. And if you remember the famous quote where Netflix has to become more like HBO before HBO tries to become more like Netflix, I think that originally it was, you know, Wise wanted to become more like the banks and Remitly wanted to become more like Western Union, at least from a services perspective, but with lower fees.

13:40But now Remitly and Wise are going to be trying to do the same thing with each other, where I think Wise is going to be trying to maybe be a little bit more like Remitly. But Remitly is definitely going to try to replicate some of these things that Wise has. And when you talk about funding, we're going to mention stablecoins. But on the recent conference call, we've mainly talked about how when, see, I have it pulled up here. So when they put, say, integrating USDC stablecoins on their balance sheet, it can really help fund, again, the liquidity you talked about in global markets. You can have, as they say here, near, and this is a quote, near instant settlement across time zones and weekends, which will enable quicker transaction processing, greater reliability and lower costs when customers send money with us.

14:26So as Dave talked about, they don't necessarily send money every time. You just need to have funding sources in every country related to what the trends are. You know, there's on average this amount of money sent in this direction, you know, from Mexico to Canada or to the United States, United States to Mexico over these hours, over these weeks. And we just need to have funding there that will reduce our costs and help us charge lower fees to customers while still generating a profit. Exactly. So let's talk about the growth. What kinds of growth are we seeing from these businesses? I'll pull it up right now.

15:03If we look at Remitly's revenue, which should track pretty much with payment volume growth, and it actually grows slower because they're trying to bring down their take rates over time. They have grown from, in 2019,$127 million in revenue to about one point, just a tad under$1.5 billion. over the last 12 months. So they've gained a tremendous amount of market share. Now, gross profit has grown even faster because their costs have come down as they've tried to replicate some of WISE's funding there. So that's grown from$70 million to just under a billion dollars. And if we look at WISE, it's been a similar story.

15:43I'll pull up the numbers in front of me right now. So they, well, yeah, if we look at their total revenue, they go back a little bit farther, I think because they went public earlier. In 2016, they only did 28 million dollars, or actually, sorry, that's pounds, 28 million pounds of revenue. And over the last 12 months, which I guess ends March 2025 is their latest update, 1.6 billion pounds. So they're similar sized revenue businesses today. I think they both have, and they target slightly different markets. This is a Venn diagram of overlapping customers. They definitely have specific customers that they target that the other one doesn't.

16:24But if you're going to talk the entire money transfer business across borders, whether individuals, businesses, whatever, they both have similar levels of market share. And from what they share and their estimates, it's about 3%, maybe pushing 4 % now given in their recent growth each. So combined, they're still under 10 % and that should give them a lot of runway to grow going forward. Yeah, for sure. For sure. So I was reading Morningstar's report about WISE yesterday, and I'm curious what your thoughts are on Remitly. Their take was that at this point, they didn't really feel like WISE really had a moat or much of a moat.

17:14What do you think about remittly in that regard? I think in the classical sense, maybe the Morningstar definition sense, you would argue today they don't have like a wide moat, but I see ways that you could have an emerging moat. For example, you know, you're not going to have, I guess, the branding maybe matters a little bit because you don't have to trust your international remittance provider, you're going to send$1 ,000 back home, you need to definitely trust who you're dealing with. But I kind of disagree because one, I think with remittances, there is the ability to build up a network effect where you have to get and this is underappreciated because there's 200 countries around the world or give or take 200 countries.

18:05And it's not that you have to get enabled to send in 200 countries, you have to have the ability to send from one country to 199, and then the second country to 199. And that is many, many more corridors, as they say, than you would think. And it takes tons of years to build up, get the regulatory licenses, all of that. So I think there's a network effect in that regard. There's also maybe even more with Remitly than WISE, because they're digital only. The payout infrastructure is something you can't replicate overnight but with wise and remittly in general i do think there are economies of scale as you get larger you have a bigger balance sheet which can help more cheaply fund payouts and what have you all the services you're providing at a lower cost that allows you to have lower fees than the competition which convinces customers to stay and then the cycle repeats over where more customers are staying, you get larger, you reduce your cost, you add more services.

19:07I kind of think there are emerging moats here. And maybe more importantly today, though, is the counter positioning versus the existing banks. Western Union cannot, and this is maybe speaking more with Remitly, Western Union is not going to be able to get rid of their physical branches overnight. They definitely have technology debt. they can't replicate what Remitly has unless they try to totally disrupt their entire business. And that's just a classic innovator's dilemma. Now with Wise, you have the banks that charge what maybe$50 flat fee for a wire transfer give you a bad rate. That is another level of innovator's dilemma that I think Wise has taken advantage of for years and years and years.

19:53So if they don't have a wide moat, according to Morningstar, I think that's okay, because because the historical situation within the remittance business that has allowed both of these companies to gain market share, I see no signs of that stopping over the next five or ten years, which should help them keep growing payment volume, revenue, and hopefully profits. Yeah.

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22:56Brett Schafer:Read found fee schedule. What's the best way to get started in the market? Download my ebook for free at stockmarketpdf.com. I would agree with that. Yeah, I think that's a really smart way to look at it. I didn't agree with the Morningstar report. I thought it was a little narrow-minded. And so I agree with what you're saying, I'd like to talk a little bit about the cost aspect of what both companies are really trying to do. And maybe you could talk about kind of the cost or the take rate versus the volume and how that's really playing into both companies' success in the future, now and in the future.

23:35Well, when you look at both companies' conference calls or investor presentations, and this is why specifically they discuss their take rate and maybe bring it up in the segment in KPIs on yeah okay great they have it on fiscal AI they have they have the take rate from the company yeah let me just do quarterly so when they're talking with investors when they're about bragging about their products what have you they always are trying to say that we're reducing our costs and then we're going to pass on these fees to customers and i think as they keep lowering their cost they are going to widen their competitive position versus any sort of now this is not necessarily because they already have they already have a better value proposition versus the banks This is maybe more versus, say, another digitally native remittance provider, someone that is trying to copy WISE.

24:40That can give them an advantage versus that company. And then Remitly is similar. They say they want to provide the best fee for their services. And that has come down over time. And one way you can track it is if payment volume is growing slower than revenue. So if we look at, we'll go to WISE first. total cross-border revenue has grown at, oh wait, yeah, total cross-border revenue has grown at a 13 % year-over-year rate since June of 2022. And if we look at total, let's see, total volume, it's grown at a 27 % rate. So they are reducing their fees a lot and they're making more money. And this is a little bit different than Remitly.

25:27This is part of the stuff that remitly is trying to copy i would say over the next five to ten years wise has a lot more services that they can make money on such as the business bank accounts with the high yield savings the why can't i think of the name the debit card they're launching card services spending services so not only sending money to someone else they want to allow you to store and spend money so So that's kind of the three-legged pillar and or three-legged stool. And that isn't another way for them to make money while reducing the fees, but also, you know, having revenue earning potential from these customers.

26:07And if we look at, I don't think I need to pull up the numbers directly here, but Remitly's send volume has grown consistently faster than their revenue, which means that their take rate is going down and down and down. That means their fees to their customers keep going down and down and down. But at the same time, their gross margins are expanding. So that shows that at greater scale, they're able to either A, negotiate better rates with regulators, clean up their transfer processes, you know, just get more efficient and efficient every quarter with their payment infrastructure. And I think that should only continue.

26:44Yeah, I 100 % agree with your analysis there. I think one of the things that makes both of these companies stand out, it reminds me a little bit of Agen, the payments company from the Netherlands, where they are constantly trying to lower their costs, which they think will attract more and more customers and bigger customers. And as they can get a bigger volume, they can reduce their rates even more, but remain profitable and grow the profits because they can use that operating leverage that they generate to make more and more profits and it becomes a nice little flywheel for them. And so that's one of the things that attracted me about WISE.

27:26And I wasn't aware that Remitly was doing the exact same thing. So that to me is very, very attractive. yeah and with remitly i don't think they have the exact same infrastructure as wise today but again and this is some of the bare case that i've read before they are trying to replicate some of what at what wise has done for digitally first sending and i also think the adgen comparison works for the innovators dilemma and technological or just basically product expertise where really wise they started from scratch they built a better product for mobile smartphones easier to understand and compared to the legacy players it's so much easier for example if like this happened in my personal life my friend was trying to convert money to yen for a trip to japan and through his legacy i always say legacy but just one of the big banks in the united states it was going to be a complicated service.

28:28You probably had to call the customer support rep. You couldn't really find what to do on the mobile application. It was going to cost$50 flat, which was going to be a huge fee for the amount of money that he wanted on the trip. But if you open WISE, you can fund it very easily. It takes a little bit of time because you have to go through their security protocols. They're trying to reduce fraud and stuff like that. But you can easily see on the mobile application what your rate is, what currency conversion level they're using, you know, from say that one currency to the other. And you can see upfront what the fee is going to be.

29:03And it's generally going to be the cheapest out there. So that's something that the banks either don't want to or can't replicate because of their old solutions. And I just think that gives wise a huge advantage over that. Yeah, that's true. Very true. So we've been, I think, fairly bullish on the businesses so far. If you had to cover what could go wrong, where could investments in these companies go bad? The first with Wise, I think there are some neobanks that could potentially replicate some of their services. For example, you have, I know they don't play in the same exact markets, but I think they actually partnered with each other is new bank.