FTSE 250-listed global payments giant Wise PLC (LSE:WISE) is in a unique position of earning more profit than it actually wants to.
During Wise’s earnings call on Tuesday, Wise’s interim chief executive Harsh Sinha, who has taken the reins during founder Kristo Käärmann’s paternity leave, reiterated Wise’s predicament.
Announcing a bumper set of results, Sinha stated that “the majority of the gross margin increase was driven by the higher interest rate earned on the growing balances that our customers hold with us - and we’re currently not able to return this interest to customers at the level we aspire to”.
That’s not all.
Wise’s adjusted earnings “will be considerably higher” in the following months, “given the higher interest rates and the reality that we are unable to return interest to customers at the level we would like”.
That’s brilliant for shareholders, who jacked Wise’s share price up 1.5% on Tuesday, but runs counter to the supposedly altruistic vision for the company.
How does Wise work?
Wise’s simple yet innovative approach to cross-border payments has made it a serious competitor in global money transfer.
In basic terms, Wise owns domestic bank accounts in the jurisdictions where it operates.
When a sender requests an international transfer, the sender is actually sending money to one of these domestic accounts.
Once the sender's money reaches Wise's local account in the sender's country, Wise communicates to a bank account in the recipient’s country from where the recipient will be paid.
This approach means no money is technically crossing a border, thus circumventing costly correspondent banking fees and other hidden charges.
Wise, therefore, can offer extremely competitive foreign exchange fees at mere fractions of what a remittance business like Western Union charges.
This has made Wise the fintech big cap it is today, with over seven million active customers, £57 billion in transfers handled in the past six months, and interim revenues nearing half a billion pounds.
But Wise has a long-held ambition to do more for its customer base.
Wise’s interest rate goldmine
As interest rates have skyrocketed across the West in recent years, Wise has seen its profits go through the roof.
In Wise’s latest interim earnings call, it booked a gross profit increase of 86% year on year to £488.9 million on a 74.5% gross profit margin, largely attributed to interest earned on customer balances.
This margin was an 11.5 percentage point increase from the same period last year. That’s a lot of profit for a company that apparently wants to pay it forward to customers.
In the UK, Wise offers 'Assets' and 'Interest'. When they turn on 'Interest', their money is invested in a fund holding government-guaranteed assets. The fund aims to maximise current income through a portfolio of high-quality short-term money market instruments and tracks the interest rate offered by the central bank. The GBP fund is called the BlackRock ICS Sterling Government Liquidity Fund and is offered through Wise Assets.
When you use Interest, you can send and spend money whenever you want - including the gains you have earned. You will always be able to get full access to your money.
The annual fee is 0.29% and includes what you pay Wise (0.19%) and what you pay the fund manager (0.10%). This means an annual fee of 2.90 GBP is paid if you hold 1,000 GBP in Interest.
In the European Economic Area, Wise is currently allowed to offer interest at a 2.08% cashback rate on euros, a 3.12% rate on pound sterling, and a handsome 3.85% rate on US dollars.
Wise is in talks with UK regulators about the difficulties it has passing on benefits. According to a Bloomberg interview with chief financial officer Matt Briars, Wise has been discussing policy changes with UK regulators.
But that is likely to be a prolonged process.
In the meantime, elevated interest rates will remain a boon to Wise’s bottom line.