WISE User Funds Risk ¿What are they?

This is my not-so-brief risk analysis of WISE, the international money transfer app. If you’re not interested in all the details, you can find the conclusions at the bottom.

To date, all of my clients live outside of Mexico. I have had clients from the United States, France, Australia, the United Kingdom, Spain, and others. My main clients are in the United States and Europe, so from the beginning, collection was complicated.

I started using PayPal, but I was never convinced due to the high transaction fees (4–7%), the terrible exchange rate (5%), and because you cannot hold money directly in PayPal in Mexico — it only works as an intermediary.

After investigating different options, I came across WISE, formerly known as TransferWise. WISE was by far the best option, with its major strengths being:

• Low fees
• Market exchange rate
• You can hold the money in the account
• Accepts 90% of world currencies
• Easy to use
• You can open a bank account per country where you can easily receive deposits
• Multi-currency

I decided to go for this option because of the low fees, ease of use, and because I could hold different currencies — this way, I can protect myself against fluctuations in exchange rates. These are the Pros, but what about the Cons…

As Cons, I found the following:

• You don’t earn interest (you lose against inflation).
• Your money is not insured because WISE is not a bank.

After seeing what happened with SVB, I asked myself the simple question: how secure is the money I have in WISE? So I decided to do the following risk analysis.

First, I investigated whether WISE is registered and regulated as a banking institution. In most countries, there are government institutions that ensure a specific amount of your deposits. In the United States, it is the FDIC and it ensures a maximum amount of $250,000; in Mexico, it is the IPAB and it ensures 400,000 UDIS (2 million pesos).

WISE is registered as a Fintech, NOT a bank — this has advantages and disadvantages that we will discuss later — so it is not regulated. On its page, they say that they follow the rules of the following institutions: FinCEN in the US, FCA in the UK, and NBB in Europe. It is also regulated, registered, or licensed to operate in the following countries.

To be clear, WISE is NOT registered as a bank in any country, so you have NO government protection if it goes bankrupt. If you use the products to earn interest within the app, you are protected because those services are provided by JPMorgan Chase Bank through WISE. (These services are only available in certain countries, and in Mexico, they do not provide this service).

How does WISE defend itself against this? Wise mentions that the advantage they have is that their business does not consist of lending and leveraging their users’ deposits; WISE is a tool that facilitates local and international transactions (this can change when they want). Still, they hold users’ deposits until they decide to withdraw them. So there is a high risk if you keep your money there.

On its website, WISE mentions several ways in which they protect users’ money:

1. The first is that they have separate accounts for operations and deposits.
2. They ensure that more than 99% of funds are held in cash in these banks, as well as in safe liquid assets such as government bonds of the EU, the UK, and the US.
3. Speaking of bonds, they say the following: “We limit the term to maturity of any U.S. government bond we purchase to 2 years or less
4. The banks where they have the deposits are the following: Goldman Sachs, JPMorgan Chase, Wells Fargo in the United States, and Barclays Bank, Citibank in the United Kingdom.

On July 7th, 2021, Wise went public with a direct listing on the London Stock Exchange valued at $11 billion. Thanks to this, we have access to their financial statements to review how solvent the company is.

Income Statement

Assets

Liabilities & Equity

Cash Flows

Cash or Equivalents

Company Cash

Sales by Account Type

Sales by Country

Expenses

Ratios:

Ratios marked with an asterisk use only the company’s assets, without including users’ assets or cash in WISE accounts.

Debt ratio = 0.92

*Debt ratio = 0.22

Debt to equity = 17.1

*Debt to equity = 0.29

Current ratio = 1.05

*Current Ratio = 4.4

Cash ratio = 1.03

*Cash Ratio = 2.9

Interest coverage = 7.2

Debt service coverage ratio = 13

Credit Access:

“Wise has access to a £212.0m multi-currency revolving facility and does not currently have debt maturing within 12 months.”

Customer deposits:

The Group recognizes financial assets and corresponding liabilities for the funds customers hold on their Wise Accounts and the funds the Group receives as part of the money transfer settlement process. At the point that the cash is received from the customer, the Group becomes party to a contract and has a right and an ability to control the economic benefit from the cash flows associated with this balance. Additionally, pursuant to IAS 32, the Group considers it does not have a legally enforceable right to set off these financial assets and liabilities, or an intention to settle them on a net basis or settle them simultaneously. Therefore, Management has concluded that the recognition of the financial assets and their respective liabilities on the balance sheet is appropriate.

Financial Risk:

The quoted market price used for financial assets held by the Group is the current close price at the balance sheet date. If the fair value of the short-term financial assets would change by 1% at the reporting date, that would result in a £11.9m (2021: £7.4m) increase or decrease in the balances and the corresponding impact on the comprehensive income.

Questions

Do they have enough money for their operations? In 2022, Wise had an operating margin of 21%, generating an EBITA of £121m. This is good news as the company is generating sufficient capital to operate plus a comfortable profit.

Do they have enough money for difficult times? It could be said that yes; Wise has cash reserves of £425m within its equity. It has £357m in cash and equivalents, and also has an open credit line of £212m, not counting free cash flow.

Do they have strong fixed costs? Their strongest “fixed” costs would be payroll, which amounts to £184m, and £22.9m in other administrative expenses (offices, computer equipment, software), which account for 64% of their expenses. Therefore, Wise has a great deal of flexibility to adjust their variable expenses (marketing, consulting…) if they were to go through a difficult period.

How do they protect users money? It could be said that they do, as 80% of their cash assets are held in the world’s largest banks (Goldman Sachs, JPMorgan Chase, Wells Fargo in the United States and Barclays Bank, Citibank in the United Kingdom), so it is unlikely that these banks will go bankrupt. Only 12% of their assets are in cash equivalent investments (government bonds), and 3% are in money market funds (ETFs).

How indebted is the company? By observing the common ratios that measure the company’s leverage, we can conclude that in 2022, Wise had healthy leverage, and the same can be said for 2021 and 2020. The risk is that although they may not have debt, they are leveraging user money, as the debt/equity ratio is 17.1, which means they are highly leveraged, but not with banks, as if you remove the liabilities corresponding to users’ money This ratio would be at 0.29. Realistically and technically, they are leveraging user funds, although at the same time they are not using these deposits to fund operations; at least that’s what they say.

How “sticky” is their revenue? If there were to be a strong recession in the world, how would their revenues be affected? To this question, I have three answers. The first is that their revenues are distributed between personal accounts (£433.2) and business accounts (£126.7), which mitigates the risk because it’s less complicated for a business account to stop making payments to a person, and this brings me to the second point. Wise is an international payments app, so their revenues are diversified. 55% of their revenues come from Europe (if you count the UK as Europe, which I would because they are so intertwined over there). And lastly, in my opinion, Wise’s business is quite robust because as a cross-border payments gateway, it is likely essential for business operations (receiving and sending money) as well as for individuals — think about the global remittance market and what happens when there is a recession in certain countries. Do remittances go up or down? Because on the one hand, there is a lack of liquidity, people lose their jobs; but on the other hand, those same people will need support from friends and family who — speaking of Wise’s customers — are likely in other countries. Therefore, it’s not clear how much a recession can affect Wise’s business; in my opinion, and looking at similar businesses (Visa & Mastercard), Wise looks quite resilient in a recession and could even benefit.

Who controls the company, do they have skin in the game? To know this, we need to see who owns the company, whether it’s the market, institutions, or insiders (members of the company). In Wise plc and according to Yahoo Finance, 53% of the shares are owned by insiders, 25% are owned by institutions, and the rest are owned by retail investors or others.

Conclusion

After this in-depth analysis, I can conclude that my money in Wise is safe to a certain extent. I say “safe” because it seems that Wise is quite financially robust, has good operating margin, is little indebted, has almost no risky investments, has a high level of cash and equivalents, has good cash reserves and credit lines, has considerable flexibility regarding expenses, the company is mostly controlled by insiders, and lastly, its industry is quite resilient in recessions.

To a certain extent because all these characteristics can change, Wise can become indebted, make bad investments, lose profitability… In other words, you depend entirely on the decisions Wise wants to make, plus external risks to Wise. But the biggest risk is that legally they are custodians of your money and can dispose of it as and when they want, and you as a user have no protection against any catastrophe, as it is not a bank, so deposits are not insured.

So I have decided to keep 40% of my income in the application. Even if I lose with the exchange rate (USD/MXN), I prefer to keep a safe portion in my bank accounts. The other option I am considering is opening a US dollar bank account.

On the other hand, I believe that Wise is the future, and you could say that this type of application is even more secure than a bank because it doesn’t operate within the fractional system (through which banks lend a certain amount of deposits they do NOT have on their balance sheets) like a bank, so executives have to be much more cautious with balances.