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Shares in UK payments group Wise fell on Thursday after it revealed plans to increase spending in the face of growing competition for customers.
The group rattled investors after it revealed it was aiming for an underlying pre-tax profit margin of 13 to 16 percent in the medium term, a new target that fell short of analysts’ expectations.
Kingsley Kemish, the group’s interim chief financial officer, said Wise would “double down” on investment in its payments infrastructure, with upfront costs the group betting would allow it to reduce fees by streamlining payment processing.
Kemish acknowledged the new forecasts would be a “slight dampening factor”, but insisted the investment would enable Wise to achieve its long-term ambition to become a global leader in cross-border payments.
Hannes Leitner, an analyst at Jefferies, said the forecast was “disappointing” and “created some uncertainty” as Wise will rely on greater investment to increase customer numbers and volumes.
Shares in Wise plunged as much as 23 percent in early trading, heading for its worst day since the fintech’s 2021 IPO, but recovered to trade 12 percent lower.
Wise was founded in 2010 by Estonians Kristo Käärmann and Taavet Hinrikus, who were exasperated by the cost of transferring money back to the Baltic state after the pair moved to London.
Its decision to list in London in July 2021 instead of New York was hailed as a coup for the UK market. The company has been valued at nearly £9 billion as it won over investors with its promise to offer banks a cheaper, easy-to-use international payments service.
But over the past two years, Wise has been forced to raise fees for customers, which it attributed in part to volatility in the currency markets. But growing competition from Revolut, as well as big banks such as HSBC, which launched an exchange and payments app called Zing earlier this year, has increased pressure to cut fees.
The company did not provide figures on planned spending, but said it would invest in “infrastructure and customer experience”.
“You have the double whammy of costs growing faster than revenues because they are cutting fees slightly,” said Rupak Ghose, a former financial analyst at Credit Suisse. “The question is, is it because of competition or does it help customers in the long run?”
The forecast came as Wise reported pre-tax profits jumped to £481m in the 12 months to the end of March from £147m in the previous financial year. The number of employees of the group climbed from approximately 4,400 to 5,500 in the given period.
As Wise eventually wants to make payment transfers free, the company is also expanding its product and service offerings in an effort to diversify its revenue. It offers multi-currency current accounts, business accounts, interest-bearing investment products and a debit card.
“We are three years after the company’s IPO, it has changed significantly and is growing at the same time. . . now we are more of a multi-product business,” said co-founder and CEO Käärmann.
Like rival fintechs, its profits over the past two years have been fueled by the interest income it generates on the customer funds it holds. Its interest income more than doubled to £120.7m in the last financial year.
But with the European Central Bank cutting rates – and the Bank of England and the US Federal Reserve expected to follow – the boost to earnings will fade.