Big bank competition could put squeeze on payments fintechs

Unlock the Editor’s Digest for free

Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.

The competition to offer customers something for nothing is hotting up in the fintech world. HSBC, undeterred by a race to the bottom in payments fees, is going after the technology disrupters by launching Zing, an app that allows fee-free international money transfers for non-account holders.

That puts the bank into direct competition with the likes of Wise and Revolut as it aims to capture a share of the two fintechs’ rapid customer growth. The threat sent London-listed shares in the former down as much as 6 per cent on Tuesday. 

Wise was already scraping the barrel on what it charges customers to move money across borders: it boasted of fees eight times cheaper than traditional banks when it came to market in 2021 and an eventual goal of free payments. But its charges have barely budged since. HSBC, on the other hand, is already offering fee-free transfers to existing customers though its Global Money account. Increased competition should push Wise towards its ultimate goal faster but shareholders will pay.

Rising interest rates make offering transfers for free more attractive. Higher yields on customers’ balances mean net interest income at Wise is expected to almost treble in the 12 months to March to more than £300mn. Keeping fees flat at between 0.6 to 0.7 per cent means that income from business and retail transactions has also soared with volumes. As a result earnings per share are expected to double this year, according to Visible Alpha. 

Shares have reacted accordingly, up 55 per cent over the past year. The current 34 times forward earnings multiple, though, remains close to all-time lows, even if Wise remains one of the most highly valued stocks in the sector. 

Big banks, such as JPMorgan Chase, have had some success in muscling on to fintech terrain. But Wise, which was profitable when it listed and has kept a lid on costs, has space to fight back. Administrative costs rose just 6 per cent in the six months to September and helped push ebitda margins to 37 per cent. The company says margins would have been 25 per cent even if interest earnings were about three-quarters lower.

That should mean a model with plenty in reserve to fend off any banks aiming to grab customers. But defence comes at a cost: Wise shareholders may need to rethink any hopes for seeing a share of its success in dividends.