The cross-border money transfer process has long been filled with friction. Whether it's the slow transfers, high fees, or inconvenient delivery methods, sending money across borders through banks is an area that's ripe for change. That's where Remitly (RELY -2.18%) and Wise (WISE -1.43%) come in.
Both Remitly and Wise enable users to easily transfer money over a mobile solution at a fraction of the cost of most traditional banking systems. But with both young companies vying for global remittance dollars, let's see which could provide better returns in the coming years.
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Remitly
Remitly helps immigrants send money home to their families in a safe and intuitive way. With Remitly's mobile app, users are able to quickly set up an account, choose who they want to send money to, specify the transaction value, and have the money sent using their preferred delivery method. And since Remitly doesn't require the brick-and-mortar locations of a traditional bank, the company is also able to pass through its minimal operating costs in the form of lower transaction fees for customers.
Though Remitly's core goal of enabling cheaper cross-border money transfers is similar to that of Wise, the way Remitly makes money is slightly different. Like Wise, Remitly charges straightforward transaction fees for transfers -- $3.99 on transfers less than $1,000 -- but also earns money on foreign exchange spreads. This means that Remitly is able to generate revenue by purchasing currencies at a lower price than it quotes to its users. While this might seem like a slightly sneakier way of making money, it's often a small amount and a price that people are willing to pay for the convenience and speed of Remitly's service.
In fact, as of the latest quarter, Remitly had 2.6 million active customers using its platform -- a 51% increase from the same period a year ago. Thanks to this strong user growth as well as existing users sending more money through the platform, the company expects to generate $445 to $450 million in revenue for the full year.
Wise
Unlike Remitly -- which focuses primarily on helping immigrants send money -- Wise wants to act as a more complete multicurrency account for any business or individual. Wise's mission is to build money without borders, and as a staple of that strategy, it intends to take its fees from transactions to zero. In fact, management even measures its success by how low it can take its average price charged to customers.
While that might sound counterproductive for generating revenue, Wise has actually been able to balance both aims remarkably well. In the company's latest earnings update, Wise was able to reduce its average price charged to customers from 0.69% a year ago to 0.60% while simultaneously increasing revenue by 34%. This success in the face of a decreasing take-rate is a testament to Wise's diverse product offering.
With Wise, users can not only send money to other countries quickly -- 86% of transactions take 24 hours or less -- but they can also hold money in up to 56 different currencies with a Wise account, spend money internationally with the Wise card, or even invest in stocks.
Which is the better buy?
If investors are looking solely at both companies' valuations relative to their trailing revenue growth, Remitly would look like the better investment today. In fact, despite Remitly growing its revenue faster, Wise's current ratio of enterprise value (market cap minus net cash)-to-trailing-12-month-sales sits at 13.6, which is a significant premium to Remitly's, which is at only about five times. But this doesn't tell the whole story.
Not only does Wise have higher profit margins across the board, but the company also looks positioned for more durable growth. With Wise proactively trying to become the low-cost provider of international transfers, it should be able to attract far more users in the long run than its competitors. As Wise amasses a larger customer base, it should then be able to extract value through its adjacent products, like the Wise card, or by earning interest on funds held in Wise accounts.
In short, despite Remitly's comparative discount, if I had to choose one of these companies to own today, Wise's long-term prospects make it look like the more compelling investment.
