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Comment by thisisit | Hacker News Reader

I have zero experience in remittances, so I could be wrong but the whole model seems very capital intensive. It needed ~ 1 billion dollars worth of transactions to turn a profit. [1] [2]

Isn't that supposed to be a bad idea, specially for software based companies.

[1] Transferwise model: https://en.wikipedia.org/wiki/TransferWise#/media/File:Trans...

[2] The company started back in 2011. And select quotes from the article:

> A source close to TransferWise, which has been profitable since early 2017, tells me the new funding values the seven-year old company at $1.6 billion.

and,

> The company now serves over two million customers and offers 750 currency routes, seeing customers transfer more than £1 billion every month.

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That's not what capital intensive means[1]. A company that has low margins as its business model necessarily needs to have a large body of transactions to get much revenue.

Six years to get profitable is not really a remarkable period for a VC-funded company.

1: It means requiring lots of capital to get set up, eg. because you need to aquire expensive assets to run your business. Buying your own hardware is more capital intensive that running cloud, even if the latter is possibly more expensive in the long run.

Yes. Sorry, incorrect choice of words.

So the question is if the margins are so low that they need a billion dollars to make a profit, what kind of scale do they need to be worth a billion dollars.

And it somehow it makes me question their business model as well. Sooner or later they will be tempted to raise fees and get more profitability.

They don't need to sell a billion dollars, they need to move a billion dollars

And yes, they might increase their fees when they get bigger, still, if it's smaller than what the banks charge, it's a win

(However, since money movements are not balanced they still need to "move back" some of it so they can settle their accounts - but I guess they already have some bulk currency buyng/selling bank to do that)

Not sure about that. Perhaps if they're super convenient to use. But if I'm going to put in the time to set up a system to reduce fees on FX conversions, I want to be sure I'm getting (close to) the best rate possible.

If they start charging 1% tomorrow, up from 0.5%, I'm pretty sure I would reconsider if I were using them (and I have used them in the past, in the early days -- they're great).

But I started routing currency conversions through an account at my broker (Interactive Brokers), and I'm currently getting market rate + 0.2%. These 0.3%s add up fast if you're converting meaningful amounts of money and in comparison Transferwise seems expensive again. But of course it's still a long way from the 2.5-5% banks are charging.

> So the question is if the margins are so low that they need a billion dollars to make a profit, what kind of scale do they need to be worth a billion dollars.

Well, if we're assuming P/E=20 then they need to be heading for 50 million dollars in profit. Let's guess their "gross margin" from their spread is 2%, so they're currently at top-line revenue of 2 million dollars (and the same in costs). So if their costs were completely flat they'd need to grow to be processing 25 billion dollars of transfers to justify the valuation; in practice growth won't be completely free of costs so we're talking about a bit more, maybe 50 billion dollars. Does that sound vaguely plausible?

> And it somehow it makes me question their business model as well. Sooner or later they will be tempted to raise fees and get more profitability.

I doubt it; there are a lot of competitors in the same space. At the moment TransferWise has the name recognition, but that won't let them raise costs a lot.

I would assume that they will be able to get significant revenue from building higher-value-added services on top of their infrastructure. The "Borderless account" is a potential step in that direction: https://transferwise.com/borderless

Plus they'll be able to increase the fees by x% little by little...judging competition

It's easy to get distracted by the value of the transactions, but they're just the payload. Nobody is "buying" a product worth those billions in transactions, the same way someone bought $N worth of books for a bookseller to have $N revenue.

A shipping company is evaluated on its ability to move containers, and nobody cares (well, the insurer does) if the containers are filled with iPhones or cardboard, as long as the customer pays the shipping fee.

It's not their capital.

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