Remitly Stock: A Challenger to Western Union?

Sundays in Hong Kong are a sight to behold. Public spaces like Victoria Park are overwhelmed with tens of thousands of domestic helpers, mainly women from Indonesia and the Philippines. They arrive in Hong Kong in droves to work as housemaids for the wealthy. With their lodging and meals paid for, most the money they earn gets sent back home to their families.

It’s not just Filipino women who send money home to support dozens of relatives. Around 20% of the world’s sailors are Filipino men who also send money home, making the Philippines one of the top five countries in the world for remittances – nearly $35 billion in 2020.

The top five countries in the world for remittances - nearly $35 billion in 2020.
Credit: Statista

The most popular way for people to send remittances has always been Western Union (WU). Many a sunburned Western male has taken the walk of shame to Western Union to send his future ex-wife a few Benjamins because yet another calamity befell her family. Today, we’re going to talk about a company that provides an alternative to Western Union – Remitly.

About Remitly Stock

Founded in 2011, Seattle’s own Remitly has taken in $505 million in funding from a slew of investors including names like Barclays, Visa, Prudential, and Goldman Sachs. The S-1 filing immediately starts down the “we’re here to improve the lives of immigrants” path, along with the obligatory pictures of smiling multiracial people hugging each other. There’s the co-founder story about how his time abroad in Kenya opened his eyes to poverty, and from that moment forward, he was on a mission to contribute to a joyful and abundant life for every deserving individual. Once you get past all this kumbaya window dressing, there’s a proper business to examine.

The cross-border remittance market was measured at approximately $1.5 trillion in total remittance inflow for 2020. From that, about $40 billion in transaction fees are taken – about 2.66%. That’s the total addressable market (TAM) for Remitly, but it’s hardly a blue ocean.

The Remittance Market

While Medium is largely a dumpster fire of intellectually-void political thought pieces like I Lost My Mom to Fox News, there’s the occasional diamond to be found in the rough. One such diamond is an article by venture capitalist Chris McCann titled, Remittance Market— Primer and Landscape. Even though the piece was written in 2019, it’s chock full of interesting facts and figures – like this one:

Cross-Border Money Transfer Volume by category chart
Credit: Proof of Capital

Let’s ignore the transfer volume numbers (they’re already outdated) and focus on the three broad categories of players. The first takeaway is that money transfer operators (on the left) dominate the remittance market, the biggest being Western Union. On the right, you’ll see the up-and-coming fintech companies. The company formerly known as Transferwise changed their name to Wise (WISE.L) and had an initial public offering (IPO) on the London Stock Exchange where it lives today with a market cap of around $14.6 billion. Here’s a look at how Remitly compares to Wise based on their latest reported quarterly earnings reports (Wise numbers have been converted from GBP).

RemitlyWise
Volume (billions)4.97622.4
Revenues (billions)0.1110.168
Take Rate (Revenue / Volume)2.23%0.75%

Wise is currently doing about 4X the volume Remitly is seeing and appears to be charging a whole lot less. Here’s how the two companies compare using our simple valuation ratio (we’re using Remitly’s expected valuation of up to $6.8 billion).

  • Remitly – (6.8 / .444) = 15
  • Wise – (14.6 / .672) = 22

Of course, we’ll need to see what shares of Remitly begin trading at because the hype train might take them for a ride. Regardless, if we wanted to make a play on a remittance fintech company, we’d have to go with Wise given their market share is 4X that of Remitly. If these companies plan to compete with Western Union on cost, then Wise will have more of a value proposition than Remitly given their much lower take rate. The problem that both these companies face is that stealing market share from Western Union will become increasingly difficult as time goes on.

The World vs. Western Union

We recently traveled to El Salvador to watch all the bitcoin bulls have a big group wank over the adoption of bitcoin as legal tender. Repeatedly, we heard the country’s president, Nayib Bukele, talk about how Bitcoin would stick it to the man by displacing the $400 million in fees that Salvadorians pay Western Union every year for remittances. While that seems more of a pipe dream than anything, it highlights just how many people are after Western Union’s bacon. In Mr. McCann’s Medium piece, he talks about why Western Union is more formidable than Bukele would lead us to believe.

One reason Mr. Bukele focused his message on Western Union is because it’s one of the world’s most powerful brands – in 75th position according to the CoreBrand Index. Over 80% of remittances take place using cash, which means having physical locations is a necessity. Western Union has over 500,000 agent locations in every country on this planet except for the DPRK. Most people who use Western Union don’t see it as something that needs fixing. While fintechs are doing some damage that’s evident in Western Union’s slowing revenue growth, they’ll have an increasingly difficult time stealing customers from well-entrenched money operators.

Should You Buy Remitly Stock?

Every individual’s investment decisions need to be a result of their own conviction. Maybe the feel-good aspects of Remitly’s business appeal to some, but where we’re sitting, this is not a business we’re interested in. That’s mainly because there’s no blue ocean TAM here. All the fintechs trying to challenge money transfer operators will need to fight for every customer they get, something that becomes increasingly difficult over time. These might have been good companies to invest in as a venture capitalist, but retail investors are arriving late to the game.

Conclusion

When evaluating any given stock, it pays to take a step back and look at the broader thesis. In the case of remittances, it’s a market that doesn’t need fixing. Around $1.5 trillion in remittances flow successfully from workers to families. While there may be an opportunity to save some dollars on fees, not everyone will jump at that chance. We’re going to avoid the remittance thesis going forward in favor of growth opportunities where there’s lots of blue ocean with fewer sharks swimming around.

If the Remitly IPO goes through as planned, shares will trade under the ticker RELY.

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