Bonsai Partners Q3 2022 Letter

Theme and Background

This chapter serves as the opening section of the investor letter for the third quarter of 2022, primarily reviewing the fund's performance for the quarter and year-to-date, and articulating its investment stance under the current highly uncertain macroeconomic environment. The report notes that rapid changes in interest rates, inflation, and supply chains make asset valuation difficult, and market volatility is expected to persist.

Core Views

The author's key judgment is that the positive performance in Q3 does not mark a turning point, as fundamental improvements in the portfolio and the economy have yet to materialize. The fund will continue to invest under conservative assumptions, seeking targets that can withstand a variety of macro conditions. The author clearly adopts a dual stance of long-term optimism, short-term caution, and remains particularly vigilant toward Chinese investments.

• Contrarian judgment: Although the fund posted a net return of +8.3% in Q3, significantly outperforming the S&P 500's -4.9%, the author explicitly rejects interpreting this as a trend reversal, emphasizing that volatility remains the norm.

Key Arguments and Data

1. Performance Comparison: Fund Q3 net return +8.3% vs S&P -4.9%; year-to-date net return -26.4% vs S&P -23.9%.

2. Historical Cumulative Performance: From inception in October 2018 to September 30, 2022, the fund's annualized net return was 29.9%, compared to 8.8% for the S&P 500, demonstrating long-term excess return capability.

3. Macro Judgment Basis: The three major variables—interest rates, inflation, and supply chains—are still evolving rapidly, leaving valuations without a stable anchor.

Indicator	Bonsai Net Return	S&P 500 Total Return
Q3 2022	+8.3%	-4.9%
YTD 2022	-26.4%	-23.9%
Since Inception Annualized (from Oct 2018)	+29.9%	+8.8%

Companies/Assets Involved

This chapter does not mention specific company names or holdings. It only broadly notes that "Chinese investments" continued to experience volatility in October, but without specific names or data.

Investment Implications

• Implications for Portfolio Strategy: The fund will continue to invest under conservative assumptions in the current environment and gradually increase exposure to companies that can endure across different operating conditions. Investors should expect short-term volatility to persist and should not be blindly optimistic based on a single quarter's strong performance.
• Implications for Chinese Assets: Although the author is long-term bullish on China, the short-term stance is cautious, implying that Chinese-related positions still face high volatility risks and require patience for stable signals to emerge.

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Theme and Background

This chapter focuses on the inefficiency and high cost of the global cross-border remittance industry. The traditional interbank correspondent banking system, built on a 19th-century architecture, relies on the SWIFT messaging network and is controlled by a consortium of large banks, lacking incentives for innovation. The fund has recently invested in Wise Plc, believing it can disrupt this structure.

Core Thesis

The author argues that the traditional cross-border remittance system is a classic case of the "innovator's dilemma"—SWIFT is controlled by banks, and any transparent, low-cost improvement would erode bank profits, so the system has stagnated for decades. Wise's business model directly challenges this outdated system, offering a more efficient and lower-cost alternative.

Key Arguments and Data

• Staggering Costs: On average, cross-border transfers lose about 6% of their value to transaction fees (source: Benson, Carol, Global Payments).
• Multi-Layer Fees: If a transfer passes through four correspondent banks, four layers of fees are incurred.
• Historical Bottlenecks: The correspondent banking system began in the mid-to-late 19th century; SWIFT was created in the early 1970s, but due to bank control, improvements have been minimal.
• Conflict of Interest: Banks pay each other high fees through "quid pro quo" arrangements and pass them on to customers, with no incentive to change.

Companies/Assets Involved

Company/Asset	Role	Key Data	View
Wise Plc (LSE: WISE)	New investment target, offering low-cost cross-border remittance services	No specific valuation or financial data disclosed	Bullish, believes it can address pain points of the traditional system
SWIFT	Bank cooperative, controlling payment messaging system	Owned by a group of global large banks	Bearish, innovation dilemma prevents self-reform
Traditional correspondent banking network	Existing remittance infrastructure	Average 6% fees, multi-layer fee structure	Bearish, inefficient and costly

Investment Implications

The author implies that investors should focus on fintech companies capable of disrupting traditional financial infrastructure. Wise, by directly bypassing correspondent banks and the SWIFT network and offering near-real-time, low-cost cross-border transfers, fits this logic. The fund established a position in Q3 2022, indicating that it considers the current valuation attractive and that the long-term growth potential from industry transformation is significant. However, this chapter does not provide specific valuation or target prices, requiring analysis in subsequent chapters.

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Theme and Background

This section discusses the structural reasons behind the high costs in cross-border payment systems. The report notes that funds travel through multiple correspondent banks, with each link adding handling fees and currency conversion costs, while lacking economies of scale. At the same time, the system's opacity allows banks to conceal fees from customers. This analysis forms the basis for bonsai_partners' observations on inefficiencies in the payments industry.

Core Thesis

The author argues that the existing cross-border payment system is structurally flawed, with artificially inflated costs and low efficiency resulting from multiple layers of intermediaries and a lack of transparency. This is a structural deficiency, not a short-term phenomenon — each individual transaction cannot benefit from economies of scale, and banks exploit information asymmetry to extract extra profits.

Key Arguments and Data

This section does not provide specific monetary amounts or percentage data, only a qualitative description of the cost components:

• Multiple correspondent banks add handling fees and foreign exchange costs
• Each transaction is processed independently, preventing the amortization of fixed costs
• System opacity enables banks to hide fees

Because the original text lacks quantitative data, no comparisons or tables can be presented. However, the author treats this cost structure as a negative factor in industry investment analysis (favorable for traditional banks, but representing disruption opportunities for consumers and emerging payment platforms).

Companies/Assets Involved

This section does not name specific companies directly. In the broader context of the full text (bonsai_partners funds invest in opportunities that can perform well under various macro conditions), the report likely points to traditional large banks (e.g., JPMorgan, Citigroup) as beneficiaries along the cross-border payment chain, while implicitly taking a long view on innovative payment companies that can bypass the correspondent banking system (e.g., Wise, PayPal's Xoom, etc.), as these firms offer more transparent, lower-cost alternatives.

Investment Implications

For investors, this section suggests: shorting traditional cross-border payment businesses that rely on the correspondent banking model, or going long on payment technology companies capable of achieving direct clearing and eliminating multi-layer fees. The author implies that, under the current macro environment (rising interest rates, inflation), cost sensitivity increases, and platforms that can reduce cross-border remittance costs may gain accelerated market share growth.

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Theme and Background

This chapter discusses the root causes of the slow speed of cross-border payments. The author points out that the structural inefficiencies of the traditional correspondent banking system are the primary reason for delays in cross-border transfers, with a global transfer typically requiring multiple business days to complete clearing.

Core Argument

The author argues that the fundamental reason for slow cross-border payments is that each intermediary correspondent bank has an incentive to hold transfer funds for as long as possible to earn interest, while each step redundantly repeats the same operational processes, resulting in extremely low overall efficiency. This is a systemic issue of misaligned incentives and process redundancy.

Key Arguments and Data

• Incentive to Hold Funds: Each correspondent bank wants to retain incoming funds for as long as possible to earn interest on the balance.
• Redundant Operations: Every step in the chain involves redundant operational processes, further slowing down the transaction.
• Clearing Time: Global cross-border transfers require multiple business days to complete.

No comparative data, no table needed.

Companies/Assets Involved

This chapter does not mention any specific companies or assets; it is only a generalized industry analysis.

Investment Implications

For investors, the inefficiency of the traditional correspondent banking system in cross-border payments (delays of several days) presents a clear opportunity for fintech companies (e.g., innovative platforms offering real-time cross-border payment solutions). Companies that can bypass correspondent banks, leverage distributed ledger technology, or build proprietary payment networks are likely to disrupt the existing market and capture significant market share. Investors should focus on enterprises that possess technological advantages in optimizing cross-border payment speed and cost.

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Theme and Background

This chapter discusses the issues of opacity, high costs, and slow speed within the traditional cross-border payment system (the SWIFT correspondent banking network). The report notes that over the past decade, numerous fintech companies (such as Wise, Revolut, Remitly, etc.) have emerged, attempting to disrupt the high-cost remittance model represented by Western Union and Moneygram, with Wise’s operating model standing out the most. Currently, the global cross-border payment market remains dominated by interbank systems, forcing consumers and small and medium-sized enterprises to pay excessive fees while lacking visibility into the flow of funds.

Core Thesis

The author argues that Wise’s core competitive advantage lies in its sustained willingness and ability to offer the lowest prices across the entire industry — this is not a short-term promotion but a long-term pricing strategy. By building its own global network of bank accounts (replacing the traditional correspondent banking Nostro/Vostro account system), Wise eliminates multi-layer intermediary fees and currency exchange markups, thereby compressing the average transaction cost to approximately 0.60%. This strategy fosters customer belief that “no other place can be cheaper than Wise,” resulting in extremely high customer loyalty and organic word-of-mouth growth, forming a strong competitive moat.

Key Arguments and Data

• Cost and Speed: Wise’s average transaction fee is only about 0.60% of the transaction value (traditional channels typically range from 3% to 5% or even higher); over 50% of transfers are instant, and over 90% are settled within 24 hours.
• Scale and Market Position: As of FQ1 2023 on an annualized run-rate basis, Wise’s annual transfer volume has surpassed $100 billion, overtaking Western Union to become the world’s largest non-bank cross-border transfer service provider.
• Word-of-Mouth and Customer Acquisition Efficiency: The Net Promoter Score (NPS) stands at 71, ranking first in the industry; two-thirds of new customers join through referrals; in FY2022, marketing spending was only £28 million, yet it drove approximately £15 billion in incremental transfer volume.
• Historical Background: Founders Kristo Käärmann and Taavet Hinrikus originally lost substantial bank fees every month. By using a personal “account matching” method to bypass SWIFT, they discovered that costs could be reduced to near zero, thus founding Wise — this model is essentially the same as bank Nostro/Vostro accounts, but without fees or delays.

Comparison with Traditional Cross-Border Payment Methods:

Feature	Traditional SWIFT Correspondent Banking Network	Wise Model
Average Fee	3%–5%+ hidden exchange rate markup	~0.60% fully transparent
Settlement Speed	2–5 business days	>50% instant, >90% within 24 hours
Transparency	Multiple intermediaries, opaque fees	Real-time display of fees and exchange rates
Infrastructure	Relies on multiple correspondent banks	Self-built global bank account direct connections

Companies/Assets Involved

• Wise (formerly TransferWise): Core subject of analysis. The author is strongly bullish, believing that its low-price strategy combined with word-of-mouth growth creates a virtuous cycle, making it “the best solution for cross-border payments.”
• Western Union / Moneygram: Traditional high-cost remittance companies that are being reshaped by Wise. Wise has already surpassed Western Union to become the market leader among non-bank players.
• Other Fintechs (Revolut, Remitly, Currencycloud, Thunes, Azimo, etc.): Also emerging challengers, but the author only mentions them without detailed analysis, implying that Wise has pulled ahead due to its lowest-price positioning.

Investment Implications

• Bullish on Wise’s pricing moat: Once its “proactive price reduction” behavior (similar to Aldi’s retail strategy) establishes a “lowest price” perception in users’ minds, competitors will find it difficult to win back customers through mere feature imitation. Wise’s NPS and word-of-mouth data indicate that a network effect has already formed.
• High customer acquisition efficiency, strong unit economics: With only £28 million in marketing spending driving £15 billion in incremental transaction volume, it demonstrates extremely strong self-propagation capability, and the long-term marginal customer acquisition cost is approaching zero.
• Risk factors to watch: Although the report does not elaborate extensively, it hints that if the macroeconomic environment deteriorates or regulatory changes occur (e.g., central bank digital currencies or CBDC direct cross-border settlements), Wise’s intermediary value could be weakened. Currently, Wise remains in a high-growth phase, but its valuation must align with the prevailing interest rate environment — the overall tone of the report is opportunistic under conservative assumptions.
• Trading Direction: If the portfolio already holds or can tolerate volatility, a moderate overweight in Wise is advisable, as it possesses stronger cyclical resilience than peers across various macroeconomic scenarios (as long as global remittance demand persists).

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Theme & Background

This chapter focuses on Wise's corporate culture and core mission — continuously reducing the cost of cross-border payments. Cross-border payments are a classic commoditized business that traditionally struggles to generate excess returns on investment. However, the author argues that if a company can sustain cost leadership in a large market, it may create outlier returns. Wise, with its vision of "zero cost", is precisely building a structural competitive advantage.

Core Argument

The author's core thesis: Wise is not an ordinary fintech company. Its "Mission Zero" culture drives employees day after day to find ways to lower the cost of every single currency corridor, and then automatically pass those savings back to customers (keeping profit margins unchanged). This "obsession with reducing costs" stands in stark contrast to competitors (banks, other fintechs), which typically try to maintain or increase revenue per transaction. The author believes this culture gives Wise a cost leadership position in the commoditized cross-border payments market — analogous to Costco's structural advantage in retail — potentially generating excess returns.

Key Arguments & Data

• "Mission Zero": Wise aims to charge customers as close to zero as possible. This is not just a slogan but a KPI embedded in daily work — employees come to work each day thinking about how to lower fees on each currency corridor.
• Cost pass-through mechanism: Every time Wise reduces the underlying cost of a route, it automatically passes the savings back to customers by keeping its margin unchanged, rather than directly boosting profit. This sacrifices short-term profitability but scales the business and extends the lead.
• Competitive differentiation: Competitors — traditional banks and most fintechs — tend to maintain or increase revenue per transaction; Wise does the opposite, actively reducing revenue per transaction.
• Analogy: The author compares Wise to Costco — both achieve structural advantages through sustained cost leadership in highly commoditized industries.
• Infrastructure & scale: Wise's own payment infrastructure, user network effects, and a willingness to "earn less per transaction" together constitute a long-term cost advantage over banks and other fintechs.

Comparison Dimension	Wise	Banks / Other Fintechs
Core objective	Reduce per-transaction fees toward zero	Maintain or increase per-transaction revenue
Treatment of cost savings	Keep margins constant, automatically return to customers	Typically retain as profit
Cultural driver	"Mission Zero", employee KPIs tied to cost reduction	Generally focus on revenue and profit growth

Companies / Assets Involved

• Wise (WISE.L): Core holding; the author is explicitly bullish. Key role: cost leader in cross-border payments with a structural moat.
• Costco (COST): Used as an analogy to illustrate the excess returns possible from cost leadership in a commoditized market, indirectly reinforcing the bullish case for Wise.
• Banks and fintech competitors (unnamed): Used as negative benchmarks; their behavior differs from Wise and they have cost structure disadvantages.

Investment Implications

Investors should focus on whether Wise's cultural execution and cost-pass-through mechanism are sustainable. If Wise can continuously convert its cost advantage into lower prices and higher transaction volumes, while maintaining its target profit margin, it is likely to become a long-term winner in the trillion-dollar cross-border payments market, generating compounding returns similar to Costco. Conversely, if the company deviates from "Mission Zero" and begins to prioritize profit maximization, its competitive advantage could weaken. The report's implicit investment recommendation: continue to hold or increase exposure to Wise, believing that its culture-driven cost leadership will drive market share growth and intrinsic value appreciation.

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Theme & Background

This chapter focuses on the efficiency differences in cross-border payment infrastructure, comparing Wise's self-built network with the traditional correspondent banking model and third-party aggregators (e.g., CurrencyCloud, Thunes). The core question: How Wise reduces cross-border transfer costs through scale effects and system automation while maintaining a long-term competitive advantage.

Core Thesis

The report argues that Wise achieves a lower cost structure than the correspondent banking model and third-party aggregators by building its own global payment network and integrating directly with national central bank systems. This infrastructure barrier allows it to continuously lower prices for customers while maintaining profit margins higher than peers. Contrarian view: Most fintech competitors rely on third-party infrastructure (e.g., CurrencyCloud/Thunes), while Wise chooses to build its own network and bear high upfront costs. This "asset-heavy" strategy instead becomes its long-term moat.

Key Arguments & Data

1. Cost advantage from direct central bank integration: After Wise directly connects to a country's central bank payment system (e.g., UK FPS, Singapore FAST), the cost per transfer can be up to 10 times cheaper than bank infrastructure. However, upfront investment and time costs are extremely high. Wise is the first non-bank financial institution in the UK and Singapore to achieve local direct integration.

2. Operational efficiency from scale:

• Instant transfer ratio: >50% of transfers are completed instantly; >90% within one business day.
• Cost structure comparison: Achieves lower unit costs through netting, batch processing, and bargaining power.

3. Data predictive capability: Wise can forecast >50% of daily transaction volumes, optimizing liquidity pools across countries in advance to reduce funding costs.

4. Compliance and customer service costs: High instant transfer rates significantly reduce customer inquiries; AML/KYC systems can be reused across regions.

5. Pricing strategy when entering new markets: Prices are highest in early stages due to reliance on local PSPs/banks; as scale grows, multiple suppliers are introduced to foster competitive bidding.

Dimension	Traditional Correspondent Banking / Third-Party Aggregators	Wise Self-Built Network
Per-unit cost (vs. correspondent banking)	Baseline	As low as 1/10 (with direct central bank integration)
Instant transfer ratio	Significantly below 50%	>50% instant, >90% within one day
Cost structure characteristics	Margin stacking by multiple intermediaries	Eliminates intermediaries, fixed costs spread by scale
Compliance system reusability	Low (developed separately for each region)	High (predictive models are portable)
Data predictive capability	Limited	Can predict >50% of daily transaction volume

Companies/Assets Involved

• Wise (WISE): The core bullish target of the report. Builds its own global payment network, directly integrates with central bank systems, and automates back-office operations (treasury management, compliance, reconciliation). Key role: disruptor of cross-border payment infrastructure, with cost advantages continuously translating into ability to lower prices for customers.
• CurrencyCloud, Thunes: Third-party aggregators providing infrastructure for most fintech companies. The report implicitly takes a bearish view on their business models, as they still rely on legacy systems, fail to eliminate "margin stacking," and lack Wise's proprietary scale and predictive capabilities.

Investment Implications

• Buy Wise: Its infrastructure barrier is difficult to replicate, and the scale-effect moat deepens with global expansion. High instant transfer rates (>50%) and cost advantages (direct central bank integration costs 10x less) will drive customer growth and margin improvement.
• Be cautious of cross-border payment players relying on third-party aggregators: These companies are essentially "asset-light" free riders, unable to benefit from cost reduction in the long term. As Wise cuts prices and squeezes the market, their profit margins will narrow.
• Monitor Wise's pace of expansion into new markets: Costs are higher in the early stages of entering a new country, but as multiple suppliers are introduced for competition and direct central bank integration is achieved, both prices and margins improve. Investors should tolerate short-term losses in exchange for long-term market share.

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Theme and Background

This chapter examines how Wise’s organizational structure and incentive mechanisms, driven by its core mission (faster, cheaper, and more transparent cross-border payments), create a highly decentralized and efficient operating model. In the cross-border payments industry, differences in local culture, regulation, and infrastructure are the primary challenges. Wise addresses this complexity by breaking its teams into hundreds of autonomous decision-making “micro-startups.”

Core Thesis

The report argues that Wise’s organizational design is a key source of its competitive advantage. By making KPIs (e.g., price reduction magnitude) fully transparent and publicly visible, and by granting local teams a high degree of autonomy, Wise can adapt to regulatory and market differences across countries more quickly than traditional competitors, while maintaining low organizational costs and rapid innovation. The contrarian, non-consensus insight is that this seemingly “uncontrolled” decentralized structure is actually the most effective way to control costs and compliance risks — because local teams understand local technology adoption attitudes and policy environments better than headquarters.

Key Arguments and Data

• Structural characteristics: Wise organizes its approximately 4,000 employees into hundreds of autonomous teams, each focused on a single geography or product line. The only constraint is whether a decision helps achieve faster, cheaper, and more transparent cross-border payments.
• Incentive transparency: Core KPIs for each currency corridor or product are made public across the entire company. Employees can see in real time whether their group has lowered or raised prices in each cycle — this transparency transforms accountability pressure into intrinsic motivation.
• Local autonomy case: When Wise entered Singapore, local authorities required fintech companies to have a physical address. The Singapore team independently decided to set up a small office in a shopping mall, becoming the first fintech company authorized to connect with Singapore’s digital identity system, Singpass. This move rapidly scaled local registration processes and significantly reduced compliance costs.
• Outcome model: The report notes that Wise thus became “the first fintech company to obtain direct connectivity with the country’s central bank.”

Comparison data (derived from the chapter’s logic; no original table, but can be summarized):

Organizational Feature	Traditional Financial/Cross-Border Payment Companies	Wise
Decision-making power	Concentrated at headquarters	Decentralized to local product teams
Information transparency	Limited or hierarchical	Company-wide public KPIs
Adaptation to local markets	Relies on uniform processes, low flexibility	Teams make autonomous decisions, high adaptability
Speed of first regulatory approval	Generally slower	Generally fastest

Companies/Assets Involved

• Wise (Wise): The core subject of analysis. It is a cross-border payments platform with approximately 4,000 employees. The author holds a long-term bullish view, arguing that its organizational culture is a sustainable competitive moat. No specific financial data is mentioned in this chapter, but the implicit logic is that autonomous teams’ reduced compliance costs and faster customer acquisition capabilities will translate into higher customer acquisition efficiency and lower unit costs.

Investment Implications

• For investors, Wise’s fundamental advantage lies not in the technology itself, but in a hard-to-replicate “self-organizing culture.” This culture enables the company to find localized solutions (e.g., the Singapore Singpass case) faster and at lower cost than competitors when facing regulatory changes in different countries.
• Key risk: As the company scales (from 4,000 employees to a larger number), can it maintain coordination among hundreds of teams and keep bureaucracy costs low? The author suggests that the current structure is suitable at this stage, but investors should continuously monitor the efficiency trends of headcount growth and team autonomy at the margin.

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Theme and Background

This chapter discusses the core mechanism of Wise’s business model: driving profit growth by continuously lowering prices for customers. The report notes that Wise has been profitable since 2017 and does not rely on external funding, a stark contrast to most high-growth tech companies. The market’s common perception that “price cuts harm profits” is a misconception.

Core Thesis

The author argues that Wise’s pricing system is its core competitive advantage: it dynamically adjusts prices across currency corridors to maintain an EBITDA margin of roughly 20%, while automatically converting cost reductions into lower prices. Volume growth compensates for price declines, ultimately increasing total profit. This is a counterintuitive “lower price, higher profit” model — unlike traditional cross-border payment companies, which set prices slightly below competitors to maximize profits, Wise consistently offers the lowest price it can sustain, without reference to competitors.

Key Arguments and Data

• Financial system: dynamic pricing keeps overall EBITDA margins at around 20%, with no cross-subsidization of other routes or product lines.
• Profit transmission: cost savings are automatically passed back to customers in the form of lower prices, and volume growth offsets the price reduction. The report provides a quantitative example: Wise Account deposits exceed £8 billion, generating roughly £100 million in windfall profits due to rapid interest rate increases. However, the CFO made clear that only 20% of the additional interest income flows into profit; the rest is returned to customers via price cuts or investment in people, technology, and products.
• Market opportunity: in 2020, financial institutions’ cross-border payment revenues were £190 billion; Wise’s revenue over the past 12 months was only £0.56 billion. Wise currently processes only about 4% of consumer cross-border transaction volume and less than 1% of business cross-border transaction volume.
• Geographic coverage: Wise is available in only 33% of countries worldwide, leaving substantial room for geographic expansion.
• New product progress: Wise Account can hold 50+ currencies, 10 of which offer local account details (e.g., IBAN); Wise Card charges foreign exchange fees far below the traditional 1.5%–3.5% charged by bank cards; Wise Platform opens API/SWIFT interfaces to challenger banks and fintech companies.

Companies/Assets Involved

The only company mentioned is Wise (formerly TransferWise). The author holds a strongly bullish stance, citing:

• A healthy business model (profitable since 2017, no reliance on external funding);
• Mission-driven management aligned with shareholder interests (founder-led);
• An attractive entry price during the downturn;
• High long-term compounding capital potential.

Investment Implications

Investors should focus on cross-border payment companies that exhibit a positive cycle of “price cuts → volume growth → profit growth”. Wise’s model demonstrates that in a massive market (cross-border payments with annual revenues of £190 billion), even a small increase in market share can generate significant profit growth. Current valuations may not fully reflect the optionality from new products (accounts, cards, platform) and geographic expansion potential. The report recommends accumulating positions on dips, with particular attention to the additional contribution from rising interest rates on deposit income (only 20% flows into profit, indicating management restraint that benefits long-term competitive moats).