Mastercard Incorporated (MA) Earnings Call Transcript & Summary

Hello, I'm Bryan Keane, senior payments processor and IT services analyst at Deutsche Bank. And we're thrilled to have with us today the President and CEO-elect, Michael Miebach at Mastercard for our Keynote Virtual Fireside Chat Presentation today. Format of this call will be a conversation we'll have with Michael, ask him a bunch of questions. And then if you do have some questions, you can either e-mail me directly or you can submit it through the portal, and I can grab any extra questions that way. So with that, Michael, thanks for joining us. And hopefully, you are staying healthy and safe.

I wanted to start out with asking about earlier this year, you being named Mastercard's President and you will become CEO effective January 1, filling in some quite large shoes of Ajay. Can you talk about how that transition is going so far and your view on the strategic direction of the company going forward?

Hi, Bryan, and hello, everyone. Thanks for having us on the call here. Obviously, the topic of transition is very dear to my heart. We announced the transition you -- some of you might recall, on the 25th of Feb, this was pretty much just before the pandemic hit us. So Ajay and myself were locked up as the extended quarantine bubble here in the office over the last 6 months. And I can tell you, there is no question unanswered in terms of the transition because we didn't have any chance to go anywhere else, and we had all the time in our hands. But in all seriousness, unprecedented crisis around us, social, economic affecting our industry. So having 2 pairs of hands on deck came in really handy, divide and conquer with our approach. The priorities as we managed through this last half year was really around -- first of all, we're on the people business, focus on employees' health and safety, peace of mind. And based on that, leaning in with our customers and being the best possible partner that we can be. So as I look back over the last 6 months, particularly our data analytics and our cyber products in such a fragile, fast-changing world came in really handy and starting to be part of the foundation of conversations with our customers around recovery and how we might help them as we get out of that. To your question about as we look forward, what's happening? Obviously, COVID is impacting our industry. It's impacting our business. So the question that comes to hand is what's the blip and what's the true trend. We'll -- over our time together, we'll probably have more time to deep dive into that. But clearly, what we're seeing is an acceleration of trends that were there before, digitization of the economy, which is fundamentally positive for us. An interest in government, in payments, which is also fundamentally positive for us. Health concerns of consumers out there impacting consumer confidence. That is all going on. So we'll see how that plays out. Fortunately, these fundamental trends we, at Mastercard, have had and our focus for years to come. You've heard us talk about government all the time. We built out a government practice. I think I called out a number in the second quarter call where we have, like, over 100 projects with -- in 30 countries in terms of addressing the immediate impact of COVID. So that's a muscle that we're building out going forward. The focus on digitization, this is really where our groundwork over the last years has paid off. The focus on tokenization, our digital-first approach, et cetera, et cetera. So that is that. We will continue down that route. Our overall strategic focus around grow diversified build, we will not let off when it comes to focusing on our core business, diversifying into new geographies and customer segments. And then really, where I spent most of my time in the last 5 years was on the build part. That's multi-rail, that's open banking, that's B2B. All that, that's really where we have an opportunity with this digital tailwind to build this out. So I'm not telling you this morning that we're changing our strategy because we're not. This all makes sense, and it will make sense even more so in the wake of COVID, and that's where the focus is. Few things that will definitely stay the same for the time being, focus on consumer experience, leveraging those emerging technologies, [ that are ] coming about 5G and the likes. Making sure we're the company that doesn't make calls on payments, i.e. it is card or something else, but we offer the full choice of payment options that are out there. And then it's this look around open banking, basically, of diversifying beyond payments into adjacent areas like data transactions and so forth. So we keep that focus. We'll do that. We'll do it organically. We'll do it inorganically. We'll do it in a disciplined way as we have done so far. So yes, I've spent a lot of time with Ajay. I could tell you a lot more about that at a different occasion.

Yes. Yes. Exactly. So obviously, a lot has changed. You've come in to become the next CEO here under a crazy time. I'm just curious if you could talk about how you try to navigate through the pandemic and the trends you're seeing in the business as we see the economies recover?

Yes. So a lot has been -- a lot has indeed changed. Pretty intense start, I would say. So when I look at how we're going to turn out of this, the shape of a recovery, the shape of how we will make our way out of it as a company and as an industry, is really first set by what's happening around us and around the effectiveness of policy in terms of 3 dimensions. The first is public health. It prophylactics, therapeutics, vaccines, that is really the key driver for consumer confidence. It's the key driver for loosening up social distancing measures, travel restrictions, et cetera. So that's the first. And we can't really predict that. So we'll see how that goes. The second is fiscal stimuli packages. We see some running out. Like here in the U.S., we'll see what comes next. They have proven difficult. So what is happening on that front in terms of bridging between where we are now at the time of a public health answer, that's again an unknown. We'll have to see where that goes. And the third one is really around monetary policy. Here again, we've seen quite effective measures of a number of central banks around the world, but yet again, hard to predict on where that goes. So with that as a backdrop, you will, Bryan, and many of us on this call, will remember us talking about a 4-stage framework. I'm not going to talk you through that again, but containment, stabilization, normalization and growth. And really, the triggers in here are, which is what we can clearly observe is, when are social distancing measures put in place, when are they loosened? What about travel restrictions, when are they loosened? And the impact of all of that on spending behavior. Net-net of all of that is right now, we believe that we are across the world in most markets in the normalization phase. So we're making our way back out of the valley in terms of the lowest growth rates. So that's -- we've seen modest improvement around that. But we're also seeing that the path is not linear. If you look into the U.K. right now, there's a couple of countries around the world which go forward, they loose, they open up and then they tighten again depending on our infection rates going back up. So we'll expect more of that as we look forward. How does this play out in our numbers? September 8, last week, we put out the latest operating metrics at the end of August. In the headline, as I -- I'm just looking at it, I just put it in front of here the chart that we sent to all of you guys. I would headline it as it's modest, continued modest improvement. So we see it on the volume side. We see it on the transaction side. We see it domestically and cross-border. I think that term describes it reasonably well. A bit of color around this is where does some of the modest improvement come from. It is an increase in card-present growth rates as social distancing measures are being relaxed in some markets around the world. But, on the other hand, we're seeing that is partially offset, as I was talking earlier about stimuli packages like with the expiration of U.S. unemployment benefits. So a bit of a mixed bag there, but continuous improvement since -- essentially since July. The card-not-present part remains healthy all along. So a bit of a change in mix is the first thing that I want to say here. The -- where we see particularly encouraging growth rates, although of a low level as in the T&E segment. So people are getting out again and they're eating at their local restaurants, and they're renting cars, they're fueling up, they're moving around again. So that is good to see. But if you take T&E out and you look at our switch volume growth rates, we are currently at a level where we were in the fourth quarter last year. So it just shows you how hard the T&E sector actually has been hit. If I take a geographic lens, Bryan, to your question, all regions outside of the U.S. have seen improvement from July to August, which is great. And we have some countries -- some more countries now, actually one -- some in each region that are in positive growth territory. And some of the big ones that we haven't talked about before, we mentioned in our release is Brazil, United Arab Emirates and South Africa. So that's encouraging to see. Transactions, they behave pretty similar to volumes. As you know, cross-border is a big value driver for us, and we see the same modest improvement here since early July. And the trend that we've seen in Europe with Europe outpacing the rest of the world in terms of cross-border volume continues at a higher level than the rest of the world. So that's positive. But as we said before, cross-border has a way to go as long-haul travel, business travel that will come at a later stage. What we see mostly is personal travel and short haul. And because of that, especially in Europe, you can get into a car and you can drive around. The bigger trends that I talked about in your first question, they all are behind that. But those -- that's how it's playing out in the numbers right now. So only these 3 policy measures in the end to kick in over the quarters to come.

Do you see COVID driving any behavioral changes that will persist beyond the pandemic? And I'm sure you do, so could you just talk about those changes and how they could serve as a tailwind to accelerate the secular shift from cash to electronic payments?

Yes, definitely. I mean everybody on this call would've -- if you look back, you'll see what your card statement says in February. It looks dramatically different than what you saw in July. So it's there. That's a little bit too anecdotal. So we went out and we are doing this on a monthly basis. We're doing these global consumer behavior studies to get a real sense of what's going on. It comes back to what I was saying earlier. Consumer confidence is largely driven by the confidence level in a public health response. So the news are better around cases that people will behave in a different way. But if you take a -- take a step from that, what the data says across every wave of this research, which gives us optimism for the medium to the long run, is that consumers are saying 70% of -- over 70% of them are saying they're going to continue or increase their online purchasing. So this thing about I was forced to use it because I was in lock down and might have not been a great fan of online purchasing, I learn to love it. So that's kind of what we're starting to get to see here. In a more recent effort, we extended our research to look at what SMEs see. And on the SME side, you're starting to see a similar trend. So there's a lot of businesses in the SME space that were brick-and-mortar only that are rebalancing into omnichannel. And here, 76% of them are saying that they do want to be more digital. 64%, and I love that one data point, is especially are saying that they are actively steering their customers away from using cash or paper checks, which is good. So the data is telling us there's something really happening, and it's been consistent month-on-month over that last half year. So that's encouraging. So as we extrapolate larger trends from that is it's clearly a continued push towards e-commerce. That should be a tailwind for us. It's a negative attitude towards cash, which also should be positive for us. More digital transactions, it's more digital transactions to be kept safe. More digital transactions is also more data that's associated with those transactions that's available. So we see a trend for more demand for data analytics and for cybersecurity solutions. Clearly, our services teams out in the market feel and live this every day. The cross-border point we just discussed, we believe that we've seen it in previous crises, and we believe it's here, and it also comes out of our studies. If I could, I would travel. So travel will come back. So therefore, cross-border will come back. We've had a differentiated position for quite a period of time in cross-border, and we're keeping our focus right now as a lot of companies in the travel sector are thinking when and how and best to engage. And of course, we are a partner when it comes to that. So cross-border happening over time. I talked about the government part. The 100 projects in over 30-plus countries. That was at a point in time. This is happening every day. So we value the interest of governments in electronic payments, just like a government being interested in other critical infrastructure, the electricity grid, the water grid. That's positive and if played well as governments are looking to modernize their payment infrastructure, we should be well positioned. The last thing that I think COVID has highlighted that there is a fundamental trend that is being accelerated here is the desire to optimize B2B payments. B2B payments have been a bit of a -- just broadly inefficient over the years to come. These inefficiencies have been highlighted further in a time of stress. So we see interest in the demand in the space. Across all of these trends, we're well invested, we're well positioned. And I said it at the outset, our whole work around tokenization, MDES, gateway capabilities and so forth pays off right now. But it's also the time, if you think about Click to Pay. Here's a great consumer experience, making the online acceptance of -- for checkout experience and guest experience so much easier. So we'll play right into that changing consumer behavior. We have a set of differentiated aspects of Click to Pay provided by Mastercard. NuData is one that we talked about before, additional layer of security provided by us. The government part, what comes in here of particular interest in our initiative around small and medium enterprises. Hard hit by the crisis, every government is looking to salvage that sector and get the SMEs back on their feet. So our commitment of $250 million around enabling the online business aspect of a small business is playing well into us. So 6 -- 5, 6 big trends, supported by data. I believe they're here to stay, and they're, broadly speaking, tailwinds that make me fairly optimistic for the years to come.

I wanted to switch gears and just ask about the battle for fintechs and super wallets and other digital players. It seems like you guys have had a fair amount of success winning your deals there. Do you think that's sustainable? And what might be driving that success?

Yes. Initially use the term battle here. It is -- it does feel like that sometimes it's a vibrant space. Fintech, everybody looks at this from a different perspective. You have the large digital companies. You have established players that are spinning off digital businesses like digital banks. You got neo banks, you got small fintechs, you've got start-ups. It's the whole range, the super wallets that you talked about. And we look at all of them. We look at all of them as one segment. And I think that is probably the key differentiator. We decided that early on, many years back, we have digital partnership teams around the whole world that I -- looking at this segment and its subsegments, the ones that have talked about their needs, and realizing that we have to engage. I'm telling you the obvious here, but we have to engage with these types of customers in a different way, and we've done that. Our accelerate program with its various subcomponents, be it our Start Path [ incubator ], our developer platform, our Fintech Express onboarding program, all of that has put us in a position of leadership, as we said. So we have that today. Post-COVID in a more -- an even more digital world, it's going to be a competitive landscape that's fluid. So we have every intention to stay ahead here and continue to innovate around that. And I feel positive about it. If you look at some of our recent wins, Apple card isn't so recent anymore, but the digital-first construct of the Apple card there is there have been more wins there. Thinking back around the end of the second quarter, our prepaid co-brand card, Credit Sesame, in the U.S., talk about large digital companies or telcos, Samsung. With Samsung, the SoFi Samsung MoneyCard in the U.S., the Samsung Pay Card that's [ curve ]in the U.K. And then on the super wallet side, since you brought it up specifically, Grab. So Grab is a Southeast Asian super wallet. It's a financial -- a super market, I would argue. They're issuing with us in the Philippines, and they're buying a lot of services from us, a great partnership over there. I could say the same about PayTM in India. And in the past, we talked about our partnerships with WeChat and Alipay in China. So that's all really fantastic. I'm very happy with our progress on the fintech side. But it makes us what we learn out of fintechs and how we become more agile and how we grow along with them, makes us a different company, which makes us more interesting with our existing partners. And our existing partners who are battling or partnering with fintechs themselves are coming to us and say, "Well, you've got all these partnerships, what can you do for us?" So the recent launch of the Chase Freedom Flex credit card. If you look at some of the digital benefits in there, they're coming from our digital partnerships. So what is happening on the fintech side helps us on our traditional customer segments just as much, which is a virtuous circle.

Got it. I wanted to move to the B2B front, which you mentioned earlier. I know you guys recently announced the commercial launch of Mastercard Track Business Payment Service in the U.S. Can you just talk about the strategy in the B2B space and how you're going to market with this solution?

Yes. So I'm happy. All puns intended, that track is on track. We said to you in September at the Investor Day, we explained the logic here. Two-sided network, a solution that facilitates easier payments between suppliers and buyers with as much data as needed with much -- as much transparency as needed with simplicity for reconciliation purposes and so forth. At that time, we put out a pilot into the market in the U.S. with a focus on the restaurant vertical. And as we said, we would launch in the first quarter. And I have to say, I was amazed by our work. We had our Mastercard Labs function actually create the platform, build it out in 90 days and get it into the U.S. market and that in the biggest pandemic that we've all seen together. So we went live in the market, 13 launch partners. Global Payments, Avid, CSI, Fiserv and many more. And the attraction here for these partners were all somewhere in the B2B space, but decided to partner with us, was this view that together by creating a 2-sided ecosystem, there is a path to scale that's easier to achieve than each and every one of them could achieve in isolation, either by focusing on buyers or suppliers, which is generally the nature of their business, only one side. What are we bringing to the party? It is a supplier directory, over 200 million entries and tells you who are you trying to pay. And where do they -- and in terms of the compliance record, a pricing and payment preference engine, say some -- a medium-sized company could say, I want all my amounts over 500,000, they've got to come with ACHplus full data and as quickly as possible and something else I want over a batch VCN and something else over VCN. So just choice in payments and outsourcing the headache. That's what this platform can do. Our first step into that was with the B2B hub that we partnered on with Avid, where we have an investment. All of this comes with a data switch. This is the key differentiator here. It's a data switch that brings an ISO 20022 full data regardless of the underlying choice in payments, which addresses the whole reconciliation transparency, what have I paid, whatever been paid for, et cetera. And then of course, all of this is not helpful if you're offering choice, but then you don't have a path to choice or multirole capabilities. So we're starting with VCN in the U.S., but it's going to go ACH and it's going to go from domestic into cross-border. Plan is to be live in other regions by the end of the year, at least with a pilot in every one of the regions. So I'm pretty excited about the proposition as such, the strength of the starting partner set, the interest in the other regions. But I'm also realistic to tell you that this is going to take some time to build a network like this out. But I'm encouraged by our first significant step forward here. Commercial transactions are flowing as we speak.

Great. I know on the last earnings call, you talked about growth in services business being strong, and I think it was continuing to outpace the core business in the second quarter. Can you just talk about a little bit the strength in services and why it's so important to Mastercard? And maybe I think a lot of us thought that services would be weakened by the pandemic, but it's still remains strong to our surprise?