Mastercard Incorporated (MA) Earnings Call Transcript & Summary

Okay. Welcome, everyone. My name is Tim Chiodo. I'm the lead payments processors and fintech analyst here at Crédit Suisse. I want to welcome our first keynote of the conference and actually the first presentation period of the 4-day event, which will run today through Thursday. I'm here with my colleague, Moshe Orenbuch. We're both very excited to have Sachin Mehra, the CFO of Mastercard here with us today. As many of you know, Sachin took over the role of CFO in early 2019, but he's been with Mastercard in various leadership roles for over a decade now. We're also very glad to have and welcome Warren Kneeshaw, the Head of Investor Relations, who's also joining us today. So with that, I want to pass it over to Moshe to begin the questions and also thank both Sachin and Warren for being here and for helping to kick off the conference. Moshe?

Great. Thanks, Tim. And my welcome to both Sachin and Warren. Thanks for joining us today.

And maybe to kick things off, Sachin, could you share any recent trends that you're seeing and comment on how Mastercard is navigating the pandemic.

Sure, Moshe. First of all, good morning, and thank you for having us today. It's our pleasure to be here. And hopefully, we can get to do this in person soon enough here. So back to your question. I think as many of you might have seen, last week, we provided some updated operating metrics as it relates to what we're seeing from an overall trend standpoint. And what we shared with you was an additional 4 weeks' worth of data relative to what we had previously shared with you at the time of our third quarter earnings call. So this took us with -- metrics out to the week ending November 21. And the headline I would tell you is that by and large, what we're seeing is that most markets continue to remain in the normalization phase with some markets in the growth phase domestically. The trends overall are pretty steady when you adjust for that 1 week in October, which we had mentioned was the week, which was impacted by some significant promotional activities by e-commerce players as well as their competitors. But by and large, I would tell you that the trends remain mostly steady. We clearly are keeping a close eye on how things are evolving in the environment. I mean it's no surprise to anybody as to what we all see in the press today and not today, just in the recent past, as it relates to how the COVID virus is flaring up in different parts of the world again. So we stay very close to that to make sure we're on top of it. Look, we've always said this and I'll say this again. It's quite possible that the recovery back may not be linear. It's all a function of how the virus evolves. And more specifically, I'll share with you what we're seeing on switched volumes, switched transactions, cross-border in the most recent weeks. Let me hit up on switched volumes first. So by and large, switched volumes remain steady. And you've seen that in the numbers. So I won't go through the numbers on a week-by-week basis. Just a little bit of color geographically on switched volumes, we saw a little bit of strength in the U.S. on the back of some better retail sales taking place in the U.S. in the last few weeks primarily in the electronics category. That was offset by some level of weakness, which we saw in Europe, which we would expect given the more restrictive measures taken by governments in the European countries as it relates to what's going on with the flare-up of the virus there. In terms of how people are spending, we are seeing card-not-present switched volume show some level of strength. You would expect that to be the case with more people staying at home, card-present activity is getting impacted. So there's little gives and gets as it relates to what we're seeing on switched volumes. On switched transactions, they're a little bit weaker. You can see that in the numbers. And a large part of that, I would tell you, is a function of card-present activity declining. And when I say declining, I mean the rate of growth of card-present activity is such that it's showing a slight downtrend just by virtue of the fact that more people are staying at home as we see it. The last piece I'll share is around cross-border because I know this is an area of focus for lots of people as it is for us. Look, I think cross-border, by and large, I would put it into the bucket of remaining steady. There's been some level of improvement we saw in cross-border primarily driven by the low-yielding intra-Europe cross-border. And that too has been more in the card-not-present category than it has been in the card-present category. The other cross-border, which is the non-intra-Europe cross-border, remains at fairly minimal levels. There's a little bit of a movement on that. But whatever shift you are seeing in cross-border is being driven mostly by our intra-Europe cross-border category spend. So that's holistically, Moshe, what we're seeing in terms of trends, broadly speaking, in the most recent weeks. If you look -- I'll just close out by saying every day is a new day. We're keeping a close eye on it. We're encouraged by what we see in terms of the news from a vaccine standpoint, clearly important developments there. But we have to see the impact of that still come through, and we expect that, that will take some time by the time the vaccine really scales. So we'll keep close to that in the interim.

Great. That was a great way to kick things off. Thank you, Moshe and Sachin. Let's move to the next topic around open banking. So you've recently completed the acquisition of Finicity. Maybe you could give us an update on what that means for Mastercard's overall open banking strategy?

Yes. Look, we think open banking is a very important development and it's an exciting area of opportunity. We have been involved in the space for some time now with various elements of what I would call organic build, which we've been doing over the last few years, focused primarily on the European market, and we've had some level of success there as well in terms of some deals which we've announced in terms of engagement with Tesco and the work carries on, on that. In the U.S., you're right about the acquisition of Finicity. Very excited about the acquisition of Finicity. The transaction is now closed. They're a part of the Mastercard family. We like what we see with that company. In particular, what we see is data management practices, which are very much in line with the philosophy and culture of Mastercard, care deeply about data privacy, consumer consent. They care deeply about creating a balanced ecosystem. They've got tremendous reach from a connectivity standpoint across the banking ecosystem. And the quality of that reach is incredibly important. And when I say quality, it's what's the nature of the engagement that you have with your banking counterparties both from a technology standpoint as well as from a relationship standpoint, which is important. And those are all attributes of Finicity, which made them attractive to in the first place. They have data sharing agreements in place with several banks in the U.S., including JPMorgan Chase, Capital One, just to name a few, and Wells Fargo actually is the other one. So we like what we see in terms of the fundamentals of what makes this business an attractive business. One, around connectivity; two, around data management principles; three, around respecting the interests and needs of consumers and delivering innovation for the benefit of consumers at the end of the day. The other aspect of Finicity, which is interesting and made it attractive to us, was their presence in the applications space. And when I think about applications, some of the applications, which they've got some level of prominence on around credit scoring and credit decisioning, clearly, an area which could be very attractive over the longer term. They have their clients in the nature of Quicken Loans and Experian who they sell these applications to. They're focused primarily on the mortgage industry today, but not exclusively there. There have been other areas which they kind of explore and we see tremendous potential to be able to leverage those applications, which currently exist as well as build out new applications given their strength and connectivity to deliver value across the universe to both banks as well as fintech players in this space. So net-net then, I would tell you, important area, growth opportunity, not only in the U.S., but globally, we have every intent to leverage Finicity's capabilities in the U.S., but also take them and migrate them over into the global environment, and we remain encouraged by the opportunity and the acquisition in question. So more to come on that. We're still in the very early days after closing. So we'll pick it up, and we'll be giving updates out as we move along here.

Excellent. Thank you very much. Sachin, Mastercard has announced that you'll be a network partner for the new Citi Plex account on Google Pay. Can you talk a little bit about that opportunity and any other recent deal activity?

Yes, Moshe, that's very interesting. Mastercard's focus around digital has been one of our competitive strengths. And you've seen that play out in several wins that we've had. We've had that in the fintech universe as in the neobank space. You've had that take place with the Apple Card, with PayPal, you've had this in all of these areas where all the investments we've made in digital and the front foot which we lead with on the digital standpoint has actually been a very prominent part of the strategy. And I view this as one more step along the way, which is we're very excited about it. We believe that Citi will be one of the first few banks to launch the new Google Pay App and the Plex account, which comes along with it. It will come with a provisioned digital debit Mastercard, which will be available to anyone who signs up for Citi Plex account. And for those who want the physical card, you'll get a contactless card as well, which will be available. So again, we view this as an important play. People care about consumer experiences, and this is one more way in which delivering a pleasurable consumer experience and Mastercard being a part of delivering that is how we see this. So that's important. That's interesting from our perspective, but it's really an extension as far as I see about all the work we've been doing from a digital standpoint.

Got you. Maybe just as a follow-up, could you talk about other deals and other recent activity that could have an impact on rebates and incentive [ structure ]?

Sure. So we've been pretty active on the deal front, Moshe. We've been -- and you've been hearing about this as we've gone through earnings calls. We've talked about several of the wins we've had. We talked about the Chase Freedom Flex Card. We've talked about more recently about the regional Santander deal, which we have in Europe, which is very exciting from our perspective, and that's just to name a few. There have been several such deals. The reality is that is the kind of stuff, which falls under the grow pillar of our strategy. That is important for us to continue to win share and continue to drive wins, both in the nature of winning new deals as well as renewing with existing partners. An example of renewing with existing partners would be the renewal of our Swedbank deal now where we're going to be the exclusive partner for Swedbank going forward. It's a long-term deal, very interesting from our perspective. All of this is important because more volumes and more transactions, as you would imagine, are important for the franchise. Along with that, there are implications from a rebates and incentive standpoint. And more broadly speaking, what I would tell you is, as we think about rebates and incentives, we should think about them on the following categories. They get impacted by the new deals we do as well as the renewals of existing partner deals, which we have. And then there are the components of rebates and incentives which are there, which are, as you know, there's some element of which is fixed in nature, and there are other elements of which are variable in nature. And the amount which are fixed are amortized over the life of the deal. They tend to -- hence, when you think about rebates and incentives as a percentage of gross revenues, they tend to toggle up and down depending on where volumes ultimately play out, right? And then the variable component varies the volume as it sounds like. And we would expect that we'll stay active on the deal front. And we've shared some level of thoughts around what we think about rebates and incentives for the fourth quarter. And that's really what I'd share with you generally speaking about the prominence of the deal activity as well as the implications on rebates and incentives.

Excellent. Thank you. Let's move to the next topic, which is B2B, obviously, an important one with the large TAM, large web space. You recently made an announcement around Mastercard Track. Perhaps you could talk a little bit about Mastercard Trackand the overall B2B efforts at Mastercard.

Sure. So I think it's -- I think the thing about the B2B opportunity as things we've been doing for some time now as a company and things which are paying off in the short term. And this is all the activity which goes on in our commercial business on card rails. And we mentioned to you historically that we have roughly 11% of our GDV, which relates to our commercial capabilities and our commercial products. And that includes our small business propositions. It includes our T&E propositions, our purchasing card propositions as also our virtual card capabilities. And we're clearly market leaders on the virtual card side. We've created initiatives across several areas on that front and continues to remain an important part of what we want to do from a B2B standpoint. So there is -- I know there's a lot of discussion and dialogue around Mastercard Track BPS, and I'll come right to that. But I think it's important to put into perspective that there is an existing commercial capability, which delivers volume and delivers revenue, which is growing at a pretty healthy pace, and that's what we've been doing as a company for some time now. Now let's move over to what we call the accounts payable opportunity and what we want to try and tackle with Mastercard Track BPS or Business Payment Service. At the highest level, what we're trying to do is we're trying to solve for the pain points which are unique in the accounts payable space. And the pain points which are unique in the accounts payable space relate to the need for data for better reconciliation of payments received by suppliers against the invoices that they provided to buyers. Today, it's a less than ideal and less than optimal experience, which exists in terms of how people have to go back and forth in terms of reconciling invoices to payments. Number two is around ensuring that while you're delivering that data and you're enabling the payment, you can do it a multi-rail capability. And multi-rail is important because if you're only one-dimensional, what we've come to realize is it's really, really difficult for an accounts payable department to say, "I will my file and I will give you x amount of payments for suppliers who accept cards and for the rest I have to process the payments myself." So that kind of really doesn't work, and the proposition falls flat on its face. So multi-rail is important and that's what Mastercard Track BPS does. Number three is around ensuring that there's safety and security in the payments. And number four is around making sure that you're enabling the provisioning of working capital to those who seek it. And working capital could be sought by suppliers or it could be sought by buyers. And Mastercard Track BPS is targeting to deliver on all of these fronts. And there are 3 or 4 elements of Mastercard Track BPS which kind of get us there. But even before I get into the specific elements of Mastercard Track BPS, the one thing which I could leave you with is Track BPS is about creating an open-loop capability to deal with business-to-business payments, which take place in the accounts payable space. There are several accounts payable capabilities which exist in the market today. A large portion of those happen to be closed loop. They're closed-loop ecosystems where the person who's processing the payables has a unique set of suppliers who they can pay to, but that's the extent of their reach, and there are all these islands which exist. What Track is going to do is bring those islands together to create an open-loop capability to allow ubiquity of acceptance across that supplier base to the best extent possible. Now to do that, what we've done is we've built a supplier directory. That's one component of Mastercard Track BPS. The second component is the establishment of data standards. Creating common data standards is a really important capability, which we need because when you do that, what you're doing is you're enabling for better data flows to go across from the folks who are making payments to the folks who are receiving payments to allow for better reconciliation of invoices to take place. Number three is to enable the provisioning of the multi-rail capabilities. And this goes back to the point I was making, a prerequisite being enable payments across card rails, around ACH rails, blockchain in the future, that should all be kind of up front and center in terms of what Track BPS is aiming to deliver. So we're making very good progress. Just to give you a few data points, and we've been kind of updating the market on this over the course of 2020. We had highlighted very early in the year, Mastercard Track BPS in the U.S. We did the commercial launch of it in May of this year. And it was enabled for the optimization of virtual card payments as part of the first commercial launch, which was done. We have several partners tied up, and these partners are the ones who are going to act as the agents who will help us get the proposition out to the end corporates. These are buyer paying agents and supplier paying agents, amongst them into -- Global Payments, Fiser, AvidXchange, CSI. There a whole bunch of people who we've kind of engaged to make sure we're creating the right ecosystem model to come around on this fare. More recently, what we announced is we have now enabled Mastercard Track BPS for account-to-account payments. So remember that vision of ensuring that we have multi-rail capabilities. We wanted to be sure we were doing that in a deliberate manner. We delivered it for virtual card capabilities as step 1. It's now enabled for both virtual cards and for ACH on that basis. And everything I'm talking about is in the context of the U.S. market, which happens to be one of the bigger markets where the opportunity sits, but it's not exclusively to the U.S. This is an opportunity we see as being right to tap across the globe, and so we are taking it across the globe. We are piloting in several markets, and the intent would be to roll out over the course of the next year in several of these markets in the international sphere as well. So look, open-loop network, tackling accounts payable flows to solve unique pain points in that space, making good progress, building out the ecosystem. But I do think, as with a lot of things which we do in our industry, building out the ecosystem and creating the capabilities and getting the right economic proposition out there takes time. So I expect that this will be a multiyear journey, but we're well on our way.

Wonderful. You've addressed some of these ideas, particularly as they relate to the B2B space. But I was hoping we could talk a little bit about your multi-rail strategy more broadly. Can you kind of give us an update as to where that sits? Obviously, Mastercard was early in this area and has kind of been -- has been a leader. So...

Sure. We think, as a company, it's really important. If we're serious about tapping the addressable market, which exists across consumer-to-business payments, across business-to-business payments, across business-to-consumer payments, the whole spectrum of the opportunity, you've got to have multi-rail capabilities. To identify yourself as a card network and only having card rails will not allow you to get after that multi-rail capability, which is why we went there in the first place. And we've shared some data with you as part of our 2018 or 2019 investor conference, where we shared with you what the breakdown of payments taking place over ACH rails is. And you can see, it's a fairly sizable amount of payments which take place over ACH rails. So we think it's important that you need to be present with card rails, where card rails work well and with ACH and the best-in-class ACH, which is our real-time ACH capabilities and those places where ACH is the [ need of the game ]. And we're doing that in the nature of executing on our strategy at the infrastructure level, the application level and services. Let me hit up infrastructure first. Infrastructure is, think about it as the -- just like in cards, you have authorization, clearing and settlement. Infrastructure in ACH is the equivalent of the authorization, clearing and settlement piece, which exists there. You need to build connectivity on what would be the real-time ACH capability. Now do we need to be in infrastructure in every country? The answer is no. But is it important for us to be in infrastructure in critical markets? We believe that to be the case for the same reasons why we believe it's important for us to be switching transactions on card rails. Being in the flow is important. That's what we do by being in the infrastructure, and we've seen really good progress on that front. In fact, our real-time ACH capabilities with the Vocalink acquisition as the primary backbone behind it, we have now mandates in 12 of the top 50 GDP countries to deliver our real-time ACH capabilities. And we've been giving you updates on this. We're making very good progress. We've got mandates out in Asia Pacific, across the Philippines, Thailand, Singapore and Latin America. We're making very good progress. We recently announced P27 in the Nordics where we're going to be the provider of the infrastructure capabilities there. And most recently, we talked about how Payments Canada has selected Mastercard to be the real-time ACH provider in the market in Canada. And we also license the software, which we have for the TCH in the U.S. So very important. And this is not exclusive inasmuch as I'm not giving the entire list of countries which are there, but suffice it to say, making very good progress on delivering on winning mandates on infrastructure but also taking them and getting them live. Next up is applications. And we believe applications are important because what applications tend to do is besides -- it's one thing to get connected and to allow for payments to go on real-time rails. It's [indiscernible] pain points which exist, either for small businesses, large businesses, midsized businesses or consumers, and that comes through the application layer and the services layer. And making very good progress on Pay by Bank. We've been talking about Pay by Bank for some time now. In the U.K., we recently announced how Barclays will be enabling its roughly 8 million mobile wallets for Pay by Bank capabilities. And when I take those 8 million mobile wallets plus what we have with HSBC, what you now have is roughly 1/3 of all mobile wallets in the U.K. market which will be enabled for Pay by Bank. And as you know, in our business, building scale is really what gets you going. And that's one side of the equation, which is enabling consumers to use Pay by Bank as an alternative method of payment to debit, right? So while we continue to win in debit and we continue to do well in debit, we think it's important to provide choice to consumers, and that's what we do through the delivery of Baby by Bank. On the merchant side, we have approximately 700 merchants signed up in the market in the U.K. for accepting Pay by Bank. So making good progress. Now we've got to start to see the volumes come through. And I think with Barclays coming on board, and we were very hopeful that going into 2021, we're going to start to see some of these volumes start to ramp up there in terms of pay by bank. The other application, which has been a big focus area for us has been in the bill payments space. And we think bill payments is an opportunity not only in the U.S., but it's an opportunity which is global in nature. We announced the launch of Bill Pay Exchange. I guess it was about a year ago, and we made very good progress on that front as well. We now have partners signed up who are enabling the presentment of bills on Bill Pay Exchange, which represent roughly 1/3 of all bill payments -- all bills paid in the market of the U.S. When you combine that with the fact that we have roughly 1/4 of the consumer side of the equation also partnered with, we're starting to build critical mass on bill payments as well. And this is purely in the market of the U.S. That same aspiration is true for other markets, and we're building out those capabilities in other spaces. The last layer I'll tell you about is services. And think about services no different on ACH as you think about services on our card rails. You know we deliver services on cards. They range from everything from data analytics to cyber intelligence tools and to our consulting services. A lot of that playbook is what we are replicating on ACH. And I want to link this back to the importance of being in infrastructure. Being in infrastructure helps you to get first-mover advantage on applications and helps you be in the flow, which allows you to deliver data analytics, which allows you to deliver cyber intelligence tools at the services layer on ACH. So all very important components, good progress being made, Moshe, out there. We're also on track for our acquisition of the Corporate Services division of Nets. We've been talking about that acquisition, which we announced last year. And we're very excited about the potential that's going to bring as well on a going-forward basis.