Mastercard Incorporated (MA) Earnings Call Transcript & Summary

Great. Thanks, everybody, for joining us today. I'm here virtually with Mastercard's President of New Payments Platforms, Paul Stoddart, and Warren Kneeshaw, Head of IR. Thank you for joining us, gentlemen. And maybe with that, we can hop right into some questions.

So Paul, maybe you could give us the rundown on your background, your current role at Mastercard, a good place to start.

Sure. No problem. Hi, everyone. Pleasure to be with you again in these strange times. So I guess, I'm somewhat of a reformed banker, as they say, having spent the first part of my career, both at RBS, NatWest Group and Barclays and Barclay Card. So at RBS/NatWest in transaction banking and merchant acquiring with WorldPay and at Barclay Card, I co-headed their corporate finance team. So more issuing and merchant acquiring. And then moved more ore into the account-to-account and ACH side of payments with Vocalink, joined Mastercard through the acquisition of Vocalink and I now lead the business unit called New Payment Platforms, which encompasses Vocalink, and it really is the unit that's driving Mastercard's expansion from cards into the broader payments landscape, been doing that now for a couple of years.

Okay. And that's the good segue to sort of addressing the -- over the past several years, Mastercard has obviously embraced this multi-rail strategy. Maybe it's worthwhile to just kind of define the strategy itself and talk about why it's important for the future of the company?

Yes. So I think we've all seen it. It's really in response to customers that, for Mastercard, we want to be able to offer choice and flexibility in the propositions that we bring to customers. They increasingly expect it. And so that means we need to go beyond cards. Now cards has served the business very well, and will continue to for the foreseeable future. But the larger part of the payments landscape, the 80%, if you like, of electronic payments, doesn't relate to a card. And so this is about moving Mastercard into a position where we can offer the choice and flexibility across kind of any rail to customers. So why is that important? Well, that broader set of flows, as I said, is the 80% of electronic payments, whereas the carded electronic payment flow is roughly 20%, a bit less. We're talking over $200 trillion of flow across all sorts of use cases, obviously, including B2B, the P2M, P2P, all the acronyms, as they say. We know the payments landscape is changing fast. Often, customer experiences can be poor, there's a lot of inefficiency still in payments, a lot of paper and so technology advancements also presents us an opportunity to really make an impact on that. I think the other thing I'd say is, as we've seen around the world, being locally relevant is really important these days. And in times of crisis that we see now with the pandemic, we've been right at the heart of supporting governments in their initiatives to support businesses and their citizens. So it makes us very nationally relevant, and that's something we think is important for the future.

It makes a great deal of sense. So let's drill down into each layer of the go-to-market approach. I mean I remember at a recent -- one of the more recent Analyst Days, kind of you guys outlining some different layers where you can play in the marketplace here, let's start with the infrastructure there. Can you maybe update us on what you're thinking around where Mastercard is headed in infrastructure and sort of, again, why it's important to play in that layer?

Yes. So 3 layers we outlined, and we play in all 3. We don't always play in all 3 in every market. But in all the large markets, certainly, it is our objective to try and play in all 3 layers. And the 3 layers being the infrastructure, the application layer and the services layer. So on the infrastructure layer, we are now active in all 5 geographic regions. We have key markets like the U.S., the U.K. and Singapore, who are customers today. And markets like Thailand as well have been customers now for a few years. And in terms of the implementations that have been underway, so the graph, if you like, for this year, both the -- or all of the Philippines, Peru and Saudi Arabia now are all live with at least 2 banks. You got to remember that all the banks in the market eventually join the service and they typically join over a period of time when they've got work to do and so on. So there'll be a scheduling of on-boarding that we work to. But we're expecting all of the banks in those markets to be on the platforms next year. So they're, I would say, the 3 advanced implementations that have been making great progress this year. The one that's at its earlier stage is the P27 Nordic's implementation. This is a global first at many levels, where it, we -- we're delivering a single multi-currency cross-border real-time payment solution across 4 countries. And the P27 commercial entity that is our customer in this journey represents the banks of those 4 markets and is -- has commissioned the solution. So we're kind of early stages of implementation there. As you can imagine, it's when you're dealing with global first then -- and very building new frontiers in some of the technology that we're doing here can take a little bit of time, but really pleased to see the progress there. The big one, I guess, is something that I'm sure people would have seen a couple of weeks ago, the announcement from Payments Canada. So Payments Canada has selected us as the clearing and settlement solution provider for their new real-time rail. They expect that to launch in 2022. So this is continuing on our run of successes with major markets around the world. It's the solution that we've already launched in a number of those other markets. DataRich provides a platform for innovation and that's how Payments Canada are thinking about it. Now they see this as transformative for their market. And that platform for innovation will allow, and I know we'll come and talk a little bit about that, the development of applications and services on top. As part of this, we'll also be -- we will be responsible for on-boarding all of the participant banks and financial institutions onto the new platform. So really, really exciting. That will obviously mean that our technology is at the heart of both the U.S. and Canada's real-time payment systems. And, of course, you may think, well, what can you do about connecting those and that's something that we're also starting to have some conversations around.

Okay. And you brought up applications, which is the next layer. So maybe talk about kind of, I guess, what you mean by applications and maybe some examples of some that you've launched?

Yes, yes. So I think, again, just to reiterate, the 3 layers, infrastructure, applications and services. And infrastructure is important because it's a stand-alone commercial opportunity that makes sense, particularly in the way that we're delivering it. We're delivering it with a global innovation model. So we have real strong economies of scale by operating a global product team, global support team. It -- we see that banks and customers are increasingly consolidating their relationships with single providers. So we want to ensure that we're the partner of choice. And we know that, that makes sense because we're seeing -- once we've secured these opportunities of any of the 3 layers that we tend to win in the other layers as well. The -- I talked about the national relevance before. I'm just -- I wanted to make a couple of points on the value of the infrastructure as I lead into the application space. And increasingly, being -- playing the infrastructure role gives us visibility of the data. And the importance of that has manifested itself through many different aspects as we look at both the applications and services layers. Not only visibility of the data, but also we look at the increasing utility of the data that's flowing across the infrastructure. So traditionally, single market ACHs would have had just payment data flowing or very, very limited data that sits in the payment traveling with it. But now, we make available a broad range of, what we call, nonpayment messages that run with the payment transactions. So the utility of the infrastructure that we're putting into the market has increased materially and is particularly valuable for open banking trends that we're seeing now in multiple markets. Obviously, standardization of message formats becomes increasingly important and allows us and the participant banks to drive economies of scale. So why is all that important for applications? Well, it's important because standardizing the message flow that runs across the application layer is kind of efficiency and value-add, number one. So being able to carry a lot more data through the application layer, allows us to: a, drive more transactions to the infrastructure; and b, develop a services proposition off the back of that, which is using data analytics and AI to protect the system, identify fraud and money laundering and so forth. So the applications become extremely important in driving volume to the infrastructure, in leveraging the data that rides across the rails that meet particular customer needs. So if it's a P2M or a P2P or a bill pay, then the application layer is serving those direct customer needs. Some examples of the applications, bill payments. We've launched bill payments in the U.S. with Bill Pay Exchange. U.S. consumers pay 15 billion bills annually. Roughly 50% of those are electronic. I should say, only 50% of those are electronic. The BPX Service, we can now reach 1/3 of all bills being paid and 1/4 of all active bill pay consumers. Betalingsservice is the prime billing solution in the Danish market, also present in Norway. That's part of the net's corporate services acquisition that we announced earlier in the year. We're expecting that to close in Q1 of next year. And, of course, direct debit, which is the largest bill payment solution in Europe out of the U.K., it gives you a sense of what we're doing in the bill payment space. And all of these solutions are driving transactions to the infrastructure and all of these solutions are providing valuable data that's flowing across the rails that allows us to build additional services on top like which are the billers that have still got the most paper? What's the average value of bill payments in the utility sector? Our billers, as businesses, still having their bills paid on a regular basis and that's really important in something like we've seen in the last 6 to 12 months with the pandemic. And we've been helping governments understand our businesses being paid still, are people still paying their bills and so on. A couple of other examples of applications. Person-to-merchant applications in the U.K. with our Pay by Account solution, also in Thailand and India. And what that does is give us an added play in the everyday spend category. And we have Barclays and HSBC on-board in the U.K., well pay on-board from a merchant perspective. The last application that I do think is worth positioning is in the B2B space with Track BPS. And Track BPS is one of our B2B initiatives. So it sits very much in the B2B application space. We -- it got a supply directory, it does card and ACH account-to-account, it has a sort of payment optimization module and we see that as a strong driver of growth for us going forward.

So it's very fascinating. So there is a kind of a synergy that accrues to being active across these different layers. It's not simply that you can opt to play here or there. If you're in all 3, then there's a bit of a virtuous cycle that emerges in terms of driving volume and/or data and/or all the component parts. It's actually quite interesting. And so you touched on services already. Maybe you can kind of delve into that piece of it a little bit more. Which -- you touched on some important kind of data that might feed volume into the other layers, but maybe you could just elaborate a little more on the progress you've made on the services side.

And you're absolutely spot on. The synergies between the layers are exactly why we're interested in playing in the layers. Now we've designed the layers to be able to work independently of each other as well. And so we don't have to be in the infrastructure to deliver applications and services. And we don't have to be in the infrastructure to deliver services by themselves. And so being able for those components to be independent of each other means that we can operate them in any market because we're never going to be all 3 in all markets. So we need that agility to be able to respond to market demands and find the right entry point. Now services has been a hugely valuable business area for Mastercard for the last few years, and it continues to be. And so, I guess, what I wanted to do is leverage that immense value proposition inside Mastercard and apply it to the account-to-account, the new payment and platform space. So if you look at how those propositions break down, the adviser's group is really there and how we're using it in MPP, is to help banks and help governments think through what does the modernization of the national payment system really mean for them. What does real-time payments mean? What does open banking mean? How can they optimize cross-border, et cetera? In a market that's already made a decision about moving to real-time payments, then it's about how could they develop their business case to support investment in a range of new products and services that will leverage the real-time payments infrastructure. And then once it's live, how do I on-board it? How do I on-board my customers to it? How do I help, as I was talking about before, how do I help the participants in the ecosystem build out that healthy application layer that I want to see it in the infrastructure provider, but that in any infrastructure provider would want to see are such that we get the transaction and transaction volumes flowing in the way that we'd like. Obviously, there's a big reporting and analytics need around that. Real-time information is often talked about across various industry sectors. And so looking at the performance and the participation of those in net payments network at any one point in time, looking at the exposure, the liquidity, looking at the resilience, looking at the responsiveness, all of that data is valuable to various different parties in the ecosystem. And then, of course, I touched on it earlier, protecting the network is absolutely critical because those -- these new payment networks are generally the target of a fraudster or a bad actor, as they say. And so what we want to do is, make sure that the participants of the network trust the network, that the security of the network is where we want it to be. And identifying abnormal behavior, for example, of money moving between bank accounts and using AI and machine learning allows us to inform either the central bank or the regulator or the very least the bank whose accounts might be being exploited as to some anomalies in the movement of funds between accounts. And that solution has demonstrated in a very, very short space of the time, it's value to participants in the U.K. We're in the process of implementing it now in the U.S. and it's increasingly becoming a standard part of our infrastructure implementations around the world. And that ultimately is about increasing trust within the network. So lots of rich service propositions that can be developed, largely off of the data that's carried across the application and infrastructure layers.

You've made a number of key acquisitions over the last 12 or 14 months like Transfast or Finicity, which closed recently. Can you give us an update on sort of how those are progressing and how they fit into the broader multi-rail strategy for Mastercard?

Of course. Yes. So let's take them. In Finicity, we were obviously delighted to see that the DoJ approved that a couple of weeks ago. That allows us to quickly move into sort of integration implementation mode. Finicity supports our open banking initiative. And that has been run out of Europe for the first sort of 18 to 24 months where the European landscape was probably a little bit further ahead in terms of standardizing how open banking would come to market and in [Audio Gap] in the market. And so Finicity is a great asset to add to our open banking initiative, and we will quickly bring a lot of the leverage of the products and services that Finicity have developed to Europe and to other parts of the world. Transfast, a cross-border transaction. We are midway through the integration of Transfast. It is an extensive business across multiple markets and supports our cross-border services business unit, which sits in the application layer -- across the layers I was talking to you about before. So really pleased with the traction we've seen in those markets. There were businesses that got hit by COVID and there were businesses that did well out of COVID. And initially, we weren't sure with some of these businesses, where were they going -- where they're going to be impacted, but I'm delighted to say that the acquisitions have really demonstrated how they offer increasingly performance through resilient times, which has been great. So great progress there. Centurion is taking longer. We're targeting Q1 next year. That should be comfortable.

Just to be clear, business.

Yes. Sorry, Centurion is the next corporate services business. And we have obviously had to navigate the landscape of competition reviews and so forth as it relates to that business. I'm pleased that we've been able to do that. It's taken longer than we planned. And we're now forecasting that we'll complete that in Q1. And Centurion plays a role in the infrastructure and in the application layer. So as you can see, the acquisitions fit quite nicely across the layers. So we're really pleased. Some things always take a little longer than others, but we're actually really pleased with the progress across the 3.

Okay. We just have a couple of minutes left, but I wanted to go back to the application layer with you, just basically ask about cross-border, which seems to be a compelling use case for the multi-rail strategy. Maybe you could sort of give us your views on utility of what you're building to cross-border and solutions, et cetera?

So I touched on it with the Transfast acquisition there. And so cross-border has increasingly demonstrated to us that: a, it's a pain point for our customers. So as they are thinking about solutions that they bring to their customers, whether that's consumer or business, cross-border still has a number of frustrations and pain points and inefficiencies that we think Mastercard can really bring improvements to. And we've seen that very quickly within that business line. So we're now bringing banks on-board to our cross-border services proposition from all of the regions, which given that we started with the bulk of it in one region, it's been great to see the progress during the course of the year. You may have seen announcements around bank clients in China and in North America as well as in the Middle East, and we are delighted to bring those new bank clients on-board. And of course, there is a -- like we talked about, the synergies across the layers, there are synergies in bringing corridors on-board. And so as you bring banks on-board as senders into your network, they also become receivers. And so the network grows as we add banks and partners into our wider cross-border services network. So I'm really excited about cross-border because, again, talking about resilience during challenges times, we've seen tremendous growth through our cross-border services network this year, which makes me excited about what we'll see next year, of course.

That's terrific. Unfortunately, that's all the time we have left. But thanks so much for joining us today. I appreciate it, gentlemen. Have a great day, and stay in touch.

Thanks.

Thanks, Ramsey. Thanks, everyone.

Thank you.