Mastercard Incorporated (MA) Earnings Call Transcript & Summary

Good morning. This is Matt O'Neill again from Goldman Sachs, payments and IT service. I'm very pleased to be joined by Sachin Mehra, CFO of Mastercard. So Sachin, without further ado and not too far off the heels of earnings -- first and foremost, thanks for joining.

But I figured we'd just dig right in on the competitive front. If you could give us that recap of some of the recent and notable wins and how you expect some of them to be implemented. And what people are always most curious about, which I think is the whys and the hows of how a Mastercard wins. Any particular deal? Obviously, no need to name names or otherwise, but really helping all of us understand those virtues of what sort of differentiates a Mastercard in that type of a scenario?

Okay. Sure. No, first of all, thank you for having me, Matt. Good morning to everybody, and I appreciate the opportunity to be here today. To your specific question, Matt, here's what I would tell you. We've always operated in a fairly competitive environment. And that is not going to change. It hasn't changed. That will continue to be the case on a going-forward basis. What's important for us in such an environment is to drive differentiation. And we drive differentiation through multiple factors, right? I mean it's everything from our digital capabilities to what we bring from a services capability standpoint as well as our multi-rail strategy. So we see that, that message, by and large, resonates very nicely with our existing customers but also prospective customers. And the message resonating is one part; proof points is the other part. And it's when you can demonstrate proof points is when people feel like, yes, this is the partner we want to work with. Our philosophy is very much one of let's not make this transactional, let's make this a partnership opportunity. Let's help you, the customer, drive top line growth. Because, candidly, when I think about it from a customer standpoint, a customer flipping from one brand to the other brand in terms of our core propositions is net neutral to them, unless you're able to drive better performance of the existing portfolio, unless you're able to bring them a set of capabilities, which helps them broaden their consumer appeal, so on and so forth, which is what our differentiated assets do. And so that's kind of the overriding theme in the competitive environment as to how we are trying to drive forward in terms of trying to win more than our fair share. Will we win every single time? The answer is no. We would like to win more often than not. And clearly, over the last few years, that's been the case. More specifically, in the fourth quarter, as we've kind of talked through this, we shared with you some recent big wins. And we've been doing this sequentially over multiple quarters. But in the fourth quarter, we talked about the win which we had with NatWest. And that's a fairly sizable portfolio, 16 million cards -- debit cards. The debit market has been a tough market to break in into the U.K. With the recent wins we've had in the U.K. between NatWest, Santander, which we had previously announced, first direct -- there have been several wins which we've announced. Once all of those migrations are complete, we would expect that about 1/3 of the debit market would be Mastercard-branded as part of that process. Now specifically, as it relates to NatWest, we expect the conversions to start later this year. They will happen on expiry of existing card. So it will be an extended period over which the conversions will take place. But net-net-net, when I sit back and I think about it, yes, we love the fact that we're going to get 16 million new Mastercard-branded debit cards, super important. But what we equally appreciate is the opportunity to be able to bring our whole suite of services, capabilities, multi-rail strategy to that customer and other customers as well. The other deal we spoke about was Deutsche Bank, which, again, is not insignificant, right? 10 million cards across consumer and commercial, across credit and debit. And I would say the same 3 attributes in terms of the partnership approach. Leveraging our capabilities across multiple areas has been a fairly significant enabler. And again, the Deutsche Bank conversion should start later this year as well. So we feel like we're in a good rhythm. And that those were the ones we spoke about in the context of Europe. Europe is not the only place in which we're having these wins. We've had this come through in the context of the Citi Plex with Google Pay deal, which we won. Again, we're bringing our tokenization capabilities, our digital debit capabilities to bear there. Clearly, something which has been -- something we've been kind of focused on as an organization globally, and we're bringing it to bear here in this particular deal. The last one I'll mention is Walgreens, not insignificant, big player, has very serious aspirations, which go beyond just core payments. And we'll certainly be helping them with a credit proposition partnering with Synchrony Bank but also a prepaid proposition. But extend that further into loyalty and rewards. And again, we bring our services, all our loyalty and rewards to be able to participate and help win in that cause. So that's kind of the overriding basis with which we are operating in the market today.

That's helpful. Really good summary there. On a related note, absent guidance, rebates and incentives, right, the contra revenue line has always been a very hard line for the buy and sell side to forecast. How do we think about kind of parsing the dynamics of the long-term obvious positive of wins offset by what could be short-term upfront, either incentive payments or shared sort of conversion fees, expenses or otherwise versus the more stable side of that contra revenue line item, which is predicated on sort of large issuers hitting sort of volume-based tiers on an ongoing basis or not as is presumably in the case in some instances throughout the pandemic where volumes have compressed?

Yes. So I think the first thing I'd say on rebates and incentives is we've had a strong pipeline of deals, both renewals and new deals, which have been kind of in action, some have dominated wins, which we've spoken about. There are other wins which have taken place, which we don't necessarily make public. We expect that strong pipeline of deal activity to continue on a going-forward basis, both from a renewal standpoint as well as new deals. So kind of that's the overriding theme which I would put out there for people to be aware about. It's a competitive marketplace, and we have every intention to compete. And that's why we're going to be focused on making sure we're staying relevant in terms of having a strong pipeline. More specifically, what I did share at the earnings call -- the last earnings call was that for the first quarter of 2021, we expect rebates and incentives as a percentage of gross revenues to be flat or up slightly sequentially compared to Q4 of last year. So that's again to the extent of what we wanted to kind of put out there for people to just generally get a sense of how all of this plays out. But philosophically speaking, I'll tell you, yes, volumes impact rebates and incentives. The activity -- deal activity impacts it. The mix between what the recovery on domestic versus cross-border is going to impact it. We're less indexed to rebates and incentives on cross-border than we are on domestic. And there's this point which you made around the tiering effect. As volumes start to ratchet up or ratchet down, you have the tiering effect take place in rebates because people hit new thresholds. And new thresholds on the way up could be a higher amount of rebates and incentives. And new thresholds on the way down, if volumes decline, would be lower incentives. So you've got to keep that in mind. It's hard to call because not every deal is identical. In fact, most deals are just not identical, but those are considerations to keep in mind. The last piece I'll mention is when you do a conversion or you do upfront payments for new deals that you win, you have a fixed component, which will amortize over the life of the deal, independent of what volumes are. And so that factors in, in an increasing volume environment, right, the component of fix as a percentage of total growth by definition will be a smaller component and then vice versa in a declining environment. So that's what I would share with you from a rebates and incentives standpoint, Matt. Again, very hard to give you a longer-term kind of view on this, but I think those are the things to kind of keep an eye on.

Yes. No, that's really helpful. There's obviously a lot of factors at play. And I think it's always when you get the big wins, which are, of course, great, great headlines and understood for the long term, understanding the short-term puts and takes around it and obviously absent guidance would be that much harder to triangulate all those points. So no, that's great. I guess, fortunately or unfortunately, the networks have become this apex of understanding all things pandemic as far as case counts, vaccination, sort of glide paths, border reopening sort of horizon. And you guys have spoken and have been very helpful talking about the sort of vast kind of variation across the globe, whether it's the relatively open kind of Mexico to the very closed U.K. or New Zealand for various reasons, right, as we just sort of jump around. What's the latest? I know we're not that far off of earnings. We talked about this a lot during earnings. But how are we thinking about the glide path from vaccine starting to get deployed to the ultimate goal of either the world is back to normal if it ever is, but as far as what's most important to Mastercard, which is really getting that cross-border traveler physically out of their home country and into a nice tourist destination or otherwise and doing some spend there?

Yes. So look, first, I'll just touch upon -- so we shared last -- actually today's Wednesday. Approximately 2 weeks ago is when we had our earnings call. And we shared with you our metrics through the first 3 weeks of January. And I would tell you, since January 21, the metrics are generally in line with what we shared with you at the earnings call. So there's nothing new to share with you per se in terms of big changes in terms of those trends. But more specifically, I think we should break this up into two parts. There's what's going on in the domestic spend environment and what's going on in the cross-border environment, and what are the factors which influence one versus the other. And if you take domestic spend and you parse out domestic spend by what happens to be travel-related and then what happens to be nontravel-related, I would tell you, by and large, and I'm generalizing every market is different, that the nontravel-related domestic spend is -- it's working just fine. Things are working well. There's good growth rates, which we're seeing there. And candidly, in markets like the U.S., which is viewed to having benefited by stimulus payments, you see the benefit of that come through in terms of increased levels of spend, as you saw in the first 3-week metrics we showed you for the U.S. The flip side of that is let's take a market like Europe where there have been increased lockdown since the middle of December. They've persisted through January. And the reality is I don't know how long those lockdowns will stay in place, but it's had an impact to the adverse in terms of domestic spend levels there as well as it has on cross-border. And so let's talk a little bit about cross-border because I think the operative question on people's mind is when will we see travel recover. And in some cases, people are asking, will we see travel recover? Our view is we think travel comes back. What we're watching closely for is a few things. One, the pace with which vaccines are being delivered and distributed. Look, the one thing I will say is we've all taken for granted that we have effective vaccines. Rewind back 6 months ago, there was -- the jury was still out as to whether we have an effective vaccine or not. So the good news is we've kind of moved from there to seeing, well, there's not one, but there are multiple effective vaccines. Now it's a question of rolling them out, getting them to the right destinations in a timely manner and administrating them in a manner which allows people to feel comfortable to take them. We see that as a path which is underway. We're keeping a close eye in terms of how that plays out. And then related to that will be what happens from a border opening standpoint. Because just administering vaccines and not having borders open doesn't get cross-border travel to happen. So we're watching that as well. It's our expectation that towards the latter half of this year, we're going to start to see some of that come through. And the reality is we think personal travel comes back before business travel does. Just for perspective for Mastercard, and we've shared this information previously, but I think it's important to kind of dimension what all this means, for the year 2019, we had said that of our total cross-border volumes, roughly half of our cross-border volumes are card-present and roughly half are card-not-present. And then of the half which are card-not-present, about 1/3 are travel-related. And the reason I'm giving you this dimensioning is because if you believe that card-present gets impacted by your inability to travel, there's a fairly decent-sized exposure, which is there to travel full stop between card-present and the component of card-not-present, which is travel related. So -- and -- oh, by the way, roughly 85% of that -- of those components of travel, which I just described, happens to be personal travel. So that's an important consideration, right? And we think it comes back. We think it comes back when vaccines come at scale when borders open. I can't tell you the month. I can't tell you the week. What I can tell you is we're closely watching it. What I can tell you is there have been proof points in corridors such as the U.S. and Mexico, to your point, where when border restrictions haven't been there, people have actually gone ahead and done the travel. In fact, before the lockdowns took place in Europe in the middle of December, we saw accelerated intra-Europe travel take place there as well. So all of these are early signals to us saying people want to get out there and do stuff. The other question which people ask is what's going to happen from a business travel standpoint. Look, I would tell you, ultimately, I believe that business travel will come back. It's just going to take a little bit longer. I think people will -- and the reality is, just to be clear, if people start to travel on their personal accord, it's going to be very hard for them to say, I don't want to do business travel. Because how do you walk into work and say, "I just did a trip with my family, but I'm not willing to take a business trip?" And so I start to see that kind of coming through as well over a period of time.

Yes. I guess the only pushback there would be on the sort of T&E expense line, which was going to be kind of my next area of question, not just on T&E and -- but more broadly, expenses for Mastercard. There's been some windfalls to corporates broadly as far as their employees not traveling. And we'll see how, to your point on business travel, recovering maybe a little bit less of that pent-up demand fashion going forward. But how is Mastercard thinking about expenses more broadly? T&E being one component. Obviously, advertising and marketing, another large one. We've seen the ability to kind of flex those expense muscles for Mastercard pretty impressively over the last couple of quarters. And so how are you thinking about allocating and investing strategically on the offensive coming out here?

Yes. So you're right. Look, we've always maintained that we're going to be disciplined from an expense standpoint. And we've demonstrated that in 2020. We will continue to remain disciplined on a going-forward basis. We manage and drive our expenses with an eye towards the long term. And we haven't lost that focus even through this COVID crisis. In fact, what we've done is, yes, you're right, T&E by definition, people are not traveling, so I get the benefit of lower T&E expense within the Mastercard expense line. But then there are several other areas in which we have reprioritized and said, "This is not currently in favor with our customers." So take something like in the loyalty side of what we do, if that's primarily oriented towards travel and travel is not in favor, I'm not going to put a whole bunch of money into loyalty at this point in time. I'm going to actually pivot that money towards digital, towards services towards multi-rail, which is in demand, right? And so we've done that, and we've done that in a nimble manner. We will continue to do that on a going-forward basis. When travel comes back, we will put energy back behind doing things on the loyalty front, for example, using my example there. Yes, we've also scaled down on A&M. The reality is we're going to come back and do more on the A&M front, much like we used to do in the pre-COVID days, but we will be smart about it, keeping an eye on how the top line is shaping up, right? That is super important for us as part of exercising the discipline from an overall OpEx management standpoint.

That makes sense. The other area I think that has investors probably kind of most excited as we are hopefully looking back on this as a finite period of time through the pandemic is effectively what the pandemic has done to catalyze the long-term secular shift, right, to electronic payments, both online, contactless, electronic, et cetera. Where are you seeing the pockets? And how are you kind of studying what may be more sticky effectively as we come out of this and as people presumably, hopefully, are able to get back into both domestic brick-and-mortar, cross-border brick-and-mortar, et cetera, kind of going forward for the long term?

Yes. To us, the sustainability of some of the trends we've seen through the COVID period is a function of habit and experience. And by experience, I mean, consumer experience or merchant experience. And look, it's our view that the accelerated trend we saw towards digital forms of payment, right, e-commerce and card-not-present generally speaking, through the COVID environment for the most part will stay. That's not to say that people will not go back into stores and do in-person purchases. I think that will happen as well. But what people have done is they've started to build muscle memory as it relates to, "Hey, look, this whole e-commerce experience is a pretty nice experience. We like it. For certain categories of spend, we will keep that going." In fact, some of the surveys we've done suggest that 70% of the respondents basically said they plan to continue or increase their e-commerce purchases coming out of the COVID environment, right? So we've kind of done surveys. Time will tell whether that kind of plays out to 70% or some other number. But by and large, I would tell you, people have started to experience from a consumer standpoint the value of the digital transaction. Similarly on the merchant side, there were several merchants who used to in the past hold out to us going omnichannel. Well, they've been compelled to do omnichannel. There's a bible that's been based on being able to now go both in the in-person environment and an e-commerce environment. And why would I shut that down if I were a merchant? I would enable both on a going-forward basis to maximize the sales coming out of COVID as well. So I think those are here to stay. Those are things which will help us from an overall secular shift standpoint, even coming out of COVID. The next theme we think about is the usage of cash in the in-person environment, right? And I mean it's very clear. There are 2 factors which I kind of think about when I think about usage of cash. One is COVID has put the fear of God into people as it relates to why should I touch cash. I don't really need to touch cash. So let's stay away from that, which is why you're seeing an acceleration in contactless payments take place even in the in-store environment. And then also generationally. You will see that as the millennials, the Gen Ys or Zs, I forget which one they are, but the reality is my kids, let's just call them that, right? They all come into -- when they come into the shopping experience, they can't be bothered with touching cash. And really, that's a key certainly from our perspective, which was there even pre-COVID, candidly. But just for the past period of time, you're going to see that very much persist. Now I've spoken very much around consumer. We're seeing the same trends, by the way, come through on the B2B side. Have they resulted in meaningful shifts in volume and in revenue experience? Not yet. And by that, I mean, you've seen increased dialogue and demand for moving away from cash and check to electronic forms of payment in the B2B environment. However, the ecosystem is not completely ready to handle that mass shift which has taken place. The consumer side of the business had moved further along in that. And we're seeing a lot of [ preparedness ] to drive down that path, which is why we're accelerating our B2B strategy with Mastercard Track as part of what we think will sustain over the longer term. The last piece I'll mention is around services. What COVID has taught us is there's a much greater appreciation by our client base for what we bring from a services standpoint. And it's everything from our Cyber & Intelligence tools, data, insights and analytics, and we can talk a lot more about this if you have any interest in it, in terms of the value we can bring to them in these hard times to help them best optimize their revenue streams and their cost base, which we expect will sustain going forward.

No, that's really helpful. Let's see, I guess, yes, I definitely do want to touch back on some of the B2B dynamics. But I was curious. Maybe we can talk a little bit next about open banking and the acquisition of Finicity and kind of how open banking fits in with Mastercard and Mastercard strategy because I don't know that it's immediately apparent kind of for all in the ecosystem, but kind of how you envision Mastercard playing in that world going forward.

Yes. We're very excited about the prospects in the open banking space. We've been involved in this space even prior to the acquisition of Finicity with the work we've been doing primarily in Europe, where we've been building out capabilities. And we've had some level of success there. We love what we're getting through the acquisition of Finicity. We think about open banking -- and I'll get into the specifics of Finicity in a second, but we think about open banking as a tremendous opportunity because we almost think about this as a parallel network to enable the free flow of data between consumers, which happens to be residing with their banks, by the way, and technology providers, app providers, fintech providers who wish to deliver them services in that regard. And so what do I mean by that? What is the use case? How do I make this a little bit more tangible for people? Let's just take Finicity, right? Think about open banking across 3 layers. There's the infrastructure, which is the connectivity, which Finicity brings by connecting to thousands of banks in the environment. Then there's the application layer, and then there's the services layer, right? So what Finicity brings is a foundational capability of some best-in-class connectivity with thousands of banks in the U.S. They have -- and it's important that you connect in the right way. Connecting in the right way means having data sharing agreements. Connecting in the right way means ensuring that you're getting consumer consent for the usage of that data for the purpose with which they're consenting, right? Connecting in the right way means ensuring that there's data privacy and security, which is being applied to the information, which is there, all of which are principles which Finicity shares, which are very common to Mastercard's principles. We signed numerous data sharing agreements with some of the largest banks in the U.S. They include JPMorgan, Citi, Capital One, Wells, you name it, Bank of America. They're all with data sharing agreements. What that effectively means is it's with the consent of the bank that we are enabling this as opposed to through screen saving. And that's very important because to create a long-term sustainable model, to gain access to data, to create that variable data network needs to be done in the right way, and that's what these guys do. At the application layer, this has built a bunch of really valuable credit decisioning and credit scoring applications. And that's just a starting point. So where they focus initially was what can we do from a credit decisioning, credit scoring standpoint by leveraging information to gain access to verification of income, verification of employment, verification of assets. They've been very tailored and focused on the mortgage industry. Their clients, for example, like Quicken Loans -- on the credit scoring side, they've got clients like Experian who leverage the capabilities that Finicity brings. So when you take that same use case of credit decisioning and credit scoring and apply it to the small business community, well, guess what? Banks would absolutely love the ability to get information in an electronic format to allow for more swift and more accurate credit decisioning and credit scoring to take place. That's just one use case. Verification of bank accounts, that's the other use case. And so we see tremendous potential. But Finicity is beyond just the U.S., right? I mean, yes, sure, they've got a fantastic footprint in the U.S. But our ability to take the applications they've created and apply them to the connectivity we've built in Europe is the other piece which we feel very good about. And then you can go into other markets in a similar manner, right? And then the last layer is services and what is the level of services that you can provide on that. So we think, by and large, if you think about the open banking space, we're very bullish on it. We think it's a great opportunity. And it's one, frankly, which is -- it's here to stay, and we feel we're very well positioned to partake in that.

Understood. On the fourth quarter call, you noted, I believe, that the service lines collectively represented about 1/3 of Mastercard's revenue in 2020. This has been an area that Mastercard, I think, excelled at for probably decades now, right? I mean Mastercard Advisors has been around for many, many years. And you've built many acquisitions and internal builds on top of that. So can you talk about the service strategy, kind of what it brings to the table and how it really helps differentiate Mastercard?

Yes. So we got into services because we felt -- this is back to your first question around how do you create a competitive edge. You create a competitive edge by providing something which is different, right? So we want to drive differentiation at the core, which is why services are important to us, right? We want to drive a revenue engine, which is growing at a faster pace than the core. Again, that's what services delivers. And the third piece is to drive a level of diversification in our revenue streams, which, by the way, 2020 has proven to be the case because we said it represents 1/3 of our revenue, and it grew at 18% in 2020. And to grow at 18% in a year which is a tough year, I would say, again, you guys will decide whether it's good, better, ugly. The reality is we feel very proud about the fact that what services does is drives these 3 things for us, which is diversification, differentiation and going at revenues at a faster pace than before. The strategy is important to understand in the context of what sits in that services portfolio. So we have Cyber & Intelligence tools. Fraud is a very prominent theme which is here to stay. There's going to be fraud. There's going to be issues around authenticating people. And we bring a set of services out there, which are really valuable, and I can go into the specifics of that. The second piece is around data and analytics, and this is around providing data insights. It's about consulting like you said. It's around managed services, those kind of pieces. Then there's loyalty and rewards. We touched upon that earlier. And then there is our processing assets. There are a few other things which kind of will inform the services portfolio, but the reality is this is the crux of what sits in that services portfolio. And we're seeing tremendous demand for -- loyalty rewards has been a little bit challenged in this COVID environment. But prior to that, it was growing at a very healthy clip. But other than that, for the others, there's been a tremendous amount of demand, which we've seen come through even through 2020. So let's take Cyber & Intelligence, the fraud tools, right? Our strategy out there is how do we identify fraud before it happens and try and put a stop to it. So that's what we call you kind of are doing the -- even before fraud happens, how do we pick it up? Not everything will be picked up. So how do you detect it while fraud is happening? That's kind of the second pillar. The third pillar is, okay, well, you didn't -- you didn't identify it before. You didn't detect it while it was happening. How do you resolve fraud after it occurred? So this is the whole charge-back process and things of that sort, right? And it's all those 3 pillars that we're focused on while delivering a good user experience. And there's a whole set of capabilities through organic build as well as through acquisitions that we have, which are moving and delivering in a very apt manner. I move to the data and services piece. And there, it's more about how do we discover what we might be able to deliver in the nature of value to our customers. And what do I mean by discover? Let's use data insights and analytics to identify what might be areas of opportunity for our customers. So that's the discover piece. Then there's the second piece, which is how do you make recommendations to them through consulting as to what they can do to improve what might be areas for improvement. Then the -- and that we do that as well, which is the consulting piece. Then there's the third piece. How do you make them add or how do you deliver and execute for them on the consulting advice you just gave them, and that's the managed services piece. So it's a whole -- full suite of products. And that doesn't mean every time we sell our data and services capabilities, we'll do all 3. Some customers want all 3 of them. Others want just 1 piece, and they want to take care of the other 2 themselves. And we're doing a lot of that as part of how we're driving growth on services. Look, I mean, I think from an opportunity set standpoint, people ask, "Well, what's the runway with services on a going-forward basis?" And I think the runway is to be thought about in the context of how we've rolled out in the past. We started up on services primarily focused on the U.S. and Europe, primarily focused on the issuing side of the equation. Well, that game has changed. We're not only doing a bunch in the U.S. and Europe, but it's actually global, LAC, AP, EMEA, all over the place. And so the client base happens to be that issuing side of the equation. But then we've proliferated that over to the acquiring side and then to the merchant community. And we've been able to do that because the set of capabilities we have can actually service that entire set of capabilities. I'd say there's a tremendous amount of runway with our existing set of capabilities to be able to penetrate a customer base, which still remains to be penetrated across issuing, acquiring and merchants. And then we will keep adding to that services portfolio to further broaden the feat. So the runway is pretty meaningful. And everything I've spoken about right now relates to the card rails. You transpose that same thinking over to what we're doing on the material side and the ability to deliver capabilities from a services standpoint, we think that engine has a decent amount of potential there as well.