Mastercard Incorporated (MA) Earnings Call Transcript & Summary

Good afternoon, everyone, and welcome back. We're now kicking off the second half of the day with Mastercard's CEO, Michael Miebach, who joins us for the first time since stepping into his new role as CEO beginning 2021. He was here -- or he was with us physically less than a year ago, right after the announcement, he would take over the reins from Ajay Banga. What a difference it makes, huh, a year, Michael. It's crazy. Thanks for being here.

But now that you've taken over the reins as CEO, Michael, maybe you could talk about your top priorities and any planned changes to your strategy?

All right, Sanjay. First of all, good to be here. Yes, it's been 54 days, look at who's counting, into the new role. And indeed, it was the last in-person investor engagement that I actually had when we were out in New York City a year ago. So in many ways, stepping into the CEO role meant a new chapter, but in so many ways, it's just part of our transition process because I had the 10 months last year, right after we spoke last time as the President, familiarizing myself more deeply with other parts of the company that I wasn't involved in, in my role as a Chief Product Officer. So it gave me a good sense, but it also got us right in the middle of the pandemic right away and rallied the team around the crisis and how we needed to navigate. I think we've done that reasonably well over last year, really focusing on what we could control, but at the expense management, leaning into digital, figuring out how the crisis is impacting our customers' lives, et cetera. And then on the other hand, not losing sight of our strategic direction into multi-rail, into services, into open banking. And here's the pivot to your question. I really think COVID has shown that those strategic priorities are actually totally on point. If there was ever a time where leaning into digital made a lot of sense and is a significant differentiator, it is now. Multi-rail, you look at all those governments that are basically saying, "Hey, I got to modernize my payment stack. I just found out, as I was trying to send stimulus checks, that, that's not the best way to do it," et cetera, et cetera. So broadly speaking, COVID has shed a limelight on to our strategic priorities and proven that we are on the right track. Now I've been in the role of CPO closely involved in quite a number of these strategies setting them, including multi-rail, which was squarely my space at the time. And it would be quite surprising if we were to sit here now 54 days in and say, "You know what? I really think we should change our strategy." So I don't think so. But I'm also quite clear, when you look around us, the dislocation that COVID has brought into our marketplace, there's players emerging much stronger than there have been before, you have potential opportunities and customers for us, emerging technologies, the hype around crypto over the last couple of weeks, all that, it's out there. And it means we need to continue to evolve our strategies. With the same agility we navigated short term last year, we're going to need to navigate as we come out of this and make sure that the strategy is truly the strategy. So don't expect a revolution, but evolving. We will continue to do that as we have over the last 10 years.

I do want to talk about crypto. We'll talk about it a little later. But maybe...

I'm not surprised.

Yes, I'm sorry. But maybe you could share any recent trends you're seeing, comment on how you're navigating through the pandemic and your views on a cross-border recovery? Any sort of long-term changes that you're thinking about?

Yes. So if I take all of us back to our quarter 4 earnings call, we shared operating metrics there at the last time, running up to the week of the 21st of January. So let's just lift off of that and just tackle the first part of your question, which was around recent trends. So really, what we're seeing over the time since then is that across our spending volumes, really, trends are behaving more or less the same way than what we have seen throughout January. So that's the first thing to say. The second thing to say is as we just said, last time we got together was a year ago. This was also when pandemic just started. So as you compare year-over-year, the lapping effect is kicking in. So when you start to look at these trends and consider it from a growth rate perspective, considering that is important. And then just over the last week, winter storms. So we have to yet see what the effect of the pretty harsh winter weather has been on spending trends. So we're expecting some shorter-term impact here as we're going to look out for that. So that's really on recent trends. Navigating the pandemic, I think that's where -- it's a really complex question you just asked here, but navigating pandemic I think was another aspect of that. So you recall, back in April last year, we set out and we stuck to this 4-phase framework, where we said, "Okay. So the world is going to try to contain this thing, stabilization phase, social distancing measures and all that, a normalization phase and then back to growth." And that's how we've run the company really with the thinking that in each of these phases, spending behaviors is impacted by tightening of social distancing measures, releasing of social distancing measures and so forth. We continue to believe that the world right now, at least when it comes to domestic economy, is firmly in the normalization phase. As I -- quarter-over-quarter, month-over-month, you see gradual improvement of spending levels overall. And that trend has shown cross-border, as a subset of that, is not in that space at this point because borders are not opened, and hence, people are not traveling. So here we are, continue to be in the stabilization phase. So that's kind of the broader backdrop. If I look ahead and see how do we navigate this going forward, for the first half of this year, I expect largely more of the same of what we have done in 2020, focus on what we can control, lean in on digital, drive our services, which are in great demand. You can emerge -- imagine a world that goes more digital. Cyber solutions are really in great demand. Understanding the crisis and getting our data analytics products into our customers is something that works really well for us, and we continue to do that and be a good partner. Now specifically, how do we navigate and how do we see the return of travel, which is another angle of your question. Now first of all, cross-border is important to us. It's a business, and it's a value driver for us where we have been ahead and had a differentiated set of propositions out there. If you take our cross-border volume, and you just kind of map this out in your mind, 50% is card-present, and another 50% is card-not-present. Out of the card-not-present part, about 1/3 is travel-related. So a significant chunk of total cross-border is travel, all of card-present and 1/3 of card-not-present. So when you take that as a backdrop, the card not present part that has nothing to do with travel has been performing well throughout. So that continues, and it continues to be strong. The travel-related part. We believe it's going to come back. It has been -- from the outset, our view, it's going to be a second half of 2021 event. That's when you listen to airlines and other players out there, everybody is kind of largely on that point. If you look out for the positive news, effective vaccines, rollout rates, production facilities, all that gives you a set of leading indicators that could leave you with an optimistic mindset. And certainly, I'm optimistic about it. So believe it's going to come back. It's going to come back with personal travel first because there is no liability questions related to employers sending their people on a trip while this is unclear. Personal travel is you want to see a different set of 4 walls. You want to see your family and all that, and the sensitivity to take risk there is very different than in the corporate world. So that's going to be that. That's going to be domestic travel first because the border problem isn't there, and then international thereafter. So it's kind of how we look at that part of the business. Meanwhile, we're going to lean in. We like cross-border. And right now, a lot of our travel partners are looking to engage their customers, and they're saying, "Great. Travel is going to come back. Airlines believe that. How can you help us engage them today?" Personal card-linked offer, personalized solutions, whatever. Longer term, let's look into the crystal ball. What have we seen in COVID that is a trend? Well, this whole drive towards e-commerce and the card-not-present rate of our overall business increased to 45% versus 40% the year before. It's a stat that we've been talking about. That's going to stay. It is definitely going to stay. People build muscle memory. They like stuff because they needed to use it, but then they find it's actually working and it's a good alternative, why go back. But people will go back as well because if your local restaurant opens, you want to go and you're going to dine out there, and you're going to go to the local shop. So having solutions for in-store contactless or solutions on file for merchant tokenization, whatever, is going to be critical. So I think those longer-term changes will play into our hands in terms of a more digitized world that we enable.

That's great. You talked about border closings and sort of the border remaining closed. I mean, do you envision that those will be lifted as we move into the summer months like we had last year and like-for-like, you probably have more demand or any sort of assumptions around that?

Yes. So this is an interesting question. And as you just said, what have we seen last year. So there is a series of experiences that we can look back to and see what has happened. So I think what's at play is a couple of things. First of all, there is consumer confidence is one driver. It gets warmer. Case numbers go down. Vaccination rates increase. We've seen the driver for consumer confidence is really what's out in the news relating to the pandemic. And as those news get better, then consumers are generally willing to venture out. So the same will apply to travel. We've seen it last year, and we expect the same thing to happen. Then there is the rollout of vaccines. Then there's also agreements that come to enable travel corridors. What are the quarantine rules on one side versus the other side? What are airport authorities doing? What are airlines doing? How can you prove that you have been vaccinated? Those are all levers that can enable that. Those are all building blocks, and the conversations are in play right now. You have airline associations talking. You have governments talking. They're all trying to solve the same problem. And I have confidence that over the last 6 months, some agreements will be struck to try to work this out in a way as we've seen some with some U.S. flights into Europe, which are basically pre -- you're documented, you have been tested and therefore quarantine rules, you can test out, so to say, ahead of your trip. Those are good examples to look for if we see more of that over the next half of the year. So it's not going to be herd immunity is the final stop and there's a switch moment. I think it will build up with all of these components.

Got it. So shifting gears a little bit, I mean, you guys have had a notable number of wins across the core over the past several quarters. Can you discuss sort of what's driving success? And maybe comment on how sustainable that is going forward?

Yes. So first of all, really happy with what we are seeing here in terms of success, notable wins. This is a time where debit is in focus. We've had a notable debit win in the U.K. with the NatWest partnership there, 16 million cards. A few others, Deutsche Bank, that was credit and debit; Walgreens, strategic partnership; Citi Plex; Google Pay, more in the digital space. So it's a broad spectrum of wins. And if I look for the common themes to your question on kind of why? I mean, I can say it's our sheer brilliance, but no, that's -- you take a step back and you look at this in the cold, hard light of day, say, all right, it's a very competitive marketplace. So that won't change, has been the case, and it will be going forward. What are our true differentiators? How can we engage? And the first thing is to say, on some of these, these were longer-standing partners, but we were, so to say, the smaller partner with these customers. And leaning in over the years and making this more than a transaction and making this more than waiting for the RFP and then coming in at that point in time, bringing things that drive value for our customers and drive their top line vis-à-vis making this a conversation about the cost of the card business or the interchange line as such, those are all approaches within -- back within a solution selling approach by our sales team that says, "Well, we can talk to you about cards. But guess what? The U.K., it's an open banking market, it's the leading open banking market in Europe, see what we have." Or multi-rail, there's alternatives to card plays that are in a market like the U.K., like the faster payment systems over there. Vocalink runs it. So you can have a broader dialogue. And that is in every one of these cases. Multi-rail services, not being transactional, but trying to be a true partner. I think that is the recipe here that has worked. And we won't win every time. We like to win. But you've got to be open to that, and we'll make our best effort going forward. And that's my answer on how sustainable this is. We will keep trying, and I believe it's a truly differentiated strategy.

Before I get into this next question, sticking on the core business. Audience, if you've got questions, on the upper right-hand side, there's a link for Q&A. Please type in your questions, if you have any. And then maybe to my question, maybe you could talk about your efforts to expand merchant acceptance, drive contactless adoption and the tokenization capabilities. Why are those initiatives important to Mastercard?

Yes. Just general acceptance of payments just lies in the nature of the business model. It's an important element of our business model if you can actually use your Mastercard somewhere, but that's the obvious thing. But if the pandemic has demonstrated anything, then it is this shift -- accelerated shift towards digital payments. And more people are using to trying to pay in more places. So expanding acceptance and taking that tailwind with us is very critical. We have invested over the years in a range of solutions to drive acceptance, and let me come at this question from 2 perspectives. The first one is online. So this whole push to e-commerce that we talked about, the 45% over the 40% that I mentioned earlier. Here, what is an attractive use case and experience for consumers that now do things more so than they do before, they can't venture outside, so they're buying games, they're streaming. Well, you put your card on file. That's the easiest. All you do is you go on to the provider's platform, and you just click, and that's it. What's behind that is our merchant tokenization platform that puts out these tokens and does it in a way that once your card credential expire, that is actually automatically updated and you don't have to put in your new data, your details in, which is generally a painful experience. So that's an easy experience. It scales significantly. We've seen a sixfold increase in a number of unique merchants in the fourth quarter. So it tells you that is an experience that works. It's in demand. It makes a lot of sense from the merchant perspective as well. The kind of merchants who love this, streaming services, I just talked about that. Marketplaces, Etsy would be one, ride hailing. Well, not a lot of people do ride-hailing right now. But when that comes back, that's certainly one as well. Didi just joined us on that some time back. So that's the predominant use case. There's another one, that's guest checkout. Nobody really likes to create a new account for this merchant that you've just signed up. Wouldn't it be nice to be having a recognized experience? And this is where click-to-pay comes in. Click-to-pay is that recognized experience. It's powered by tokens as well. That's the industry-wide initiative that I think probably most people on the call here would be familiar with. So making good progress there. In terms of sign-ups, double-digit growth on sign-ups, consumer sign-ups, thousands of merchants, international expansions, live now in 8 markets around the world. So that's that. But back to my point earlier, people will go back into shops, into stores, into restaurants. So when you think about the in-store experience and acceptance there, the groundwork that we've done over the years is now really accelerating by more and more merchants coming to us, I want your acceptance in my shop. I want to guide my consumers to use digital payments. We do these studies all the time. And more than 60% of small businesses are saying, "I'm going to guide my consumers to use more digital payments vis-à-vis the cash alternative." And that coincides with the consumer research that we have where consumers are saying, "I do want to use these." And again, more than 2/3 of consumers are saying the same thing. So supply and demand, when it comes to acceptance in-store, is pointing our way. So we have solutions for in-store and solutions for online. And right now, that tailwind, just do both of that, so that we deepen the moat around our castle, so to say, is a way to look at it. It's just central to our business model. It drives a lot of value for consumers and merchants.

You touched on click-to-pay. I mean, has the momentum been -- remained very strong through the pandemic for click-to-pay? Or have merchants been distracted a little bit by everything that's going on?

Momentum -- yes, yes. So momentum continued on the same track that it has before. There wasn't really any significant change there.

Okay. Got it. So now to the crypto question. Obviously, you said on your last earnings call that you plan to add digital currency to support the network, and you guys made an announcement that you will start to provide settlement on select currencies. But maybe you could just talk about -- elaborate on the philosophy there and sort of how you view crypto in the future.

Yes. At the outset of the conversation, I talked a little bit about the strategy and what matters and what will stay. And I mentioned our multi-rail strategy. So in the end, what we're trying to do is we're trying to be that one-stop shop payment partner regardless of what type of payment it is. That's great from enabling choice. So people can -- companies, governments, anybody can have the choice to pay whichever way they want. And they have one person, one partner to come to, to enable that. So that's as simple as that. Now here's an interesting technology, distributed ledger technology, blockchain and crypto as a variance -- as a use case for blockchain. And that falls right into the choice paradigm. If that is relevant out there, then of course, we want to enable that. And of course, we have to enable that to stay true to our strategic positioning. So was it ready? It's the same as realtime payment. Realtime payments wasn't ready until like 4, 5 years ago when it started to become a thing, and then we were there, and it's the same when it comes to crypto. Now with crypto, as with anything else we do, we wanted to take a principled approach and see what actually makes sense from a payment perspective. When it comes to open banking, we put out data principles and said, "Well, here's a set of principles. If you play around with somebody's data, then you should adhere to that." And we took a similar approach here. We said, "Okay, so what matters? First of all, regulatory compliance. How would we do something that is not regulatory compliant?" Okay. That's pretty straightforward. The second is consumer protection. Does it actually make sure that your data is private or if in the case of hacking or fraud, are you protected? And then the third principle is stability. Is this actually suitable for payments because you're exchanging goods and services where a price is found pre-transaction, transaction happens and then somebody receives the money, is there stability in that relationship? So we put those out there, and we said, "Okay, if these 3 principles are basically adhered to, we will support it because we're a multi-rail provider." Now what is out there in terms of cryptocurrencies? I see 3 types of currencies. Central bank digital currencies, that's just like fiat currency. That's what our network carries today. And if governments are ready with CBDCs, we will enable them on our network. We're far down the line on the technical preparation. So somebody would come our way now and say, "That's what we want to do." As of the beginning of the second half of the year, we're going to be ready to engage. So number one. Number two is that is private sector-issued stable coins. Similar to government, so they don't fluctuate in value, but it's a private sector consortium of somebody who puts this out there and then has fiat deposits behind it somewhere at a commercial bank so that the stability point is addressed. As and when such initiatives match the other 2 criteria, we're ready to engage. I can see a clear path to that. When it comes to free-floating crypto assets like Bitcoin, generally, I don't have a conceptual problem with it. But the problem with stability is a very real problem in the world of payments. In a recent interview, I'd give a pizza example and then made the headlines in terms of, okay, this is how you can actually understand what it does when you pay with Bitcoin. Basically, the point is you pay 10 units of a free-floating crypto asset on a service. And then once the money settles, it could be you have way overpaid or you way underpaid. In both sides of the transaction, the payer and the payee are not happy with that, and we stand in the middle of the payment guarantee. So that's just fundamentally a problem. We don't see a path right now for these free-floating crypto assets to be used for payments. But a lot of people hold these assets because they like it as an investment. We want to enable that? Absolutely, we want to enable that. So you basically they use our partner programs to transfer your crypto holdings into fiat currency, and you transact it through one of those partner program -- card programs onto our network. So that's our approach. Relatively straightforward and a clear element of our multi-rail strategy.