Mastercard Incorporated (MA) Earnings Call Transcript & Summary

Good morning, and welcome to Evercore ISI's 5th Annual Payments & Fintech Innovators Forum. I'm David Togut. I lead the payments processors and IT services research team here at Evercore ISI. Delighted to kick off the day with Mastercard, Craig Vosburg, Chief Product Officer. Craig, welcome, and thanks so much for being with us here today.

Thanks, David. Great to be here. Appreciate the invitation, and happy to help you get the day started today.

Well, great. So first of all, congratulations on your new role as Chief Product Officer. Could you give us a sense of the scope of your role and how your priorities fit with Mastercard strategy going forward?

Yes, I'd be happy to. I came into this role as Chief Product Officer the first of this year, and it's a role that really encompasses the full breadth of our product capabilities that are aligned with serving the needs of consumers of businesses through a variety of means around the world. Really encompassing the full scope of what we're doing with our multi-rail strategy and enabling different rails to provide connectivity with real-time payments, with push payments, with account-to-account payments, with the opportunities that blockchain may present, things that we'll pursue in the commercial space and targeting greater opportunities in B2B spending. And of course, driving the continued growth in our consumer business and opportunities there, most notably with respect to the digital capabilities and the secular migration that, that continues to advance. So it also includes most of the -- many of the companies we've acquired over the years, Vocalink; soon, hopefully, Nets; Finicity; Transactis; Transfast, others that sort of come into the fold. They continue to build out these capabilities for us. And at the same time, we've also, for the first time, brought our product and engineering organizations together as one, part of this team as much as really our product is technology. It makes -- we thought it made a lot of sense for our engineers and our product teams to be working hand-in-hand and in close -- as close as possible with our customers and our partners around the world. So the product group really underpins Mastercard's corporate strategy. The things that I mentioned as being in scope are the things that are really supporting our focus on enabling choice for consumers and businesses and how they pay and providing the applications and services that they value in managing their personal affairs or their business affairs. And really executing on those dimensions, executing on the multi-rail strategy, executing on the digital opportunity, executing on the opportunities in B2B and open banking and a variety of other areas. So it's -- I'm excited about it. I think it's a great opportunity to help us progress on our strategy and continue to execute, hopefully, with excellence.

That's great. Just a side note for investors who are participating. If you could type in the questions in the blank field beneath the video box as we go, those questions will show up and I'll be able to ask Craig as we go. So you've mentioned a number of notable new deals recently, especially in the U.K. Can you discuss how your products and services specifically have helped you win?

Yes, I'd be happy to. I would say we're thrilled about the wins that we've been able to communicate, not just over the course of the last quarter or 2, but really extending back over a number of years, that are real examples, I think, and demonstrable proof points of how our strategy is coming together. And I would broadly characterize that as being a function of having a breadth of capabilities. Payments capabilities, value-added services, combined with a partnership orientation and working with our partners around the world to craft the combinations and solutions that are most relevant for them, given what they're trying to accomplish in their businesses and what their respective strategies are. So by example, you mentioned the U.K., we're thrilled, of course, with the recent win with NatWest, 16 million debit cards that will come over onto the Mastercard network in conjunction with that. I think a great example of working collaboratively with a partner to work through how we utilize this array of capabilities we have. Our digital assets that are enabling different kinds of consumer experiences, combined with the opportunity to provide choice in how the consumer ultimately transacts, leveraging the multi-rail strategy as sort of a guiding vision on where that partnership can go, and the things that we can create together to bring different kinds of experiences into the market with the consumer. Similarly with Citi and the Citi Plex Google opportunity, building on the things that we've already built and delivered in other applications with digital-first capabilities, working with Citi to envision a different kind of digital experience in different digital journeys that can be accessed by consumers through the Google platform and create an entirely new sort of consumer experience with respect to digital banking, leveraging our digital capabilities, digital first, tokenization, a number of other things that will pull into that partnership. Payments Canada, an example of a very different sort, working constructively and collaboratively with the constituents in Canada, Payments Canada themselves; Interac, the domestic banks in the market to craft an approach that works for the Canadian market, leveraging our capabilities with respect to real-time payments infrastructure, aligning that with the structure of the market and how the Canadian banks want to work -- continue to work with Interac and how we can play a role in that to meet the needs of that market given where they are in their particular journey. And the list goes on. We talked about Walgreens. An interesting example of not just a co-brand. We love the co-brand, and we'll be excited about launching that with Synchrony in the very near future, but also an opportunity to work with Walgreens to craft a partnership that's built on a credit co-brand, prepaid opportunities, looking at how to leverage data and analytics more effectively in their business, loyalty solutions to drive deeper engagement with consumers, a partnership to think about how to reenvision payments in the health care sector given the complexity of health care-related payments that consumers are increasingly grappling with. So I'll come back to where I started, it's really about taking this breadth of capabilities, products, technology, services, and partnering constructively with our partners around the globe to think about how best to deploy them to meet their needs and the needs of their end customers.

Appreciate that. Can you give us some more insight on what Mastercard is doing to accelerate the secular shift to digital payments. We've seen clearly a number of signs of that during COVID. And also if you could comment on recent trends and how you see travel recovering over time, clearly, a lot of focus on that.

Sure. We've, of course, been focusing on the digital migration for some time. That's clearly accelerated over the course of the last couple of -- over the last year as consumer behavior and corporate behavior has adapted to the circumstances we're all in with COVID. But it has underscored, I think, and reinforced the validity of the strategy we've been pursuing. And in particular, emphasizing a couple of things. First, ensuring that we and our partners are working to deliver a great consumer experience in the digital realm. And that can take multiple forms. That can take the form of providing digital-first availability of our products, where the -- we saw this initially with Apple in the Apple Card. We've since deployed it in a number of other instances where the consumer gets access to digital credentials virtually instantaneously that are provisioned through a token that's provisioned into a device almost instantaneously upon approval of the application. That delivers a great experience. That's available, ready-to-use without having to wait for something to come in the mail and be activated and all that sort of thing. Everything from the digital-first kind of experience to enabling a cleaner, simpler, more intuitive experience at the checkout process for digital, particularly for online and e-commerce for the guest checkout experience. We've all become accustomed to typing in too many digits and data points as part of the checkout process. Click-to-pay is clearly focused on eliminating that inconvenience and creating the kind of consumer experience that increasingly we're all -- we've all come to expect a one-click sort of checkout experience. Contactless is another example. In some cases, driven by digital and a gravitation towards devices and using devices as a means to transact, but also during the pandemic, increasingly, consumers wanting to use their cards in contactless ways to avoid having to touch things, and we've seen a real increase in the uptake and usage of our products through contactless means. So that -- a number of things around the consumer experience continuing to enable that consumer experience by connecting it to multiple options related to the multi-rail strategy. So different connect points to enable transactions to be conducted through a variety of means. And ensuring that those transactions are secure because, obviously, in any environment, any channel security is paramount. In the digital realm, it's even more of a concern because of issues that are introduced around cybersecurity and risks associated with that. And so increasing our efforts around tokenization and tokenizing credentials across a variety of different environments, in wallets, increasingly in the card on file environment. And we've seen, I think, a sixfold increase in the number of tokens that we have deployed through the merchant community to tokenize card on file credentials to enhance the security of those. Obviously, our own transactions through the clip-to-pay platform be tokenized as well. Investing in things to enhance the authentication of consumers on the other end of transactions, whether that's through biometrics, whether that's through behavioral data. Attributes that we can incorporate into an off -- decision in conjunction with issuers, whether that's through exploring digital identity, managing cybersecurity risks, helping our partners protect themselves against breaches that could result in credentials being compromised. So there's a variety of things. I could go on and on, on that because it's such a fundamental part of our strategy, enabling this migration to digital and doing it in the right way. And there was a second part of your question, and I've talked so long on that one, I forgot what the second part of your question was.

No, that's terrific. A lot -- you covered a lot of ground there. So just if you could comment on recent trends and how you see travel recovering over time.

It's travel. That's right. Yes. Obviously, travel has been massively impacted by the pandemic, and you've seen the numbers across the industry. So you can appreciate the magnitude of that impact. Our expectation is travel's down but not out. It's going to come back, but the rate at which it comes back is going to be a function of a couple of things. Clearly, the pace with which vaccinations can take place in different countries and different geographies around the world. And with that, the stance that governments take on relaxing order restrictions, whether that's domestic restrictions like we have in a number of states in the U.S. or international restrictions where national borders are restricted or closed in some cases. That being said, though -- those sort of structural or systemic enablers of a recovery in travel will be important. Beneath that sort of understanding the demand that will be there once those restrictions are eased, is obviously an important secondary consideration. And we continue to believe that there's pretty significant pent-up demand for travel, particularly with respect to personal travel. With as individuals, as consumers are -- people are anxious to see family, they're anxious to see their friends, they're anxious to take a real vacation again. And we think that as the vaccination rates increase, as infection rates moderate, as borders and travel restrictions are eased, that we'll see a pretty healthy resurgence in personal travel. Business travel is a little tougher, and we're expecting that to be a little slower to recover given a lot of the uncertainties that corporations, many of us and people on this call have in their organizations around the future of the workplace and when people are going to be back to work and what that means for work-related travel. That being said, the vast majority of our travel-related volume is related to personal travel. And so we're looking forward to that and are expecting that to begin to see some healthy signs of recovery as these restrictions get eased.

Just on that topic, Craig, will Mastercard be involved in producing any sort of digital vaccination certificate. There's been a lot of press on that recently.

Yes. We're exploring ways in which we can be helpful. We're in conversations with governments, with industry associations, with health associations. It's a complicated topic, and I don't know that anyone is going to have a single panacea on this for maybe a bad pun on that. But there's going to be roles to play for multiple parties across the industry, I think, and in providing information, the right kind of information in jurisdictions where that information is accessible and valued or, in some cases, required. And we're in conversations to explore how we can be helpful, either through some of our kind of authentication and digital identity related endeavors, leveraging data transmission. But as yet undetermined exactly what that would look like.

Understood. Can you tell us more about your approach to open banking and how the acquisition of Finicity helps drive your plans in that area?

Yes, love to. We're excited about open banking and the opportunities that, that presents. First and foremost, as a catalyst for innovation in financial services and for enabling consumers to -- and small businesses to avail themselves of innovative product, services and solutions that they want. And open banking is I think, fundamentally, a means of empowering the consumer with their data to enable them effectively to vote with that data to get the access to the products and services that they value and they want. And so we see that as an important catalyst and a driver of innovation and growth in financial services. We also see it as an area where there's value in there being a trusted intermediary to help facilitate the exchange of data, which fits pretty well with Mastercard and what Mastercard does, the way our network is architected, the way we -- what our brand stands for and the things, the way that we work with, constituents across our ecosystem. And so in looking to play a greater role in the open banking environment. Of course, we've been active in open banking in Europe for a number of years. But the market in the U.S. had evolved in a very different way than what we've seen in other geographies. And we felt an acquisition was the way to go. And in looking at various options, we're really impressed with Finicity and -- for a couple of reasons. One, impressed with the business they've built, perhaps equally as importantly, impressed with how they built it. And what I mean by that is the business they built has really solid connectivity into the U.S. banking system, access to well over half -- direct access to well over half of the deposit accounts in the market, direct data access agreements with the biggest -- with many banks, including the biggest banks in the market, Chase and Wells Fargo and Bank of America and Capital One and Citibank and TD Bank, where there's direct connectivity through API integrations to access data, which enhances the quality of the data. It enhances the reliability. And it obviously establishes the right sort of construct for exchange between the bank and the user of the data in ways that help to protect the consumer and help to protect the bank's interest, which are important because the bank obviously has responsibilities to that consumer. And so we're impressed with how they built it, the things they've begun to built on top of it, particularly with respect to using that data to help consumers get better access to credit as a primary really focused and use case of the way Finicity was built. And you see that in practice with custom partners like Experian using that to enhance credit scores and make them more representative partners like quicken loans, using it to enhance the mortgage underwriting process. And others, Brex using it to enhance how they're thinking about underwriting corporate -- access to corporate cards. And so we love the way that -- what they've built. I touched on the things around how they've built it. Direct access agreements, a real commitment to data security, to data privacy, to managing consumer consents, to working constructively and collaboratively across the industry, including investing heavily and helping to promulgate a standard across the industry for data exchange through FDX so that banks who are providing data, the parties who are using the data, whether that's another bank, whether that's a fintech, everyone kind of understands the rules of the road and what's being exchanged and how it's being exchanged, that's important. And it's important to us in as much as, obviously, I refer to our brand and the things our brand stands for privacy, security, transparency, all those things are important. So we see it as a great company on which to build further growth in the U.S., expanding on the business they're already in the process of building and have built nicely already, broadening the product suite to include things beyond credit, focus things into things like personal financial management, into payments-related opportunities and expanding geographically into other markets around the world where open banking is equally as important.

Understood. Could you provide an update on your multi-rail strategy and how you're progressing across the infrastructure, applications and services layers?

Yes, I'd be happy to. You've set me up nicely by framing the elements of that strategy around infrastructure and applications and services. And those are the 3 layers or the pillars, if you will, of how we're building out our strategy in multi-rail. Infrastructure, obviously, to complement the existing infrastructure, we have with respect to debit and credit, where we've got rails that extend across the globe, with additional alternatives to enable the facilitation of money movement. That started with us really with the acquisition of Vocalink and the move into real-time payments and Fast ACH, but it's not limited to real-time payments. It includes how we think about push payments and leveraging the debit network to push payments for different kinds of use cases, account-to-account payments and facilitating transfers, particularly in the cross-border context, opportunities to leverage blockchain technology, a rail for data. And we think of open banking and Finicity as another set of rails, not specifically used for payment, but for -- used for the movement of data, that may also incorporate a payment, but doesn't necessarily. And so we're building out that infrastructure in markets around the world. There's obviously a lot of interest in and focus on the real-time payments rails, given that we've moved into that space with acquisitions of Vocalink and expect to complement that shortly with Nets, that is giving us a presence now in managing real-time payments infrastructure through Mastercard owned software in markets, important markets in every geography around the world. 12 of the top 50 GDP markets globally are running our infrastructure. The push payments capability has been enabled in dozens of markets around the world, the cross-border capability in -- through account to account. Movements, including what we acquired through Transfast enabled in multiple markets around the world. And so the infrastructure piece is progressing nicely. You've heard about market-specific wins: Canada, the launch in Saudi Arabia, the work we're doing in the Nordics with P27, the launch of our hub, our Asia hub in the Philippines, all progressing nicely on that front. So the infrastructure piece is moving along. With that, we -- on the back of that infrastructure, on top of that infrastructure, we're launching applications to focus on specific payments-related use cases that really cover a variety of different kinds of applications, enabling a direct account-to-account payments through things like our pay by bank app that enables payments to be made directly from the DDA account. Things like Mastercard Track and application focused on the B2B space that leverages multi-rail capability. Things like Mastercard Send, that's built on that push payment infrastructure to enable different kinds of payments to be pushed, whether that's in the P2P context, whether that's supporting gig economy, whether that's, in some cases, small business-related payments for small business suppliers, insurance, disbursements, et cetera, a variety of use cases there. Bill payments, another one we're very excited about, an application that we've launched recently in the U.S., and we'll be participating in other markets as well to leverage some of that infrastructure and its functionality around real-time messaging, in particular. And so we're making good progress in launching those applications. And then the services piece that goes along with it. Oftentimes, the initial services opportunities revolve around security and safety and understanding cybersecurity risks, helping to identify and target illegal activities, things related to anti-money laundering. And so that's a really constructive area of dialogue with those who are -- who have significant interests in domestic payments infrastructure, particularly as it begins to extend across multiple rails and becomes representative of the fabric of how payments might operate broadly in the domestic context. So we're feeling good about the progress we've made. Lots more to do. We're still in relatively early stages of executing on that, but progress is good.

Great. You've talked about B2B as an opportunity with a sizable addressable market and some pretty clear pain points. Can you give us an update on how you're approaching B2B, for example, you called out Mastercard Track and specific progress in this area?

Yes, I'd be happy to. I guess the -- our starting point in B2B is a pretty healthy commercial business already. Commercial volume represents about 11% of our total GDV as of last year. That was built on targeting opportunities that represent a relatively small sliver of the overall B2B payments flows. There are cardable opportunities in T&E and procurement cards, virtual cards that are used in some cases to make a portion of supplier payments or certain kinds of supplier payments. But there is a bigger opportunity in B2B that we've been focusing on through the development and launch of Mastercard Track that gets at some different kinds of needs in the B2B market. Needs that aren't necessarily well addressed with card solutions, but can be addressed more effectively through a broader application like Mastercard Track to help buyers and suppliers manage cash flows more effectively, to help buyers and suppliers manage the transfer of the data that's needed, not just to facilitate the payment, but facilitate reconciliation of an invoice with that payment. And a number of other things. So Mastercard Track is really the application that we have developed to target those opportunities that incorporates couple of important components. One is it's a directory that houses supplier payment preferences, so that there's that value-added component of understanding how suppliers prefer to or are willing to be paid, which is an important consideration. Not all suppliers want to take cards, for example, and therefore, having optionality in different ways to pay them and understanding what those preferences are, becomes an important component of facilitating that payment. Connecting that directory and the preferences that it includes to payments optionality, which ties back into the multi-rail strategy. Card payment, virtual card, a real-time payment, could be a regular old ACH payment, whatever those particular connection points are. And then helping to optimize the payments based on the preferences and the options available. And then helping to manage the data transfer as well through some standards and data fields to help with that reconciliation issue that I addressed. And so that's the basic premise behind Mastercard Track. We're live with that in the U.S. with a number of significant partners that are helping to engage with both buyers and suppliers, number of partners we've shared on various earnings calls, so I won't repeat them here. But we're -- we've enabled that initially with cards and have since added account-to-account capability here in the U.S., and we're extending that into other markets around the world with a similar sort of pattern, initially connecting through cards and virtual card capability and enhancing that with other payments optionality as we go. So we see that as a sizable and a very -- a long-term opportunity. Long-term in the sense of it having legs that can last for decades. And we're on our way now to -- we've got live transactions, and we're on our way to beginning to build that volume.

Cryptocurrency is a rapidly emerging growth area. Mastercard's recently announced plans to support digital currencies directly on your network later this year. What is Mastercard strategy around blockchain in cryptocurrencies? And how are you executing against that strategy?

Yes. Interesting topic that generates lots of enthusiasm these days. Let me frame that, again, in the context of our overarching strategy of enabling choice and the role of the multi-rail strategy in facilitating choice. And to the extent digital currencies and/or blockchain-enabled currencies become a means of payment that is in demand for consumers and businesses, then clearly those are -- that's a choice that we would want to explore and support in the appropriate ways with respect to our network to continue to broaden this -- the opportunities -- the options available to consumers and businesses for making and receiving payments. So let me just -- let me frame the way we're thinking about this, though, because it's an area that's rife with enthusiasm, and there is a mixing and matching oftentimes in the media around terminology. Our focus is on thinking about digital currencies broadly in 3 categories and addressing them in -- with very distinct approaches. One, which isn't necessarily blockchain enabled, but a digital currency that would be sponsored by a central bank. So central bank digital currency that would be issued by government, backed by a central bank, backed by the full faith and power of that government that would effectively be the equivalent of fiat currency. Many governments around the world are exploring this. A few have -- are moving ahead. The Bahamas recently launched the Sand Dollar, their digital currency. We would view that as equivalent to fiat currency and would look to support that on our network as a means of facilitating payment. In the -- so that's public sector. In the private sector, there's 2 broad buckets of cryptocurrencies that we see. One is stablecoins and one that we think of as a free floating currency. Stablecoins backed by some asset value by deposits pegged to a fiat currency to manage the valuation and provide stability. The free floating currency is not. And the value of that is a function of supply and demand in the market, and that's an area that generates a lot of excitement and enthusiasm. Bitcoin is one of those. It's a very interesting asset class and an area to invest in. We don't see it as an appropriate means of making payment because of that volatility in value. It's very difficult to provide assurance between the consumer and the merchant who effectively agree on the price of something at the time of that transaction. Reality is, today, there's a lag time often between that point in time and when the funds actually change hands. And if there's a wild fluctuation in value, then there's sort of a breakdown in that contract, if you will, around what the price of that transaction was. So directly transacting in those cryptocurrencies is not something we're looking at enabling the network for. What we are -- have already enabled is working with partners and crypto exchanges, just as we would with brokerage firms, frankly, who would be connected to equities and other asset classes, connecting in with our products to enable them to be exchanged for -- enable those assets to be exchanged for fiat currency, U.S. dollars, euros, whatever it may be, which can then be used to transact. Just like you can't transact with a share of stock today, but you can sell that stock. And with the Mastercard debit card that's connected to your brokerage account, use that to transact. So that leaves the middle category, the stablecoins, as the area of focus for us. And the area that we've said we would look to enable the network with some very important principles in mind. What I've already alluded to, which is stability, there needs to be stability for it to be an appropriate means of facilitating payment. The second is regulatory compliance. At the overarching level, whether or not governments are permitting them as a means of exchange. And beyond that, the extent to which they're meeting things like AML and KYC requirements. And a third area relates to consumer protection and things related to data privacy, data security. And we're evaluating different stablecoins against those criteria to see which would meet the criteria to be used to facilitate payment directly on the network, and that's where we are. And that's what we announced last week or the week -- I guess, on earnings call, and there's been some other logs and things like that since then. That's what we're focusing on for direct enablement of cryptocurrencies on the network. Hopefully, that's clear.

That's terrific. Very clear, Craig. We're -- I think we're at the end of our session time. So let me thank you. Greatly appreciate your time and insights today. A lot of growth opportunities at Mastercard.

My pleasure. Thanks again for having me. Hope you have a good conference.

Thank you so much.

All right.