Mastercard Incorporated (MA) Earnings Call Transcript & Summary

Great. And speaking of investments, Michael, we've talked about a number of growth opportunities ahead of you. Taking a step back. This opportunity set in multi-rail, B2B, services ahead of peak growth, does it mean that you'll have to reinvest more? And somewhat related to that, the question we often get is just your thinking regarding expense management in the -- over the long term.

All right. Good. So as I said at the outset when we talked about changing priorities, and I said they are not really changing, the point is this long term -- the long-term priorities of leaning in on digital, driving services, building out our multi-rail offering, including B2B, that stays. We, from an expense management perspective, generally, want to drive the company for top line and bottom line growth. So we have been doing this throughout the crisis. And you -- if you recall, second quarter, third quarter last year, the expense agility that we demonstrated where we ratcheted it down very quickly. We have that same ability up and down because we have a relatively flexible expense base, and we use that in a disciplined fashion. So as I look into these long-term strategic priorities and I'm seeing growth is returning, as we talked about this on the trend side, then you start to say, "All right, I want to invest ahead of the curve for that growth but do so in a disciplined manner." And that is -- that's like the important point here, top and bottom line growth but while doing that, ensuring positive organic operating leverage. So that is what we, I think, made pretty clear in our earnings call on the first quarter, and that's how I intend to continue to do it. If you take a slightly different slant on your question, taking a look at our acquisitions and how we look at acquisitions. Here, we have held ourselves to a standard of an acquisition should be accretive after 2 years, i.e., non-dilutive beyond 24 months, ideally faster. And we will continue to hold ourselves to that standard. We will show you revenue and expenses in year 1 and then -- in the year of closing and then in the second year thereafter. So that continues to be our approach. We have been acquisitive, and we will continue to look around for things that accelerate our strategy. From a capital allocation perspective also, really no change, strong liquidity, strong balance sheet, strong credit rating, and then we will invest organically or inorganically in our growth. And whatever is left we'll return to the shareholder with a preference for buybacks. So unchanged on that front. What you're seeing right now, there's a few bigger acquisitions that have come in, and we work them through those principles. And hence, no news on that front, I think, is probably good news.

Great. And Michael, how do you -- on that M&A point, how do you think about the regulatory landscape on acquisitions, especially in light of the challenges Visa faced with Plaid?

Yes. It's -- when I look around -- and just lifting off from our recent examples. So we had Nets, we talked a little bit about that, Finicity Ekata. So that gives us a good, I think, illustration of the regulatory environment. Ekata, we announced, and we are going through the approval process as we speak. But as you can see, we're -- we went into this thinking we're doing the right thing here by driving benefit with a digital identity proposition for consumers. We're bringing competition to the market. We're trying to scale this technology around the world. That is generally what regulators are looking for. So we're confident. Otherwise, we would have not gone down that track. You've seen with Finicity, that closed relatively quickly last year in the open banking space in the U.S. Again, it was a process we went through. We said, "Here's the benefit for the consumer. Here's the benefit for the market. This is what it does. This is how we drive competition with this approach," and we find, again and again, that, that approach does work. So fundamentally, I don't see any major shift in the regulatory environment. We just have to go through our process, and we do that very diligently.

Great. And Michael, let me just layer in a question from the investors attending the call. Can you explain the transaction-level data that Mastercard has access to and explain the extent to which Mastercard is going to monetize transaction-level data in the future?

So transaction-level data access, when I look at this, this plays out in different ways across the kind of transactions that we're looking at. So there's our traditional card business. You look at it in the account-to-account space. You look at it in the space of open banking, where these are data transactions. And the answer is a little different, first of all, because each of these 3 spaces have -- at are different evolutionary point in time. So on the card side, as I mentioned before, we are using aggregated anonymized data to drive insights, and that is the source of our data and some of our data analytics and insights products. And that's thriving and that works. We do this always in an approach where it's very, very clear what data we're using for what. We will never use PII for these kind of products, personally identifiable data. And hence, that has worked very well for us, and we've not had any issues on data privacy or access type of situations. When you look at it from an account-to-account, Faster Payments, real-time payment space, the world is still emerging here. So you could see examples like -- in a market that's further advanced than others, the U.K., they're on about a decade-long journey of Faster Payments. And here, the banks have come together to agree with us to use transaction-level data, again, aggregated, to do fraud management as in the sense of anti-money laundering, money mule and those kind of solutions. So that was -- clearly, the market was coming together and saying that's an opportunity. We had the technology. We also had the underlying infrastructure, which comes back to the point about it is helpful to be in infrastructure and then come out with these types of solutions. So that is a space that's emerging yet. We have to see where else that is going. But I can see a world where you have -- in a bilateral setting with a customer, they say they want to give you access to the underlying data so you can provide better solution, let's say, Pay by Account or account verification and so forth. So space is still emerging. On the open banking side, it's very similar in terms of the emerging space. I think here, the starting point is the approach to open banking. I talked earlier about our acquisition of Finicity. What we liked about Finicity, a player -- a leading player here in the United States, is their approach to open banking, how they deal with data. And their logic was, first of all, it should be all permission API-based. So things like screen scraping, where it's a way of getting ahold of transaction data that is not sustainable over time, that was their starting point. And then they said, "Okay, everything has to be governed by actual agreements," so this is in the light of day. And that approach is one that we find sustainable. In this world of open banking, because it's, in the end, about the individual making more use of their personal data, it has to all be driven by consent management. Am I, Michael, giving some third party the approval to use my data to give me a better service? And that consent management is very much built into our open banking platform that we have created starting in Europe, where we say consent management and then the data can flow into any one of our services. That's where the European regulator is going anyway. We have that. That's very much in line with GDPR, and that is one of our principles that we've adopted. So that's kind of where the journey is. You could see some very evolved pieces and then some rather recent developments where I think we have the right tools and I think the right mindset on how to play.

Fantastic. Michael, let's switch gears a little bit now and talk about some of the disruptive forces in payments. The word payment has transformed significantly over the past year, with rapid growth of BNPL, crypto, digital wallets, fintechs. And a question we often get from investors is whether Mastercard's competitive moat is intact. How do you think about Mastercard's evolving competitive positioning in this rapidly changing thing as well?

Yes. I -- if I look back over the last 14 months and you look at all the change that we've seen there in terms of consumer behavior, in terms of business behavior, so there's like wide open mindset to using digital payment solutions. You can just expect that there is a time ahead of us where we're going to see more change than we have seen in the last 5 years, the last 10 years, just compressed change. And if you look at some of the drivers for that to -- the disruptive forces term that you just used, Harshita, you see alternative payment solutions coming in. You see buy now, pay later, fintechs left, right and center, digital wallets, super apps, you name it. Any one from that could be driving significant -- are likely to drive significant change in our ecosystem. So our competitive moat when I look at this is -- first of all, it has to start with a mindset that will lead into change. We lean into change. We lean into emerging technologies. So many years ago, when we set up Mastercard Labs, that's been a bit of a hedge for the future because that's where we lean in and we'll figure out if it works or not. And if it fails, then it fails, and then we move on to try the next thing. So we'll continue to do this. Our engagement through PE funds, through venture capital funds to see where -- smart money investing, our partnerships and investments just give us a good sense of what is actually going on. But very specifically to some of these that I just mentioned, buy now, pay later, there isn't a conversation I'm having -- so I'm getting asked the same question that you're getting asked. "Is -- buy now, pay later, is that a threat to your credit business? what's going on?" And the way I look at this is you start to see -- we have an amazing ability with our acceptance footprint, which is part of our strategic moat, a scaled acceptance footprint that we can connect the players and the buy now, pay eco -- buy now, pay later ecosystem. That's merchants, that's lenders through the acceptance point. And we can enable that through tokenization technology, card-on-file, VCN, you name it. So I look at this as an additional opportunity. These are different use cases than what we generally see in the credit business. Merchants are happy they sell more. And lenders are happy because they can grow their interest-bearing portfolios and so forth. We -- in this space, we've organically invested for many years with our own installment solution. We invested in Pine Labs because, in India, there was a specific situation that we wanted to address in a large non-bureau market, et cetera, et cetera. So partnership, all that, I think we have a role to play. Super apps, digital apps, let's look at that. I think we're well positioned. Look at our position with Apple. Look at what we've done with Google Pay and the Citi Plex account, with Samsung Pay, our partnership with -- strategic partnership that we have with PayPal, Mercado Pago, you name it. The key thing here is these are all open-loop systems. And yes, they bring better experience to consumers, which is great. That lifts everybody's boat as long as the Mastercard pay -- it's a Mastercard payment credential. And that is where our services come in because these relationships are very broad in terms of what else we can bring, and then we can bring both of that together. So that's another example. I could go on for a while on this. I feel leaning into change is important. Think about crypto. I mean we were out there talking about crypto some time back, is that should be enabled on our network. There's so many things that are going on. And we try to pick what works, invest ahead of the curve for our customers so we can work with them on where the journey is going.

And Michael, let's talk more about crypto. A lot is happening across public cryptocurrencies and CBDCs, or central bank digital currencies, and you've kind of alluded to that, too, which you have been doing a lot in the space. You have your own blockchain patterns, engagement with the governments, CBDC. You're also looking at issuing -- enabling stablecoins in your network. Can you talk about your strategy in crypto? And how do you think about the different kinds of digital currencies which are out there?

Yes. Not too long ago, I gave an interview that tried to explain this by giving a reference of pizza and how it is not sensible to buy a pizza with Bitcoin. We have moved on from that analogy because I think that wasn't potentially clear enough. So here's how we're thinking about this. The -- it starts actually from this point about being a multi-rail payment provider. So if there is a credible technological choice to make payments easier, simpler, faster and distributed ledger technologies/blockchain, crypto is one of those, if you're a true multi-rail player, you will have to and you will want to lean in and say, "Is this an alternative that I can bring? And to what use cases and what customers can I bring that?" So that was our starting point on why we said we definitely have to be there. I see largely 3 categories of crypto. And the first one, and that's an easy one to deal with, is actually the pizza example, is free-floating crypto assets, and they're exactly that. They're assets. We don't look at them as a payment tool, but people will want to invest in Bitcoin or whatever it is. And they should have the ability to use a card to invest and buy those currencies, at the same time, safely sell and turn them into fiat so they can spend them whatever they want. And from that perspective, we have enabled partnership programs in different countries around the world and different types of partnership programs. I think here, it's important that you have sufficient reach but also you have choice, again, in the type of partnerships that you have. So we felt the true enthusiast around Bitcoin is looking to also participate on the upside when it comes to, let's say, rewards. So our partnership with Gemini is a crypto reward card. So instead of miles, you get fractional cryptocurrency as a reward. And the enthusiast likes that. So we felt that's an additional choice we should bring. We have these partnerships in different countries around the world. That is our approach. I do not see any of this as a payment vehicle, mainly for the reason of currency stability. Prices fluctuate in the context of a payment that you either have paid too much for your pizza or too little, and that doesn't work for either side, the buyer or the seller. So covered that. The other 2 categories, central bank digital currencies and private sector stablecoins. And here, the stability issue is not an issue because both are linked to some -- either a commercial deposit or the actual, are in itself just a digital representation of the fiat currency. For both of these, we are getting ready to -- we are almost ready to have them technologically enabled on our network as a settlement currency along the euro, the dollar, the yen, whatever it is. And now the question is, is any of -- are any of these ready to be enabled on our system? And we're not at this point. It is relatively early days on this. On the central bank digital currency, we're engaging on as a multi-rail provider. On the question, first of all, what are you trying to do? Is a cryptocurrency is a digital currency the answer to what you're trying to do? Are you solving financial inclusion? Are you solving cash for -- cash access for everybody? Are you solving cross-border? What are you trying to do? We help with that assessment. And the answer could be you want to modernize your real-time payment system vis-à-vis going the crypto route or the answer might be the exact opposite. And then we engage in that we help policy shaping. So we produced a bunch of white papers in this space. And then we're leaning in on actual technical construction and testing because, in the end, any private sector stablecoin or central bank digital currency needs to live in the real world. It's got to engage with a terminal at a merchant. In the end, you want to spend. That's what we've done in Bahamas, of all places. In the Bahamas with the Sand Dollar, there's a partnership program with Island Pay. You can actually get a crypto transfer from the government of the Bahamas, turn it into an actual fiat card payment by just tapping it anywhere on the island to spend. So there's different roles, different ways of engagement. The same essentially plays out with the private sector stablecoins with one big difference. A central bank digital currency will pass the smell test office as regulatory compliant. Private sector stablecoins will have to have overcome those hurdles and actually get those approvals. And once they're there, we're quite happy to lean and enable them. So very active. As a true multi-rail player, we have to have those alternatives. We're investing, and I feel pretty good about where we are.

And Michael, you talked about engagement with the government. And even if you look beyond CBDCs, and this is a question that came in from the audience as well, an increasing number of governments globally are looking at payments as a core national infrastructure.

Yes.

So what is Mastercard doing? Just even beyond CBDC, what is Mastercard doing to engage with the government and manage nationalism pressures?

Yes. So our approach for some time has been that whatever we do has to be locally relevant. And we look at everything through a lens of "Is it also localizable?" So we do that. We have a whole set of assets that we actually engage in with local competitors. So you think about national schemes, card schemes that exist in many countries. Oftentimes, we power their fraud system. We engage with them on data analytics and insights because we believe we have to be a relevant and local partner. Now that brings you right back to multi-rail. So if a government says, "I look at payments as national critical infrastructure, like the electricity grid or a water grid," they want to have potentially more control over that. And that's very understandable. So with our multi-rail account-to-account approach, we're very open to that. I'd give you an example, and that's our recent win in Saudi. So here's a government that wanted to run its own system. But they said, "We are quite happy for somebody who knows what they're doing to do it, and we just put our sign on the door." So the Saudi real-time payment system is run by the central bank there. They own it, but we are the technology behind it. And that is a balanced way of getting engaged in an economy where we have domestically not been engaged at all. So that's a way of doing it. Generally, this approach of leaning in and being a relevant partner has helped us in good steads with many governments around the world. Nationalistic tendencies are not new. We've been navigating that quite well with this approach. We shifted a lot of resource from the U.S. into our markets today. It's the vast majority of our people out there. We have 17 tech centers around the world. Our recent investment in our multi-rail payment hub in Philippines is a good example. That's all on soil, but we use global technology. So we create an instance that is local. But because of the architecture, we can preserve some of our scale effects as we do that. So we're not optimizing our business model but we become locally relevant. I would describe it as glocal, which is a good strategy for us.

And Michael, related to that point, another question that has come in is can you discuss the effort of European banks to start their own network?

Yes. So that is EPI, the European Payments Initiative. Being European, I can talk about that even better. So this is a long-standing effort in Europe to gain some sovereignty -- strategic sovereignty. And that isn't reserved to payments at all. That is a general approach that Europeans are seeking through. That's the direction that the EU Commission is taking and so forth. So when it comes specifically to payment, there have been previous efforts with local payment initiatives, and EPI is the latest one. The whole strive towards having a competitive local payment system is very understandable. We agree with that. That makes sense. And because we have this history of partnering with local schemes, we're quite okay to partner. We are engaged. And there's an interim entity that has been created, and we're a part of the working group conversations to see where they want to go and what we can do to help them. At the same time, we're happy to compete. We like competition, and we're in the European market. If I look at some of our recent wins with Deutsche Bank on the continent or Santander, it seems it's a healthy competitive environment, and we feel well positioned there. The fact that Nets has just closed in March, that gives us a huge European footprint based out of Denmark. So being a local European player with such a strong footprint, Vocalink in one side, our business in -- headquartered in Belgium, our cards business and now Nets, which will fuel a good chunk of the P27 for -- country initiative on account to account, we have a strong footprint and hence, strong relationships in Europe. And I find that, that is something that we can navigate.

And Michael, I wanted to ask more about the competitive strength for Mastercard, a question we hear very often. Over the last several years, if I look at the numbers, Mastercard has been gaining share in your core consumer-to-business payments market. And in the earnings call, you also highlighted a number of notable wins during the quarter. What has helped you grow faster in the market? And more importantly, from an investor's point of view, to what extent that is sustainable?

Is that sustainable, yes. All right. Yes. So let's look at those. Over the last couple of earnings call, there were quite some notable wins, as you said. I actually just mentioned a couple of them. Deutsche Bank, it was like 11 million cards that we're flipping in Germany, NatWest in the U.K. previously, First Direct and Santander in the U.K. We're actually on a path to be 1/3 of the debit market in that country, so strong momentum in Europe. But here in the U.S., just in the last call, we talked about Huntington and the TCF flip that's happening there. Or on the co-brand side, where we've had a great run now with Gap coming in and that's a full flip on to Mastercard across all of their brands. So why is all of this happening? I took a step back and said -- because I'm asking myself that question, how do we make sure that this continues? And...

Good problem to have.

Yes, exactly. The first thing is we have, I think, worked really hard at getting a solution-oriented mindset into our customer-facing team. So solution selling is probably not even the right term. I think solution oriented. What are you trying to do? And the last 14 months were the best example of that. So customers came to us and say, "You -- please help us with your data analytics insights to understand the crisis. What will it do to me? How do we predict what's going to happen? How do we recover from that?" So leaning in with customers, trying to understand how we can help grow their top line, not make this a conversation about the cost of acceptance. So we don't want to have a cost conversation. We want to say, "How can you drive your broader business?" Gap is the perfect example. That was a long-standing services relationship that had nothing to do with our co-brand business. We were trying to help them on Test & Learn, on how to -- whatever their offerings look like. So I think this mindset really helps a lot. But then you go from a mindset perspective into what are the differentiated solutions that we bring, and that brings us right back to services. It brings us right back to our digital-first capabilities. So in the context of NatWest, they were excited about a whole range of buy now solutions, not just debit. So that was a broader conversation. As I said, Gap, that was long-standing services. So there's these examples across the board, but I can say our unique differentiated services portfolio as well as our multi-rail offerings are an inroad. And then the mindset, I think all that together -- needless to say, it's a competitive landscape. It's always very competitive financially speaking. But I think that sources of differentiation are significant for us to say, "Hey, by the way, we can cover all of your needs." It's a conversation about be that one-stop shop payment partner.

Great. And Michael, it looks like we are running out of time. So my last question for you. We talked about accelerating digitization trends in this pandemic, both the consumer and new payment flows and the opportunity that Mastercard is bringing to life with value-added services and your multi-rail efforts. Given the trends you're seeing in the market, how do you feel about the long-term growth algorithm for Mastercard versus your opportunity set a year or 2 years ago?

Yes. So let's start right where you started your question, and that is the accelerated secular trend. So from a near-term opportunity perspective, I think that's just significant. There's still so much cash out there, but at the same time, we now have billions of consumers that were forced to use digital offerings because they had to. And that open mindset and having a different view and what I might try is going to last for some time. And if we walk through that open door, I think we're going to have a real opportunity to not only enjoy that secular trend but actually drive it further with our customers and make sure we put even better solutions out there that are not reactive to a crisis but actually, the best possible UX that you can have. That's where the focus is, doubling down on digital. And I think that's going to be a good and important part of the growth algorithm in the near term. On the multi-rail side, doing the same thing. These are all digital payments but they happen in different spaces. We talked about supplier and buyer payments. So that whole space about penetrating into these additional payment flows is very much a part of our longer-term growth algorithm. And in between -- nicely in between, driving our short-term growth as well as the longer-term growth in services, which we can drive across these flows. And here, I think that's going to help us continue in the short term, growing faster than the core but also start to build up the yield that we have on these account-to-account payments over time, if you run cyber across and data analytics and so forth. So every one of these growth vectors that we have, I think, we are positioned in those in a differentiated fashion. So there is a lot to be optimistic about. Disruptive forces are there. You got to be vigilant. But I think we're looking at a bright future.

Fantastic. I think that's about all the time we have. I wish we had more. Thank you, Michael, for joining us today. And thank you, everyone, for listening in.

Thank you, Harshita.