Mastercard Incorporated (MA) Earnings Call Transcript & Summary

Good morning, everybody. My name is Bob Napoli. I'm the analyst for William Blair that covers Mastercard and the fintech space. For a complete list of disclosures, please go to williamblair.com. Very excited to have with us this morning, Linda Kirkpatrick, the President of the North America for Mastercard. Linda has been with Mastercard for 24 years tomorrow, I believe. So she's been through a lot and seen everything. She became President of North America a little over a year ago. So excited to have you. Thank you for joining us, Linda.

Thanks, Bob. Great to be here.

So I mean, maybe start by sharing your background a little bit, and your current role as President of North America and maybe key areas of focus, key priorities that you have?

Happy to, Bob. So as you mentioned, I've been with the company for 24 years. I have a finance background. I started at Mastercard in our corporate finance function and had a variety of roles over the course of a decade. I also was fortunate enough to participate in the process for going public back in 2006, and actually had an opportunity to create the Investor Relations function at Mastercard. So this community is very familiar to me, very near and dear to my heart. After working in Investor Relations, I held also various roles on the strategy, communications and franchise front. And then for the past, over a decade or so, I've been in client-facing roles both on the merchant and acquiring side for several years as well as on the financial institution side. And as you mentioned, I've taken on this new role of President of North America, starting in January and delighted to be in this post. So with respect to the priorities within the market, we have a number of priorities that have remained consistent over several years in a number of new areas of focus. We like to think about our strategic pillars across 5 different categories in North America, which is, by the way, inclusive of both the U.S. and Canada. It represents about 1/3 of the volume across Mastercard, and is the part of the organization where many of our initiatives begin and start scaling, many of the acquisitions that we've made are first launched within the U.S. and in Canada before they're launched globally. So it's a very active market, and it's one that has great appeal across the business. We look at our strategy, as I said, across 5 pillars. The first is to focus on the distribution of our products. And really, what that is, is our core credit, debit, prepaid and commercial products. And for those, we work primarily with financial institution partners or issuers to deepen our business with them. Second pillar is thinking about the evolution of the next-generation of the point-of-sale. In the past, we talked about this as expanding acceptance and expanding the number of acceptance points into Mastercard. And while that still is very relevant and important, we now have iterated on that and to really think about how technology is evolving the point-of-sale, both digitally with solutions like click-to-pay and MDES for merchants as well as physically through contactless and then, of course, 5G and mobile point-of-sale and how that's evolving. So a lot of focus and emphasis on the next-generation point-of-sale. Third pillar is really to drive digital performance and preference. And we've got great relationships in the digital space. We've made inroads for the past several years. And what we're really focusing on now in North America is doubling down on those digital efforts and that spans contactless. It relates to things like driving card-on-file preference, deepening engagements with fintechs. And we're very -- we're obviously laser-focused on this as a digital-first brand for sure. So very, very active in that space. Fourth pillar is really to focus on growing our services. And of course, by that, I mean, our data and insights, our cyber and intelligence, our loyalty capabilities, and really differentiating our brand in the market with respect to what our customers need and want. And then the fifth focus area is really focusing on the new and different and ensuring that all the new business models that Mastercard is focusing on, like new payment flows capabilities, open banking, the realization of our multi-rail potential here in the market. This is an area of great focus, keeping us very busy. So I think about the priorities across those 5 pillars. And again, some very consistent over the past several years. Some that are being iterated on and innovated on differently given the shift in our model.

Right. Thank you. Very comprehensive. I appreciate that. Coming out of COVID, what structural changes do you see to the payments market? And I don't know if you can maybe give some commentary on business trends? In North America, you're seeing reopening. And your thoughts around the return of travel maybe?

Yes, happy to, Bob. Well, with respect to COVID and structural changes, I think it's -- even from your own personal experience, you can see that consumer behavior has shifted. We believe that much of that shift is going to be permanent. Our surveys tell us that more than 70% of consumers plan to maintain or increase the purchasing that they're doing in an online environment. 60% of them think they're going to continue to use cash less even as the pandemic subsides. So we do believe there is a significant shift. We just released our spending pulse results for the month of May. And what that showed us is e-commerce, as a percentage of total retail sales, is over 20%. And before the pandemic, e-commerce as a percentage of total retail sales was about half that. So that is a significant shift in the business. And again, I think that is once consumers create behaviors and spending, it's hard to reverse those. And fortunately, for us, we're in an organization and has -- our organization is poised for ongoing digital growth. And we've been investing in this space for so long, both through our products and solutions and through our rules and capabilities that we are really fortunately poised to take advantage of these changing consumer trends. In the online world, click-to-pay, MDES for merchants, as I mentioned earlier, tokenization is something that has really exploded. So we've seen merchant tokenization for card-on-file, having a sixfold increase in the number of unique merchants transacting just in the fourth quarter last year alone. And again, here, our research tells us that 7 in 10 consumers have their payment credentials saved with at least 1 merchant type. So card-on-file tokenization with subscription merchants in particular, merchants like Netflix and Etsy, ride-hailing services. This is incredibly relevant. From a contactless perspective, we're continuing to drive adoption across all our markets, but especially in the U.S. The U.S. market for contactless had been really tepid before the pandemic. And during the pandemic, it's been -- as we've reported, it's been quite active with more than 70% of our volume occurring at a terminal that's enabled for contactless and significantly more issuance of products that have contactless capability. So before pandemic, transit was -- transit enablement for contactless was driving usage. And now we see other rationale driving contactless usage, convenience, health, safety. So it's -- again, it's a trend we've been delighted to be on the right side of. And then as e-commerce grows and digital volume grows, so too does cyber and intelligence. And the products and solutions that we've acquired and that we've invested in and we've grown, have proven to be very relevant in the current environment. Companies like NuData, Brighterion, Ethoca, RiskRecon. Fraudsters are as sophisticated as they ever were, and they're migrating to digital environments. And so the inventory of assets that we've amassed, I think, are more relevant than we've ever been before. So I think those shifts, the shifts in merchant spend with respect to buy online and pick up in store, the shift in delivery services, like grocery, I do believe that consumers are just much more comfortable transacting in a digital environment. Now with respect to travel, we do believe there's some pent-up demand for travel. We're seeing that through our results. Of course, airline and lodging has picked up for the month of May. Domestically, I think we shared with you on the Q1 call that we had that we've seen U.S. airline spend double from what we have seen at the beginning of the quarter, and we're continuing to see that positive trajectory today. What I see in the U.S., in particular, is a direct correlation between restrictions being lifted, borders being opened up, availability of vaccination, distribution of vaccination and the propensity for spend. So we're definitely seeing in areas where consumers can spend that they have a willingness to travel and they have a willingness to spend in categories that are nondiscretionary. And that's a really -- that's a good sign for us. Now with respect to cross border, we do believe that, that will pick up more in the second half of the year. International travel is starting to open up intra Europe. And particularly with countries with low infection rates and advanced vaccination distribution, we're seeing good activity there as well.

Great. Thank you. Over the last year and recently, Mastercard has won a fair amount of large deals in the U.S. And I think one of those is converting the Gap portfolio to Mastercard. What's driving those wins? And what's the pipeline? Should we expect more win announcements?

Yes, you're right, Bob. We've had a very active first half of the year with respect to competitive flips and new deals signed. Certainly, Gap is a marquee win for us. And we've been the recipient of several competitive co-brand flips over the past several years. Gap builds on portfolios like Bean and Cabela's and Kroger and others that have converted their business. To Mastercard, we've been the winningest network with respect to co-brand conversions. And the Gap is the next, and we're going to be their exclusive network across all of their brands, the Gap Old Navy, Banana Republic, Athleta, that is expected to migrate over in 2022. We've had a relationship with them for some time on the services front, particularly in the data, test and learn area. And so this is just a terrific next step in the evolution of our relationship with them. They have amazing brands. We have shared values with respect to diversity and inclusion, and we're just incredibly excited about that one. On the bank front, we did announce a new deal with Huntington Bank. So you probably know they acquired TCF, and that's going to make them a top 10 regional bank in the U.S. So they announced that they were renewing our existing business with them, and they were going -- they expressed their intent to convert the TCF business to Mastercard. It was previously with the competitors. So we're -- that's going to bring significant new debit business to our brands, and we're really excited about that. On the digital front, we have the Citi Plex product that they announced with Google Pay is going to be a Mastercard-branded product. The product is going to leverage our tokenization, capabilities as well as our digital debit product. And right now, there's a waitlist for that product in the market. We're excited about that one. And then also on the merchant front, we announced a multifaceted strategic partnership with Walgreens, which includes a new credit product with Synchrony that will launch in the second half of the year. It also includes a number of our services like insights, analytics, loyalty and other solutions. So really a very robust rhythm of wins and a pipeline that is quite rich as well, really pleased about the pipeline that we have in place. And from our perspective, there's a few factors that we've heard our customers talk about that are differentiating for our brand relative to others in the marketplace. I think our capabilities with respect to digital, cybersecurity, as I mentioned earlier, data and insights. The ability for us to support these partners across the entirety of their business, not just in payments and in cards, but beyond that, in adjacencies, like I mentioned, I think that's a significant differentiator for us. We have a B2B2C model where we take a partnership-first approach where we know that our customers, our role in the ecosystem is to power our customers with the best of what we've got. And that role that we play is very important. And I think our partners realize that, that again, we're here to support the entirety of their strategy and not just cards, not just to be the branded -- the brand that sits on the front of the card. And then as I mentioned earlier, we've got this authentic and steadfast commitment to diversity and inclusion. And I think brands, whether you're on the merchant side or the bank side, want to be aligned with companies who are like-minded and that includes shared values. And we've had a long-standing belief in the notion of doing well by doing good. And that's playing an important role as we do business with our customers. So again, Bob, really first busy 6 months of this year and more to come.

Thank you. I mean, time goes way too fast. So I do get a lot of questions on crypto, Mastercard and a lot of interest in your strategy there. I was hoping you can give some color around that.