Mastercard Incorporated (MA) Earnings Call Transcript & Summary

Hey. Good morning and welcome to the DB Tech Conference. Today's fireside chat is with Mastercard's Sachin Mehra, the CFO. I'm Bryan Keane. I cover the payments processors and IT services companies here at Deutsche Bank. And the format of today's conference call will be I'll ask Sachin some questions, and then if you have a couple you'd like to ask as well, you can put it into the portal and we can get to those. So with that, Sachin, thanks for joining us.

Thanks, Bryan, for having me, and good morning, everyone.

I guess I'd like to start by getting your thoughts on the economic recovery in light of the Delta variant, along with the current trends you're seeing in the business, particularly around travel, cross-border and e-comm spending.

Sure, Bryan. Happy to do that. Look, here's where we stand. From an overall driver standpoint, I would say the headline is that we're largely in line with our expectations. We have seen continued improvement in cross-border, and this is across both travel and nontravel. And we have now reached prepandemic levels relative to 2019. And this improvement which I just mentioned on cross-border is primarily being driven by an increase in intra-Europe spend, although I will say that most other regions have improved as well. So fairly broad-based recovery in cross-border, both travel and nontravel. As it relates to switched volumes and switched transactions, those remained steady. We have seen some level of moderation take place in the U.S., which was expected. It's part of the stimulus roll-off, which we had expected. And this is offset by modest improvement elsewhere. And again, Europe has shown some level of strength, but it's more broad based than Europe in terms of what we're seeing there. So net-net, here's what I'll tell you, that we're largely where we expected to be, with some minor mix changes.

Great. Mastercard has announced several large wins recently with issuers, fintechs and co-brand partners. Can you talk about the competitive environment? And give us a sense of what is driving these wins as well as if you feel like they're sustainable.

Yes. Look, I mean, the competitive environment is as it has been in the recent past. We are operating in a competitive environment. We believe we are able to differentiate with our capabilities. And broadly, I'd bucket them into our digital-first capabilities, our services capabilities and our multi-rail capabilities. And at the end of the day, it's what you do with these capabilities which is going to matter in terms of how we compete in the marketplace. And specifically, it's our ability to co-innovate with our partners, as well as we have adopted what we call a solution selling approach, and we believe that sets us apart with our competition. And this has translated into the recent wins we've been talking about in the marketplace. More specifically, I thought I'd spend a few minutes just talking about some of the more strategic wins which we've announced. First off, we talked about NatWest in the U.K. Here, as we had previously mentioned, this is a 16 million-debit card portfolio. It's a flip, and we expect this to start later this year with cards migrating as they expire. And with this migration, along with the migration of some other deals in the U.K. that we have previously mentioned, such as Santander U.K. and First Direct, we believe we'll have approximately 1/3 of the U.K. debit card market after all these migrations are complete. Now it's important to note out here that we've followed up this NatWest announcement with an announcement around the launch of our Pay by Bank app with NatWest as well. And this just goes to show that, back to my earlier point as to what helps us compete, it's the combination of what we can bring in the nature of co-innovation, solution selling, along with our services capabilities and our multi-rail capabilities, in this instance Pay by Bank, which helps to really provide what we would call the full suite of solutions to customers who really care about that. And then moving away from the U.K., I'll talk a little bit about the U.S., you've heard about the co-brand win with Gap. This builds upon some of our prior wins, Bryan, specifically with L.L.Bean, Cabela's and Kroger. We will be the exclusive network across Gap, Old Navy and Banana Republic and the Athleta brands, and this migration is planned for 2022. Again, it's important to note what helped us win here was the fact that we've had a long-term services relationship with Gap, which led to additional opportunities to support both their co-brand programs and their broader business. And so besides what's going on in terms of what we're doing in the U.K. with our traditional issuers, what we're doing in -- actually even in Germany with the Deutsche Bank win, which we had announced previously, as well as what I've just spoken about in the U.S., when you think about the activity which is going on in the digital giant space as well as the fintech space, once again we've demonstrated with the set of capabilities which I just alluded to our ability to really compete specifically whether it's the Apple Card portfolio, Citi Plex on Google Pay, the Samsung Pay with Curve. They're all kind of proof points of things which we've done to actually drive home the competitive advantages which we have.

Yes. It's definitely resonating with the market. I wanted to turn to M&A. On Tuesday, you announced the planned acquisition of Aiia in the open banking space. How should we think about this acquisition? And can you discuss how Aiia fits into your broader open banking strategy?

Sure. So first off, I'll just mention that we believe that open banking is a big opportunity, and we're pleased with our position both organically as well as through the acquisitions of Finicity and, more recently, with the announced acquisition of Aiia. Look, at the end of the day, the way we kind of think about it is, we're all in the business of providing choice and we want to make sure we've got whatever other rails which are in demand by our customers and by the end consumer is what we want to be able to provide. And that's what we have at Mastercard kind of care deeply about. So when we think about open banking, you're aware about the acquisition of Finicity. What Finicity brought us was tremendous connectivity in the right way. And I'll speak a little bit about what I mean by in the right way. It brought us tremendous connectivity across the banking ecosystem in the U.S., along with applications in the credit scoring and the credit decisioning space. What Aiia brings us is connectivity in Europe, specifically in the Nordics and the Baltics, to be expanded and rapidly expanding across the rest of Continental Europe, as well as a set of very capable payment applications. So when I think about how we're advancing our open banking play, we are taking this global. We believe it's a global opportunity. We are building the footprint from a connectivity standpoint through, in this instance, Finicity in the U.S., creating the connectivity, Aiia creating the connectivity in Europe. And then there's the cross-leveraging of applications which each one of these providers have in the different markets. And again, this is not just about the U.S. and Europe. We certainly have plans to take it in other parts of the globe as well. But that's really the play. And specific to Aiia, what we liked about, what we saw there was the strong API connectivity, the experienced team that they bring. They have an extremely high-quality platform with existing payment capabilities. They also happen to be a licensed payment institution service provider and account information services provider. So all in all, really good acquisition, very excited about it, plays very well into our overall open banking strategy and very much complementary to what we are doing with Finicity.

Sachin, I guess you won't be surprised that we want to ask about the buy-now-Pay-later space, including Square's acquisition of Afterpay and the partnership between Affirm and Amazon. How is Mastercard approaching BNPL? And do you see it as a threat or an opportunity? In particular, there seems to be a lot of concern that the networks will be disintermediated by the whole ACH threat.

Yes. Just at the outset, what I'm going to be very clear about is we view this as an opportunity. But it's not a new opportunity. It's an opportunity which is an extension of what we've been doing as a network for the longest time, which is making available our network capabilities to all forms of payments: debit, credit, prepaid, commercial. And what BNPL is, essentially, is another form of credit. We very much are participating in this space and will continue to participate on a going-forward basis. So let me be a little bit more specific as to what I think we bring as a network to the BNPL space. We bring technology in terms of our installment capabilities which we are making available to our lending partners. And I say lending partners deliberately because it spans banks, it spans other fintech players, so on and so forth. What we also bring is reach. And reach is important. So I'd say I think this is exactly what we do as an open loop, which plays well into that space. And when I step back and I think about this, Bryan, here's kind of my idea of the world. There are several credit propositions which are out in the market. We think about them in the context of credit cards, but there are credit propositions. BNPL happens to be one more credit proposition which can very well be enabled right over our network, which is what we're doing. And this is away from the fact that there's a funding transaction and then there is the repayment of the BNPL loan, both of which we participate in, by the way, through our virtual card capabilities to -- when they're used to pay the merchant as well as when our cards are used to pay the 4 installments which need to be paid thereafter. So overall, I kind of view this as a very interesting space, one which we're participating in. And honestly, I think I've heard the narrative about how this could be a threat to the network. Let me just spend a little bit of time on that, which is around the whole closed loop versus open loop. Our view is there's a lot more power in the open-loop environment than there is in the closed-loop environment, and this has been demonstrated over the last decade on multiple occasions with different plays. Specifically, in order for this to be something which matters and be at scale, you need at-scale lenders on one side, and you need at-scale merchants on the other side, both of which we bring. And so when I kind of think about the power of what an open-loop network can do, to the extent I have aspirations to be a lender in the buy-now-pay-later space, leveraging Mastercard's footprint could only be a plus. And that's been demonstrated time and again in terms of other threats which have shown up over the past decade. So we continue to believe that there's something to be said about what we deliver to the merchant community and which we will continue to actually enhance, which continues to be a source of strength not only for buy now pay later but, I would argue, largely speaking, for our business model as an open-loop network.

I wanted to move to another hot topic, cryptocurrency. Can you give us an overview on your digital currency strategy and provide an update on your progress?

Sure. So 3 things I'd kind of mention as I think about the world of digital currencies, right? We can -- we break them up internally into central bank digital currencies, private stable coins and then the third one being cryptocurrencies. And I think there's a difference between 1 and 2 and the third one. So said differently, central bank digital currencies and private stable points, to the extent the private stable coins are backed by fiat on a 1-to-1 basis, have store of value. Crypto assets are essentially an investment class in our mind. And we believe that we have a role to play in all 3 but in different ways. So as it relates to central bank digital currencies and private stable coins, to the extent private stable coins are meeting our standards around consumer protection, compliance, ensuring a level playing field and economic consistency, like I mentioned, we have a role to play, which is helping them at the infrastructure level as well as enabling acceptance of those across our acceptance footprint. And we've been doing that. We do that actively across the globe. We are engaged with several central banks in terms of how they are thinking about issuance of digital currencies. We do that in the nature of consulting engagements but also in the nature of making available our technology to help them in our sandbox to experiment as to what those central bank digital currencies might look like. As it relates to private stable coins, once again, we have mentioned that we will enable the right private stable coins for settlement over our network, which will allow for the acceptance of them just like any other currency is settled over our network. And then finally, as I think about the crypto asset category, a few things. One, we participate in them today by virtue of people using our card products to purchase those crypto assets. And we've also developed or gotten into several partnerships with various players who are looking to provide their consumers the ability to use their crypto assets at the point of sale. Now again, in that instance, we don't handle the crypto. We don't handle the conversion of the crypto into fiat. We take delivery of the fiat, but we do make available our acceptance footprint with players in that regard. The last point I'll make, Bryan, in this place -- on this space is you might have read yesterday in the press we announced the acquisition of a company called CipherTrace. CipherTrace -- and we're very excited about this acquisition. Look, it's at the forefront of exactly the space we're talking about, its technology, its global footprint. And its security monitoring capabilities, which is over 900 cryptocurrencies, is what we believe to be pretty powerful. And we believe this will significantly enhance our risk and compliance offerings. So what I'm excited about in that space is we are getting into what is a growing space, which is the crypto world. We're getting into it in a manner where we're delivering services which are very much in demand across our customer base -- existing customer base, to help identify what might be a big pain point, which is fraud. But it also helps up open a new segment, which is the segment of crypto exchanges, crypto ATMs, for us not only to deliver our fraud management solutions from CipherTrace to these new segments, but our broader suite of broad capabilities to this new segment. So all in all, I'm very encouraged by the direction we're taking and how we're executing on this space.

Great. Great. I wanted to turn to innovation in the acceptance space. Can you discuss how Mastercard is enabling this and helping drive acceptance growth and what it means for growth going forward?

Sure. So again, acceptance is important, right? I mean this is something which is kind of our bread and butter for the most part in terms of where we are focused. We believe that we as a network, we keep expanding our acceptance footprint. And we have been delivering on that year after year, and we will continue to do that on a going forward basis because the wider our acceptance network, okay, the more powerful our proposition is in terms of the open-loop comment I made earlier. And as it stands today, our network is highly scalable. And if anything, the global pandemic has accelerated the shift to digital for merchants and consumers, further increasing demand for digital acceptance, which is something we're very focused on. So we continue to partner with merchants globally. And this is true in every region of the world but also across what we call emerging verticals. And these would include verticals like rent, insurance, utilities, consumer loans. So that's kind of one facet of how we're going after acceptance, which has just broaden the footprint geographically as well as across new verticals. The second aspect is increase the proliferation of the different types of products and solutions that can be accepted at the point of sale. And here, I will point you to the efforts we made around contactless and the success we've had there, where we've talked about in Q2 how contactless penetration represents roughly 45% of in-person purchase transactions globally according to our switch transactions, which is up from 37% a year ago. But in addition to contactless, the work we're doing around Click to Pay, where we're live now in over 10 markets, as well as the work we're doing in the BNPL space, which I just spoke about, as well as Tap on Phone, which is something we've kind of talked about previously. So when I think about acceptance, very much a focus area, continue to deliver value to the merchants, which will only continue to enhance our overall proposition as an open-loop network.

Services have become an increasingly important part of your business, and I think it's now about 1/3 of Mastercard's total revenue in 2020. Can you update us on the services strategy, why it's important? And should it continue to grow maybe with outsized growth?

Yes. And you're right, we did mention that in 2020, our services lines represented about 1/3 of our revenues, which grew at about 18% during that period on a currency-neutral basis. And look, I kind of think about services across the following vectors. One, it's growing faster than the core in terms of its stand-alone revenues; number two, it provides us a very good source of diversification of our revenue streams, and this was very much demonstrated in 2020 in a year in which our core drivers were impacted by the effects of COVID, but services still continued to grow at a healthy 18% clip; and number three, the power of what services does from a differentiation standpoint across our customer base to help us win market share. And this is something I talked about earlier when I talked about NatWest and some of the other wins which we had. So strategically, very much on point, very much executing around this. What comprises our services portfolio is things like consulting, cyber and intelligent solutions, data and analytical capabilities, our loyalty and rewards capabilities, our processing capabilities. These are all part and parcel of what we do from a services standpoint. The opportunity for me on -- from my perspective on services is very compelling. And let me explain to you why I think it's compelling. What we are very focused on as a company is to take our existing suite of services and deepen their penetration across our existing customer base. So that's kind of pillar #1. Super important. And when I talk about existing customer base, I'm not only talking about the issuing community. I'm talking about the issuing community, I'm talking about the acquiring community, I'm talking about the merchant community. And also actually, as we're expanding our capabilities, there are new players who we service, just like I said right now when I talked about CipherTrace with the new segments which come into play there. So that's kind of vector #1 on services opportunity. The second is, while we're doing that, we're expanding the suite of services we've got. So as you keep expanding, you're not only taking your existing services and causing quite deeper penetration with your existing customers, but you're offering them more and varied solutions. So that just drives a whole lot of opportunity right there. And then the third vector is taking all these services and adopting them to what our multi-rail strategy is all about, which is not only making them available across card rails, making them available across ACH rails, across digital currencies, across open banking. So the opportunity is pretty compelling, Bryan, from our perspective. We continue to deliver on this. They grow at a healthy clip. We're seeing good demand. And this is very much part and parcel of where we'll continue to stay focused going forward.

Great. Great. I want to turn now -- turn to Nets. That acquisition, I know it took a while to close. But it did close, and it really bolstered your multi-rail capabilities. Can you give us an overview on multi-rail? Because I know that's a differentiator for Mastercard. And up update on your progress there.

Sure. So I think it'd be probably helpful first for me to just kind of frame up what we mean by multi-rail. Because oftentimes, this is a question I get, and I think it's important for people to just kind of get on the same page on this one, which is the basic premise of why we are a multi-rail network is because we believe in choice. We believe in providing choice to our customers and to our end consumers and businesses whoever the endpoint is. And when we talk about choices, we want to make sure that we are not one-dimensional and say that we are only about providing card solutions. We want to provide solutions across card, ACH, digital currencies, open banking and whatever else might be their preferences going forward. And so what multi-rail effectively means is having the ability to be able to deliver solutions which leverage any and all of these rails which I just talked about through a single point of connectivity. So connect once, get access to all these rails. That's what we mean by multi-rail. And what Nets is, is basically an accelerant to that multi-rail strategy. So you're aware about Vocalink Nets is in addition to that. But then there's everything else we're doing across the various other rails, whether it's card rails and/or the digital currency rails or open banking, which all come into this multi-rail strategy. The Nets acquisition specifically is going very well. We're in the integration phase. Things are moving along. We are very focused as a team on delivering on the synergies which we had identified as part of that acquisition. It is important for us at 2 levels. One, it brings a set of infrastructure capabilities which are different that -- than what we had with Vocalink. They are more what I would call suited for smaller markets. They're basically different from Vocalink in as much as Vocalink is more for complex markets, which are highly customized markets, and Nets is more about -- it's a little bit more of a plug-and-play. That's at the infrastructure level. The application level is what makes this acquisition particularly interesting because it brings a set of bill payment capabilities, which are very important. And I think you know that we mentioned in the past we believe that the bill payment use case is a powerful and a fairly large-size market opportunity for us globally. And we're doing -- we're going after that with Nets and the Nets' capabilities. But we're also going after that with the work we're doing around Bill Pay Exchange in the U.S. So I kind of think about the combination of what Nets brings and what we have with Bill Pay Exchange in the U.S. as accelerating the application level of our multi-rail strategy. And then finally, there's the services component, which I've already spoken about. When we take the services capabilities and we apply them to not only Nets but across all the rails, it just makes for a much more compelling proposition. One last point I'll mention is this decision to actually be in the business of providing choice across multiple rails plays very nicely to actually address what is a growing -- perceived to be threat, which is around the need for greater nationalism and nationalistic tendencies. Because as we are doing what we are doing, we are expanding our footprint or presence in various locations across the globe. So that's -- specifically, when you are operating with Nets, the Nets infrastructure is catering in-market to the European environment. And so that addresses concerns which might arise from a nationalism standpoint in that example in Europe to some extent. And then if you're doing the similar thing with the Vocalink capabilities in Asia, you're establishing the infrastructure in Asia. So this is -- it's very important for us as we think about our business model going forward that we're very focused on delivering; choice but, at the same time, responding to what we are seeing as an evolving environment where there's a greater level of demand for creating national infrastructure.

Great. Great. So as we look forward, Sachin, what are the key longer-term opportunities that Mastercard is looking at? And then the flip side of that is always the risks that you're kind of watching out for.

So I'll hit the risks up first. One I just kind of touched upon, which is the risk of nationalism, and this comes in different forms, and we're working hard to mitigate this by working with governments to address what their underlying concerns and problems are. And I just talked about the multi-rail strategy being one way to do it, but there are several other engagement models which we've got going with that. The second area of risk as I see it is around the emergence of new technologies and what that means from a threat of disintermediation standpoint. Reality is, this is not a new risk. This is one we've been dealing with for many, many years. And the way we actually go after this is to continue to drive innovation and stay ahead of the technology curve, whether it's through our Mastercard Labs, our blockchain efforts, Mastercard Start Path. There are just different ways in which we're kind of staying ahead of the game on this one. And the third area is around cybersecurity, which we believe is mission critical for our industry and broader society, frankly. And in a highly complex ecosystem, there is no single silver bullet solution for security. We mitigate this through our layered security by design strategy which we have adopted here at Mastercard. On the opportunities front, Bryan, first and foremost, I want to kind of make sure I'm very clear. We continue to believe there's a significant opportunity in our core card payment space. There still remains a tremendous opportunity to continue to drive the shift from cash and check to electronic forms of payment. Very focused on that. We'll continue to remain focused on that. Number two, we're going to continue to be focused on driving market share wins. We think that's important, and there's really a lot of opportunity in that space for us as well. But beyond that, the opportunity and what I'm really excited about is everything I just mentioned about, the potential from a services standpoint, to which we did not nearly get into in a high level of detail but we touched upon, our digital identity and open banking, again areas of real opportunity for us as we think about ourselves going forward from a differentiation standpoint. So look, we continue to invest to drive to realize these opportunities, and we will do that with prudence. And we look forward to telling you more about these opportunities at our upcoming investor community meeting, which is slated for November 10, as we had previously mentioned. And while we were hoping to have this as a hybrid event, given the circumstances, we have now decided that it is best for us to hold this as a fully virtual format -- in a fully virtual format. So that's kind of where I am on the challenges and opportunities.

Yes, this tech conference was supposed to be in person, then hybrid, and then we had to move to virtual. So I guess it's the reality that we're living in. It's still going to be a virtual world for the time being.

Yes. And really, we thought that given where we are right now, the best decision is to go virtual at this point in time.

So a couple of questions that have come in. I guess the first one is on the Fed requested comments on the exclusivity provision on debit routing, especially card-not-present debit routing. What's Mastercard's position on this?

Yes. Look, I mean, the proposed amendment has really not been finalized quite yet. And so it's somewhat difficult to comment until the language is finalized by the Federal Reserve. However, in whatever form that the amendment is implemented, we will be compliant, and we stand ready to support our customers. I think the thing to keep in mind is that we have been very focused on ensuring the safety and security of every transaction, both in an online and an off-line environment, and this is a core part of our strategy. And we continue to invest in this space, as we've kind of talked about a little bit. That's going to be important as this plays out going forward. So historically, there has been less invested into the fraud management space on PIN Debit rails as many have been dependent on PIN being present in the card-present environment. And if the regulation were to change, there will be gaps in terms of the majority of many of the networks to offer the safety and security which we aspire to provide and we do provide through our various capabilities, organization included, in the online environment. So look, we continue to stay focused on this. We stand ready to be compliant as to whatever is required. And we do believe, for all the investments we've made in terms of ensuring safety and security in the space, we stand well positioned to be able to compete there.

Great. Another question came in asking for a clarification on your -- some of your opening comments on volumes. I think cross-border in the last report was 91% on the 2-year in July. And then it sounds like it's back to prepandemic levels. So does that mean that we're back at 100% right now in August and currently run rate?

What -- would that mean -- yes. So when I talked about cross-border being back at prepandemic levels relative to 2019, that's exactly what I meant, which is we're back at the 100% level there.

Yes. And going forward, I assume -- we've seen the airlines, I think, just take down numbers. I would assume they're probably likely to see some moderation in that number given the Delta variant?

Bryan, it's really hard to tell. I couldn't really tell you as to what's going to happen. Just -- it's an uncertain environment kind of -- it's really so dependent on how the Delta variant plays out, what people's level of confidence is. But by and large, what I'm starting to sense is people are coming to terms with the fact that this COVID, in its various forms, with its various variants, is something we're going to have to live it. And it's becoming more and more part and parcel of how people are adjusting and adapting their lifestyles to that. So it's hard to say what the impact in any given week or any given month is going to be on cross-border travel. But I will say, what we see right now is, like I said earlier, continued improvement in cross-border across both travel and nontravel. And remember, at the end of the day, the most important thing here is, do people have the ability and intent to travel? And we have seen when people have the ability to travel, they have demonstrated that they do have the intention to travel, particularly in the personal travel space.

Okay. With that, Sachin, thanks so much for taking the time. We really appreciate it.

Bryan, thank you very much for having me.

Goodbye.