Mastercard Incorporated (MA) Earnings Call Transcript & Summary

Good afternoon, everyone. I'm Ashwin Shirvaikar. Citi's Global Head of FinTech Research. And we're on the last open session of a very strong day 2 of Citi's 11th Annual Fintech Conference. Glad you're with us. One logistical note before we start the session. For investors who want to ask questions, you'll see a box next to your screen. Just type your questions in. I can get him -- I can look them in into my own questions and so on. With that, let's get started. So next up, we have Mastercard. From Mastercard, we have Craig Vosburg, who is the Chief Product Officer. Craig, welcome, and it's great to see you again.

Thanks, Ashwin. Great to be back.

Yes. Yes, absolutely. A lot has changed for you since the last time we spoke.

But I'm going to start with the Investor Day last week. Michael Miebach talked about 3 key strategic priorities for Mastercard. And I just feel like it's worth revisiting them and discuss the priorities why they're important.

Yes. Yes, I'd be happy to. As you mentioned, we hosted an investor -- investment community meeting last week and spent a lot of time talking about our strategy and really framing that around the evolution of our strategy that has, for many years, been centered on growing our core business, diversifying into new areas to diversify our revenue streams and building new businesses. And that served us really well over the course of the last decade or so and enabled us to continue to drive growth in our payments business and develop and launch a number of value-added businesses that are now meaningful contributors, very important contributors to our overall revenue and build out businesses in new areas. And as we've thought about how we're going to take the business forward, to continue to drive that growth and continue to have a good means of anchoring and centering our attention, articulating our priorities, that's evolved now into, I think, a more discrete focus within each of those areas. So that's revolving around payments and growing the core with a focus on payments, diversification with a focus on our value-added services business and building new businesses with a focus on embracing new networks. And each of those, we think, has really attractive growth potential for us going forward. Payments is obviously at the core and at the center of what we do. And we see a lot of runway for growth, both in our core consumer to merchant purchase transaction activity as well as a number of new flows that I'd love to talk about today. Continuing to build out and expand our value-added services and embracing new networks where we have adjacent opportunities where we can leverage our capability and our experience in managing a 2-sided multilateral network in areas like digital identity and open banking.

Right. Right. At the event, and we will get into some of the -- you talked about in detail. But at the event, Mastercard also provided sort of global market sizing figures, identified a subset of things that Mastercard has been doing. So can you talk about the opportunity, the specific flow...

Yes, I'd be happy to. And that's really what's at the core of the focus on payments, the first pillar of that strategy. And really, I should mention each of those pillars really reinforces each other as well. They're very complementary, and there's a lot of synergies between the 3. If we look initially at payments specifically and we look at the overall addressable opportunity that we have before us at $255 trillion in payments flows, that's a broad range of opportunity that's really become addressable as we've invested significantly over these last handful of years to broaden our capabilities to be able to intermediate payments beyond our card rails, which we continue to love and nurture and see lots of ongoing growth coming from, but diversifying into other payments capability as well related to real-time payments and account-to-account payments and push payments and blockchain and things like that. And so with that, that addressable opportunities has been and remains quite significant. We shared last week a focus on 5 particular categories, which, in the aggregate, represent $115 trillion of that $255 trillion that are really driving our strategy, and that's the focus on consumer to merchant purchase transactions, what you can think of as our core cards business where we see ongoing and significant growth potential. $37 trillion in addressable flows there. The second is with respect to remittances and disbursements that we see is a $32 trillion opportunity that we're pursuing through Mastercard Send and our cross-border services capabilities. A third area is in commercial card -- commercial transactions at the point-of-sale, which are carded, $14 trillion in opportunity there. B2B accounts payment flows, another $24 trillion. And finally, consumer bill payments that we see as an $8 trillion opportunity for us. And those are the 5 areas that are really anchoring our payment strategy as we go forward, and we see each of them as representing really significant potential for growth and ongoing revenue growth for Mastercard.

Great. Great. That's actually a really good framework to dive into. So maybe let's start with kind of the base, the consumer purchase part of it. What is your strategy to continue driving growth in core payments? I know in the past you talked about acceptance growth, acceleration of digital, things like that. But could you talk about those as well as new cases?

Yes. I'd be happy to. We've seen an ongoing acceleration of the trends, the migration towards digital payments that's accelerated throughout the course of the pandemic as our lives became increasingly dependent on digital means of interaction, on digital means of communication and on digital means of commerce and transacting. And so there's some really attractive, I think, ongoing secular opportunity here that the forces that we've seen at play literally for decades that have accelerated over the course of the last 18 months, and we see opportunities to continue accelerating in part driven by those changes in consumer behavior, many of which we see as being very sticky. And as people have learned how to transact and engage in commerce digitally in new ways, there's virtually -- there's almost nothing you can't buy now through digital transaction. And in many cases, it's more convenient and is going to remain very appealing to consumers. Beyond that, consumer behavior-driven acceleration, there are some things that we're focusing on to increase our own growth in these spaces and continue to build out the breadth and the power of our network, one of which you mentioned is acceptance. The breadth and reach of Mastercard's merchant acceptance network is, without question, one of our most important strategic assets as a company. We now have more than 80 million merchants around the world, merchant locations that accept Mastercard. That's more than doubled in the last 5 years, growing 14%, 15% on a compound annual growth rate, increased by 19% in the last year as more merchants found the need to be able to diversify their own channels for selling and had a higher propensity to start accepting Mastercard payment products. And so continuing to lean into that trend, which is also being driven by new technologies, more and more markets, including here in the U.S. embracing contactless as a form of initiating a payment, new technologies that are enabling literally any connected device, any mobile phone to become an acceptance device through our tap-on-phone acceptance capability, that's potentially literally billions of new acceptance devices around the world that can be enabled to accept a contactless card through the touch of the card to the phone. So that's an important trend that's continuing to drive growth in our core cards. Business, the things related to digital, leaning into digital and the increasing digitization, and with that, incorporating Mastercard capabilities, things like tokenization and the increasing proliferation of tokens to enhance security, to improve the consumer experience with life cycle management. We're now processing over 1 billion tokenized transactions per month. That's in a handful of years since tokens were introduced into the mainstream. That's enabled and unlocked a whole new range of digital commerce opportunities and has done so in ways that are safe and secure and convenient for consumers. Our digital-first issuance programs, things that we're working on with a number of our partners and geographies around the world that are enabling payment credentials to be issued digitally effectively immediately upon application and approval in some cases, only digitally; in other cases with a physical companion card at the consumer's choice. But these kinds of things have also fueled a third pillar of that growth strategy, and that's driving close partnerships with fintechs, with digital partners who are increasingly on the cutting edge of delivering these consumer experiences that are attracting consumers to commerce experiences that are changing behavior and just accelerating that migration. So it's kind of a self-reinforcing cycle that we see and one that we remain really excited about in terms of the growth potential it has for Mastercard.

Right. Right. If I can just come back to a couple of these points. And it's frankly impressive to have at this stage of the game 15% CAGR on acceptance growth, for example, right? Which of the areas that you've kind of laid out gives you more of that? Is it the tap-on-phone versus cloud commerce? Where do you see more action, so to speak?

Yes. I think it's the breadth of things. It's not one in particular that I would point to. I think, certainly, over the course of the last 18 months, since we've been living with the pandemic, we've seen clearly an increased importance on the part of literally any business to be able to diversify their channels and reach customers through digital means, to be able to sell online through mobile devices, et cetera. And so there's been a catalyst on the part of businesses, particularly small businesses, to join the digital payments revolution, in many cases, as a necessary means of survival, to ensure that they're still able to generate revenue at a time when customers were physically unable to visit their stores or interact with their establishment. So that's one. There's a whole range of new technologies and technology enablers, partners that we work with across the ecosystem that are making cards acceptance available more broadly to a wider range of businesses through, in many cases, new technologies that are lower cost than traditional acceptance technologies. That's opened up the prospect of accepting cards for payment to a wide variety of new merchants, whether that's through a dongle, whether that's through a QR code, a variety of ways to do that both in developed and in emerging markets around the world as well as the kinds of technologies I referred to, upgrades of terminals to enable contactless, upgrades of terminals to incorporate chip security that has embedded more functionality in traditional terminals as well as new technologies like tap-on-phone. And tap-on-phone is -- it's getting -- we have meaningful numbers of deployments, but it's at its early stages of deployment. And that's a pretty exciting technology. When you think about literally any device that's capable of communicating and any device that's capable of reading a contactless card can be enabled to accept card payments. That's a lot of reach when you think about that. So that's a trend that we see -- we're excited about them and see that continuing for some time. And by the way, that doesn't even include things like connected devices, Internet of Things. You think about your car, you think about your house, you think about appliances, all these devices are going to be enabled when you combine that with the power of something like 5G technology that's being introduced in markets around the world, the number of connected devices and the ability to effectively establish an Internet session between any of these devices creates the ability for all of them to transact. So we see that just continuing to grow.

Absolutely. No, we have an embedded finance conversation that's happening on the last day of conference. So certainly, that's a fascinating area too. Like, your favorite topic in mind, as we know is BNPL. So let's talk about that. This is a -- that really has been -- the traction from the consumer standpoint has gained a lot of [ concern ] from an investor standpoint. And there's a lot happening here as well. And what you guys announced with Mastercard Installment was very interesting, introduced the second element to primarily what used to be like a lead generation merchant conversation. Could you talk more about Mastercard Installments? Can you provide us the recent update? And how do you view the risk from closing...

Yes. I'd be happy to. Mastercard Installments, we introduced, I guess, just about a month ago as an addition to our suite of Buy Now Pay Later capabilities. We previously offered the ability for our partners, principally issuers, to offer installment capabilities through card products, through a set of APIs that we've developed and made available to them, and a number of issuers are using that. Mastercard Installments is a fundamentally different proposition in as much -- in a couple of ways. One is it's not -- the lending device is not a card product. It's a consumer loan. The lender is not an issuer per se, it's a lender, any lender who wants to participate in the program. And we've actually expanded and added a new participant in the context of our franchise framework to enable lenders who are nonissuers to participate in the program, whether that's a bank, whether that's a fintech, whether that's a digital wallet. It could be one of the Buy Now Pay Later pure plays who would like to take advantage of Mastercard Installments to extend their reach. And so the beauty of the program, in our view, is that there's real value in it for everyone in the ecosystem. For the consumer, it's providing the ability to access more Buy Now Pay Later functionality. And clearly, this is a concept that's resonating with consumers. They like it and they're using it. So to be able to access a wider variety of Buy Now Pay Later offers through a wider range of lenders and to be able to use that at any merchant where Mastercard has accepted, any of our 83 million merchant locations around the world, and to be able to do that with the protections that come with a Mastercard-branded transaction, 0 liability, charge-back rights, et cetera, things consumers have come to expect for Mastercard, so it's a great proposition there. For the merchants, there's no effort required on their part to be able to participate. If you're a Mastercard-accepting merchant, you're basically eligible to be in the program. And there's no tech integration. There's no additional contracting or sort of bilateral agreement that needs to be entered into. So they're getting access to this significantly increased pool of purchasing power with little effort, and we've seen the impact that the Buy Now Pay Later offers have on increasing merchant conversion rates and increasing ticket sizes. For the lenders, of course, it gives them an opportunity to meet the needs of their consumers that are attracted to this proposition and to do it at scale across the full breadth of the Mastercard network. And to do so, by the way, in differentiated ways, leveraging the power, for example, of our open banking capabilities to incorporate with consumer consent transactional banking data to enhance their ability to underwrite a loan and extend the appropriate -- credit on the appropriate terms to a consumer based not just on a credit score, but on their cash flow and their demonstrated financial capability. So we're excited about the program. We've had a tremendous level of interest from our partners of all types, merchants, lenders, fintechs, the Buy Now Pay Later players. And we're excited for that to officially launch early next year, and we'll look to extend that into new markets with a number of new partners as the year progresses in '22. A closed-loop question that you raised. Look, we always are on the -- have our eyes open, I think, looking out for the risk of closed-loop models. We believe in the power of open-loop models and the reach and the scale that our open-loop network provides. Payments -- our view for payments to be successful, any payment product to be successful, it needs to be ubiquitous. Consumers don't want to have to pick and choose when and how they can use it. They want to be able to use it whenever and wherever they want to. And so there are some inherent limitations in that respect to closed-loop networks. That being said, we don't take that for granted. We continue to invest in our acceptance network and some of the things I've addressed in the last question around the growth and acceptance is an important part of that and continuing to grow that acceptance network and extend that reach for the benefit of all of our network participants. Merchants, lenders, consumers alike is and will remain an important priority. But we're also talking to players who have closed-loop models about ways in which they can take advantage of and leverage our open-loop acceptance capability to have greater scale and reach of their proposition and not spend too much effort signing up new merchants, focus on consumers and delivering a great experience to their consumer.

Okay. No, that makes a ton of sense. This is kind of a follow-up question. You kind of are going to launch in the U.K. and Western Europe, I think, in 2022, Australia. From your experience with buy Now Pay Later, do you anticipate sort of differentiated response? Do these consumers in different parts of the world look for different things from the product? Or is it always about just the convenience factor and the digital footprint and so on?

Yes. Our launch markets are the U.S., the U.K. and Australia. So that's where we'll launch first. I think consumers are fairly consistent in terms of what they've come to expect in this increasingly digital world in which we live. They expect convenience. They expect ubiquity when it comes to payments. They expect security. They expect a great consumer experience. And I think from that perspective, the ways in which the product will be successful in the different markets working with partners -- local partners who have established relationships with those consumers, will lead us down a path to being able to grow that and be successful. There are some nuances with geographies that maybe have more to do with the regulatory environments and consumer protection, for example, agencies that are appropriately protecting the interest of consumers, and that's been an area where some questions have been raised in various geographies about Buy Now Pay Later programs. This is where we feel like the incorporation of open banking capabilities to improve the underwriting decision and have it really be based on a deeper insight into a consumer's ability to repay is an important addition to this value proposition and an important way to make sure consumers are getting access to credit. Getting access to credit is a good thing, and it helps improve the quality of people's lives, but getting access to the right amount of credit under the right terms.

Right. I was going to ask about open banking next, but you mentioned new payment flows. So [ let's ] talk about it. Could you -- how do you think about these new flows, the opportunity there? What's the framework that you use to pursue them?

Yes. The new flows, back to what -- some of the things we talked about last week at our Investor Day, these are the new flows in the areas of remittances and disbursements, card commercial transactions at the point of sale, B2B accounts payable and consumer bill payments. We see all of these as really attractive and long-term opportunities for growth for Mastercard. Each of which we're approaching in -- with a roughly similar frame because they're new flows, they're incremental in most cases, not all, but incremental in terms of what we were able to address when we were limited to our card rails. And so an important part of this is establishing broader reach with payments capability across a broader range of infrastructure to be able to intermediate payments in a broader range of geographies, and then enable our partners to connect to them seamlessly through a single connection to Mastercard, target specific use cases within each of those major flows, align a series of value-added services with those and then engage with our B2B partners as we traditionally do to enable distribution and ultimately drive adoption and growth to drive revenue for us. So that's the approach we're following. We're somewhat different stages and with -- in somewhat different configurations of assets and capabilities and, in some cases, different markets where we are focusing and active with each of those new flows but all areas that we're investing in and enthusiastic about how they'll contribute to our growth going forward.

Not sure what happened. I think I might have kicked out. But you're talking about new flows, and I heard most of the answer. The question I kind of have for you on the new flows front is obviously traditional ways of doing these have existed for a long time. Some of the partners that you have are traditional partners and that kind of thing, a Western Union or a [indiscernible]. So in terms of just the interplay that you have with traditional players, they're trying to do the same thing, do you bring different capabilities depending on who the partner is? Or is it more or less -- I mean does it become a bespoke-type offering? Or is it a standardized sort of offering if that makes sense?

Yes, it's a great question. I think it's very consistent with our business overall, where we're very proud of having a partnership orientation and focusing on understanding the needs of our partners, the objectives of the partner, their business, their strategy, where they are. And in some cases, how they want to compete, in some cases, where they are in their own development cycle and what they're ready for now versus what they may be ready for at some stage in the future. And then tailoring the suite of capabilities and services and assets that we deploy to engage with that partner to help them achieve their objectives in the process, help us grow our business and drive revenue growth as well. And so that takes on a variety of shapes even within very consistent parts of the business, even with something in our core business, something like a co-brand program with one partner may look very different from a co-brand with another partner. The same is true. And when we look at remittances and disbursements, we're working with a bank that may have an international footprint versus a bank that has a domestic-only footprint versus a fintech that has a very different set of customers and a customer proposition versus someone like a Western Union since, you referenced them in the question, who has some capabilities of their own in that space that are very relevant, and in fact, very additive to what we do. Each of those in order to really optimize the opportunity, given their footprint, given their capabilities, given the customer segments they serve, the geographies that they're in, the particular flows they may be targeting, their own economic models, we engage with each in unique ways, leveraging that -- the capabilities we have, and we can leverage them broadly enough to be able to drive growth at scale, but in ways that are aligned with the partners, individual circumstances as opposed to a plain vanilla offering.

Got it. Got it. And if I was to dive in to, say, 1 of the bigger pieces, B2B account flow, right, it's obviously a huge opportunity. You had Mastercard track in there as a start-up would -- a card, of course, been there for a while, supply chain financing. Can you sort of drill down a little bit more into your specific approach to capture B2B accounts payable flows?

Yes. Yes. It starts with the premise that establishing a 2-sided open-loop B2B payments network will enhance the utility and increase value for buyers and suppliers in terms of being able to increase the efficiency of payments, increase the efficiency of their invoicing and payments management processes, use it as a mechanism to inject new sources of value, like supply chain financing that you alluded to. And so building out that 2-sided open-loop B2B payments network, again, I mean, it does harken back a little bit to your earlier question about closed-loop networks. There are some successful closed-loop B2B payments networks that they are limited in terms of their opportunity to intermediate payments based on participation in that network on both sides. Those create opportunities to connect to a broader open loop network, serve a broader range of buyers and suppliers. And that's what we're in the process of building out and with an initial focus on the U.S., the U.K., the UAE, signing up partners -- B2B partners who are representing on the buyer side, buyers and suppliers and helping us make the connections based on supplier payment preferences, based on their agreed terms and conditions, based on things like opportunities to increase the adoption and usage of virtual cards as an early sort of use case, but to extend that into other account-to-account-based payment flows, to introduce value-added services like supply chain financing that we announced recently through our partnership with Demica, particularly to benefit smaller- and medium-sized suppliers who have less access to credit and short-term financing vehicles, and therefore, can serve as a powerful incentive for them to engage and benefit from participating in this network.

Right, Right. Do you care, for example, virtual card versus account to account in this particular area? What are your thoughts?

Look, we're focusing on building this out in ways where we have multiple avenues to monetize participation for us. And in some cases, that may come through the payment itself. If there's a card product, it -- we'll see card economics. In some cases, it could be through intermediating a payment through another of our capabilities through cross-border services or even Mastercard Send, through a real-time rail. There will, in many but not all of those cases, be opportunities for us to monetize that portion of that payments flow, but then there's value-added services and capabilities like the supply chain financing piece. So we're building out, I'd say, a broader array of being able to ensure that as the ecosystem is experiencing the value of this 2-sided payments network, that Mastercard is also benefiting from that through incremental revenue drivers.

Got it. Okay. as always happens, we're running out of time, even though I probably went through the 3.5 of my 7 questions or 8 questions. But 30 to 60 seconds, perhaps wrap up on, in your view, biggest opportunities and risks for Mastercard? What should investors think?

Yes, I think it comes back to where we started, and it's driving growth in our payments business, both through the core where we see ongoing opportunities to drive growth in our cards business, but also increasingly contributions that we'll see from these new payment flows that will be incremental areas of participation for us and incremental drivers of revenue. It's continuing to expand our portfolio of value-added services that complement and help differentiate our core payments capabilities, but also drive their own discrete revenue streams for us. And then building out these new networks. And we didn't get to go into them in as much detail as I would have liked to, but we're really excited about what open banking holds for us in the future and the position that we're establishing for Mastercard and open banking and the prospect of digital identity and the complementarity really between all 3 of those areas. So we think, in the aggregate, that provides a really nice and extended runway for ongoing growth for Mastercard.

Yes. Now we didn't get to everything, but still a fantastic conversation, great insights. Craig, thank you very much. I appreciate the flexibility with your schedule to make this afternoon.

Yes. Thanks, Ashwin. Good to see you again.