Mastercard Incorporated (MA) Earnings Call Transcript & Summary

Welcome back to Evercore ISI 6th Annual Payments and Fintech Innovators Forum. I'm David Togut. I lead the payments, processors and IT services research team. Delighted to welcome Raj Seshadri, President, Data & Services for Mastercard. Raj, thanks so much for being with us here today. We appreciate it.

Thank you, David. Delighted to be here.

Could we start by having you share your background and the scope of your current role at Mastercard?

Sure. I have a rather unusual background. It started in the world of physics, and then I spent over a decade in consulting. And then I've been in the business world, but in various different roles, product, marketing, running a business, strategy. And actually, as I lead data and services, it's been kind of fun because most of these services I have in data and services, I've worked in at some point in my career. And so in fact, when I give career advice to young people, I always tell them, if there's something you're really passionate about, go deep, but there's nothing wrong with going broad. And I think I have benefited from going broad. So yes, I lead our Global Data & Services business.

Understood. What are your top 3 priorities for Data & Services?

Top 3 priorities are, one, is to continue enhancing the value of payments. right? We already do a lot to enhance the value of consumer card, whether it is helping our partners acquire customers, optimize portfolios, drive contactless adoption, the shift to digital, accelerating that. But it's also -- in that priority, it's also going beyond cards. So things like for a treasury bank being able to provide insights across all types of spend, including card, or for multi-rail driving, both deployment as well as thinking through value propositions and things services that you can deploy into multi-rail. The second priority is to expand into new services and new use cases. So for example, at banks that is going beyond payments. It is looking at -- I'll give you an example, looking at their locations, looking at their hours of operation, thinking about the balance between digital and physical, like for staffing. And then beyond banks, it also is going into new segments like retail and commerce, like digital and fintech, governments of all types, central banks, federal government states, cities, right? So really diversifying our customer base. So expanding in that manner is the second priority. And the third priority is to support our new network initiatives. So a good example there would be open banking where we do a lot of work, for example, helping our partners reimagine value propositions in the context of open banking or helping our partners and small businesses and consumers get greater access to credit in the right way, which is good for them and good for the lender, so things like that. So those are the 3 priorities. So enhance the value of payments, expand into new segments and use cases and then support our efforts in building new networks.

Can you discuss Mastercard's overall services strategy and why services are important to the company and to your customers?

Sure. Happy to do that, David. Our overall strategy at Mastercard is it echos the services strategy. Our 3 pillars are the growth payments, card and beyond card; to grow services; and then to build these new networks. So if you think about services, which is that middle pillar, it's about 35% of our net revenues in 2021 and other currency-neutral basis. And just to give you some context around that 35%, it was 26% in 2018 and 16% in 2012. So that just gives you a sense of where services are growing at Mastercard. And there are 4 benefits when you think about it, right? The first is obviously growth. I mean, when you think about the 35% coming from 26% coming from 16%, it's clear that it's high growth. And 35% of net revenues in 2021, the corresponding growth rate of revenues was 25% for services. So it just tells you how fast growing it is. And it's not surprising because it accelerates payments and it goes beyond payments, right, and it's growing faster than payments. The second reason is a differentiation. So services differentiate us, differentiate payments. And the reality is what that means is that it helps us win payments deals. It makes customer relationships stickier. And in fact, almost every Mastercard issuer uses at least one service. Many of them use multiple services. The third reason is diversification. This is going -- we're able to add value and relevance beyond payment now, as I was saying a minute ago. And what does that mean? That means that, frankly, it's good for us. So during the pandemic in 2020, even during that year, services grew at a rate of 18%, again, on a currency-neutral basis. So that just tells you there's diversification built into our services portfolio for Mastercard. And then, finally, the fourth reason we're in it is for the talent. So about 1/3 of our joiners to Mastercard come in through services. And as they grow in their careers, many of them come in through our professional services advisers organization. And as they grow in their careers and train and develop, like I did at a consulting firm, they can then go become leaders across Mastercard. Many of our leaders grew up in advisers. And then in the talent category, there's also acquisitions. As you know, we're quite acquisitive. We build organically, and we buy. And the acquisitions bring in amazing talent, folks that make us even more innovative and creative than we are. So those are the reasons we are in services, and it's increasingly an important part of Mastercard because it both supports payments as well as diversifies us beyond payments.

Appreciate that. And just for all those who are actually dialed in, please do feel free to type your questions in the chat box for Raj, and I will pass those along to her as they show up on my screen. Building on that, could you provide some examples of how Mastercard services are helping to reinforce Mastercard's other strategic priorities, for example, to expand in payments and to embrace new networks?

Sure. Absolutely. The services is the middle pillar. It stands alone in our strategy as a pillar, but it also supports the first pillar and the third pillar, the first pillar being payments, the third pillar being new networks, right? So let me give you a couple of examples, right? If you take payments, in 2021, about half of our services revenues were driven by payments, by transactions. And I'll give you an example. Loyalty cash back is one example, there are many of these. So we did a number of campaigns to use cash back to drive a lift in spend for our -- with our customers. And what we found is that the lift in spend among redeemers is twice as high as amongst non-redeemers. And so there are things that we can do in services to really drive the adoption of payments, the usage of payments, the spread of payments with more users. And then in new networks, the third pillar, a good example would be open banking. So in open banking, we do a lot of consulting, and we have for many years. And so I'll give you an example. We worked with an Eastern European banking group where there are multiple banks. And we did work with them to say, "Hey, what should -- what are the strategic advantages? What are the opportunities in open banking for them?" And it is a process by which the team came up with a couple of dozen ideas and then narrowed it down. They ended up with 3. They prioritized those 3. And one of them, we've actually prototyped it, and it's in the market. It's live in the market now, which is a multibank app. And the value proposition is very simple as for a consumer, and it's very powerful, which is about accounts in multiple banks. I can pull them into this app and actually be able to see my consolidated financial picture across all my accounts. So it's -- at the end of the day, that middle pillar of services stands alone, but it's also a force multiplier for payments, and it's a force multiplier -- or it wraps around and enhances new networks. So that middle pillar is -- it's an interesting pillar for us at Mastercard in our strategy.

Raj, if we could drill down into your areas of responsibility, can you break down Data & Services into its various components and highlight any areas where you're most competitively differentiated?

Sure. Very excited to do that. I love this business. So our mission is to help our customers make smarter decisions for better outcomes, both in their own businesses in terms of how they run their businesses as well as in how they engage with their consumers. That is the mission and purpose of Data & Services. And underlying that, we have 8 service areas, and these are curated based on what we see in terms of what our customers need, what we see going on in the market in terms of trends and where we believe we have expertise or experience to really make a difference. And if you think about the age, they've come from different sources. So some come from payments. I mean, their origins are on payments. So examples of those would be originally our consulting franchise, our marketing services franchise, our issuer loyalty franchise all came from payments. Some come from our customers looking at Mastercard. A good example is our innovation services. Looking at Mastercard saying, "Hey, you do this well. Can you help us do it?" So what we did is package up some of the techniques that we use very effectively within Mastercard and allowed our customers to use them, provided it to them. Some have come organically. We've built it organically. A good example would be our business intelligence platform. It's a Software-as-a-Service platform that we built in-house, and some have come through acquisitions. Good examples are Test & Learn that came from the APT acquisition. It's a Software-as-a-Service platform for experimentation; or SessionM, which is a Software-as-a-Service platform for merchant loyalty. So we've curated them and we curated them from many different sources. Now when we go to market, we put the customer at the center, and we take a very systematic approach, a 4-step approach, which is to understand what the customer is trying to do or accomplished. It could be an opportunity or challenge. And then the first step is discover where you pull in their data, what we have access to insights, third-party insights and figure out what to do, so discover. Recommend is to then figure out what should get done. Act, which the customer could do on their own or we could help them do it. And improve, which is to continue to optimize. So we do this very systematically. And sometimes, the answer to what we're trying to do is one of our services. And sometimes, it's a bundle of services, a combination of services or solution, and sometimes, a solution that includes payments or includes things that the customer has. So it's a solution that draws upon many services and plus more. So what's a good example? Let me use Test & Learn as an example, right? It came from our APT acquisition. It allows our customers to be able to massively parallel experimentation where you can double down on the experiments that work and quickly cut off the experiments that don't. And frankly, it's used in so many different applications. Everything from optimizing location, store layouts, hours of operation, pricing decisions, there are just so many applications of Test & Learn. And when we think about Test & Learn, it is both standalone. Like I was saying before, one service, often in the retail and commerce space, it is a standalone application. Or sometimes, it's bundled, and that bundle could be bespoke or it could be a bundle that we've already built. So for example, we've embedded it to our marketing services. We've embedded it into our issuer and merchant loyalty. So then it's pre-bundled because we know it adds value there. Now when I think about each of our 8 services and think about who we compete with, each of them competes with a different set of specialized competitors, entirely different set. And in each of them -- when we look at those markets, in each of them, we're growing faster than the market is growing. And these markets are highly fragmented, right? They're not like the card market. They're highly fragmented. And when you look at the market, there's a tremendous room for growth as we invest in innovate, because even the leaders have typically single-digit market share. So that just tells you there's tremendous opportunity to grow in each one of them. And then when you look across them, I don't think anyone else has the curated set of services that we have. It's pretty unique. It is created and curated for what we see as needs in the market for our customers. And we continue to invest and innovate in these 8 services and then add to the list. So very excited about what we have in Data & Services.

Incoming investor question. In services, was the delta between 18% in 2020 and 25% in 2021 the transaction revenue or the nontransaction revenue?

So it's a combination, right? If you think about our services, there are things that are tied to the transaction. There are things that are tied to payments beyond the transaction. There are things that are completely independent of the transaction. And there are some things that might even be countercyclical. So it's a combination. So you really have to break it down in order to answer that question, but my answer would be knowing the details of how it gets constructed, there are a number of different factors that contribute.

Appreciate that. Who is your target customer set? And how has that customer set evolved over time?

So that's a great question because if you look at our customer set in Data & Services, it's large. It is growing, and it's diversifying. In fact, D&S is often the path into Mastercard for many customers and has been for many -- for a very long time. New customers often come in through us. And what I would say is that -- I'll give you an example of new customers coming into us. We work with 4 out of 5 of the National Retail Federation's top retailers in the U.S. market, right? And many of them came into Mastercard through Data & Services. And it's true -- our franchise is truly global. We have 15 hubs globally, 80 nationalities, a variety of different subject matter expertise, speak many, many different languages. It is -- we have thousands of data scientists, software engineers and consultants. And that's why we can actually add value not just in payments, but also beyond payments to our customers. And that's why we serve both the payments customers as well as have a pathway into customers into Mastercard who may not be payments customers.

Within the loyalty space, you recently announced an agreement to acquire Dynamic Yield from McDonald's. Can you discuss Dynamic Yield and how that fits into your broader merchant strategy?

Yes. Very excited about Dynamic Yield and its capabilities. It is a state-of-the-art personalization platform and decision engine that enables real-time optimization of a consumer interaction. It is a very effective and a trusted way of driving a better customer experience with a better outcome across channels that you touch a customer. And it's a Software-as-a-Service platform again. And obviously, McDonald's uses it and would continue to use it, but there are about 400 other brands, including banks like Synchrony that also use it. It has a very nice synergy with what we do, and this is where I say our suite of portfolio -- our suite of services is very curated. It's a curated portfolio. We really think about what we do, who we serve and what else can we do that is synergistic. So this -- we have a vision around loyalty and engagement to be able to pull together marketing services, Test & Learn, issuer loyalty, merchant loyalty and now Dynamic Yield into sort of a hub -- engagement hub. And so it is very -- it has great synergies with what we have. And it builds on our track record of providing data-driven digital real-time engagement capabilities, of course, always rooted in our data responsibility principles, but it builds on that track record and extends it. So very excited about it. And we hope we can close it sometime in the first half of this year and take it to even more customers.

You mentioned Test & Learn. Can you share a few specific examples of how you've been able to deploy your Test & Learn capabilities to help strengthen relationships with customers?

I love the Test & Learn platform. It's a Software-as-a-Service platform that, like I said before, supports massive experimentation in a very structured way, so that you get more bang for the buck, right? I mean, it's really -- when we say smarter decisions for better outcomes, it is at the core of it. And I'll give you 2 facts. 9 out of 10 users of our Test & Learn Software-as-a-Service platform get a 5x return on investment, 5x. And it's not that the -- it's 9 out of 10. The 1 out of 10 is still very positive. It's just a little below the 5x. So it's pretty dramatically high, right? And not surprisingly, our renewal rate for a multiyear software subscription of this platform is at 95%, which is very, very high for Software-as-a-Service. And the reason for it is it can test virtually anything, and it can create greater impact quite easily. So I'll give you a couple of interesting applications. So lots of stories around Test & Learn given the breadth of applications that it supports. So early in the pandemic, we worked with grocers. This is way before -- what I'm about to describe to you is like BAU life today. Early in the pandemic, we worked with grocers who didn't know how to respond. So the initial instinct was let's talk the bigger warehouse stores. Well, actually, you have to double down on the smaller -- not the hub, but the spokes in the store networks. We had to help them think through hours, hours for vulnerable shoppers, hours where you close the store early, because supply chains back then were highly variable. One day, you got a lot of stuff that you get on to the shelves. Another day, nothing came in. And staffing was difficult. So we worked with grocers pretty substantially, and a lot of what you see in the market now evolved from the early 2020 period. Now more recently, fast forward to 2022, sustainability is a topic that a lot of folks are thinking about. And there, too, Test & Learn has an application. So we worked with a retailer, for example, on a reduced to clear strategy around reducing the -- make the food supply more sustainable. And so of course, you think about eco-friendly lighting and things like that, but this was actually -- in this example, it was a program where the retailer wanted to discount perishables that were on the shelf at the pace at which they perished and then incentivize consumers to buy them appropriately at different stages of the food cycle. And overall, what we were able to do with the retailer is obviously reduce waste, which is important, but they also saw a 20% increase in profits. And above and beyond that, they found an incremental $7 million of revenue just by being able to target certain actions at certain stores where they worked better. That is the power of the Test & Learn platform. And there are so many other examples between sustainability today and responding to the pandemic 2 years ago and many that much long-dated -- long track record of working with various sectors of the economy using Test & Learn.

Turning to consulting services, you also recently announced an expansion of your consulting services into several new practice areas. Can you discuss your plans and share why you're targeting these specific areas?

Sure. I'll -- hold on, one second. I have a little bit of a glitch there. There we go. Hopefully, you can still see me, right, David?

Yes, I can.

Thank you. So I would say consulting is a longstanding service of Mastercard. It has -- we've been -- and the 3 practices that we just announced are just the 3 that are the most recent, open banking open data, crypto, CBDCs, NFTs, ESG. These are just the 3 new practices, but it's a very longstanding service area for Mastercard. And when we see an increase in demand and we see a pattern of engagements that we've done, that's when we formalize it into a practice area, and we've done it before with other practice areas. And what's interesting about our consulting services, it started in payments. Today, about half our engagements are in payments. About half our engagements are actually outside payments. So that just tells you the diversification that there is -- just in our consulting practice. I spoke about open banking earlier when I was giving you the example of the Eastern European group. I'll give you a couple of other examples in the other practice areas. In digital currencies, there's a lot going on in helping central banks. Customers think about what to do right now, what's prudent to do, what makes sense to do, what doesn't make sense to do. So we're working, for example, with central banks to help them explore and design CBDCs in our Mastercard sandbox and testing platform to really do -- instead of an R&D effort, to really understand what is it that the digital currency can do that's incremental because if it just tells what already works well in an economy, it doesn't do much, right? So it really only matters if you can do something that you can't do today. So we're working with central banks to help them research and figure this out. In ESG, let me give you an example there. We worked with a bank in Latin America to create a program around sustainability, leveraging our Priceless Planet Coalition, which is about planting trees. And this was about empowering cardholders to act. And so they could -- each cardholder could make a positive impact just by being part of this program and contributing to restoring forests by planting trees, while driving card usage and spending growth for the bank. So that's a good example in the ESG front. So a lot going on in all the practices that we already have, and now these 3 new practices that we formalized given we see a lot of work in these areas and a lot of demand in these areas.

Understood. Can you talk about your ability to generate the most differentiated insights? And can you share some of the key marketplace trends that you're seeing?

Yes. It's -- if you think about our services, the thing that makes them truly unique is the data-driven intelligence that underpins all of our services. And all of these data-driven intelligent domains are built based on our data responsibility principles. So they're built in the right way. The principles guide what we do. We access a tremendous amount of data, a tremendous amount of -- it's high frequency, it's high quality. It is global, and it's local at the same time. And for example, just in consumer card, I think the statistics are that we touch about 100 billion transactions every year in about 210 countries and territories from about 3 billion cards, right? That -- those are big numbers. And -- but it's not just about the data. We then use advanced analytics, machine learning, AI to cleanse it, to aggregate and anonymize it in the right way, to make it -- to make sure the quality is there, so that it's ready for analytical purposes. We bring in relevant third-party data to add context, to add insights, to add nuances. And this stuff is not easy to do. It's not easy to replicate. There is no shortcut, and it's one of these things where, to be honest, anyone doing it with a shortcut will -- it won't do it the right way because you have to do it correctly, and you have to get -- have really high-quality, high fidelity data in order to do analytics on. But what that creates for us is data-driven domains, which are really our unique advantage. So they span things like cybersecurity, consumer engagement, macroeconomics, small business, travel and tourism, fraud, identity, a variety of different domains of intelligence. And these insights then improve -- we use them in our services to improve the performance of a portfolio or improve the performance of a business. And it's quite exciting because we can zoom in and we can look at things like how to personalize offers to an individual consumer. Obviously, in the right way, we can zoom in to look at travel patterns in a particular geography. We can also zoom out to look at travel patterns across regions. We can zoom out and look at macro -- we have a view of the economy that is quite -- it's a bird's eye view that is quite unique. And it also helps in crises where, for example, when there's a natural disaster, we can point to where one can pump gas or get groceries. In the pandemic -- early in the pandemic, we could point to which shops were open, so consumers didn't have to drive around looking. They could just look using our tools to see whether the local store was open before they drove there. So it really is extremely powerful. And now in terms of trends, there's some interesting trends that are emerging. One is the experience economy. Our SpendingPulse report recently talked about this. For a couple of decades, we saw an increase in the experienced economy versus the economy of things. In the pandemic, there was a bit of a reversal. People went back to things. What we're seeing now is a shift back into the experience economy. And SpendingPulse will show you how there is a double-digit growth in restaurants, in lodging, in travel, et cetera. Another example would be -- we also shifted digital in the pandemic. We saw a number of retailers go digital transactions, go digital consumer spend, go digital. And our estimate is about 20% of the shift to digital will stick as we come out of the pandemic. And we recently -- our Economics Institute released a paper with the IMF, which is a really interesting read, if you like reading this kind of stuff. So what I'd say is our insights are very exciting today. They're very powerful. They power all of our services. They make us unique. But we're not at the end of our journey, right? There's a lot more to do in terms of leveraging all the data we see, the data we have access to and using the right set of principles, doing in a principled way, being able to tease out the insights where we can make a difference with -- for our customers with the portfolio or with their businesses and help them engage with their consumers.

Can we just double-click for a moment on Mastercard helping customers create, let's say, personalized offers to consumers? This is a huge area of focus for kind of payment companies. Can you talk about how you create these customized offers for consumers? And is there a way to think about how big an opportunity this is for Mastercard?

Yes. The first thing I'd say is you really have to make sure you do it in the right way. So our data responsibility principles are really important as we think about this and as we design and act and execute this. Yes, in this world that is becoming much more data driven, much more digital and much more omnichannel, right, the physical and digital are merging into the 2 bookends. But there's everything in between, whether you shop digitally and pick up in store or you see something in store and then you go buy it digitally. So it is a spectrum. And as we -- right now, being able to personalize my communication to you, my offer to you, being able to contextualize it, being able to present it in the right way, whether in a digital channel or with the digital means in a physical channel, which could be a kiosk or it could be an app, right, it could be a menu board, this is very powerful because the ability to do that correctly can increase for a customer the amount a consumer spends, the frequency with which the consumer spends and increase in the number of consumers. It is very powerful. And that's why you see us innovating in this space, investing in this space, building in this space and acquiring in the space.

How do you see Mastercard's Data & Services capabilities evolving over the next several years?

I think Data & Services, and services more broadly, at Mastercard, it's in our future. It's been a tremendous asset to us as we built it. And it will be a bigger and bigger asset to us as we grow in the future. And because it both is a force multiplier of payments and new networks and it stands alone, right, and diversifies us. So we will continue to evolve our current services by innovating, investing, by doing add-on acquisitions. But we're also developing new services, and we're developing them both organically and through acquisition. But in areas, in carefully selected areas where we see an opportunity, like I said, our services portfolio is highly curated, so where we see an opportunity, where there's a customer need, where there's a market trend, where we think we can make a difference given who we are, we will also build out new services. And to facilitate that, we'll continue doing what we're already doing, which is to extend our know-how in data and AI and machine learning and analytics to extend into new segments, to extend into new use cases, into new distribution channels. And of course, to -- our services business is, like I said, talent is really important, so to focus on people to make sure we are a track to retain the best people and they have amazing careers in Mastercard. And we already have many leaders who grew up in our advisers franchise. I hope there are many more in the future. And I'll come back to our mission as I think about our future. It is to help our customers make smarter decisions with better outcomes as they run their businesses and as they engage with their consumers. And I'm very excited to fuel more innovation and more growth in this space.

Great. Maybe just double clicking on innovation, and you highlighted your background in physics and consulting in the beginning, what would be some of the more futuristic things we should look for from Data & Services over the next few years? What are some of the most impressive innovations, things that you're working on that we should watch out for?

So David, I have a checkered past as you point out. Physics, consulting and being in the business, yes, it is rather a checkered past. What I would say is we keep track of many technology trends that are out there. And we think about the technology trends in different stages, right? Some of them are in the early stages. Some of them are a little more mature. Some, we're experimenting with building use cases. And some of them are entering our product pipeline, whether in payments or in services. And so we will continue to do that. And then as technologies emerge at the right moment, we engage with them through our foundry and our labs entity, through a lot of our customer work that we do, a lot of our thought leadership that we do, a lot of our R&D that we do. I was describing the sandbox with CBDCs before. And so we continue to do this in the Data & Services business, but also across Mastercard because a lot of these technology trends are very important for us to keep an eye on to really figure out not just how they're evolving, why they're evolving, what we can do with it, what our customers can do with it, but also the pace of evolution, right, how real are they, when will they become real, these are all things that we keep a very close eye on.

Understood. That's terrific. Well, Raj, thanks so much for spending the time with us today. We greatly appreciate your time, your insights, and look forward to future innovation and growth from the Data & Services business.

Thank you, David. Delighted to have had this conversation with you, and appreciate it. Thank you.