Mastercard Incorporated (MA) Earnings Call Transcript & Summary

[Audio Gap] from Mastercard, the CEO of Mastercard with us today. So Michael, really appreciate you joining us. Thanks again for being here.

Darrin, thanks for having us. Hopefully next time this happens, we can actually back -- be back in person again.

Absolutely.

But I'm looking forward to our chat today.

Absolutely.

Lots of stuff going on.

There always is these days. But listen, I guess, on that note, I mean, it's been some time since you've been the CEO of Mastercard. I mean seriously taking over into an interesting time frame.

So maybe just start off, I'd love to hear how things have been for you, managing the business through everything we've been through, whether between the pandemic and some of the geopolitical noise that we have and concerns. Just start with what kind of a day-to-day is like for you now?

Right. Darrin, interesting is an interesting word you as you -- these are, for sure, interesting times. Now recall when we announced the leadership transition in February 2020, 2 weeks before the U.S. lockdown. Then Omicron hits. We think we're just out of COVID and then we have an invasion in the middle of Europe. So the world certainly has a lot on its plate. From a Mastercard perspective, I mean, the way we have managed through this is I think in the early days, April 2020 really approached us with a sense of humility as being clear, you don't have all of the answers. That was an unprecedented pandemic. Today, what we're facing is an invasion in Europe, which hasn't happened in modern times. So again, there's really no playbook for that. So being agile, being quick served us well, being guided really by empathy for first of all, our people and then secondly, our customers. Today, when I look back on COVID, if -- kind of seeing what can we do to help our customers to get online to -- because the world was locked down and at home, we threw everything that we had into this. And in the end, the ecosystem never really missed a step, and that endeared us to our customers. That's helping today. So that mindset is serving us right now very well as we speak. It's our people and their safety. It is our customers who are looking at their business in Ukraine and Russia and saying, what do we do? How do we do this in an orderly fashion? And yet again, that's helping. And all of this during COVID and now as well is you cannot forget the long term. And what we have prioritized quite significantly over COVID and said, there's so many things -- so many choices of stuff we could be doing in our world. But we told you at our Investor Day in November last year, there's essentially 3 strategic priorities. And getting down to that focus with everything that we are going through over the last 13 days now, that focus is unwavering because that is a very -- compared to COVID, a very geographically concentrated crisis that we're facing. The fundamentals of the business are very strong, and we're still seeing a recovery from COVID playing in favor of us, accelerated secular trend and so forth. So these priorities stand, and we're humming along those lines. But every day, we worry about our people.

Yes. That's good. No, that makes sense. Maybe -- look, on that topic, if you could just give us a quick update on the Russia and Ukraine situation, just given your recent announcement to suspend operations in Russia. I know you have disclosures, but whatever else you can add.

Right. So you're all aware on Saturday, we announced we're going to suspend operations in Russia, important emphasis on the word suspend here. But before I explain to you rationale and what it all means, I just want to come back to the people one more time. I mean this is, of course, devastating. We're sitting in calls trying to get our people into safe places and so forth. So the human dimension of this is beyond imagination. So the kind of stuff we have to deal with these days, it's just horrible. Now on the business perspective, I'll take you through the arc of this very briefly. On the day of the invasion, sanctions come out. And then every day as the conflict escalates further, more sanctions are added. And that gives a very complex scenario for us and for our customers. From a regulatory perspective, these are sanctions of unprecedented nature in breadth and in depth. And we have been working through that, and we have been compliant and fulfilling our compliance obligations here, of course. As we look at this, our expectation was we're going to face more sanctions and eventually, the market will come to a stage of being shut down. As custodians of the ecosystem and wanting to make sure that we avoid unintended side consequences, we said we need to do this in an orderly fashion, which was the main reason to say on Saturday, well, let's do this at our terms in partnership with our customers to give them a heads up so that in the end, once sanctions hit, we're not caught on one side or the other side of a particular moment in time. So settlement, all these aspects that need to be worked through in a complex ecosystem, we're taking care of that to also avoid spillover effects beyond Russia itself. So it's kind of where we are. What it practically means is our network services in Russia will cease to work. Russian cards will not work abroad, and foreign cards on our network will not work in Russia. That's the impact. It's important to understand that domestic transactions will continue to flow but not with our involvement. The NSP cost switch, which has been built post 2014 sanctions around the Crimea annexation is -- will take that over. So the impact on the average Russian person that needs to go to an ATM, take rubles out to buy food, that is an impact that is kind of shielded here because that transaction will still work. So that's kind of where we are. That's the logic. I'll point you to the 8-K from last Tuesday, where we said revenues from Russia is -- net revenues from Russia has been 4% of -- in 2021 and 2% in Ukraine. I'd just say a word on the Ukraine business. It's still continuing, but it's obviously very heavily challenged as circuits and other communication infrastructure that is helpful -- that is needed to facilitate our transactions is inhibited. So we'll need to see where it goes. We're working through the impact as it speaks. There's revenue impact, but there's also settlement aspects, there's balance sheet items that we need to work through. We don't really have a very clear picture at this point in time. On Thursday, our services will cease to operate. Just one last comment on this. Suspension means we will still have our people there. We have 200 people in Russia, and we worry about their safety as much as we worry about the safety of our people in Ukraine. And that was an important consideration on our timing. When do we do this? Do we have a plan in place to take care of them? And we now have that plan in place. So that's good.

Okay. That's really helpful. Well, we're all hoping for the best. All right. Well, shifting -- another topic, obviously, that's been front and center now for a couple of years is obviously cross-border. And we've been seeing a nice resurgence in terms of reopening. I mean especially now on the other side of Omicron, I think there's a lot of hope and excitement of that continuing. How do you view the recovery of cross-border travel longer term for the business?

Right. Darrin, I would make the point that cross-border has been in focus for much longer than a few years. So we love cross-border. Of course, it's been a real differentiator for us. We have had an amazing run with our co-branded portfolios, with our partnerships with airlines and so forth. So that's looking good. COVID comes along, and that largely falls off a cliff. That's what we saw in April, May 2020. And as you rightly said, the recovery has been steady. Then Omicron does come along, and it put a little bit of a damper on that. And we saw that towards the end of the fourth quarter and into January. I have to say, looking at our switched metrics that we now have to the end of February, it continues. Cross-border continues to improve and continues to improve in line with expectations. So I still believe that the fundamental driver here is going to be that pent-up demand. We're still, depending on what geography you pick around the world, somewhere between 20%, 25% beyond -- below 2019 levels prepandemic. And we have seen it every single time where there's a border opening just -- if you look at the fourth quarter, Canada, U.S. opened up, we just see border opens, people want to go and travel predominantly led by leisure travel, but some cross-border corporate travel also kicking in. So I don't know how far that is behind leisure, but it's not like people are not traveling. If you see your competitors see your customers, you're going to go and see your customers as well. So those are just the dynamics. Same thing. I traveled all of last summer for exactly that reason. So I think pent-up demand is going to be the driver. If I look at some of the deals that we have locked in, you think JetBlue, Cathay Pacific, what we've done with LatAm and so forth, I think we're really well positioned to capture the share that we want as this comes back. So I'm excited about cross-border. And link this back to the invasion here and what's going on in Europe, this is a concentrated geographic conflict at this stage. So if Asia starts to open up and booms on the cross-border travel side, I don't really see any impact from one to the other.

Understood. That's really helpful. Keep it going down the longer-term path, I mean, when you think about the strategic framework you gave us at your Investor Day really not too long ago, if you could just maybe give us a quick refresher on that for a minute. Some of the key strategic priorities you find yourself most focused on.

Right. Right. I recall November 10 vividly when we laid out to you where we're going to go. Top line basically was grow, diversify, build as a strategic framework continues. I mean, obviously, we want to grow our core business. And obviously, we want to diversify that and build new businesses. What we want to do very clearly put out to all of you is where is the specific focus? If you got a $235 trillion payment market, comes out as how do you eat an elephant? So we've put out detail and granularity around very specific flows. So the 3 strategic priorities, expand in payments -- I mean, the headline I would give you is leave no white space. Whatever is the relevant technology, be it crypto, we're going to be there. Is it real-time payments? We're going to be there. And there's, of course, huge potential in our core payments business. So that's #1, expand in payments. The services piece, deepen our service and our existing customer relationships, build new services, extend across new flows. The more new flows on the payment side we get in, the more opportunity is for services. Those are the 3 vectors of growth for our services portfolio. That's been growing ahead of the core business for some time now, and we like that. We continue to push it, and we'll invest in that. And then the last one was embrace new networks. So we're good in building multilateral networks and managing them. Where else do we see these dynamics and can take these core competencies, put it elsewhere. Open banking, obviously, comes to mind. There's many different players on the fintech side as well as the banking side, should they all bilaterally connect or do they see value in a multilateral network that helps them do that. That's our positioning, and that is working well as well, and then there's digital identity in the same frame. That was what we said to you with some reasonable granularity, I think, we provided on each of these components. Now what I -- what excites me about the strategy, each 1 of the 3 strategic priorities are an opportunity in itself, but they all reinforce each other. Services differentiates on the payment side for us. But if I take the example of Gap last year, we flipped their whole co-brand business or payments business over to us. That started with services and then went into payments. And then you take our open banking capability. Our recent announced launch, which is going to happen in the first quarter of this year, Buy Now Pay Later. We will be using our open banking Finicity capability to drive better lending decisions for the lenders that come on to Mastercard installments. So it all reinforces each other. That's our approach. The basic anchor point is payments and leave no white space in payments. We're going to have whatever matters.

It's incredible to see the transformation and evolution on services combining with payments. But you're right. I mean the payment side of the world is still your bread and butter, obviously. And so getting into that a little more in the payment strategy. Within core consumer payments, where do you really see that opportunity in terms of how Mastercard is positioned to capitalize on what's to come, given how much you really already accomplished?

I mean core consumer payments if I think back about our latest sizing, $45 trillion, $20 trillion of that is carded today. Just number-wise, that's a huge opportunity. And then you think back about the last 2 years. We talked about COVID a little bit earlier. Changing behaviors, are they sticking? They are sticking. And this is not -- people are not going back to cash and checks because they have learned over the last 2 years that digital payments is a better answer. And it's actually easy to order your groceries online. Why not do that? But they would still go back to the local store because everybody does want to support the local economy, but they're going to use cash now. They're going to use contactless because contactless has moved from 1 in 3 payments to 1 in 2 payments post the pandemic. So the dynamics around core payments are very much in our favor. I think it's an accelerated secular trend away from cash and checks, which will be excellent from a long-term growth opportunity. We laid out in November that near term, in the next 2, 3 years, we see this as a 10% to 11% CAGR on the core consumer growth and in the longer run, 9% to 10%. So there's so much room for growth. We've got a couple of things that really play in our favor versus the next fintech down the line that potentially has an alternative payment option. It's our franchise. Our franchise comes with zero liability chargebacks, and it comes most of all with massive reach. 80 million merchants, 3 billion cardholders. That is near ubiquity and that is a fantastic growth driver for us. That brings me to a subcomponent around the franchise, and that is acceptance. So it's the second thing I want to say that really plays into this opportunity, how massive I think it is, is our acceptance continues to grow. During COVID, it grew even faster. So the CAGR over the last 5 years was an average 15%. In 2019, our acceptance footprint grew by 19%. That's very significant. Think about tap on phones. Think about Apple's announcement on they're going to go turn all these iPhones that are out there into acceptance devices and so forth. The last thing I would say is just simply our win rate and our relationships with our customers over the last year or so. And you saw some significant deals from us. NatWest, Deutsche, Santander on the financial institution side. We still enjoy a comfortable lead on the neobank side and on the fintech side. And I think our conduct in the last 2 years in how we try to be the best possible partner in a difficult time of COVID is paying off right now. So all of that together on the core consumer side makes me very optimistic as this is going to be a continued growth engine.

All right. That's great to hear. Look, just moving a little bit beyond that and beyond -- and into the new flows, which is an area that we've all done a ton of work on. But some of the opportunities are so large, it's hard to really get your hands around. Can you just give us a sense on what you're seeing there, what you're most excited about and what you're really targeting?

Right. Right. Back to there's all these flows and -- look at ACH, basic NCH, batch ACH, trillions and tens of trillions of volumes, what we have picked out in a very specific approach, we said for new flows, we should do 4 things. First of all, establish reach. We can see the flows. That's our multi-rail strategy. Have the rails, be able to see those transactions to a real-time payment infrastructure and so forth and then pick out the flows that we believe have the highest growth opportunity where there's demand and where we have a set of applications to go after them. Then you run services across the board, and then you find the right kind of go-to-market models and B2B partnerships and so forth. Those are the 4 steps on how we identified out of that tens of trillions what are the flows that we want to go after, and we call out 4 for you in -- back in November. The first one is around remittances and cross-border. That's about $32 trillion. That's a huge number to go after. And that's a fast-growing business for us. Our Transfast solutions are -- after we bought out our partners on HomeSend. All of that, I think we're very well positioned. It's commercial POS, which is the second flow. That's a -- this is a high degree of similarity to the core payment opportunity I just talked about. Some good momentum here. Bank of America declared us to be the lead brand and new acquisition on all of their commercial flows. Then it's B2B accounts payable. That's [ fast ] on track, it's humming. And finally, it is consumer bill pay. So those are the 4. We have assets in all of them. We gave you the current revenue contribution, and we believe there are substantial growth opportunities.

Okay. That's helpful. Look, there's obviously a ton of great opportunities. But over the past year or 2, in particular, we've had even more questions around risks and competitive dynamics and disintermediation with new technologies. What are your thoughts on those -- some of those questions?

Yes. So you wouldn't expect anything different, but I come back to the optimism around the payments opportunity that we just talked about, so I won't repeat that. But that's kind of our starting point and say, all right, if you look at the core consumer payment opportunity, why is that so attractive? And how is that a defense when it comes to alternative payment options? Or is it even an offense play? How does it all work? So the power of the open loop system, the fact that we have the franchise and we have that reach of 80 million merchants, I think when it comes to competing payment solutions, I think that's an important starting point. How do you turn a competing offer into a potential partnership? Buy Now Pay Later is a very recent and outstanding example. So if you're buy now pure play, you start to build your own business in a bilateral fashion. You're going to come to a point where this is getting harder and harder to find the next set of customers. So partnering with these kind of players to come to our network, enable our network before Buy Now Pay Later offers as kind of like an in-build proposition and deliver that to 80 million merchants. That is how you turn what is potentially a competition and disintermediation threat into a true partnership that in the end delivers better choice to consumers and the whole ecosystem. That's how we go about that. There will be use cases out there that continue to expand our market like Buy Now Pay Later. And there will be others where there's -- where our existing solutions -- it's just a competing nature, but I think the power of the ecosystem will allow us to compete effectively. With our investments into multi-rail, I think we have a whole set of assets that when it comes to the account-to-account threat that has been talked about, disintermediation through account-to-account solutions. And again, here, we've leaned in back in 2016 with [ Boca ], with Nets and so forth. We have our whole set of assets. We have pay by bank account and so forth. So we are ready. We have the experience. We have the technology, and we have the partnerships to engage. But we still find, oftentimes when the choice is on the table, that the existing card ecosystem is the preference. We see it. It's the reality for funding digital wallets, et cetera. So we're flexible. We recognize choice. There's a lot of power in the cards ecosystem that we can play on everything. So I think we're reasonably well positioned to deal with what's going to come our way.

Okay. That's really helpful. Look, while we're on the topic of incremental technologies, obviously, crypto is a hot topic all the time. Maybe just touch on what you guys are really doing in this space. There's a lot of different headlines and different...

Right. Right. Talking about a vibrant space, it for sure is. I have quite a high set of expectations what we're going to see this year. It's only a space that's going to accelerate. We're going to see governments leaning further on central bank digital currencies. Private stablecoins will continue to be explored. And of course, there's the whole world of facilitating crypto as an investment, facilitating NFTs as an alternative asset class and so forth. So we want to play on all fronts. As simple as that, that's the strategy. And the way we're going about it is first of all, what is nearest term and what is the biggest type is investment in cryptocurrency as an asset class. So we are -- and we want to continue to be a leading on-ramp and off-ramp for these type of investments. So crypto-wallet partnerships. What we're doing with Coinbase and NFT. Those are all examples of partnership [ with back ] to put some loyalty solutions around that because people seem to love crypto rewards as well. So that's that whole space. I think we're very well positioned there, and our team needs to drive that. You go a little bit deeper into this, enabling private sector stablecoins and central bank digital currencies, our network. Early part of last year, we said we will do that, and we'll be technologically ready. We are. But the world isn't quite ready. There isn't really a CBDC that's ready to go that next step. Where we are, we're engaging with governments around the world using our sandbox, our test sandbox to just drive things forward. On the private sector side, I think there's even less momentum at this point on having that as compliant and a real alternative. I think if I were to look for a space where there will be use cases, it might be in the corporate banking B2B kind of space. So we'll see where that goes. We're ready, and we're going to play when we can. And of course, this is -- all of this is a logical extension for our services strategy. Ekata, our digital identity solutions. In a world of blockchain-based digital assets, who's on either side of the transaction and digital identity questions will still be asked. CipherTrace, our acquisition on tracking compliance of multiple digital currencies. Again, it's well received. We can't be running fast enough. So we'll play wherever there is a space to play. We like the space. As a multi-rail strategy company that enables choice, we have to be there, and we want to be there.

Yes, that makes sense, Michael. Can we shift to RTP and connected open banking? Look, obviously, it's an area that you guys were at the forefront around whether it's through M&A or even other initiatives you've partnered with. Even in RTP, I know there were 16 tech partners you had joining Mastercard Send partnership as partners recently announced. What exactly does that do for Mastercard? And maybe just touch more high level on RTP as well.

Yes. So real-time payments, in this case of Send, it's basically using our existing network in a bilateral fashion driving push payments through it. The Mastercard Send partner program is very simply, we're going to take our technology and embed it with the partners in the program in a seamless fashion, so we make the onboarding much easier for them and allow them and Adyen, a Checkout.com, a Stripe, a PayPal to deliver a seamless digital solution for push payments to their customers. So kind of powered by Mastercard kind of logic fully embedded. That's what that is. We love Send. It's great for disbursements. It's fast growing, and I think this is going to give it another kick.

And broadly speaking, now RTP in general has been obviously both an opportunity and perceived as a risk, right?

Well, because we were an early investor in 2016 when we went into that, I think we have deep understanding because we are in infrastructure. We are at the table. When there is RFPs, we're invited. This is a hotbed in Europe with our investments in Nets and basically running the P27 project. I feel we're well positioned to turn the risk into an opportunity for us. I mean we have a decided strategy to be in real-time payments, not to defend against it.

Right. Yes. It's clear that you guys were more at the forefront of this than others. And even on that note, I mean, your more recent acquisitions, I guess, Finicity and Aiia, I mean clearly, even doubles down on that, right? Can you just touch on what are those acquisitions and those offerings can really allow you?

Yes. So first of all, the link between the 2 is for an efficient open banking proposition where somebody uses their financial data to get better financial services offers, real-time matters because if you pull account balances, if you don't have real-time capability, whatever open banking proposition you have won't work. So that's the intersection point of that. We -- with Aiia and with Finicity, we're well positioned on connectivity in the United States as well as in Europe. Both companies have open banking applications, for example, in the lending space, mortgage verification, account ownership verification. That's stuff that people want. That's what fintechs want, but that's also what banks want. So we're targeting both of these segments. I think the combination of the reach of both and the applications allow us to cross-fertilize across the Atlantic on their capabilities, but also take the whole offer into places like Australia and Brazil and so forth. So open banking, I think it's a near-term opportunity. It took a little bit of time to gain momentum in Europe. We had originally started post PSD2. But the volumes we're seeing through in the U.K. and our partnership with Tesco and Lloyds are encouraging. So this is a good space. That's why we called it out very specifically in our new network strategy. In the end, this is not just about payments. It's about data transactions as well, which is a whole new tap.

You can communicate a lot more information under some of these technologies, I think, right?

Exactly. Exactly.

Yes. Michael, services, in general, has been a big opportunity for Mastercard and a big driving force and a tailwind for you guys, I think, for some time now. So can you just touch a little more on your plans and your strategy of that, and going forward what you've already done.

I think just the last 2 years have shown how important services is. So here's a world that is accelerating more rapidly towards a digital economy. So more data, more data to be kept safe. Our cyber solutions are in great demand. They have been throughout COVID. In fact, they accelerated through COVID as more people got online and drove a business online than ever before. And then there's more data that wants to be analyzed. So data analytics and cyber solutions are 2 main buckets of our services have proven to be the right areas of focus. So we continue to make acquisitions in this space. You saw us talk about Dynamic Yield, which is in the data analytics space, really focused on digital experience. Examples is a retail bank that's trying to optimize its card-acquiring process. What card do I offer you, at what point, through what channel? That's what Dynamic Yield can facilitate. We use our Test & Learn and our other merchant engagement options like SessionM and so forth, bringing it all together. So new -- the strategies, as I said earlier, more products and services, more services offerings and drive that deeper into our existing ecosystem and then drive it across new payment flows. What we love about it, services grow significantly above the core growth rate of our core payments business, 25% growth in the past year and 35% of our overall revenue. Those are by all means attractive numbers. We're going to continue to invest and use it mainly as a differentiator for our payment services, but also increasingly so as an entry point for new customers. You enter with services and then you follow with payments, that path works just as well we have found out. I gave you the Gap example earlier.

Michael, just since we only have a minute left, I mean, putting it all out together at this point, it's obviously a pretty amazing time in the world of payments and fintech evolving -- evolution. What are you most excited about just going from here on longer term?

Right. As I look ahead, with the tragic developments in Europe, I still come back to the points that I was excited about in November 10. And that is there's a long-term underlying core payment opportunity, accelerated secular trend, massive services opportunity where we open -- they really open up a whole new set of growth vectors. Specific areas that I'm excited about is the B2B opportunity, is the cross-border opportunity. This all upside yet to come. So I look forward with great optimism. Points like what is the impact around Russia and Ukraine, as I said before, it is a geographically concentrated situation. But we have the fundamentals of the business running across the world and being very sound. So I look forward with optimism into that. Those are the main drivers.

Okay. Really helpful, Michael. Listen, it's been a pleasure having you. Thank you. I hope everyone is safe. And let's catch up again. Certainly looking forward to seeing more in the future.

Will do. Thank you, Darrin. Appreciate the chat. Thank you. Bye-bye.

Thank you, everyone, for joining us. And next session, everyone is up at 11:20 with Brex followed by Bill.com. Thanks, Michael.

Thank you.