Mastercard Incorporated (MA) Earnings Call Transcript & Summary

All right. Great. Thanks, everyone. It's great to see everybody. My name is Tien-Tsin Huang for the payments and IT services sector at JPMorgan. And really excited to have Mastercard. Craig Vosburg is here with us from Mastercard. He's the Chief Product Officer. We're going to do a fireside chat. You guys have heard the drill. Taking a lot of questions from the audience. We'll do questions from the portal as well. But I've always enjoyed talking to Craig. I was just telling Craig before, he doesn't remember, but when we were doing early studies on things, nerdy things, like virtual card, issuer processing, things like that, a few minutes of conversation with him really enlightened me quite a bit. So really excited to have you here for the next few minutes, Craig. Thanks for being with us. Hope you're good.

Yes. Thanks. Great to be here. I should share a story, too. I remember stories with Tien-Tsin hearing about legacy tech and fintech, future tech and who's on which side of the valuation curve. And we're working hard to be on the right side of the valuation curve. So excited to talk about some of those things today. But thanks for having me.

No, for sure. Yes. The modern versus legacy debate. We'll cover a lot of that, right? You've got a great seat sort of as the product officer. So maybe let's dig into that. Like what does that entail exactly? And what are you working on?

Yes. So as the Chief Product Officer, I look after our product and engineering organization, which has responsibility for a sizable part of our overall strategy. Our strategy revolves around expanding our role in payments, extending the value-added services that we provide and building out new networks where we think we can play a meaningful role. The product and engineering team effectively has responsible for the payments pillar in that strategy and the part of new networks related to open banking, which is an area that we're really excited about. And so within that, we're focusing, within the payments realm, on continuing to drive growth in our core business, our core cards business that we remain wildly enthusiastic about in terms of the growth potential that we see there and happy to dig into some of the things that we're focusing on as a part of that. We're focusing on leaning into new innovations and technologies that are shaping parts of the future payments ecosystem. And we're very focused on capturing new payments flows, payments activities that have been traditionally beyond the reach of our network, where we think we can play a role and capture target and capture a larger addressable market. That's all in the payments piece. And open banking, we're really enthusiastic about the role open banking will -- is playing and will continue to play in enabling innovation in financial services. And we're building out on our presence in the U.S. and Europe and expanding into new markets and very focused on leveraging that capability as a part of our business. So happy to get into any or all of those things in as much detail as you want.

Perfect. So let's do card. You said you're still excited about it. That's the core business of Mastercard. Clearly, it's in the name.

It's in the name.

So if you look at the chart, some would argue that the pandemic pulled forward 2 to 3 years of penetration, right, Craig. And so is there any concern on your side that, that pull forward could slow card growth over the next cycle? That's the question. And what are you guys doing to keep up the pace of growth?

Well, I would say we continue to see the addressable opportunity for our cards solutions for debit and credit as being substantial. We've made great strides over the course of our first 55 roughly years of existence in penetrating cash and check and enabling the digitization of those payments. But even with all of that progress, by any measure, we're still 50%, 55% penetrated in terms of the global opportunity. And while that varies some by country market, that leaves a lot of runway for growth in our core cards business. And while we have seen some acceleration of that over the last couple of years, influenced by the pandemic in an accelerated pace of digitization, we continue to see real opportunities for growth going forward in that being driven by a number of factors. I mean, ultimately, the overall opportunity for us in cards, we look at as being a function of increases in levels of consumer expenditure, which obviously fluctuates some with economic cycles, and the rate at which payments activity is migrating from paper-based forms of payment to digital forms of payment. There are real opportunities and things that we're putting a lot of energy behind that will continue to drive the portion of that, that's more controllable for us. We can't really control consumer expenditure, but we can influence the pace of digitization. And so continuing to invest heavily in the expansion of acceptance, the reach of our acceptance network, something that I think is often overlooked and underappreciated for a company like Mastercard, but the value and the breadth and the reach of our acceptance network, I think, is our one of, if not the most significant strategic asset we have as a company. And the pace of growth and acceptance is accelerating exponentially. So we've doubled the size of our acceptance reach in the last 5 years. With the last 3 years, the CAGR for acceptance growth has been 18%. One new acceptance location on average every 2 seconds and that pace is continuing to grow. And I think we'll even accelerate as we begin to extend acceptance even more broadly, not just beyond terminals and websites, but through the enablement of any connected device, a mobile phone with tap-on-phone capability, Internet of Things. It's all of these connected devices that can communicate will be acceptance devices. That's going to continue to expand reach and influence digitization. The increasing engagement with consumers and businesses in digitizing the overall experience, things like I just mentioned, technologies that will accelerate digitization of the rollout of 5G and the ongoing growth of the Internet of Things and cars and appliances and connected homes, all of these things will be acceptance devices that will drive ongoing digitization of the consumer experience and commerce, and with that, payments that positively influence that rate of secular migration. And it also enables us to continue to target new areas, new verticals that haven't traditionally been easily accessible for cards, things like rent payments, where we have fintech partners who are targeting these specific verticals with a digital proposition to enable, for example, consumers to pay their rent online. That creates an opportunity for us to introduce cards as a form of payment in places where that hasn't traditionally been the case. And the same is true for other verticals as well. So we -- like I said, we remain really enthusiastic about the growth potential that we have in the core cards business. That being said, we're also excited about expanding beyond that into newer flows, which we'll, I'm sure, get into a little bit as well. Was there -- I don't know if there was a second part of your question that I missed.

No, I think you covered it well in terms of -- you mentioned acceptance, right, and capturing card penetration. Digitization is happening. I guess I'll expand on what you said, thinking about the pandemic and the consumer. And it was really hard, right, to call the trends right, depending on where we are regionally, where we are with COVID cases, et cetera. The travel piece has been really, really hard to call. You're seeing a pretty big recovery. So I'll ask you where we are on the travel recovery, Craig. But also the last couple of calls, you -- Mastercard has been talking about casting a wider net to make sure you catch a lot more in that travel spend. So can you elaborate on that?

Sure. Yes. Travel has been a particularly -- as you know, it's a particularly important part of our business for a variety of reasons, including the cross-border nature of a lot of that spend. It's also been perhaps the most difficult to predict throughout the cycle here with the pandemic of getting decimated in the early days and gradually bouncing back, although with variations in activity as we've seen border restrictions imposed and relaxed and reimposed and relaxed. But where we are now is in a pretty good place. What we've seen consistently throughout the pandemic and we continue to see is where consumers have the opportunity to travel, they will travel. The desire and the demand for travel persists. It's strong. It seems to be something that's sort of innate. People want to see other people. They want to see their families. They want to see their friends. They want to go have great experiences on vacation and that kind of thing. And so we've seen that demand. Where we are in that recovery cycle is we're back to being above prepandemic levels of cross-border travel spend as of March. We see -- this isn't in our spend data, but through the Mastercard Economics Institute that looks at a variety of different data sets, we see advanced bookings for travel for both leisure travel and business travel being above prepandemic levels now for the first time. In both cases, frankly, ahead of what our expectations were as we came into the year, particularly on the business side, and just this audience is a great -- is great evidence of the fact businesses -- businesspeople are getting out and traveling again and not just short-haul, long-haul travel as well. So we're seeing the recovery. It's been prevalent across all regions, although uneven. We still have more to go in Asia where the recovery in travel spending has been a little bit slower given some of the restrictions, particularly in the northern parts of Asia. But we're on a good trajectory there. We're not just riding the wave, though, and waiting for that to come back. We've been working hard to expand our reach and the breadth of our footprint in the travel sector with key partners who put us in a great position to capture travel spend. Airlines, renewing our partnership with American Airlines, with JetBlue, with a number of other airlines around the world, in Canada and Europe and Latin America, with other partners in the travel and leisure sector, in the lodging space, with partners like WEX who are helping to power some of the online using virtual cards, some of the online travel booking engines. And so expanding our footprint and then working with those partners to optimize spend in those programs with the right propositions, the right kind of loyalty elements of the program, the right offers to encourage spending on the Mastercard branded products has been a real heavy focus, and that's paying off. So we're -- we've got a reasonable amount of exposure to travel and cross-border. We -- that didn't help us so much on the way down, but we're feeling good about the impact that should have on the way back up.

Good. Yes, the setup should be good, especially getting all those airline co-brands lined up. So let's shift into Buy Now Pay Later. I think since you're on the product side, when you put out Mastercard Installments, I think we called it one of the biggest product launches for the company since signature debit, I don't know if you would agree with that or not, Craig, but what differentiates your Buy Now Pay Later solution versus some of the other things that are out there? Most importantly, what people always ask me is, is this complementary or cannibalistic to credit and debit?

Well, first, I appreciate the call-out on the impact of the product innovation here, which we're proud of, and our team, I think, has done really solid work in this area. It is something we see as being innovative and very differentiated from other Buy Now Pay Later propositions in the market in a couple of ways. Mastercard Installments, first and foremost, brings the power of installment-based purchasing to the marketplace at scale in that it leverages the Mastercard acceptance network and is available immediately upon activation across our full acceptance network. So 92 million merchant locations around the world that accept Mastercard have the ability to participate on the merchant side in our Mastercard Installments Buy Now Pay Later program, which is very differentiated from other alternatives in the market. Some of the pure plays, they measure their acceptance reach in the hundreds of thousands, not the tens of millions, right? That's complemented by a very low touch integration on the merchant side. Merchants who already accept Mastercard will be able to accept the product and the program without doing tech work on their side. It benefits the lender in this case, and I use that word specifically. It's a lender. This is not a card-based program. It's a consumer lending program and that lender can be a bank, it can be a fintech, it can be a digital wallet. It can be anybody who participates in our franchise construct under the -- as the role of a lender who wants to make these installment loans available to consumers. They can avail themselves of some of our open banking capabilities to get visibility into consumer cash flows and balances to enable more appropriate underwriting of the actual loan itself. And the consumer can get the benefit of Mastercard consumer protections, all the things that come with the Mastercard branded transaction around privacy, around data security, around dispute management and dispute resolution and be able to access that offer from a variety of partners, in many cases, including the financial institutions they already know and trust. And so we're really excited about the program. It's been very well received by partners across the ecosystem, merchants, lenders, digital players, fintechs, and you'll see the first live launch of that very, very soon.

Good. And then relative to debit and credit, how does Buy Now Pay Later fit?

I think Buy Now Pay Later actually, in some ways, accelerates the debit proposition for us. It's -- in as much as the repayment -- the mode of repayment for the majority of Buy Now Pay Later transactions in the U.S. is from a debit product. And so it actually takes what might have been 1 transaction and breaks it into multiple transactions, which is advantageous for us and retains and reinforces the value of the debit product and creates that ongoing sort of habituation. From the credit perspective, there's some -- there's likely to be some element of credit transaction -- of purchasing transaction that would have been a credit transaction on a card. It's now a credit transaction through an installment. The Mastercard Installment product gives us the ability to participate in that transaction regardless. In fact, we participate in it multiple ways. We participate in a funding transaction to pay the merchant. We participate in the repayment activity to pay the lender, and we'll participate with some revenue generated through participation fees of the lender.

Right. Good. No, that's helpful to hear. So let's -- so that's a payment method, as we call it. Sticking with person-to-merchant payments, let's do new flows. You mentioned new flows. The definition of new flows, I think, means different things to different people. So tell us what specific flows you guys are prioritizing today.

Yes. So we think about new flows as things that were -- have either been beyond the reach of our cards network or have just been kind of consistently and historically underpenetrated. So there are specific -- there are 4 specific categories of flows that we're laser-focused on developing new products and/or penetrating more deeply. One is disbursements and remittances, both domestic and cross-border, A second is commercial point-of-sale transactions. A third is B2B accounts payable transactions. And the fourth is bill payments, principally consumer bill payments. And so there's a mix across those 4 things that we're developing new capabilities and new solutions, new rails, new value-added services that go with it, disbursements and remittances, B2B accounts payable, to an extent, bill pay principally. There are some where we actually have solutions, point-of-sale -- commercial point-of-sale transactions. Those are cardable transactions, but are still somewhat underpenetrated, both in the large corporate and particularly small business. And so in all of those areas, we're focusing on growth through those dual avenues. I guess, more than 2, 3 avenues of developing the right product and solution, wrapping the right value-added services around it to increase its value in the market and then making sure we have the right distribution partners and the right distribution focus to get after it. Some of those are much nearer in opportunities. Things that are cardable are closer in. The product exists in many cases. Not all the acceptance infrastructure exists. Partners exist. We need to just work with them to drive greater penetration and usage. In other cases, what we're effectively doing is looking to stand up both sides of an ecosystem, a new ecosystem. That's true with B2B accounts payable. That's true in some markets with bill pay, and that's a heavier lift. That takes a little bit more time. But in all cases, these are substantial flows, trillions of dollars in flows. In the aggregate, $80 trillion that we think is addressable in the near term with products we either have in market or in late stages of development. That $80 trillion is split across those 4 categories, the smallest of which is $8 trillion in bill pay, which is still a pretty big number. And so we think even those where it's a heavier lift, it's a big enough opportunity and one that has a long enough runway for us that it's worth the investment and the effort as a means of continuing to layer on additional growth curves in our revenue profile over time.

Yes. Makes sense. So to go after some of those flows and your existing business, right, you had to work with digital players and fintechs, right? We talk about AR, AP. I can think about AvidXchange, right? Mastercard works with them. I think when the [ OCT ] Mastercard Send first came about, you were working very closely with Square, right, to do instant deposit, things like that. So how do you grade yourself? What's the pipeline in terms of working with these fintechs or digital players? And you have to balance that working with traditional banks as well. So where are you in that balance?

Well, first, with fintechs, we, I think, very early on recognized the value of fintechs as partners. It's interesting. I was having a conversation earlier today where we were sort of talking about competitive forces in payments. And there was a time where a lot of the questioning would have been around the competitive threat that fintechs may represent. And yes, that's -- that was true at the time, but by pursuing more of a partnership approach, both in terms of helping them achieve their business goals and working with them in ways that were consistent with ours, fintechs have become a really important segment of partners, not only in enabling new kinds of payments experiences across the ecosystem, but as a really important channel for distribution of our products. And so we've invested a lot in making sure we have the right kind of products and proposition. What fintechs want to do is build their business -- launch a product, build a business and move fast. And we've organized ourselves to be able to do that with the right sort of product proposition, both in terms of the payments capability and some of these kinds of value-added services we wrap around it, whether that's consulting, whether that's risk and fraud, whether that's loyalty kinds of solutions. We have a very -- a partnership orientation and working with them, collaborative and a spirit of co-innovation to think of new ways to bring our capabilities to bear in the market. And frankly, in many cases, they've been great catalysts of innovation in our own shop. And then a very dedicated focus with a pretty sizable team dedicated to serving that segment specifically. And so we've been very happy with the growth there and the importance that they play in our ecosystem and our business. The balancing act is it's an important one because they're partners, the banks are partners, acquirers are partners, merchants are partners. But we have -- as it's part of what comes with being the network of sitting at the center of what are sometimes competing interests is learning how to work with partners in ways that help them achieve their goals that don't necessarily mean not enabling other people to achieve their goals, it's about like helping them be the best they can be, whether you're a bank, whether you're a fintech, whether you're a merchant. And a lot of our strategy has been built on serving those various segments as effectively as we can. That doesn't mean some of our partners don't sometimes wish that wasn't the case. Fintechs represent a degree of risk to some segments of the financial services industry. But there's a lot to be learned across each of those segments in terms of speed of execution and innovation and focusing on delivering a great consumer experience that we're working to help all of our customers be able to deliver on.

Yes. So the partner then versus buy decision, Craig, with -- I'm thinking about some of the areas where you've bought, right, Transfast and remittance, Finicity and data aggregation, does some things in security, digital ID. So when do you -- what's the appetite to buy? When do you decide to buy? And how have these acquisitions been doing, right? I know there's been some dilution in the near term, but just curious where you stand on that.

Yes, the philosophy around M&A is very much -- it's strategy-driven. So as we look at what we're trying to deliver into the marketplace to differentiate Mastercard and continue to drive growth, we look at the capabilities that are going to be required to do that. Technology, products, distribution, talent, the full breadth of things that would go along with being able to execute on the strategy and where we have gaps and where we feel that we don't have either the time or the capacity to develop something organically is when we look to acquire. And I feel as though our acquisition strategy, you can see clearly where we're focusing based on what we've acquired. We've acquired things that have diversified the breadth of our payments capabilities with things like real-time payment rails, with account-to-account payments, with Transfast that you mentioned, consolidating our ownership in HomeSend to support our cross-border remittance capabilities. We focused on a lot of our value-added services portfolio with things around data and analytics, loyalty solutions, fraud solutions, cybersecurity, some things that are taking us into the crypto realm with our recent acquisition of CipherTrace, but again, related to risk and fraud management. And those are the areas we've been focusing on, open banking as an important area of investment to support the element of our strategy around new networks and innovation in financial services. And so the acquisitions, we're happy with how they're integrating in. Some of those are things that we can bolt into the network and scale pretty quickly as part of a global proposition. Others have a different sort of build profile where it's more of a market-by-market or segment-by-segment extension. But in all cases, they're capabilities that we see as being additive to our value proposition and something that's best owned -- additive by being proprietary part of our value proposition and where we're the ideal owner by virtue of being able to leverage those capabilities across the full breadth of our business.

Good. We have, what, 8 minutes left. So you mentioned crypto. So I have to ask a question about crypto. Didn't I mention I was going to ask you about it?

No.

No, I'm kidding. I have to ask a question about it.

It's impossible to go to one of these and not talk about crypto.

So I've been trying to think how to best ask it in a succinct way. So we've seen market cap drawdowns. Obviously, the values come in. There's been some press around the rewards activity around crypto cards. But let me just -- cryptocurrencies in general, then the blockchain tech itself. The obvious question is, friend or foe, threat opportunity, where do you put it across that spectrum for Mastercard?

Yes. I think I'll get to that specific question. I'm going to pull it up a level first and be above crypto and talk about -- broadly about digital currencies. And digital currencies, whether that's a central bank digital currency, whether that's crypto in the form of a stable coin or a free-floating crypto, whether that's a digitized or tokenized bank deposit, there's -- we see value in the role that those digital currencies can play in enabling commerce in -- and intermediating payments in an increasingly digital environment where in some instances, there can be a reduction in friction, et cetera, et cetera. So broadly speaking, we view that as a positive and an opportunity for us. Because there are opportunities across digital currencies to be able to introduce them into commercial environments with clear kind of rules of the road around how they're used, particularly with respect to payments, the kinds of things that you would associate with a Mastercard franchise where there are rules that participants adhere to, where there's clear guidelines around consumer protection, where there's a clear process for handling dispute resolution, where there is an ability to establish interoperability between different digital currencies that will be important in increasing their scale and use, where there's a need for enhanced means of managing identity and compliance, all things, by the way, that I think for now are hindering the ability for some of those technologies to scale in payments. The things that are going to enable them to scale, we think we can play an important role in providing that. In the meantime, with crypto specifically, we've been active in areas that, for us, we feel like makes sense for our business given where crypto is today. And that's doing things like enabling Mastercard products to be used for the purchase of and redemption of crypto into fiat sizable transaction flows that are traversing our network in fiat currency, but for the purpose of either buying or redeeming crypto. There's value-added services opportunities with things like CipherTrace that I mentioned to help identify crypto-related activity and risk that's happening within some of our partner organizations. There will be -- we will enable the network to transact in select stable coins, but only those that will adhere to some important principles that we've established around stability of value, around ensuring consumer protections, around data privacy and data usage, and importantly, compliance. Compliance is an important part of the equation that's still very much in development stage. Regulators are still wrapping their arms around what the compliance or what the regulatory framework will be for crypto. And so we've been moving in areas that we think makes sense, given where the market is today, while thinking about a future that has greater clarity around regulatory constraints or requirements, I should say. A clearer framework for managing identity for consumer protection, for interoperability and making -- taking the steps we need to position Mastercard to play a role in that.

Good. No, I remember speaking you warned about this, and it's a big deal. If Mastercard validates a digital asset on the network, it's a big deal. So you can't take it lightweight for all the reasons you talked about. So...

If we put our brand on it, it has to mean the things that our brand stands for.

Yes, 100%. So we have 4 minutes left. Let's take 1 or 2 quick questions from the audience, if that's okay. We have a mic, if you don't mind using the mic.

A number of large retailers like Walmart, Target, they're kind of on the earnings call recently talked about slowing consumer. Could you talk about what consumer trends are you saying?

We're seeing pretty healthy trends with consumers, a lot of demand, still pent-up demand. Overall spending levels are healthy. Our -- again, our Mastercard Economics Institute released our latest spending pulse report in April. In the month of April, we saw a little more than 7% increase year-on-year in overall retail spending. That's -- the difference versus the year before was roughly twice that 15%. So pretty consistent growth in overall levels of retail spending. Obviously, some increasing pressures on certain segments of society and inflationary pressures are going to probably drive some reallocations of spending. But at the overall level, the consumer balance sheet is pretty strong. The consumer appetite to spend is strong. The desire for spending in different categories is evolving a little bit and shifting a little bit away from what had been a heavy focus on things during the pandemic, stuff that you would buy for your home versus things that are more experience-based, restaurants, travel, et cetera. But so far, we're seeing pretty healthy trends among consumers.

Let me do one last quick one. Anyone? Yes. So one right here, then we'll close it out with one last one from me.

You laid out the 4 areas for new flows. Maybe if you could just talk about which of those areas you see, I guess, the largest Mastercard value-added within. In other words, which of those are the least likely to be commoditized by, say, a RTP-type network?

Yes, it's a good question. I don't know that I could say there's one where I feel like there's the most opportunity for us to add value, but I think there's opportunity for us to add value and differentiate across all of them. We'll do it in different ways, though. I mean, in some cases, it's adding speed or transparency or price certainty to a transaction, for example. With a disbursement or remittance, people can disperse and remit funds today. There are ways to do that. But we have products that we can bring to bear that enable them to do it faster, to do it with greater clarity and understanding when it's going to get there, how much it's going to cost to get it there to be able to reach a broader number of endpoints. In the B2B realm, it's going to be a different set of capabilities that enable us to add value and differentiate. It's going to be about how we enable buyers and suppliers to identify and agree on the terms on which they're willing to be paid at what price and what time frame so that they can each respectively manage their cash flow and working capital and can also, if you're a buyer, ensure the health of your supply chain. In bill payments, it's going to be through things like displacing the cost that goes with mailing out an invoice to someone. And there's a cost that the biller incurs for that. We can digitize that process. We can monetize it as part of that. All of these things, we think, are differentiated, and we think we can sustain that differentiation.

You have a good radio skill.

I was trying to leave time for your last question, but we're at triple zeros.

You ended right on 0.00. So Craig, thank you for the time. We'll close it out there. I appreciate the catch-up.

Thank you. Great to see you.