Mastercard Incorporated (MA) Earnings Call Transcript & Summary

Okay. We're going to get started. Hi. My name is Bob Napoli, I'm the analyst for William Blair that covers Mastercard. For a complete list of disclosures, please go see www.williamblair.com. We're excited to have with us today, Mastercard. The amount of innovation in the industry is pretty dramatic, so we're very fortunate to have with us today, Craig Vosburg, Chief Product Officer, as well as Warren Kneeshaw, Head of Investor Relations. We're doing a fireside chat format. Craig has significant responsibility in the product and engineering organization, deeply involved in strategy. And one of the things that I think is most misunderstood about Mastercard over the years is people look at it as a payments company and a network, which it is, but it's also a technology company. And the amount of innovation and the amount of investment and development and technology is something that we've always felt investors don't really get or some investors don't. But Craig, welcome.

Thank you.

Maybe start the conversation with your work at Mastercard. Can you maybe give a little color on your role in the organization? And what are the top priorities for you and your team?

Sure. Happy to do that. First, thanks for having me. Great to be here. Nice to be here with everyone. So I'm the Chief Product Officer at Mastercard, I run our product and engineering team, which has a responsibility for a decent portion of our overall corporate strategy. Our strategy as a company is focused on expanding our role in payments, expanding our value-added services portfolio and building new, relevant, adjacent networks. And the product team that I look after has responsibility pretty much for all of the payments-related products within that grouping and our activities in open banking, which is one of the areas that we're targeting for creating a new network that, hopefully, we'll get a little bit of time to talk about because we're pretty excited about that. The priorities that we're focusing on in payments really revolve around continuing to drive growth in our core business. We continue to see ample opportunity to grow the core debit and credit business to -- we're leaning into areas of innovation in the payments world, new technologies, new capabilities, buy now, pay later, account to account, digital currencies, et cetera. And we're executing our strategy to help us penetrate new payments flows, number of flows that for us represent a really significant opportunity to expand our addressable market. And those are the top-level priorities, along with building out and establishing open banking in the markets that we're currently active in the U.S. and Europe and a number of additional markets targeted for entry.

Maybe give a little color on Mastercard's core card franchise. A pretty dynamic environment that we're in. Maybe some color on the opportunities around that core business.

Yes, I'd be happy to. The core -- our core cards business is something, as I mentioned, we remain very enthusiastic about the prospects for growth in the core. We've seen continued growth over the past number of years. There's been acceleration in some of that throughout the course of the pandemic, some of the secular trends associated with cards and cardable payments. Some -- we've seen some speculation associated with that, that it's sort of pulled forward the secular migration and maybe had an impact on the amount of runway available for growth in the cards business. We continue to see great runway for growth. And by all measures that I've seen in terms of analyst reports, others who follow the industry in terms of cards penetration, estimates of global penetration of total consumer to merchant payments flows on the order of 50%, 55% globally, which still leaves a pretty significant amount of cash and paper-based payments for us to target as ways to drive growth in the cards business. Ultimately, the cards business has driven -- growth in that part of the business is driven by overall growth in consumer spending, the rate of secular migration from paper-based forms of payment to digital and the extent to which we can continue to win market share in our core markets. And there's -- obviously, we can't control consumer spending and the macroeconomic environment, but there are certainly things we can do to influence the other 2 and have been focusing quite a bit on that. One area that I'll call out that we're investing heavily behind and has been, I think, a major contributor to the ongoing migration of payments from paper to electronic forms is the continued expansion of our acceptance network. And that's sometimes something that can be easy to overlook. But our acceptance network stands at roughly 92 million merchants worldwide today. It's doubled over the course of the last 5 years. It's literally in a phase of exponential growth. We're adding on new merchant to the Mastercard network literally every 2 seconds on average. And there are exciting technologies, developments that should enable us to continue to expand that with some of our cloud commerce capabilities, things that enable cloud-based point-of-sale capabilities, tap-on-phone capabilities, QR codes and contactless expansion, et cetera. These are things that just enable the ongoing migration of payments into digital forms that continue to expand the reach of the network. The more places people have to use their cards, the more places they actually use them.

At your investment community meeting last November, you launched or announced -- introduced Mastercard Installments for buy now, pay later. Can you maybe give an update on how things are progressing and how you view the broader BNPL opportunity?

Sure. We did introduce Mastercard Installments last September, a new product construct that we're excited about to really tap into the consumer demand and energy around the buy now, pay later proposition and enable our partners to bring that to market at scale. And it's a program that we feel is unique, designed in a way to leverage the Mastercard acceptance network for -- so that merchants can seamlessly accept a buy now, pay later transaction without having to do additional tech integration in order to do that. As long as they accept Mastercard, they can accept this buy now, pay later Mastercard Installments transaction. It gives consumers the ability to utilize that capability across this full scope of the Mastercard network and provides opportunities for our partners, lenders to make that capability available to their consumer, again, doing so at scale. And the lenders here -- this is not a card-based program. It's a consumer loan-based program. And so the lender can be a bank, it can be a fintech, it can be a digital wallet. We've had a really positive reception thus far. Over the course of the last 9 months, we've announced a number of partners in the U.S., in Australia, in the Middle East. Partners in the U.S. like Fifth Third and Synchrony and Huntington Bank and SoFi, Barclays U.S., FIS, Fiserv, TSYS, Marqeta, Galileo, a number of partners who have signed on to launch, and most recently this week, of course, the Apple Pay Later announcement that they made as part of their Worldwide Developers Conference will leverage the Mastercard Installments program as the means through which it's delivered at the point-of-sale.

What is your view on that market? It's a little bit -- become a little bit controversial, I guess, and just on some of the growth rates, but what is your view on the long-term sustainability and the long-term growth of that business?

Look, I think consumers have demonstrated that they have an appetite for buy now, pay later propositions. And so it's -- there's demand that we think is sustainable demand, and that's what drove our interest in creating a product to be a part of the Mastercard network to meet that demand and enable our partners to be able to meet the demand that their consumers are showing. It's not a market, though, without imperfections, and that's also reflected in our approach. The long-term viability of the buy now, pay later proposition will rest on sound underwriting standards, on ensuring that there's clear consumer protections, including things like being able to provide dispute resolution -- dispute management and dispute resolution. And our approach specifically incorporates that. There are clear guidelines that the lenders need to follow in terms of ensuring consumer protection, data privacy, et cetera. The same dispute management and dispute resolution processes that underpin the broader Mastercard network are part of the Mastercard Installments proposition. And we're providing an ability for underwriters to leverage the power of open banking and the incremental data points that, that provides into consumers' accounts once the consumer grants permission to be able to actually underwrite on the basis of cash flows and account balances and other data points that the consumer would grant access to, that should help lenders ensure that they're underwriting responsibly and offering loans to the consumer that they're capable of repaying, all of which are going to be important things for that market to continue to be viable and grow.

Agree. Mastercard has had a string -- have announced some pretty nice wins over the last several quarters with fintechs and co-brands. Can you give some color on those wins? And what is driving those?

We have had some nice wins that we've announced over the last few quarters. It's a continuation of what's been a good trend for us. We've been growing our market share across all of our core products in, I think, 16 of our top 20 markets worldwide. Some of the things that we've announced more recently, the wins with Wells Fargo in their -- both our small business and consumer portfolios with both proprietary and co-brand programs; an expansion of our partnership with Capital One in consumer and small business. We've established -- reestablished and are expanding our relationship with a number of other issuers across the U.S. market and globally, important co-brand partners, American Airlines, JetBlue, Gap, et cetera. So there's positive momentum there. The more relevant question is probably what's driving that. And we feel like it's a combination of things, having a good product proposition. Obviously, we have to be competitive with economics and have a good economic proposition for our partners. Beyond that, the product proposition needs to be strong and enable them to meet the needs of their consumers, which increasingly means offering the right kind of digital proposition that can meet the consumer on their own terms and enable the kinds of digital experiences that we, as consumers, are all increasingly seeking. But it also revolves around the incorporation of value-added services and capabilities we can provide our partners to help them be more effective in achieving their own business objectives, whether that's a financial institution looking to grow and maximize the value and revenue of a cards program, whether that's a merchant who's looking to increase the value of their loyalty program and ultimately drive more sales within their core business, whether that's a fintech partner who's looking to quickly build and launch and grow the products that actually -- that ultimately support the growth of their business. The value-added services we're providing around data and analytics, loyalty, fraud, risk, cyber solutions are an important component of that, combined with a partnership orientation that I think we've effectively taken into the marketplace to work with our partners collaboratively and constructively to help figure out how we help them achieve their goals more effectively.

At this point, obviously, a lot of people are very interested in trends in travel, and we can't have Mastercard and not talk about travel and cross-border travel and what you're seeing. And I know we have a pretty good turnout here, and we have a very big international turnout at our conference. So maybe just if you could give some color from...

Sure. Well, it's great to see the turnout and it's even better to hear that lots of people came from overseas and hopefully use their Mastercards to get here. The turnout here is consistent with what we've been seeing now for a number of months across the business, where travel trends -- we've seen throughout the course of the pandemic, obviously, travel was impacted very significantly and very quickly in the early phases of the pandemic. But throughout the pandemic, we've seen consistently that as consumers are able to travel, they will travel. As soon as travel restrictions are eased, certainly, the introduction of the vaccine and increasing vaccination rates have spurred a nice recovery in travel overall, which we saw first on the leisure side but are now seeing come back strongly as well on the business side as well. So our cross-border travel volumes surpassed pre-pandemic levels for the first time in March of this year, which is very encouraging trend, I think sooner than, frankly, we anticipated as we were heading into this year. We've seen through data that our Mastercard Economics Institute tracks the travel bookings. So this isn't actual Mastercard spend data yet, but travel bookings for both leisure and business travel are ahead of pre-pandemic levels for the first time, both on consumer and business. So the trends there are encouraging. We've seen a resumption of travel in all regions. It's been a little uneven. Asia is still a little bit trailing, given some of the restraints that have persisted, particularly in the northern parts of Asia. But the travel recovery has been a strong one and one that we're optimistic about its continuation.

So from your viewpoint, Chief Product Officer, when you think about Mastercard is doing to expand in payments, all the innovation you're working on, what are you most excited about today?

Well, the thing I'm most excited overall about is growth. And we've got growth coming from the core, as I've described earlier. But we also have the opportunity to drive growth through our payments activities addressing new payment flows. And as I mentioned, this is really all about going after a larger addressable market opportunity, new flows, in particular, related to disbursements and remittances, related to commercial point-of-sale transactions, related to B2B accounts payable transactions and consumer bill payments, which, in the aggregate, represent roughly $80 trillion addressable pool of payments, things that we can address with products that we either have in market or in late stages of development. Now some of those are going to take time because they involve introducing new products and scaling 2 sides of a payments ecosystem. The B2B accounts payable, consumer bill pay would be examples of that where we're underway and we're in the process of building the partnerships that we need to have to reach buyers and suppliers in the case of B2B payments; or billers and consumers in the case of consumer bill pay. Those are underway and progressing in a number of our markets around the world. Others of those flows are much nearer in. And in fact, a number of them can be addressed with card solutions. So they're not unaddressable through cards. They've just been underpenetrated with cards. Commercial point-of-sale transactions would be one where we have opportunities to continue to grow and more deeply penetrate corporate payments associated with travel and entertainment and procurement. There's a significant opportunity in small business and small business transactions that can occur through a card at the point-of-sale. And so there's some very attractive opportunities there. In the B2B space, virtual cards are something that's in market today, has been growing for us very nicely for a number of years. This is a relatively lower-hanging fruit to go after in addressing B2B payments with a carded solution that's been growing and deepening the penetration of some of those B2B accounts payable flows where there's room and runway for additional growth that we're pushing on. It's going to revolve largely around expanding acceptance and getting suppliers to accept the card more readily and continuing to increase the distribution of that capacity through our financial institution partners.

Open banking, and that's an area we're very excited about as well. I know it's an area of focus for Mastercard. And I was wondering if you could give a little bit of color on the strategic priority of your investments in open banking and maybe the opportunity that you see there and any updates on exactly what your progress is.

Sure. Yes, I'd be happy to. So open banking is something that we see the use of consumer-permissioned data, transaction data that open banking facilitates as being a real enabler of innovation in financial services. And we've seen that already manifest itself in markets like the U.S., in different ways in Europe, where consumers are demonstrating a willingness, preference, in many cases, to give access to their account data to service providers who are providing innovative, creative services and products, great consumer experiences, helping them achieve their financial goals more effectively. We see an opportunity to be able to do a couple of things: one, to bring that capability to bear across markets at scale; two, to do it in what we think is the right way and serving as a trusted intermediary and enabling these flows to take place between provider and user of the data. That means with the right kind of consumer permissions, the right kind of data privacy, the right kind of data security, the right kind of protections for the consumer and for the financial institution that's providing the data with known rules of the road in terms of how the user of the data can actually make use of that. And there's a way to do that with the right kind of connectivity between the provider and the user, and that's through direct API integrations, not through over-the-top screen scraping, which introduces all kinds of challenges and risks. And so we're building a business with those important foundations in place and working with our partners to be able to make that data available to address some very specific use cases early on. One is around increasing access to credit and being able to provide credit opportunities for thin file consumers to enable consumers to enhance their credit scores, to enable them to interface with lenders who have sort of nontraditional underwriting models, a variety of ways in which consumers can use that capability to get access to more credit. There's a range of use cases around personal financial management and being able to aggregate account information across a variety of accounts to pull together for budgeting, for investing, for a number of other financial management purposes. And there's a range of use cases related to payments initiation, so establishing connectivity to a DDA with the intent then of also either moving funds for an account funding or potentially to establish a recurring payment transaction. That obviously has some connections and synergies with other parts of our business, is an important part of kind of leaning into innovation around account-to-account payments and is an area where we think we can add value and generate incremental revenue from those flows.

I mean open banking is primarily -- it's really started in Europe, and it's primarily in Europe, account-to-account as well. Is it -- will you see -- will we see open -- European like open banking in the U.S.? And as far as account to account -- and is there any risk to the networks as you could bypass...

Well, it's interesting, the comments about Europe. Open banking in Europe and open banking in the U.S., if you contrast the 2 markets, both very active open banking markets, but with very different starting points and catalyst, Europe being catalyzed by regulation and required open access, the U.S. being catalyzed by market forces really and by innovators and fintechs combined with consumer appetite for those products and services and a willingness to make their data available as part of that relationship with the service provider. And so it's been present in the market for a number of years, fueling a variety of different digital wallets, fintechs, investment platforms, et cetera. And so there was a second part to your question, and I've forgotten what it was, while I was...

No, just on account-to-account, is there something...

Oh, account-to-account, yes, so the -- open banking is an enabler, a pathway to account-to-account payments. And that, frankly, is part of the reason that we're interested in it as a way to ensure that Mastercard has a role in those transactions, to the extent that gains traction and becomes a meaningful way for consumers to make payments. There are certain kinds of payments that are more likely to be initiated through an open banking-established connection and account funding to fund an investment account, to fund a digital wallet, potentially a subscription payment for a subscription service provider. These are things that are not likely to be cannibalizing existing flows elsewhere on the network because, in most cases, they're not going to be carded transactions, but they're flows that we can play a role in and generate revenue from by providing value-added services associated with the connection and some intelligence that will be associated with that.

Digital identity, payment fraud, we actually -- we just put out a deep dive white paper on payments fraud, and it's a growing problem. But just maybe give us a little bit of color on what -- in digital identity, what you're doing in that space, what attracts you to it and your broader efforts in payments -- in the payments fraud space.

Identity, it's a theme that cuts across a number of aspects of our business. And I think as the world is increasingly digitized and consumer and business interactions become increasingly prevalent through remote and digital channels, the challenge of establishing and verifying identity increases, and it increases in importance, whether that's as part of authenticating a payment transaction, whether that's associated with opening a new account at a service provider, whether that's through initiating a transfer into or out of a crypto account, you sort of go across the spectrum of things. Identity plays a key role in enabling those transactions to be performed in a way that's safe and secure and that's compliant. And so it's an area that we've been investing in, building a suite of capabilities and an expanding array of data sources that we can use to determine the -- with increasing levels of confidence, the authenticity of an individual's identity. And so for a number of years, we've used things like our transaction data to -- as an initial view into the authenticity of a transaction and the counterparties associated with that. We've complemented that with data related to biometrics, with data related to behavioral -- human behaviors and how people interact with the devices that they're using to initiate transactions. We've complemented it with a number of other identifiers, things like e-mail addresses, phone numbers, device IDs, device fingerprints. Much of that is through acquisitions we've made over the years with NuData, with Ekata and others that we brought into the Mastercard portfolio to be able to stitch that together and then overlay it with artificial intelligence to be able to take advantage of that in near real time to provide to our partners and for ourselves an indication of the validity of a transaction based on an individual's identity. So it's an area we've been investing in. It's an area that we will continue to invest in because we see it being important and the number of use cases associated with digital identity just continuing to expand.

Racing against the clock here. But Mastercard is now linking all employee compensation to ESG targets or ESG goals. Can you maybe give a little bit of color on what that is?

Sure. Something we started last year with our executive team, where, as part of our ESG commitments, we identified some specific targets that we were going to hold ourselves accountable for and that it would influence our incentive compensation. There are 3 areas in particular that are particularly relevant for our business and goals we've established, one related to financial inclusion, which has been a long-standing priority for Mastercard and measuring the number of individuals that we're bringing into the mainstream financial ecosystem by providing electronic payments products to. A second revolving around our commitments towards net zero carbon emissions. And the third revolving around gender-based pay parity. And we have goals for each, and we have compensation modifiers associated with each if we overperform or underperform. We introduced that last year in our executive ranks. And this year, we've cascaded that across the entire organization. So all of our 26,000 roughly employees will have those ESG modifiers as part of their compensation. And we just feel like that's the right thing to do. It's been very well received by our team actually because our team is also committed to delivering on the kinds of ESG objectives, things that we can influence as a company, and they're important things for us to deliver on.

I'll sneak in one last question. And we've talked about, I think, what you're most excited about, but what keeps you up at night? I mean I get that question all the time. It's been a great story for a long time. Who can disintermediate -- every -- somebody is always looking to disintermediate. Is it stablecoins? Is it blockchain? What keeps you up at night?

Well, we've talked a lot about the good stuff, the growth. There's always another side of the coin, the things that you need to be a little bit paranoid about. And as a network, you have to always be thinking about things that could potentially disintermediate because the value of the network is a function of the breadth of our reach, the number of nodes that we can access on either side and the amount of volume that's going through it. That's really the foundation for the whole business, the core revenue stream, the value-added services, the things that we're building around new networks. So anything that could take us out of that flow is something we pay a lot of attention to. There's things that we've talked about today that have, over the course of the last couple of years, occupied different degrees of mind share, buy now, pay later, account-to-account payments, things where we feel like we've got a pretty good play underway. We're closely watching and engaging in the evolution of digital currencies and the role that they could play in the payments ecosystem, taking steps to intermediate where we can, where flows are going back and forth via fiat currency, where we can provide value-added services, where we can incorporate select stablecoins into the network as a medium of value exchange, and that's an area we'll continue to watch very closely, both for its evolution on the technology front, consumer and merchant adoption and importantly, regulation.

Great. Thank you very much, Craig. We're out of time.

All right.

But it's great talking to you. I think we could have gone on for another hour, but thank you.

Thanks, Bob. Appreciate it.