Mastercard Incorporated (MA) Earnings Call Transcript & Summary

Okay. Good morning. I'm Bryan Keane. I cover payments and IT services at Deutsche Bank. And we are super excited to have from Mastercard Raj Dhamodharan, who's the EVP blockchain and digital currency expert. So looking forward to digging into some of this stuff on digital currency here, Raj, but thanks for joining us.

Thanks for having me here.

So maybe a little bit -- we could start with just a little bit of your background. Can you share a bit about kind of what your role is with the organization and maybe prior history?

Yes. Absolutely. Again, thanks for having me here. I'm originally an engineer, programmer and computers and so on for the early part of the career. I got involved initially in technology in companies via startup. So we were running telecom software at that time back in the Bay Area. And then I shifted, and the last 10 years have been -- 11 years, I should say, been working at Mastercard and a variety of capacity. I started in our regions, helping us deploy our digital products in Asia Pacific region. And the last few years, I've been helping run the space for Mastercard. And Mastercard has been in this space for quite some time, and we can get into that, but that's the short history.

Got it. Got it. And could you provide an overview of how Mastercard is participating in the digital currency crypto space today?

Yes. Absolutely. A couple of different ways, right? The number one is we -- as many of you know, we run a large network with 3 billion plus cards, 90 million merchants on the other side. So the first thing is really to let consumers and merchants experience the crypto in a safe and secure way. Crypto flow is the #1 thing, which is letting consumers buy using the cards in the street with buying crypto at exchanges and so forth and on the ramp side. And also on the off-ramp side, when once consumers accumulate crypto, there are variety of ways that they can get back to Fiat, either by spending through a card. There are a variety of crypto card programs. In fact, we've had 20 card deals -- plus card deals just this year on that topic. And also using our Send, you could get the product money out from crypto to Fiat back into your back and count as well. So participating in the crypto flows is a big part of it. The second, again, we can get into this a bit more later, is the services aspect, which we have a range of services starting for analytics. You may have seen our site to trade purchase, which is focused on blockchain analytics. So we also have identity products. So it's big services business there as well. And then we are starting to add select currencies into our network, which again are bringing some of the digital currencies directly into our network in a safe and secure way, allows people to experience the crypto in different ways. That's just a high-level view on various things that we do on the crypto space.

Great. Great. And so what about the distributed ledger technology? What's Mastercard doing there?

Yes. So we -- this is a fascinating piece of technology. As you know, it started like 10-plus years ago. Mastercard has been at this -- in this space for quite some time. We've spent some early -- invested some energy in understanding the technology years ago. This is well before I got started in the company. And it gave us lot of insights into how best to use the technology. So we've been -- we've used this technology in a number of places. I think that this has a lot of potential in some select use cases. And we are starting to apply this, for example, we launched a central bank digital currency sandbox a couple of years ago, which governments used to design digital currencies. We've also think that there are the number of issues that need to be solved in the blockchain space that we can help solve. For example, how do you scale the network? Today, the blockchain networks are fairly slow in terms of how transactions are done. How we help scale the network, we partnered with consensus to put more open-source technology out there, a technology called roll-off that helps use scale the blockchain network. All of this helps us to understand how the network works as well as put to use in a variety of use cases as we see. As you guys know very well, they're a multi-rail company. So running multiple networks to solve different use cases is not new to us. So that's how we approach it.

Got it. And what's your view on the crypto winner here that we're in?

Look, I think markets will do what it will do. I think -- we think this overall, the technology, the crypto and the digital currency technology and the blockchain -- underlying blockchain technology is here to stay. We do expect multiple public blockchain networks to continue to exist and multiple use cases to emerge out of this. And we are here to provide a simple, safe choice to all the consumers and merchants. We're not really asking people to use crypto or not use crypto. But when they want to experience innovations coming out of the crypto space, we want to make sure that, that happens in a safe and simple way. That's why we enabled the card for purchases. That's why we enabled NFT purchases on cards as well. Again, that is about really curating the space and seeing what is the technology that's available and innovation that is available that we can make it broadly available across our network base.

So I think Mastercard announced that you guys would support the settlement of select digital currencies directly on the network. Can you just give us an update on how that process will work and how it's going?

Yes. If you look at it, most of the cryptocurrencies, and we put them in a couple of different categories, right, there is a free-floating cryptocurrencies like bitcoin and ether, and under currencies like stable coins. Most of the cryptocurrencies, people are not looking to use as a payment currency. So we've actually developed a set of principles to decide which currencies that we want to over time support. So this is about stability, consumer protection and making sure that we are doing this in a compliant way across the board. So we said publicly that we will enable some select stable coins in the network. We are doing that through partners today. I'll give you an example. So we have a crypto card today from one of our partners. And if they want to settle with us through a stable coin, they could do so, right? We already support 100-plus currencies in our network. Adding one more currency is not a big deal for us, but we are looking at it saying what the customers want. If an issuer of the card wants to settle with us in that currency, we are open to doing that through a couple of partners. And that's available. It's live. It's working. We generally see less of a demand on the merchant side. Merchants are interested not in getting paid in crypto. They're more interested in accessing the consumer spend power. And that is best done through the cards that we have. We have a number of cards that are launched, including Binance that launched recently in Argentina. These cards provide access to the spend power that consumers have. Their original holdings may be in crypto, but we move and settle in Fiat, right? So it's really about providing that access on the merchant side and merchants are happy to get paid in Fiat or the currency of their choice in a local market.

And so how -- are there multiple ways that you guys support bitcoin on the network?

We don't support bitcoin on the network. What we do is if you have a bitcoin holding in your wallet, you have a crypto card attached to that wallet and you could spend that holding. You can buy a cup of coffee if you want. What happens is the issuer converts that into kind of Fiat and settles with us or converts that into a stable coin and work through a partner to settle with us. Idea being here is that if there is a crypto-native issuer of the card who wants to deal with -- in crypto when they pay us, then we enable that through our partners. That's the whole idea of it. We don't put the bitcoin on the network. We don't support that because we haven't seen that being a payment currency with the utility, right?

Yes. I was going to ask, will that ever happen you think, in the future?

Look, I think the way that we look at it is take a very principled approach given there are 2,000-plus currencies that are out there. We're looking for, like I said, stability in the value so that people can think of it as a payment currency. We're looking for consumer protections. We're looking for compliance in a given jurisdiction. When all of that comes together, that -- those are the things that we are looking at. So yes, that's how we approach it.

So what about the view of disintermediation in payments? And I know that the Lightning Network gets some press. What do you think about that, the possibility in the future?

Yes. Today, our network -- if you look at what the value that we provide to our network, like I said before, the 3 billion plus cards and 90 million merchants, there are a lot of ample protections in our network and scale that it provides end-to-end, right? So you could have a card and you could travel to Africa tomorrow and spend on that card, and it simply works using a consumer experience. And if you don't get what you want in that transaction, you can charge back. That is the level of protection and scale that's available end-to-end. And all of -- the merchant that you spend in Africa lets you walk out with whatever that you're buying based on a message from Mastercard through our partners. That's the scale that we've provided, right? So -- and it comes with a lot of protections and services, creating -- so the way we look at it is that if consumers want choice in how they want to pay and get paid, we can add currencies to our network and make that happen. And that's how we think about it. I really don't think about it as a disintermediation issue. It is more about how we can provide scale and choice using the networks that we have. And today, if you look at a number of the networks that are out there, that -- some of them you are referring to, getting to consumer identity is an issue. Who is on the counterparty that you're paying to is an issue? All of that has fundamental systematic issues in the network. Over time, it'll get solved. In fact, some of our services help you understand who is the counterparty in a blockchain network is. Yes. So that's -- the way that we think about it is that in order to get scale, you need to provide end-to-end consumer protection, privacy and provide a choice of currencies. And I think we -- our network provides that through multiple rails, not just card networks. As you know, we're -- we operate multiple networks around the world.

Do you think the Lightning Network will get more volume that it will begin to scale?

So they today's support -- I know there have been some news on new currencies. But today, they support bitcoin, right? Bitcoin is the primary currency in the Network. I really don't -- like I said before, merchants are looking for accessing consumers spend power on the other side. They're not necessarily looking to get paid in bitcoin, right? So I think you need a simple, safe consumer experience that can bring a billions of consumers in a simple way to a location that the merchant wants to accept using a simple well-defined consumer experience. We offer that through Tap to Pay at the point-of-sale location, Click to Pay online and a variety of other mechanisms that we have. That's what people are looking for. I think they have a long way to go in creating that kind of scale and also choice and currency, right? Network cannot function without having a choice on everyday currency being available to be used.

Got it. How is Mastercard thinking specifically about the central bank digital currencies?

Yes. Look, this is a very fast-emerging pace. A number of governments around the world are looking at what should be their approach towards central bank digital currencies. We, like I said before, have a number of tools in our toolbox to help governments think through. We are engaged with most governments around the world in helping them think through how best to approach the space. If they choose to do a central bank digital currency, we have a tool. We have a CBDC sandbox, which allows them to help design how the currency should be, how it should interoperate. And we also encourage them to think about how the CBDC will coexist with the rest of the retail networks. For example -- I'll give a tangible example. When Bahamas launched the Sand Dollar project, they want an instant acceptance of that digital currency in everyday merchant locations. So they decided to do a card with us. And the card provides instant access to that currency in all merchant locations that we have available. And it's transparent. So it happens behind the scenes. So consumers get the utility and access. Government gets to distribute. So that's one way to interoperate. There is also many governments that are thinking about central bank digital currencies as a wholesale settlement currency, which is a very different approach to take where it puts core efficiency into how quickly the transactions are settled. And that could be very interesting. And we today use multiple ACHs to settle around the world. We could use a central bank digital currency network to settle as well if that were to be available. So it's -- different countries are taking very different approaches on this topic. We remain engaged with all major countries on this through the variety of tools that we have.

Can you share some of the detail on Mastercard's various service capabilities that you were mentioning and how they support the crypto space in general?

Yes. It's -- we've been investing, as you know, investing in services space for a long time, right? And this is prior to crypto as well, but it -- we've -- there are a number of services that it turns out is very important to the crypto industry. The first one I will talk about is the identity space, right? Knowing -- KYC identity verification is quite important as crypto players get involved in supporting consumers across the world. We have Mastercard identity product, Ekata, that's been sold to a number of top crypto wallet providers in the world. It is -- this identity is a very important part of that service as well. I briefly talked about CipherTrace. CipherTrace is -- just to give you a bit of a picture on what CipherTrace does, right? So we today look at every wallet provider in the world and look at their compliance and AML policies. And we have a score or a rating that allows people to understand how a wallet provider operates. We also score every public blockchain address for its risk. We score every transaction. This kind of analytics is very useful for anybody who interacts with the public blockchain. That is a key building block. Again, a number of the players use the service in the crypto industry and are -- we have a services organization, a consulting arm, which has been also offering a number of services implementation projects in the crypto industry, all the way from strategy to implementing a specific project. We have a number of deals, 50-plus, I believe, that we won recently that we are engaged in the various services projects in implementing. So it's an important project, an important area for us. And it ties it back to a number of things that we do in the core network, a very relevant area on the number of projects that we have in this space.

One of the questions we get and we're thinking about blockchain and digital currencies pricing, how do you think the market will end up making the pricing for the execution of digital currencies?

So we -- the way that we think about this is that our network supports a number of currencies in the market today. When we add one more currency to the network, the existing economics would apply. We haven't really seen kind of people wanting to get paid in digital currencies in a big way, especially the merchant community. So our approach to this has been consistent with how we've been treating the overall network and the value that we offer.

Got it. We can open it up for questions from the audience. So just raise your hand and love to keep the discussion going here. So Raj, want to ask you before we go to see if there's any questions just on regulation. Obviously, that comes up all the time. Where have you seen regulation start and kind of where is it going, you think, over the next few years?

Yes. This is an important area. It's also fast emerging. We, in general, very much welcome the clarity in regulations in terms of what are the rules of the road are. And so anywhere that clarity is provided, we welcome that. We are engaged with governments around the world. I'm seeing a couple of legislations move through, right? For example, in Europe, European Parliament [ there is make ] a regulation that is putting overall framework. I know people will talk about, okay, they like one part of it and not like the other part of it. But in general, the way we approach it is that any clarity in putting the -- what the rules are, what the guidelines are is very helpful. I know in U.S. also that is -- after the executive order, different agencies are looking at providing more clarity on various aspects of it. We welcome that as well. So it is an emerging space, and there is different jurisdictions working through how they should treat different parts of the crypto industry in a meaningful way.

I think we have a question over here on the right.

So every fireside chat that we've had at this conference so far, we've talked about macro potential recession. So we can't let you get away without asking the same thing. So obviously, crypto didn't exist during the great financial crisis, but I read this great article in the New York Times about crypto in Argentina and how the Argentine peso has crashed so much, that crypto has become a better store of value than the Argentine peso. So I don't know, do you have any comments on what you think the role that crypto is going to play in the event that there's another financial recession on the horizon? And how can Mastercard sort of participate in that?

Yes. Look, we -- our view on this is very simple. We believe in providing people choice in using different currencies, and they should be able to buy whatever they like as long as it is legal in a given jurisdiction and it has the right fit of consumer protection. And we think there is overall a fame -- utility for that use case. That's how we look at it. Obviously, we operate in multiple countries. I am not for or against a specific currency in one market or the other. We look at those principles, and that's how we apply it. So that's how we approach. And this is all about providing choice but providing choice in -- with safety and simplicity in mind.

Raj, what do you think the biggest opportunities are for Mastercard? And is there a revenue model here? Or is this more just opening up the network to expand and create more digital points?

Yes. I think there are incredible set of opportunities here, Bryan. So I'll give you a little bit of frame on how we think about this space, right? So if you look at the -- we believe there is multiple public blockchain networks that are there. They're here to stay. They will continue to evolve. They're more launching every day on what's called this Level 1 networks. They're here to stay. But there are a number of issues that need to be solved and where I think we can help given our historic role in this space, right? Number one, again, I will talk about identity. It is very difficult for people to understand who the counterparty is in a blockchain network to interact with. Again, the services that we have can help with that process. That's the #1 problem in the blockchain space, right? The number of safety and security issues that are happening in this space is quite high. And identity as a key building block is an important part. The second part is we've seen -- if you look at the overall crypto industry and the value of it, I haven't checked the market today, the overall value of the cryptocurrency is close to about $1 trillion, and that includes, I think, bitcoin, right? We haven't seen -- there are a lot of emerging technologies out of the blockchain space that is useful to the broader industry. If you look at the banking sector, the balance sheet power of the banking sector is significantly higher. And finding a way for this entire financial industry to benefit from some of the innovation, I think there is a lot more work that can be done there as well. The third is really, we talk about -- if you look at the number of the networks that are there and the number of hacks and security breaches that are happening, there is really -- because of the identity, because if there is no overall scheme or overall setup available to really offer the protection, it is hard for people to build new applications on it. That also continues to be an issue. And finally, if there are multiple networks, interoperability is a core issue in blockchain as well. How do you move assets from one network to another network? These are things -- each of these areas are areas that where Mastercard has worked for a number of years in the traditional networks, how we help one ACH to interoperate with another ACH in a different country. In fact, our card network does that, right? So you're able to take your card from U.S. and spend it in another country. We -- in effect, to settle that transaction, we interact with the ACH network here and the ACH network in the other countries. So that interoperability, something that we know how to do. So I look at this space as there is a lot of promising technology. There are also issues to be solved. Where I think, historically, the way that we've been involved in a number of these because of the multiple networks that we run and the value that we provide, we can bring that expertise to solve in this space as well over time. That's how I look at the space going forward.

Got it. We have a question. Anybody got a question? Go ahead. Yes.

Yes. I have one more. So you mentioned NFTs pretty early on, and I know you partnered with Coinbase to help enable the purchases of NFTs. So maybe you can help us understand what you see as the long-term sort of value or use case in NFTs. Because today, I think most of us see an NFT, and it's a picture of a cartoon monkey selling for $1 million, right? So maybe can you help us understand like where you actually see that going, what value you see in it for Mastercard, for consumers? Just any color there would be helpful.

Yes. So that -- so today -- what we do today -- and then I'll share comments on what the potential is. What we do today is the NFTs as a technology that refers to digital goods, is what is most prevalent today. Some of it is art. Some of it is music. There, what we saw is the biggest problem is, everyday consumer wanting to get involved in that NFT, it was a very complex process for them to go through. You have to go by cryptocurrency first, and you need to decide which currency to buy, and then you have to go figure out a wallet, connect to a website and finally get to purchase. So we thought our network can offer a very simple way to do. Like you said, Coinbase and 9 others have added now and continue to add, a simple card-based purchases. So that offers the full set of Mastercard networks protection when you buy a good and simple settlement consumer experience and all the good stuff. The future of NFTs is -- I think it's promising because it is a technology where you can uniquely represent something to digital world. If the blockchain networks were to take off and if more commerce work image out of this, one of the key building blocks required is you need more things tokenized and put, right? I do believe that initially, it will be digital-related items that will get tokenized. I think there are a lot of issues to be solved before anything physical that gets tokenized using NFT technology. I think that is some years away. And it'll also -- even there, it will be in select categories. But anything that is digital, I think there is a lot of promise for NFTs. Because what happens subsequently to that asset and how it gets paid and what the originator of that asset gets paid over time also can be encoded using smart contracts and other technology. It allows new innovative ways of recording an asset, right? So we think it has potential. And we continue to work with partners to see how we can help in that process.

Previously, I think you've talked about maturity cycles in crypto where you find that crypto within investment classes is the most mature use case. Then NFTs is being the next most mature. So could you just give us some color on how you think about maturity cycles and how that helps guide your thinking in developing new products?

Yes. It's a great question, and you're right. So we talked about investing. It's the everyday use case, and NFTs are coming. And there are -- look, I think it is very hard to speculate and be right about all this, but I can talk about principles that we used to apply. We think we have a responsibility to enable safe experiences to billions of consumers in our network. So when we see a new innovation coming in, the first thing that we look for is can we offer it in a simple consumer experience? Can this be safe -- offered safely? And are we enabling compliant behavior, meaning that is that thing that innovation is valid and useful and compliant for that market. So that's the angle that we look at it. There is a lot of innovations that are happening. And we just talked about NFTs, and there are more assets getting tokenized. That is one innovation that is happening. There is a lot of emerging models in DeFi. We didn't talk much about DeFi. Some people talk about DeFi as an alternative to traditional finance. We think about it more as this is a way -- I come from tech world where we've seen open-source innovation really drive mainstream adoption. Think about Linux. Think about other things that came in over time. I look at this DeFi as a space where new ways of doing business would emerge, and that could benefit the organized financial world as well in terms of the regulated financial world. Those innovations would apply over time. So we'll continue to kind of lean into the space we are in there, trying to figure out what is the next thing that we can make it available widely for the consumer base we have.

Raj, I'll ask you just -- I know we only got a few minutes here, but just what are the risks? Is there anything that you watch carefully just to see what's developing and what's not?

Yes. Look, in this -- I worry about broadly a lot of security issues that are there in the blockchain networks themselves, right? And every day in -- both of us read news about this hack and that hack that people lost money. And this goes to say that why you need a framework. You need a framework -- always things -- when you set up something and when you conduct a transaction either in any of the network, you need ways to correct mistakes. You need to be able to reverse them. You need to be able to provide protection. I think this is one of the issues that is in a big way that's facing the overall industry. The way we approach it, that's why we take a very thoughtful, careful approach about what aspects of that we enable directly on our network. Yes, security is a big issue in the blockchain space at the moment.

Yes. There's not a lot of [indiscernible] dispute capabilities, I think, to reverse the transaction.

That's right. And people -- it is -- it always -- things could go wrong for a variety of reasons that people don't see -- foresee, right? So what is the mechanism to correct that is an important aspect to look at as well. Yes.

All right. With that, we'll keep it there. Thanks so much, Raj. Thanks for being here.

Thank you. Thanks for taking time.