Mastercard Incorporated (MA) Earnings Call Transcript & Summary

Good morning. My name is Audra, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Mastercard Incorporated Q3 2022 Earnings Conference Call. Today's conference is being recorded. [Operator Instructions] At this time, I'd like to turn the conference over to Warren Kneeshaw, Head of Investor Relations. Please go ahead.

Thank you, Audra. Good morning, everyone, and thank you for joining us for our third quarter 2022 earnings call. With me today are Michael Miebach, our Chief Executive Officer; and Sachin Mehra, our Chief Financial Officer. Following comments from Michael and Sachin, the operator will announce your opportunity to get into the queue for the Q&A session. It is only then that the queue will open for questions. You can access our earnings release, supplemental performance data and the slide deck that accompany this call in the Investor Relations section of our website, mastercard.com. Additionally, the release was furnished with the SEC earlier this morning. Our comments today regarding our financial results will be on a non-GAAP currency-neutral basis unless otherwise noted. Both the release and the slide deck include reconciliations of non-GAAP measures to GAAP reported amounts. Finally, as set forth in more detail in our earnings release, I would like to remind everyone that today's call will include forward-looking statements regarding Mastercard's future performance. Actual performance could differ materially from these forward-looking statements. Information about the factors that could affect future performance are summarized at the end of our earnings release and in our recent SEC filings. A replay of this call will be posted on our website for 30 days. With that, I'll now turn the call over to Michael.

Thank you, Warren. Good morning, everyone. Let's get right into it. So the headline is that consumer spending remains resilient and cross-border travel continues to recover. With this backdrop, we delivered strong revenue and earnings growth through the focused execution of our strategy. Third quarter net revenues were up 23% and adjusted operating income up 27%, both versus a year ago on a non-GAAP currency-neutral basis, excluding special items. Now the macroeconomic and geopolitical environment remains uncertain. Inflationary pressures have remained elevated and central banks are continuing to take aggressive steps to bring inflation in line. Tensions remain high with the war in Ukraine and the supply of natural gas to Europe is a concern. Despite all of this, unemployment rates remain low, wages are rising, consumer savings levels remain elevated and credit is readily accessible. In this setting, overall consumer spending has remained resilient, although we are seeing some shifts in what consumers are buying. Looking at our switched volume trends. Domestic volumes remained steady, showing growth relative to 2019 levels relatively consistent to the second quarter 2022. The trend towards spending on experiences continues. We saw notable strength in airline, lodging and restaurant spend with a shift away from categories like home furnishings and appliances. The current mix between retail, T&E and other categories of spend is now broadly similar to pre-pandemic levels. Cross-border. Cross-border continues to recover as border restrictions are progressively relaxed. Cross-border travel in the third quarter has reached 124% of 2019 levels. Relative to 2019 levels, most regions are up sequentially, including a notable improvement in Asia. Cross-border card-not-present ex travel continued to hold up well. Notwithstanding the continued strength in consumer spending, we will continue to watch the environment closely, including fiscal, monetary and other policy actions taken in response to events. This will inform our actions as it always has. Should the market outlook weaken, we are prepared to act quickly to modulate our expenses. As we demonstrated during the pandemic, we have the flexibility to respond quickly across a number of levers and will do so while maintaining focus on our 3 key strategic priorities. The focus on these areas that will create new opportunities for growth, that starts by solidifying our positions and payments, complemented by our differentiated services lines and our expansion into adjacent activities like open banking and digital identity. Moving on to some examples of how we are progressing against each of these. First, we are expanding in payments by enabling digital transformation with our customers, carded volume growth, expanding acceptance and capturing new payment flows. There are now over 3 billion Mastercards in circulation supported in part by programs such as our digital-first initiative. A digital-first solution starts with the ability for a consumer to acquire and then use a new card digitally in near real time. It's helping customers create a best-in-class digital experience, leading to increased approval rates on average by 2 percentage points, reduce fraud on average by 4 basis points and increase spend per active account on average by 10%. To date, we have launched over 200 digital-first customers around the globe. Banco Santander in Mexico, Chase in the U.K., Citibanamex, ING in Spain and Nubank in Brazil are amongst the latest customers to partner with Mastercard to lever an end-to-end digital-first customer journey. Also, we're driving growth in volume with new and renewed wins across a broad set of partners. In the U.S., we recently extended our exclusive deal with KeyBank's debit, credit, commercial and small business as well as deepened our relationship on services. This quarter in partnership with Chase, we will launch a new co-brand program with DoorDash. This deal further expands our presence in the digital food delivery space. We also went live with the Uber Pro Card and enhanced loyalty and payments experience that will help drivers in Korea save on gas, fees and other expenses. In Europe, we have seen momentum in Italy with [indiscernible] securing an expanded deal that includes a credit and prepaid flip as well as securing the current Mastercard portfolio. And in Latin America, we have renewed our exclusivity agreement with Mercado Libre and secured incremental credit share with Banco Scotiabank Colpatria. Overall, another great quarter with notable wins. Let's shift to one area that is sometimes underappreciated. That is how we are enabling growth in payments by giving people and businesses more places to use their MasterCard. We have added more acceptance locations in the last 5 years than the previous 50, and we are now accepted at more than 90 million merchant locations. The preferential contactless payments that grew over the last 2 years continues. More than half of the in-person switch purchase transactions are now tapped up from approximately 1/3 pre-pandemic. And this trend will be bolstered by the adoption of new technologies such as Tap on Phone. Further, our technology and global reach enable growth and acceptance while helping our partners drive their digital strategy. For example, we have signed with McDonald's to use our gateway capabilities, enabling them to easily offer more solutions to new markets beginning in Middle East and Africa. Finally, we're driving growth in payments while leaning into innovation to capture a prioritized set of new payment flows. We continue to make progress in going after flows in the disbursements and remittances space by expanding into new use cases and geographies. For example, in the U.S. gig economy, we signed a new global agreement with Airbnb to facilitate host payouts using Mastercard Send in select markets. We've also expanded with gaming payouts, launching our Gaming Fast payout program. To address account-to-account, cross-border and domestic payments, we have signed a deal with Pagero, a leading global B2B network and solutions provider that provides accounts payable automation to some of the world's largest corporate brands. We're also growing commercial point-of-sale transactions by targeting small business, corporate T&E, purchasing and fleet flows. In the U.S., we announced our exclusive co-brand partnership with First National Bank of Omaha to issue the [indiscernible] small business card. This product offers small business owners industry-leading access to tools, benefits and services with a focus on equitable access to credit, very important. We also continue to target B2B accounts payable flows by expanding access and reach, leveraging our virtual card capabilities. We signed a deal with Marqeta to enable our next-generation virtual card solution, Instant Pay. This solution intelligently and automatically sends instant payments to suppliers. We have also signed an agreement with SAP Taulia to integrate our virtual card solutions into Taulia and SAP solutions, enabling their customers to facilitate virtual card payments. We're also well positioned to capitalize on the return of travel with our Mastercard wholesale travel program. In Bahrain, we signed a deal with Infinios for their online travel agency and travel management company volumes. And in Europe, we signed a deal with the fintech, Swile, while going after B2B travel flows in Europe and Latin America. As you can see, we continue to make steady progress in addressing our prioritized set of new payment flows. Now turning to services, where we delivered another quarter of strong revenue growth. Our services deliver a diversified revenue stream for Mastercard beyond payments. We accomplished this by adding new service capabilities as well as extending existing service offerings into new and existing customers. There continues to be a tremendous growth opportunity in this space. First off, we're excited about Dynamic Yield's unique personalization platform, which offers a great example of how we're adding new service capabilities. Since complementing the acquisition earlier this year, we have added dozens of new retail and commerce customers. A great example is [indiscernible], a German fashion store. I always share German examples, if I can. They have more than 1,400 stores in Europe. We have deployed our content personalization capabilities to additional markets. In addition, we are expanding our capabilities to financial institutions. Now beyond adding new services, there's an opportunity to grow by extending existing offerings into new and existing customers. In the third quarter, we signed an agreement with Sky Italia, part of Sky Group, one of Europe's leading media and entertainment companies to enrich and commercialize a new service to support small businesses. Imburse, a technology provider to insurance companies, is implementing our card-linked services for their MicroSavings programs with Generali Insurance in Switzerland. And in Spain, we have grown our relationship with CaixaBank with one of our largest European Africa deals. The deal enables them to provide a more efficient charge backflow for all the card portfolios. Beyond expanding in payments and extending in services, our third key priority area is embracing new networks. As a reminder, our current focus is on 2 areas: open banking and digital identity. This quarter, I'll touch on open banking. While open banking is early in the game, it is a tremendous opportunity. We are engaged with a broad set of financial institutions and fintechs who are increasingly interested in a wide range of use cases. And what's unique and interesting here is that we are the partner that brings what is needed to scale and instill confidence in the space, things like responsible data practices, consumer protections and deep compliance, all on top of our robust technical capabilities, broad connectivity and extensive applications. So just to give you a flavor in the U.S., Quicken, a leading provider of financial management solutions has selected Mastercard as a provider of consumer-permissioned data for its popular simplified budgeting platform. We're also working with Fidelity, to support their innovation in student loan repayment for organizations that want to help their employees improve their financial wellness. And then there's Jack Henry, which will enable the community and regional financial institutions to be at the center of their account holders' financial lines. They will do this providing the ability to securely see all of their financial accounts within and outside the primary financial institution in a single view. This will help enable consumers and businesses to make more informed financial decisions. This is just the beginning, much more to come in open banking. Before wrapping up, I'd like to share an example of how we are incorporating our capabilities across all 3 strategic pillars. Our strategy to engage in the crypto economy leverages assets across payments, services and new networks, a combination that yields a truly differentiated value proposition. Here, we're deploying our payment capabilities to enable consumers to spend their crypto holdings on card and cash out their crypto wallets via Mastercard Send. This quarter, we partnered with Ebonex who will become our first partner in Australia to issue crypto-funded cards. We're enabling off-ramp solutions with Mastercard Send and recently added 5 new players in North America and Europe, including Binance supported by Checkout.com and Nubay. In all instances, we do not handle crypto, but rather take delivery of fiat currency. Our services and new networks capabilities are providing identity, cyber and consulting services for market participants. Crypto Secure is an innovative solution designed to bring additional security and trust to this digital ecosystem by helping card issuers address regulatory risks. We also recognize the interest people continue to have buying and holding crypto through trusted [indiscernible] like their banks. So last week, we announced Crypto Source, which is designed to give our financial institutions partners access to a comprehensive suite of buy, hold and sell services for select crypto assets. This will be augmented with our proven identity, cyber security and advisory services. To support these upcoming pilot programs, Mastercard is expanding its partnership with Paxos Trust Company to leverage their crypto asset trading and custody services. As you can see, our crypto strategy is bringing together best-in-class capabilities at scale, all built on our core principles of providing strong consumer protections, safety and security. In summary, we delivered another strong quarter of revenue and earnings growth, aided by a resilient consumer and a continued recovery in cross-border travel. We continue executing against our 3 strategic priorities. We have strong momentum with our customers, offering a diverse set of innovative solutions. We will continue to manage our expenses carefully within this macroeconomic environment and our well-diversified and flexible business model positions us well for the future. Sachin, over to you.

Thanks, Michael. Turning to Page 3, which shows our financial performance for the quarter on a currency-neutral basis, excluding special items and the impact of gains and losses on our equity investments. Net revenue was up 23%, supported by resilient consumer spending and the continued recovery of cross-border travel relative to 2019 levels. Acquisitions contributed 1 ppt to this growth. Operating expenses increased 17%, including a 3 ppt increase from acquisitions. Operating income was up 27%, which includes a 1 ppt decrease related to acquisitions. EPS was up 22% year-over-year to $2.68, which includes a $0.06 contribution from share repurchases. During the quarter, we repurchased $1.6 billion worth of stock and an additional $505 million through October 24, 2022. So let's turn to Page 4, where you can see the operational metrics for the third quarter. Worldwide gross dollar volume, or GDV, increased by 11% year-over-year on a local currency basis. On the same basis, if you exclude Russia from the prior period, GDV increased by 18%. In the U.S., GDV increased by 10% with credit growth of 20%, reflecting in part the recovery of spending on travel. Debit increased 2%. Excluding the impact of the roll-off of a previously discussed customer agreement, debit increased approximately 5%. Outside of the U.S., volume increased 12% with credit growth of 15% and debit growth of 9%. Cross-border volume was up 44% globally for the quarter, reflecting continued improvement in travel-related cross-border spending. Turning to Page 5. Switched transactions grew 9% year-over-year in Q3. Excluding Russia from the prior year, switched transactions grew 19% year-over-year in Q3. Card present and card-not-present growth rates remained strong. Card present growth was aided in part by increases in contactless penetration in all regions when excluding Russia. Contactless now represents 54% of all in-person switched purchase transactions. In addition, card growth was 5% or 10% if we exclude cards issued by Russian banks from the prior year card count. Globally, there are 3 billion Mastercard and Maestro-branded cards issued. Now let's turn to Page 6 for highlights on the revenue line items, again, described on a currency-neutral basis, unless otherwise noted. The increase in net revenue of 23% was primarily driven by domestic and cross-border transaction and volume growth as well as growth in services, partially offset by growth in rebates and incentives. Acquisitions contributed 1 ppt to this growth. Looking quickly at the individual revenue line items. Domestic assessments were up 9%, while worldwide GDV grew 11%. The difference is primarily driven by mix. Cross-border volume fees increased 57%, while cross-border volumes increased 44%. The 13 ppt difference is primarily due to favorable mix as higher-yielding ex intra-Europe cross-border volumes grew faster than intra-Europe cross-border volumes this quarter. Transaction processing fees were up 22%, while switched transactions grew 9%. The 13 ppt difference is primarily due to favorable mix, FX-related revenues and pricing. Other revenues were up 22%, including a 2 ppt contribution from acquisitions. The remaining growth was driven primarily by our Cyber & Intelligence and Data & Services solutions. Finally, rebates and incentives were up 26%, reflecting the strong growth in volumes and transactions and new and renewed deal activity. Moving on to Page 7. You can see that on a non-GAAP currency-neutral basis, total adjusted operating expenses increased 17%, including a 3 ppt impact from acquisitions. Excluding acquisitions, the remaining increase was primarily due to higher personnel costs to support the continued execution of our strategic initiatives. Turning now to Page 8. Let's discuss the operating metrics for the first 3 weeks of October. For your reference, to help you understand the trends in the business ex Russia where we suspended operations in March 2022, we have included an appendix later in the stack to show all the data points from the schedule if you excluded activity from Russian issued cards from prior periods. As a general comment, our metrics are holding up well in October. As expected, the year-over-year growth metrics faced tougher comps as we began lapping periods in 2021 when COVID-related restrictions eased and spending levels started to rebound. However, it is important to note that all metrics continue to hold up well relative to 2019 levels. Going through the metrics in turn, starting with switched volumes. For the first 3 weeks of October, we grew 17% year-over-year, down 1 ppt versus Q3. Switched transactions grew 9% year-over-year through the first 3 weeks of October, consistent with Q3. As a reminder, Russia has a relatively low average ticket size which results in a larger relative impact to this metric. Overall, cross-border volumes through the first 3 weeks of October grew 36% year-over-year, down 8 ppt versus Q3. Cross-border travel had another quarter of strong growth as border restrictions continued to be lifted. In the first 3 weeks of October, cross-border travel was up 62% year-over-year, down 11 ppt versus Q3 due to more difficult year-ago comps as I just noted. Cross-border travel is now at 125% of 2019 levels, up 1 ppt from Q3 levels. Cross-border card-not-present, excluding travel, was up 12% year-over-year in October, which includes the impact of significant e-commerce promotional activities and is down 1 ppt from Q3. This metric continues to hold up well in relation to 2019 levels. Turning to Page 9. I wanted to share our thoughts on Q4. Let me begin by saying that the execution of our strategic priorities is translating into expanded and deeper customer relationships and the broader adoption of our material solutions and differentiated services. Consumer spending remains resilient in the face of macroeconomic headwinds and cross-border travel continues to recover as border restrictions ease and consumers shift their spending back towards travel. Just to update you on some metrics we are tracking. Asia, which represented approximately 14% of cross-border inbound travel pre-pandemic in 2019 is at approximately 76% of 2019 levels in Q3, up from about 60% in Q2. We continue to believe there is more room to grow as several travel corridors, particularly in Asia, still remain restricted and airline industry capacity continues to build back up. We remain well positioned to capitalize on this growth with our travel-oriented portfolios and service offerings, including access to an extensive airport lounge network and concierge services and our global Mastercard Travel Rewards program, which allows issuers and merchants to connect -- to provide consumers with unique benefits through a simple digital experience. As we have laid out, there are a number of factors that could influence future economic growth. These include elevated inflation and rising interest rates and geopolitical tensions balanced against low unemployment, rising wages and high savings levels, in particular. We are monitoring each of these. As Michael just said, we are prepared to act quickly to adjust our expenses to reflect any meaningful change to top line growth. With respect to the fourth quarter, we expect year-over-year net revenue to grow at the high end of a mid-teens rate on a currency-neutral basis, excluding acquisitions. This is consistent with prior expectations and sequentially reflects: one, generally resilient consumer spending relative to 2019 levels; two, stable to slightly improved cross-border travel growth relative to 2019 levels with some continued improvement into Asia and some moderation within Europe; three, higher rebates and incentives as a percent of gross revenues due to elevated deal activity consistent with seasonal norms; and finally, the lapping of a strong year ago quarter as border restrictions were lifted in the U.S., U.K. and Canada during Q4 2021. Acquisitions are forecasted to add about 1 ppt to this growth, while foreign exchange is expected to see a headwind of approximately 6 to 7 ppt for the quarter. As a reminder, the euro has depreciated significantly year-over-year and is the primary driver of this headwind. From a sensitivity standpoint, based on the current mix of the business, the annual impact of net -- to net revenue of a $0.01 change in the value of the euro relative to the U.S. dollar is approximately $55 million. From an operating expense standpoint, we expect Q4 operating expenses to grow at a low double-digit rate versus a year ago on a currency-neutral basis, excluding acquisitions and special items. Acquisitions are forecast to add about 3 ppt to this growth. Foreign exchange is expected to be a tailwind of approximately 4 to 5 ppt for the quarter. Other items to keep in mind, on the other income and expense line, we are at an expense run rate of approximately $100 million per quarter given the prevailing interest rates. This excludes gains and losses on our equity investments, which are excluded from our non-GAAP metrics. And finally, we expect a tax rate of approximately 19% in Q4 based on the current geographic mix of our business. And with that, I'll turn the call back over to Warren.

Thanks, Sachin. Audra, we're now ready for the Q&A session.

[Operator Instructions] We'll take our first question from Sanjay Sakhrani at KBW.

Sachin, I was just wondering if you could just parse out a little bit at the fourth quarter net revenue expectations. It was a little bit lower than we were thinking. I'm just curious, is it incentives kind of spiking up in the fourth quarter? Or is it just the gross number? Any color there would be helpful.

Sure, Sanjay. First, I'm just going to kick it off by saying the fourth quarter thoughts that I've just shared with you are very consistent with what we had shared in our implied fourth quarter numbers when we gave you our full year guidance at the last earnings call. So very consistent in terms of what we'll be sharing with you in terms of fourth quarter numbers. But just a few things I want to kind of emphasize as to what our key assumptions going into the fourth quarter are. One is we continue to believe that there will be a resilient consumer and spending from the consumer relative to 2019 levels will be generally resilient; number two, we are expecting stable to slightly improved cross-border travel growth relative to 2019 levels. In terms of rebates and incentives to your question, as a percentage of gross revenues, we expect them to be higher in the fourth quarter. This is very consistent with our seasonal norms. So nothing unusual as far as I'm concerned there. And then also, again, if you look at it on a sequential basis back to comparing fourth quarter to third quarter, there is the lapping effect which I kind of talked about. So really, I mean, the summary of what I guess I'm sharing with you is our fourth quarter thoughts are very consistent to what we had actually shared with you previously.

We'll move next to Lisa Ellis at MoffettNathason SVB.

Terrific. I wanted to -- question about business resilience, I guess, looking forward in the face of the potential economic downturn. I'm just thinking about the fact that over the last several years, Mastercard increased the diversification of the business significantly with more debit, more fast ACH, more services, et cetera, more B2B. So how do you think about kind of where you are now in terms of resilience of the business if we do, at some point, see a slowdown in the consumer side of spending?

Lisa, thank you for your question. So let me kick off on that one. You imply the answer in your question actually. It is the nature of our continued diversification. I mean just to remind everybody on why are we diversifying, it is to give us a diversified revenue stream, but it's also to differentiate our payments. And all of that plays hand in hand with better services. We're going to see payment volumes come out with better services. It's easier to get into some of the new payment flows. For example, our safety, security solutions are well sought-after in the B2B space, where there is fraud issues all over the place. So all of that, I think, is a good starting point for us. If I just look back over the last 2 years where we certainly had a slowdown on the payment side in the macroeconomic overall and services carried today very significantly for us. So we're just going to continue to push harder there. And then new flows, and I gave you a whole range of examples earlier on how we are building out the new flows. And if you just put some light on to commercial POS. So here is, this is existing tools that we have. We don't need to build a lot for it. It's a space that we haven't penetrated significantly in the past, and we're ready and we're going in. This is a $14 trillion opportunity that we're going after, which is payments diversification going on, in addition to our services diversification. And earlier on, with the stats on acceptance, just more places where people can spend. In the end, then people will spend even in a downturn. It doesn't actually matter for us what they spend on, but they spend on a Mastercard, we give them more opportunities to do so. So diversification is the name of the game.

We'll move next to Darrin Peller at Wolfe Research.

Your model is clearly still showing benefits of inflation. And if you could just kind of remind us, again, the sensitivity in the areas you see in the basis points driven inflation impact. But also whether or not there's any pricing changes you guys are interested in employing on the non-basis point side, whether it's transactions or services, probably more importantly, just given what we've seen or if you've done so already? And then maybe just on a sidenote on that, on the other side would be the expense management and the willingness, just how willing you are on, for example, marketing to flex there if necessary?

Darrin, I'll take that question. I guess to your point around inflation, look, I mean, persistent inflation for long periods of time, which causes for a shift in share of wallet away from carded categories into non-carded categories would be the one area I would actually flag as a potential headwind as it relates to our business model. But putting that issue aside, the reality is you're very correct about the fact that we charge our basis points in cents per transaction. Our basis points are a nominal value of spend and that reflects the impact of inflation in there. So the reality is, as we've said in the past, modest inflation and inflation in carded categories, we're generally -- we kind of -- our business model accounts for that because depending on if it's carded, it doesn't matter, like Michael said, whether it's happening in travel or it's happening in food and building, those are carded categories, and you kind of get the benefit of that come through. Look, I mean, as it relates to your question on expenses, we've always remained disciplined on expenses. The thing which we always keep in mind is a few things. One, we want to make sure that we're investing in the long-term growth of our business along the 3 strategic priorities, which Michael talked about. We will continue to do that. That being said, as we demonstrated during the COVID environment, we do have the opportunity to flex our expenses whether it's around marketing, whether it's around professional fees, whether it's around T&E, it all is a function of making sure we are keeping an eye on the top line, keeping an eye on the bottom line while we're actually delivering what we need to do from an expenses standpoint, and we'll continue to do that going forward. The reality is we keep a close eye on to what are the things which are in demand from our customers, what is it that the consumer wants, and we are bouncing our expenses in that regard. An example would be, as you remember in COVID, when travel was out of favor, we started to pull back on A&M related to travel. It just didn't make sense for us to be doing at that point in time. So we'll remain flexible on that. And then there are initiatives which we've got which are longer-term initiatives, which will pay off over many, many years in the future, where we have the opportunity to actually pulse the pace at which we're incurring expenses on those to the event -- in the event we start to see a little bit of a slowdown in terms of top line. You asked the question on pricing. Our philosophy around pricing is very consistent as it's always been. We price for the value we deliver. And our assumption from a pricing standpoint, whether it's pricing in basis points or cents per transaction is very tightly correlated to the value we're delivering to our customers and to the end consumers and to our merchant partners. So all of that is very consistent at the end of the day. We assume minimal net pricing, net of rebates and incentives from a pricing standpoint.

Yes. I just want to -- Darrin, just want to add one point here. And that is looking back at the last 2 -- over 2.5 years now, back to the second quarter of 2020 when revenue was severely impacted by a truly unprecedented event out there. So to the power of the levers that we have and a range of levers that we have to modulate our expenses, hiring, AMM, professional fees, T&E and your market appetite and all of that, it just shows that we did not have to make any compromises when it comes to driving our strategic priorities. We pulled through it on new flows, we pulled through on services expansions and so forth. The model is wide and flexible. That helps us a lot. And as I look forward, there is optimism in how we're going to navigate that.

We'll take our next question from Harshita Rawat at Bernstein.

Michael, Sachin, can you talk about online debit routing in the U.S. that Fed very recently put out clarification approvals? If I recall correctly, last time you ended up gaining market share, but they've been disimplemented. So how does it impact Mastercard with online debit routing now?

Harshita, thanks for the question. There's always something in debit routing going on. So here, we have the clarification of the rule by the Fed. And it takes us all the way back to a decade ago when there was this requirement to have 2 networks on every debit card. And basically, what the Fed here clarified is that this is applying to whether it's a debit transaction that's made online or in-store. So pretty simple, pretty straightforward implementation by mid of 2023. So we have some time, but we will be ready and we'll be implementing. I think really what that does is we will just continue to compete with all the assets that we have in debit. I'm not really sure what this will do to the market, but we will certainly be there leveraging our technology to win more debit in the United States.

Harshita, I'll just add one additional comment to what Michael just said, which is, as you know, we've been investing pretty heavily in our services capabilities some of which relate to cyber intelligence. And in an environment where our partners, whether it's the merchants or the issuers need more of our services to better manage their product capabilities in the online environment, we stand ready to do that as well.

We'll take our next question from Tien-Tsin Huang at JPMorgan.

Just you mentioned nothing unusual on rebates and incentives, but I just wanted to ask as I sometimes always do with deal activity versus 90 days ago. Any change there? Is your appetite to drive program growth versus maybe more disciplined growth on their side? Or are there changes in timing of deals and implementation, things of that nature?

Sure, Tien-Tsin. I can take that. Tien-Tsin, I think you know that we've been active in the marketplace. We've been winning share globally, and that's just part of the strategy of what we want to do, which is on a disciplined, profitable basis, we want to win share and deliver more in the nature of services on that share to optimize and grow our overall net revenue yield. I'll start with that as kind of the headline. But on your specific question on Q4, on rebates and incentives, nothing unusual. It's a rich pipeline. We continue to be active in the marketplace. We're not seeing any changed kind of behavior [indiscernible] as it relates to how our issuing partners are in the marketplace. And we just remain active, and that's really the essence of what we're seeing there.

Next, we'll move to Ashwin Shirvaikar at Citi.

Michael, Sachin, if I can ask about cross-border now that we've seen some normalization in travel? If you could kind of talk about how much more travel improvement there is yet to come in your view and the mix of cross-border now that some of the normalization has happened as we look to travel versus non-travel?

Sure, Ashwin. I can take that question. So first, I'd kind of mentioned that -- as we said in the last earnings call, we saw opportunity in terms of further recovery in travel. We saw some of that come through in our Q3 numbers. We still believe there's potential from a cross-border travel recovery standpoint, in particular, in Asia Pacific. I shared a metric about how Asia Pacific inbound cross-border travel is approximately 76% in Q3 of 2019 levels. So that just goes to show there's some more room to grow there. I mean there are several markets in Asia Pacific which still remain to be opened. Also, airlines are bringing more capacity back on. And as you know, from our personal experiences, getting seats on planes is hard, and it's expensive. And so the reality is all of that should be helpful in terms of the potential for cross-border travel recovery. The other point, which I think you alluded to, Ashwin, is as it relates to the mix and the mix is also important because the mix of cross-border has not reverted back to historical mixes. So said differently, if you remember, as we were going through COVID, we first saw recovery take place in intra-Europe. And you know intra-Europe is generally low yielding. We've recently been seeing a stronger growth pattern in ex intra-Europe cross-border. And so the reality is that makes us not back to the pre-pandemic levels at this point in time.

And just one thing to add, it wasn't exactly your question, but that whole space has been in focus for us, pre-pandemic, during the pandemic and now. While airlines were struggling with really no flights taking off, we were a strong partner, and it showed in how the engagement with airlines and travel-oriented portfolios work now. So we stand well positioned to benefit from the trend that Sachin just talked about on the services side as well as on the payments and the co-brand side. So exciting space. I think our bets are paying off.

We'll go next to Rayna Kumar at UBS.

You continue to see very strong growth in Latin America, 29% GDV growth in the quarter. Can you discuss some of the key drivers of that growth and how sustainable you think it could be going into 4Q and into 2023?

Rayna, let me start off on that. Latin America, fascinating region for us, highly diverse from a super well-developed Brazil to markets at the other end of the spectrum, high travel markets with the Caribbean, so -- Mexico. So you have all of that in the mix. It's really interesting when you peel the onion of it and you look at some of these markets and you compare them, 2 of the largest markets, for example, Brazil and Mexico. If you look at the digital penetration in Mexico compared to Brazil, there is so much more potential to go. So there's upside in digitization. There's other issues that require some of our solutions. The region has experienced some fraud issues generally in payments. So our safety and security solutions are in great demand and are a great driver for growth for us in the region, while the underlying digitalization continues. So you put those trends together, it's all fairly attractive. And then I talked to you about our engagement in the crypto economy. If there's one place in the world where crypto is really in focus, it's in that part of the world, historic pain through high inflation and so forth. People were thinking crypto might be an answer. A lot of innovation in the space. So across all payments, services and new payment flows and innovation, this is a region that has -- is showing full momentum for us.

Yes. Rayna, I'll just bring to life one of the points which Michael talked about in terms of increased trends towards digitalization. As it relates to our performance in Latin America in Q3 and going forward, the reality is we've been very focused on the conversion of Maestro to debit Mastercard. And this has been part of what we as a company have been doing for a very long time. You're seeing the fruits of that come through because as you know, as you go down the path of converting Maestro to debit Mastercard, whether it's a companion digital debit Mastercard or it's an actual conversion of the card, it now becomes enabled for online transactions back to the regional trend, which Michael is talking about. So it's all about us trying to enable those cards, and we've been seeing good migrations take place from Maestro to debit Mastercard.

We'll go next to Jason Kupferberg at Bank of America.

I wanted to see if you can unpack a little bit what you're seeing in terms of consumer spending across different parts of Europe. And then, Sachin, wanted to see if you could make just a quick comment around what you guys are envisioning the potential FX headwind to revenue in 2023 just based on current rates?