Mastercard Incorporated (MA) Earnings Call Transcript & Summary

Welcome back to day 2 of Evercore ISI's Seventh Annual Payments and FinTech Innovators Forum. I'm David Togut. I lead the research team at Evercore ISI and payments processors and IT services. Delighted to welcome Mastercard to the conference. Representing Mastercard is Jorn Lambert, Chief Digital Officer; and Global Head of Investor Relations, Warren Kneeshaw. Jorn, Warren, welcome. Thanks so much for being with us here today.

Thank you for having us.

To start, Jorn, could you share some detail on your background as Chief Digital Officer of Mastercard?

Yes, absolutely. So I've been with Mastercard for about 20 years, so quite a while. I lead product engineering team that looks after our core platforms, which do authorization, clearing and settlement and our digital platforms, like our tokenization platforms and Click to Pay. I look after our issuer solutions and optimization of all our issuing platform. I look after our acceptance and gateway services and then crypto and digital assets.

Understood. Mastercard talks about having a digital-first approach. Can you help us understand the various components of digital-first and how you're bringing these capabilities to market?

Yes, that's a great way to start, right? So payments, you have to realize, payments is the most frequent financial services use case. Nobody does any financial service more than paying. Everybody does that a few times a day. And digital payments gives banks an incredible channel to engage with their consumers and every step of the payments journey at the time that you want to apply for a payment instrument, provision it in your device, manage your credentials, engage on loyalty through notifications and what have you. And so our digital-first suite is simply a set of APIs that means that every bank can ingest all the services throughout the payments journey through their digital channel. And we call it a digital first because the physical card is actually optional, right? We think consumers have moved towards digital for entertaining themselves or interacting, shopping. And therefore, it's digital first. Now it's not just a better experience for the consumer. It's also higher security. It's also much richer in terms of being able to consume different services like digital receipts. And as a result, we see much more engaged consumers who spend much more on those types of products, who have a higher return rate, who have less declines on their credentials. And so we've launched -- we've actually cocreated this digital first with players like Nubank, Monzo, Kakao Bank, the Apple Card who take -- and we now have about 200 banks that take advantage of that stack of APIs. So it's really about that. It's making sure that banks have an easy way to offer a truly top class digital solution to their consumers.

Mastercard has announced several recent partnerships with fintechs, wallet providers and digital giants. Can you talk about how you're working with these types of companies and share what has driven Mastercard's success in the space?

Yes. I think fintechs and this type of players have really brought a constant driver of innovation and pushing the needle or pushing the boundaries on both security and experience out there. And so for us, they are critical [ forcible ] supplier segments to make sure that we are staying on top of innovation, to make sure that we look around corners of what's coming next. And we look at them in different capacity. Some of them are our customers. They're actually distributors of our products to consumers and to merchants, and they do that in a very innovative way, the cloud first, highly digital. And so some of those partners we've talked about, and so we see them across the world as being very important distributors of our products. Others are enablers. They are helping our banks or our partners to stand up their solutions. Think of a Thales, a Galileo, a Pomelo, which is a Latin American processor and today are working with us, so that we pre-embed our solutions in their stack and so that our customers can very easily deploy that. And then yet others, or early-stage venture-backed startups, and we have a program called Start Path, which allows them to engage with us, to play with our APIs, to be coached by our employees in various segments. And we very often co-create with these companies in sectors that are really important to us. We have, for example, a Start Path track around open banking. We have one around in crypto. We have one around in small businesses. We have one around diversity. And so we actually invite those early-stage start-ups to work with us co-create and help us look around corners and help us actually modernize the ecosystem for us. So great, great partners, and we have an API platform that allows them to access the Mastercard ecosystem easily and, thereby, help us advance and modernize payments.

Mastercard's broad global acceptance footprint is clearly an important asset and key differentiator for your company. How has the acceptance footprint grown over time? And can you talk about Mastercard's strategy to continue expanding the acceptance footprint?

Yes. Look, I am passionate about acceptance. I mean, in my view, we are -- fundamentally, we're a network. And as -- I think it's called [ net ] cost, the value of the network is the square of the connecting points. And so the more points we have on the consumer side in terms of cards and on the acceptance side in terms of merchants, the more valuable the network becomes, the more important it is for people to join us. And so our acceptance has grown -- has more than doubled over the last 5 years, and the reason for that doubling is because the acceptance value change has really changed over the last couple of years, with many more players like payment facilitators or ISVs, which stands for integrated -- independent software providers, or payment facilitators that are really bringing a whole host of new smaller merchants to the ecosystem. And so especially in emerging markets, we've seen tremendous growth of our acceptance over the years. Now that is not going to plateau anytime soon. A big discontinuity is about to hit the market, which is Tap on Phone. Now a Tap on Phone is that this kind of device becomes your acceptance terminal. And the reason for that is there is an NFC wire in there. And with our new Tap on Phone program, any merchants will simply be able to download an app and start accepting payments, contactless payments. Now we think that's a major discontinuity because if today we have nearly 100 million acceptance points, imagine how many mobile devices that are -- are there, and every device is potentially an acceptance device. Now not only is that something that we've already started to commercialize. But with the new PCI standards that has come out in December, we have created a cloud application for that, something we call Cloud Commerce. And what this means is that any provider out there, any payment facility that are out there, and there's hundreds of them, to now actually say, "All right, I want to offer acceptance to small merchants on online mobile device, instead of me developing an application based on that standard. And then certifying the application based on that standard, I'll just take the Mastercard cloud-based application, which is recertified. And I'll focus not on the development. I'll focus on the go to market. I'll focus on the distribution." And so you can imagine what kind of drive this can give and the potential of increasing the nearly 100 million acceptance devices to a multiple of that over the years. So as you can get a sense, really quite excited about what's coming. It's not only more acceptance devices in the hands of small merchants. We're also focusing on penetrating new verticals, open-loop transit and small ticket categories, utilities, EV charging, for example, or all categories whereby cards are not that prevalent, but we're making really great strides in growing the acceptance. And with acceptance, you can see how -- if there's more places where people can use their cards or the payment instruments, you will see that bringing more growth to the network.

Tokenization is another area that Mastercard has highlighted as a critical capability for the digital world. Can you discuss your approach to tokenization and why it's important both to Mastercard and the various stakeholders across the ecosystem?

Yes. Maybe it's useful to just explain what tokenization is, not so sure if everybody is familiar with that. But if you think about it, we have 3 billion credentials out there in the hands of people, and this credential gets stored in many places. They get stored in devices, in wallets, with merchants on their card on file systems, in marketplaces. And so as we think about -- as we thought a number of years ago about digitization, we thought, oh gee, and even if all of these places where the cards get stored, we have very robust security and firewalls, the day will come when these firewalls will get breached. Some hacker will find its way through it and will breach it. And then that's not a good thing, right? And so what we have done is we have rearchitected things and we said, "Well, even if that firewall was breached, even if the credential gets stolen, we will make sure that, that credential becomes useless in the hands of the hackers," and the way we do that is by tokenization. The way we do that is instead of storing the actual credential, we store a proxy of that credential, a surrogate, if you like, which when a transaction is being made, it comes to us. We verify whether that credential, whether that transaction comes from the right place, has the right pictographic signature on it, and only then will we pass it to the bank for completion of the transaction. And so we've essentially eliminating the potential of people stealing credentials out there or a potential to -- for them to do something with it. So really, really a structural advance in how we operate. It provides higher security, therefore, higher approval rates. It provides, at the same time, the card art to the consumer, this consumer sees on the digital device have that they are using their own card, which gives them confidence that there's not something fishy coming. Since we are separating the token from the underlying card, even if the underlying card gets displaced, we don't need to displace the token. And so your token that is stored with Netflix, let's say, continues to be valid, and your movie doesn't get interrupted. And obviously, we're not sharing any private data into our ecosystem. So it's a really very structural thing that we've done. Now maybe one last point around that. We also thought about tokenization not just of, "Oh, let's make mobile payments happening." Tokens are now going into, like I said, the Netflixes or the Amazons of the world, so into carbon file systems. But we're taking it a step further. We're looking at how we make tokens work in EV charging. So imagine the token that goes into your phone can also go into your car, and that car can then communicate through a cable with the EV charging station. And payment can happen machine-to-machine from the token to the EV charging station, which is now the terminal. And so it is really a technology that is future proofing and allowing us to move into other use cases as the payments network grows and enriches.

Can you discuss Mastercard's strategy to continue to deploy contactless payments around the world? And what capabilities contactless payments offers you and consumers and businesses?

Yes. So look, everybody here is probably familiar with contactless. In fact, there is already 56% of all in-store switched to purchase transactions are contactless today. So already, the majority of transactions there in the shops are being tapped with either a card or a phone. Now we are passionate about it because it's frankly a really, really great user experience. Very easy to do, pretty much unbeatable in terms of speed and ease. And it allows us to get into a heavy -- cash heavy spaces. Think about transits, right? I mean, here in London, the London Tube, pretty much, everybody is now in open loop card or phone contactless payments. Think about quick service restaurants. So the heavy cash sectors are very quickly moving to what is essentially a safer and a very convenient way. But what we also like about it is -- as I mentioned earlier, it's really compatible -- forward compatible to the mobile infrastructure, and it is riding that same card-on-file tokenization, EV charging example, rails as what I just mentioned about. And so it just reinforces the infrastructure that we have, and there is no need to rewire the entire payments infrastructure in order to enable new use cases on that tokenization, on that contactless way, which is why it's getting such an adoption and such a consumer response.

Shifting to online checkout, Mastercard introduced Click to Pay to help streamline the online guest checkout experience. Can you talk about what makes Click to Pay unique and provide an update on market response and how the rollout is going?

Yes. So obviously, online commerce is a huge part of our business already today. And we separate -- or when we look at online, we view it as 3 distinct categories. The biggest part of our online -- of our e-commerce activity is what we call card-on file. So the card of the consumer is stored with the merchants with the marketplace. Those of you who use Uber, who use Netflix, who use Amazon almost certainly have their card on file with that merchant, represents the majority of e-commerce. Another portion is where the card is stored with a wallet, right? Many of you may have a wallet. Well, that represents a portion of our e-commerce checkout as well. And then the remainder is what we call guest checkouts or -- and so I guess, checkout is where a consumer goes at the merchant at a hotel and say -- and you fill out your 16-digit PAN number, your CDC, your expiry day, your billing address. And that is, of course, not a great experience. Our aim is across these channels to have an optimal experience and to have an optimal security. In guest checkout, that's not the case. And so what Click to Pay is there to do is to actually say, okay, how do we upgrade that very much thinking of how do you upgrade from magstripe to a chip, how do you upgrade from the clanky guest checkout to a highly secured, tokenized, streamed experience with Click to Pay. And so that's what we've done on an industry standard, just the way contactless is on an industry standard. We've launched this a little while ago. We are progressing really nicely in a number of geographies and with a number of partners. And just pointing to 2 examples, which I think are really telling. We launched in December with a company called Cinepolis, a big cinema chain in Mexico, had enormous adoption. And the -- Cinepolis just announced last week that they've seen through Click to Pay is 6% higher conversion rate of consumers using Click To pay. So conversion rates is all what merchants care about. It's actually translating an attempt to buy into a purchase. And so that is a huge endorsement of that product. Another example is Adyen that actually yesterday has put a press release out around their commitment to Click to Pay. They're pushing this out to their merchants, selling it to their merchants and seeing the real benefits of moving, again, what is not a great experience and what it's not a highly secure experience to something which is really top-notch on both security and experience. And so these things are hard. These things take time. And just like contactless took quite a few years to get to scale. And so Click to Pay will take a little while as well to get to full-fledged scale. But we're well on our way. And as you can see by these 2 examples, we're starting to see a real pull from the merchants who see the value in the solution.

How Mastercard's value-added services help drive growth in digital payments?

That's a great question. So not everybody knows that already, today, our services represents about 1/3 of all our revenue. And as we've actually mentioned to our investors, and that's a very substantial part, of course, of what we do. But let me start perhaps by defining what we mean when we talk services. So we have a number of services that are strictly related to our transaction activity. Think about fraud scoring service that is on a transaction that you make. And then we have a number of services that are dissociated from our transaction. Think about consulting or loyalty and rewards that apply on -- beyond our transaction. And so we've built up this business over the years, and it does really 4 things for us. On the one hand, it obviously drives growth of our core business because if we make the transactions better, if more secure, less declines, more approvals then obviously our growth benefits from that. It allows us to differentiate us. We think our services are superior to any of our competition. And so we allow -- the services really allow us to actually win deals that otherwise we might not win. We diversify our revenues. Like I said, it's about 1/3 of our revenue, so that's going to be really substantial. And it allows us to extend what we do beyond the footprint of the Mastercard brands. So many of our services are not just on the Mastercard process transaction, but also on the nonprocess transactions, and quite a few apply to non-Mastercard transactions and even noncarded payment transactions. Think, for example, a service that is our Gateway Service, which we call MPGS. Gateway is used by merchants and acquirers to service all of their payment volumes, whether it's Mastercard, whether it's another card scheme, whether it's the counter accounts. Think about a service called Ethoca Clarity, which is digital receipts, that allows the consumer to see what they have bought and to dispute the transaction. Well, that's not just for Mastercard. That's actually for other payment brands as well. And so by leaning into services, we can transcend, let's say, our natural market share, but we can also enrich and differentiate on our existing payments volumes.

Digital currencies have been in the spotlight for a bit here. Can you talk about Mastercard's approach to the digital currency space, including CBDCs, cryptocurrencies, NFTs and the underlying blockchain technology of recent events, especially in the crypto space, impacted how you think about these opportunities?

Yes. And spotlight is probably an understatement. So I think to start off, I think it's important to first distinguish the role of crypto as an investment activity and one as a payment rail, right? People sometimes tend to confuse. We think of it as very distinct applicabilities of crypto, and 95% of all the activity and all the spotlight that we've seen thus far has been on the trading and the investment activity. That in itself is actually not all that interesting. It's not particularly innovative. People have been trading in assets for not even decades, for centuries. That is what people often do in order to make some money, and that is what most of that they have been, and we have actually been supporting the business. I'll come back to that in a moment. Crypto or blockchain as a payment rail is a very different type of thing. It's actually saying, well, can the technology of blockchain be useful in the notion of decentralization, the notion of programmability, the notion of a multi-asset ledger. Can that be useful to power the really economy, to power real business, to power real commerce? And that just is a really interesting piece that has real potential. And in the future, that has the potential to reorder value chains. That has potential to bring benefits to real use cases. And that is something that we are really interested in. If the recent events, as you call them, the crypto winter is applying to the first, the crypt winter has no bearing on the second, and our conviction that crypto or blockchain will play a role in payments of the future has not been -- has not changed with the recent crypto winter. And so what do we do about it? On the one hand, we support the investment activity by being on ramp, by allowing people to use their cards in order to buy crypto assets. We support it in order to off-ramp, in order to bring out value from this investment activity. And we do that by partnering with crypto wallets, by partnering with exchanges, but always with a very strong lens and very principal lens on consumer protection, on security, obviously, on compliance and then on bringing a simple consumer experience to the consumers. So that has actually driven quite a bit of activity for us. But what's really interesting in our view is, while it's coming probably down the line 3, 4, 5 years from now when blockchain has a payment rail, either through CBDCs or through stable coins or potentially through other means of tokenized deposits, will power real-life use cases. I'm saying a couple of years down because, as you all know, there is now a real trust deficit in the space. For this to become a payment rail, we need to restore trust in the asset itself. We need to restore trust in the counterparties and identities on the blockchain. We need to restore trust on the actual underlying technology, and we need to prove that it can bring real value on real-life use cases beyond the trading. There's a lot of conviction, and our investment is still there. And it's just that the trading piece, which has really no bearing on what we do, is where the attention is today.

One of the areas of pushback around blockchain as a payment rail for consumer payments has been, historically, the lack of scalability and the relatively low processing speed, certainly when compared to the Mastercard network. You mentioned a 3- to 5-year time line. Do you think that this question of relatively slow processing speed will be solved over the next 3 to 5 years when looking at consumer payment applications globally?

It's a great point. I mean, many of the players in the industry claim that they have already spoke -- claim that some of the Level 1 blockchains can already produce this kind of throughputs. And if not the Level 1, but Level 2. But as you and I know, this has not been proven yet. Nobody is putting the -- I mean, Mastercard has done last year $125 billion transactions. Nobody has even come close to putting that kind of throughput to the rails. And so the proof is in the pudding. I believe it will get solved. I believe it can be solved, and I believe that there is a lot of smart people looking at it. And so that piece, I think, is the more mechanical piece of it. What I think is much harder to solve, as I mentioned, is the trust deficit. It's making sure that people actually know when they transact, who are they transacting with it, and it is not some kind of a bad actor on the other side. And in then the trust in the asset itself, making sure that the asset will still be there tomorrow, and it can be trusted. And that is a little harder to solve than the mechanics. And that is why we believe it's so important to be focused on consumer protection, on security, on compliance and simplicity because that's the only way that payments will ever grow up in that space.

You recently introduced the buy now, pay later program called Mastercard Installments. Can you discuss what differentiates MasterCard Installments and how you see it fitting in alongside your other payment capabilities?

Yes. So just, again, as most of the bank, we think installments is part of a real consumer need out there that is increasing over time, which is consumers want credit. And thus far, many consumers get credit through their credit cards in what people call an open to buy. Now the thing with the open to buy is that whether you fill up your tank in the car or whether you go and buy groceries or whether you buy a nice pair of shoes, it all goes into an open to buy. And the line of credit is applied to all of that. Some people prefer to be much more opportunistic and say, "I like the transparency of debits, meaning I get charged for my filling up the car and I get charged for my groceries right in my account. But when I buy a nice pair of shoes, I want to enter into credit." And that is where buy now, pay later comes in. It's opportunistic or occasional credit, whereas the rest of your transactions are [ hitting ] your account by the way. We think that transparency is great for consumers, that optionality is great for consumers. And so we think it's part of a more structural trend that will -- it's not just a fad. It's something that we'll see grow over time, and more and more players and consumers will want that. What we're saying is that, actually, consumers want that optionality and want that in an open-loop solution, meaning they want to be able to use that optionality across the merchant ecosystem, and it's not up to -- and not just by a select few merchants, which is how most buy now, pay later see it. And it has obvious benefits to consumers. And it has obvious benefits to lenders who now have the ability to offer that service across a much broader set of payment categories. And it has benefits to merchants who now can offer buy now, pay later without the very onerous and complicated implementations that the current installment programs are requiring. And so our view is an open loop system is much more beneficial and is much more, I think, appropriate for what we believe is a structural trend out in the market. We're getting great responses from issuers, from wallets, from merchants around that. And it fits perfectly alongside our other capabilities in the sense that we want to offer choice to consumers, and the choice is always a good thing. So that's now running quite nicely. I think we had a number of implementations already in the public domain, like SoFi, and in other countries, NatWest or CommBank in Australia. And you'll see in the weeks and months to come further implementations of that solutions across the world.

Finally, as you look forward, what are some of the most interesting new and futuristic technologies that you and your team are working on?

Let's just talk of that one. So -- well, I would separate technology and perhaps payment trends. So there's a number of payment trends, which we find very interesting, and that will probably gain an importance over the next couple of years. One, which we're looking at very closely, is what we call conversational commerce or social commerce, so commerce whereby the act of buying is conducted not on a static website, but in a chat environment. That chat can be a bot or can be a person on the other side. But that chat ultimately results into a transaction -- payment transactions. And so being able to enable that in a secured and a convenient way is really important. The whole influencer economy is actually driving a lot of that social commerce or conversational commerce. And so we think that's a big thing for our future. I mentioned the EV charging whereby the car talks to the charging station. I think this kind of notion of a machine-to-machine payments, which has been preprogrammed or has been predefined, I think we'll see much more of this. And I think with IoT, with sensors needing to buy CPU from the cloud, we believe that machine-to-machine payments is -- will increase quite a bit. We also have a hypothesis that consumers will want to use their -- the power of their connected device when they're buying in-store. And so we'll see the buying experience change over time. Like today, when you go to a shop, the only time when you really interact with that merchant is when we walk out of the store. It's only natural that you may want to check in with a merchant as you walk in, have a shopping list, have offers, have a buy now, pay later option as you walk in the shop and then pay through what we call the next-gen of POI or next-gen of the point of interaction. And obviously, embedded finance is another big trend that we're looking as an impact, right? So that's the kind of payment trends. Technology trends that we're looking at are -- I would say, the usual suspects. So we think 5G, 6G will inevitably bring very new business models, just like 4G brought the subscription economy of Netflix and what have you. It brought the social networks and the TikToks of this world. We also think that 5G will bring things that we don't really quite know what it will be. But it will bring new business models, new commerce models and new way of payment. And so we're experimenting with, for example, Verizon on how we can bring use cases in 5G. I think cloud has the incredible power to accelerate innovation. Now 2 kids in a garage have unlimited compute power to the cloud in order to innovate and can actually start a whole business without needing to have fixed costs. And so that accelerates our innovation. It's a big reason why we have startup and our kind of accelerator programs out there. You mentioned blockchain. I really think it has the potential to reorder the payment value chain in many respects. And then the buzzwords of today is all about AI and ChatGPT, how exactly that will result into commerce use cases and when is to be seen. But it's probably a link with the first point I mentioned around conversational commerce and how we see that happening. So that's a little bit of the -- a snapshot of what -- things we're thinking about. But throughout, I would say, we're humble because we may be a big payments company, but you never know what's around the corner. We're very thoughtful around making sure that we have the consumers' interest, security compliance in mind. And we co-create with all kind of players around us to make sure that we look around corners and are prepared for the next thing.

Jorn, thank you so much for your time and your insights. Warren, thanks as well to you. Greatly appreciate this wide-ranging discussion. Have a terrific day up ahead.

Thanks, everyone.

Thanks for having me.