Mastercard Incorporated (MA) Earnings Call Transcript & Summary

All right, guys. Just to keep things going on schedule, why don't we jump right in? So first of all, again, thank you all for joining this morning. Again, I'm Darrin Peller. I cover fintech and payments and processing at Wolfe Research. I'm really happy to have Mastercard with us here today and represented by Craig Vosburg, who I've known for many, many years and I've had on this stage for many, many years, although with different titles.

And so look, maybe just kick it off, if you don't mind, just give us a sense of your role and a little bit about yourself and, say, we'll go from there.

Sure. Well, thanks for having me. It's great to be here with you again. I'm the Chief Product Officer at Mastercard. So in that role, I look after all of our various payments products, serving different segments, consumer, commercial, small business, et cetera; the different payments capabilities that we have with the cards products, real-time payments, push payments, account-to-account payments, blockchain-enabled payments, our open banking capabilities and sort of everything related to that. So in the role for 2 years, ran our business in North America for 5 years before that.

Thanks, Craig. Look, before we even kick it in on the questions we had prepared for today, just given the backdrop of what we're seeing in the environment, I think there are questions as to the fluidity of the network, the financial flows you're seeing, if everything is operating seamlessly with some of these bank failures we're seeing. I mean, can you just touch on that for a minute?

Sure. Obviously top of mind for everyone, and it was a busy weekend across the financial system. Good news, from our perspective, is our card products continue to operate normally. We were encouraged by the actions taken by the regulators over the weekend. And we're in close contact with the relevant regulators and received assurances from the FDIC that the card operations at SVB and Signature would continue to operate on a business-as-usual basis. And with that, our settlements with both banks have continued as per normal. And so that's an encouraging sign...

Yes. That was even the case over the weekend, everything was pretty smooth?

Yes, and yesterday. Yes.

And just as a backdrop, Mastercard, I mean, the networks in general, they step in, if necessary, right, I mean, in terms of settlement funding?

Yes. I mean part of the Mastercard value proposition is providing a settlement guarantee. And so that is an important role that we provide in the payment system. And obviously, related to that, we work very closely with and monitor the financial health of our various counterparties in the system. And -- but that is a role that we play.

It's a good reminder why it matters to have you guys there. Look, you came into this role in January of '21, so right in the middle of the pandemic. Curious to hear what you've been seeing, what kind of moves you've made since that role change? Maybe just start there, if you don't mind.

Sure. Yes, it was an interesting time, both with respect to the pandemic and in sort of the journey of the evolution of Mastercard's strategy and how we've been sort of broadening our capabilities to be able to play a broader role in intermediating payments of different kinds. And so over the course of those couple of years, there's a couple of things we've been focused on. Of course, it starts with ensuring that we're well positioned to meet the needs of consumers and businesses with payment products that are safe and secure and ubiquitous and easy to use and convenient, all the things that people want and expect from payments, but to do that in a way that's aligned with our principle around providing choice. We obviously love the cards business and the cards network, but there are more ways to pay than with cards. And so I think the combination of that, expansion of our capabilities and in the midst of the pandemic, a fairly aggressive reset around -- not a reset, an acceleration of trends around digitization and payments led to a couple of things just in terms of the role and how we were approaching things. One was in recognition of the pace at which things were changing, both within the industry and with a lot of our customers, made some changes to bring our product and our engineering teams closer together so that we're functioning as one, which, to a start-up or a fintech, might sound pretty obvious. But for a company with a 50-plus-year legacy of running a business at scale, it was a fairly meaningful shift in terms of how we were developing products with the intention of being able to do that more efficiently, more nimbly, in closer connection with our customers to be meeting needs in the marketplace as they were evolving very rapidly and to do that with a couple of key sort of priorities in mind. One was continuing to drive the growth of our core cards business, particularly with a particular focus on ensuring it's fit for purpose in an increasingly digital world. And that's a journey that we've been on and continue to be on to sort of ensure we've got the right underlying capabilities to meet the way consumers want to interact with our card products. Secondly was around capturing some of the newer payment flows in areas where Mastercard hadn't traditionally been active. And then to invest in and lean into different innovations in the payment space to make sure we're well positioned; to participate in newer areas, things like account-to-account payments, digital currency, et cetera; and really set the frame of our strategic priorities around those areas, plus clearly open banking as an area that we've been investing in. So that's been the focus. I think it's sort of ensure that we're nimble, we're efficient, we're focusing on the things that matter in the marketplace and matter to our customers and their end customers so that we continue to meet their needs and grow along with them.

The increase in value-added services you guys offer as a percentage of revenue contribution has been pretty dramatic. So I see why you're spending the time on that. But in the backdrop of the macro we're in, I think there's a lot of questions as to whether you should be spending more or less, I mean, and how you should be managing expenses and the balance. Can you just touch on how you think about balancing investments right now versus potentially looking for long-term growth?

Yes. It's a good question and one that we're always very focused on. The way in which the product organization that I look after is structured is with a portfolio. I mean I just rattled off a number of different areas that we're focused on. It's a pretty broad portfolio of products and solutions that we're investing in that have different profiles in terms of maturity, in terms of scale, in terms of time to market, time to revenue. The overarching objective is to make sure that we're investing for the long term to continue to be in a position to participate in and benefit from the secular trends and payments and the opportunities that payments represent. And so there is a very explicit focus on making sure that portfolio of investments is balanced, both in terms of driving near-term growth in the core business, ensuring that we're reinvesting in the core cards business, but also making the investments that we believe are going to be meaningful drivers of revenue growth to us over time, literally for decades to come. Now in an environment of greater uncertainty like we're in right now, where the macro -- there are questions around the macro environment, what does that mean for us? Well, there is, in that environment, a focus on sort of shifting the focus a little bit left, I would say. So left in terms of things that are nearer-term revenue growth opportunities, higher degrees of certainty in terms of the payoff. And that's important both from our perspective, obviously, so that we're investing in the things that are going to have a higher confidence and higher ROI. But it's also important because all of our products and services go to market through partners, B2B partners, and they're also thinking about the same things. There's less of a proclivity to invest in something that has a 5-, 7-, 10-year payoff when everybody is sort of managing through the same degrees of uncertainty. So it's a balance. And I would say, over the course of the last 12 to 15 months or so, we've had that little bit of a shift left to just make sure we're really digging deep into the things that are going to drive near-term results. And some of the things that are a little farther out, we can scale back some of the investment and keep it active, but not go in hard until we had a high degree of confidence.

A lot, yes. I mean your data of spending [ pulls ] has still looked very resilient, even through February. And so I guess, I think the management team has said, you can turn it on, turn it off when necessary, and you will be willing to do so, right?

Yes, we have levers that we -- and this is not unique to the current environment. And every year and every part of the cycle, we always are developing plans that have contingencies around different macroeconomic environments. And there are levers that we can address with to help manage expenses if we need to in the short term. In parallel with that, we constantly are reprioritizing and redirecting investment into things, as we learn from a product perspective, things that are -- that we're experimenting with developing. You learn some of those things. You get signals that they have the potential to scale and become meaningful; some don't, frankly. And the things that aren't showing promise, we redirect the investment into things that are going to hopefully have a higher degree of payoff.

During the pandemic, the percentage of e-comm as a percentage of total retail jumped around 400 basis points to around 17% or 18%. Usually, that increase is less than 1% a year. So it was a massive change, obviously. We all saw it happening. Is that structural or cyclical? Is that going to -- that behavior going to persist in your mind? And looks like it's been pretty resilient.

Yes, I think it's a little bit of both. In our business, we saw card-not-present transaction volume, which is our sort of proxy for e-commerce and mobile commerce, increase from around 40% of our total volume to the high 40s with a pretty rapid acceleration. That since has leveled off and has stabilized in that range. And so there was -- I think we could see a pull forward of some of that growth, but then as a little bit of bouncing around as consumer behavior reverted more to the norms of the mix between e-commerce and in-person, but with a stable level of e-commerce-oriented spend at those levels. And so, again, that points right back to some of the things I was alluding to with our product strategy and making sure that our products are fit for purpose in a world where more and more commerce is happening through remote channels, through e-commerce and mobile commerce, through things like digital-first capabilities and offering a whole suite of APIs to our partners to be able to ingest and offer our product stack through digital integrations. There's a -- maybe the most tangible example of this is with the Apple Card where you can apply for it digitally. You get underwritten and approved through the issuer. And the card credential is provisioned effectively instantaneously into a mobile device without a physical card being necessary and really remaining optional. That's a similar proposition that's available in market through a number of our other partners. The workaround tokenization is another example of that. Token technology, I think it's not an overstatement to say it's revolutionized payments in the digital world to provide real security, convenience and an increase in the range of available use cases where our payment products can be lodged and used in a secure fashion. We're processing more than 2 billion token transactions a month now in less than 10 years since token technology was introduced. So an example of how investments in some of those kind of product capabilities are enabling digital payments to proliferate and proliferate in ways that are helping to serve new use cases, meet the needs of consumers and businesses and do it in a secure way.

And the economics that you can generate on this new behavior on more e-comm, more digital transactions versus what you had before, has that changed? Or is it better pricing on e-comm, for example?

There are some pricing differences. Look, the fundamental objective is make sure that Mastercard products and payment credentials are in the flow and that they're being used in whatever environment consumers and businesses choose to transact. There are some minor variations in some of the pricing that goes with those. But the real opportunity for us is in the digital realm. There's a greater opportunity to introduce value-added services. And a lot of that stems from increased risk in digital transactions and the potential for fraud, the need for more security solutions that we can offer through our Cyber & Intelligence solutions. That could present an opportunity for us to provide more value-added services. There's things that we can do with our partners around customer acquisition, around customer engagement, things like that, that are easier to execute in the digital realm than the physical realm that have some benefits for us from an overall revenue perspective. But again, the core objective is make sure the Mastercard credential is there to facilitate the payment.

Right. Let's just shift gears. I mean you've won a fair amount of incremental customers in the last several quarters. I think Citizens is a good example more recently than not. What's driving those wins? I mean a lot of investors and a lot of people will say, what's -- it's hard to tell sometimes the difference between the networks. Maybe you could just touch on what you see as the biggest differentiator and what's been really driving attraction to your network.

Yes, it's a great question. We're thrilled, of course, with the Citizens win and a lot of others that we've shared on our earnings calls of late. I think it's a combination thing, one -- of things, the breadth of the product portfolio and the range of optionality that gives us to work with our partners around different kinds of payment capabilities, not just cards products, across the various segments of commercial, consumer, small business, the digital capabilities that go along with that, some of which I was just alluding to; the combination of being able to leverage open banking capability and technology to extend reach, to enhance underwriting, a variety of things that can be packaged into a set of solutions for an individual partner, depending on what their particular strategies or objectives are; combined with the suite of value-added services around data and analytics, around fraud and security and cyber risk management, around loyalty solutions, et cetera. That gives us a very broad palette of capabilities to work with. And combined with what we think is a real partner orientation in working with an individual partner, whether it's a bank, a big bank, a small bank, a merchant with a co-brand portfolio, a fintech, whoever it might be, they've got their own strategy. They have their own objectives. They have their own views on the role payments plays in delivering on their business objectives. And we have a strong partnership orientation and working with them to figure out the best combination of things to innovate together and help them differentiate from their competition.

So your sales strategy has shifted a little bit, it sounds like.

It has over the years, for sure, to become very solution selling oriented, leveraging this very broad suite of capabilities and really focusing on our partners and their P&L and how we can help them maximize...

Does that give more flexibility on pricing as you may -- as you have these discussions?

Well, pricing is -- first of all, pricing is always competitive, right? We operate in a very competitive space. I would characterize it maybe less so around flexibility in pricing, but more so around having more levers in play that are value drivers for both for our partner and for us. And the more revenue levers that you have in play, the more creative you can be in terms of how you structure a commercial opportunity.

Right. Okay. Let's shift gears just to talk about some of the 3 big initiatives you talked about, whether we start with payments for a minute and then services and networks, new networks, new opportunities. I think a lot of people still wonder if the opportunity and the addressable market in payments is as big as it used to be. Can you just touch on -- I mean a lot of the new initiatives are addressing that, I think. How do you frame the opportunity in terms of the TAM? And what's really out there?

Yes. Well, we shared at our Investor Day in 2021, for consumer-to-merchant payments, the total addressable flow is at $45 trillion, of which around $20 trillion were carded. So that, in and of itself, gives you some sense for ongoing upside growth potential in terms of consumer-to-merchant payments and the potential for additional penetration into those flows. Beyond the numbers themselves, there are some things that are driving the growth -- the ongoing growth in this -- the secular migration towards payments that we're particularly excited about, some of which are very sort of back to basics for the cards business. One example, in particular, is focusing on the growth of acceptance. Our acceptance network, I think, is an often underappreciated asset. But for us, we have nearly 100 million merchant locations that are available to Mastercard cardholders at which to use their products. The -- and that has doubled in the last 5 years. We add a new merchant -- one new merchant to our acceptance network roughly every 2 seconds. And if you think about the pace at which that is driving growth, 18% CAGR over the last 3 years in our acceptance network, what we see time and time again is the more places you give people the opportunity to use their Mastercard, the more places they're going to use their Mastercard. And so investing in acceptance expansion is an incredibly important way to both strengthen the value of the network, increasing the number of nodes on either side and then the case of acceptance on one side in particular, and then drive value to our partners by increasing the utility of the products, giving consumers and businesses more places to use them. And so that's an area where we've invested in things like contactless technology. Why? Because on the one hand, contactless payments provide a great consumer experience. It's easy to use. It's very seamless. Consumers love it when they're given the opportunity to make contactless payments. We now have 56% of our total in-person transaction volume is transacted using contactless payment technology. But we love it for more than the consumer experience. It's taking us into new verticals and use cases that hadn't always been as easily addressable for us with traditional terminal technology. So verticals like transit, if you -- if anybody here took the subway this morning to get here, you probably tapped your card going through the New York City subway. The same in mass transit systems around the world. That's one example of an entirely new vertical that is new and small ticket that, in many cases, had been dominated by cash as the tender type. And that's enabling us to expand. Cloud Commerce is another where we've enabled our acceptance software in the cloud to be able to be downloaded very seamlessly into a variety of different mobile devices to seamlessly establish acceptance capabilities. And this is coming to market most notably at present with tap-on-phone technology. And so we have in more than, I think, 50 markets around the world now the ability for partners to download...

Merchant partners.

Well, you need to be a "merchant" because you still need an acquirer to be able to process the payment, but you can be a casual merchant. This could be you at the flea market selling your stuff. If you have an acquirer standing behind you to represent you into the system, you download the software onto your phone and your phone becomes a contactless acceptance device. When you think about that kind of potential sort of dislocation in the acceptance realm, where you've got -- we're talking about merchants in around 100 million locations, the number of smartphones that are in circulation, and you can extend that beyond the smartphone into literally any device that's capable of communicating. We shared on our last earnings call, a partnership with an auto manufacturer to effectively establish the same kind of payments capability in vehicle. And so you combine the ability of a vehicle now to be able to communicate with token technology to be able to lodge a payment credential in the vehicle. And suddenly, the vehicle becomes a hub for commerce, some of which is related to the vehicle itself, paying tolls, fueling, recharging if you're at an EV station, conducting other kinds of commerce that you might choose to do while you're in your car. So this explosion of opportunity on the acceptance side of the ecosystem is one that we're really excited about.

I know you don't have direct responsibility for all the services in the business, but it's just been such an explosion of opportunities and, frankly, success by you guys. Can you just touch on what's been so successful about it? What areas are really resonating with customers? And what the path is for it?

Sure. Well, we actually all have responsibility for services in a way because it's so inextricably linked to and intertwined with our payments business. And it's a very self-reinforcing cycle around growth in payments. A lot of our services activities that are fueled by the data that is generated through payments activity and then redirected back into helping to propel the growth of our payments business. And so services, just to level set, our -- when we talk about services, we mean data and analytics, we mean consulting services, a variety of things we work on with issuers and merchants to help them test and evaluate new propositions, loyalty solutions, fraud solutions, cyber intelligence solutions, our processing business. And it's something we've been investing in for some time, 10-plus years, depending on which part of the business. And where we've seen it really add value back into the business is in a variety of areas. One, it helps us differentiate the core payments business. And so a Mastercard portfolio supported by these breadth of services capabilities can be a more -- a better performing portfolio. We can help our partners identify new customers, acquire new customers, activate them, engage with them, manage and reduce attrition, all while also helping to manage things cost related to fraud, risk-related solutions, helping them manage their cybersecurity environment. So all of those things are sort of reinforcing in terms of helping to differentiate the core business, drive growth in the core business. A simple example, if we can help a partner reduce fraud rates and increase their approval rates, that's going to drive growth in their business and it's going to drive growth in our business. And in parallel with that, it serves as a form of revenue diversification for us because a number of these things are sort of stand-alone services that have their own revenue model associated with them, which, as you pointed out, is now representing 1/3 of our revenue roughly at the corporate level. So it's been a really important part of our business and will continue to be. There are -- we see ongoing growth opportunities across that full spectrum of value-added services. And not just in the cards business, by the way, the same applies as we think about the diversification of our payments capabilities beyond cards. The same opportunity applies to interlink and overlay value-added services with them as well.

On that note, I mean you can overlay services across different flows and new flows, right? And so P2P has been a very big use case of Mastercard Send and different offerings. But B2B has been pretty notable also, and I know you guys are one of the pioneers of that in terms of virtual card and other. When you think about disbursements and remittance, other categories that historically Mastercard wasn't as involved in, but last several years has been, what kind of progress has been made around that? And what's the opportunity there?

Yes, these are areas that we laid out at our last Investor Day around what we call new payment flows. They're not new to the world, but they're newer to us. They've been a smaller part of our business historically, but they are all areas that we see real promise and growth potential. And they represent huge flows, $80 trillion in flows in the aggregate. And there are 4 that we've prioritized in particular: disbursements and remittances, commercial point-of-sale payments, B2B accounts payable, and consumer bill pay. And we're seeing good progress across the board there. In the aggregate, in 2021, they were about 13% of our revenue. Each of those is continuing to grow and prosper. Some of them -- and this is a little bit going back to my comments earlier about shifting left in terms of the point of view. Some of those can be served with card products and card solutions that exist today. They don't need new solutions that we have to invent. We will build out a portfolio of capabilities that will go beyond card and solutions. But if you think about commercial point of sale and B2B accounts payable in particular, these are effectively card products. It's T&E, it's fleet, it's purchasing cards, it's small business, it's virtual cards, all of which exist, all of which are in market, all of which have established revenue models, distribution partners, customer needs and use cases that we're serving and that are growing nicely. Our commercial volume in the most recent quarter, I think it was, increased 24%.

That was last year.

That was the year -- for the year last year. So 24% growth in those commercial card and virtual card products. It's a healthy growth.

It's amazing. Yes. So putting it all together, and then I'm going to try to take a couple of questions from the audience shortly also, I mean, structurally, when you think about new flows, value-added services being such a big part of your mix, growing more quickly than the average, I mean would you -- do you think that Mastercard's long term or growth over the next 5 years could be faster than the prior?

Well, I'll leave that to our CFO and our Investor Relations team to prognosticate on what our growth rates will actually be going forward. What I see are multiple vectors and avenues for growth in large unpenetrated or underpenetrated segments of payments with -- all of which have opportunities for overlays with things like value-added services, many of which take us into newer areas, too, like account-to-account payments and opportunities there. When you look at the combination of open banking with account-to-account payments and consumer bill pay applications, which, by the way, is exactly what we've announced recently with the JPMorgan partnership with Pay by Bank, that's sort of the -- that's like a Venn diagram of interlocking circles between open banking, consumer bill payments and account-to-account payments with a really important partner right in the middle of it with JPMorgan Chase. That's the kind of thing that I find really exciting about presenting new opportunities for growth. And when you look across the core business with ongoing opportunities to drive growth in there with acceptance and increasing cash displacement and card penetration, the new flows that we touched on briefly, some of these other areas like account-to-account payments, all with the services overlays, we see a lot of opportunity for ongoing growth that we're really excited about.

Well, I mean I'll throw a plug in. From our estimation, you guys should accelerate by about 50 to 100 basis points in about 4 or 5 years, which is impressive on the base of size you guys are. One last one, and then maybe we'll take some audience questions, is just we always get questions around disintermediation risks, other technologies. What are you seeing out there? Anything new or anything on your mind as a risk? Or -- and how do you approach incremental technologies? Do you just try to outcompete them? Do you buy them?

Yes. No, it's a great question. We're always on the lookout, obviously, for what's happening in the payments space around us. I think there's a couple of things that would underpin our approach to that. One is a deep conviction in the value of the cards proposition and a deep conviction in continuing to invest in that proposition. It's a great consumer experience. There's great consumer protection. It's scaled with 3 billion card credentials in circulation around the world for Mastercard, 100 million roughly merchant locations, an established franchise and rules of engagement, et cetera. But at the same time, we recognize consumers and merchants and businesses want choice. They should have choice. Cards aren't the only way to pay for things. And so enabling choice is an important part of our strategy. And the things that, on the one hand, you might look at as a risk of disintermediation for us, we also -- our starting point is to look at it more as, is this actually an opportunity for us? Because if it's a disintermediation risk, on the one hand, that means there's some demand for it out there. There's some need in the marketplace that it's potentially serving. And our starting point is to think, well, why can't we serve that need? Which is exactly what's taken us into diversifying our payment capabilities beyond cards themselves into things like account-to-account payments and push payments and blockchain-enabled payments, et cetera. And so there's sort of a short list of ones that we're particularly focused on. They've ebbed and flowed a little bit as the market has ebbed and flowed. If we were having this conversation 18 months ago, it would have all been about buy now, pay later probably. Buy now, pay later still matters to us, and we have a great solution we've introduced with Mastercard Installments. That's live in the market with SoFi. It will be underpinning the Apple Pay Later proposition, et cetera. Digital currencies is another category that certainly has ebbed and flowed, but one we continue to focus on, not just in the form of crypto and stablecoins, but CBDCs and tokenized bank deposits. I'd say account-to-account-related payments are sort of at the top of the list at the moment in terms of focus. And one of the reasons we're so excited about the JPMorgan Chase partnership that I alluded to, because it's a real example that we think has the replicable potential to work across partners and across markets to leverage the capability of open banking and account-to-account payments to go after incremental volume for us. These are consumer bill payments that are not being carded today. So it's incremental, it's in a new space, it's account to account and it has a really attractive revenue profile.

That's exciting. All right, guys, I think we have time for maybe 1 or 2 quick questions if anyone has.

There's one here.

You mentioned 56% contactless penetration. Do you mind talking about maybe some of the reasons why the U.S. is much further behind in that? And what gets the U.S. to accelerate in terms of contactless adoption?

Sorry, the dishes were clanking out there. Did you say why the U.S. was behind?

That's correct, in contactless adoption, what drives that forward?

Sure. Yes, it's interesting, 56% is a global number for us. But as you would imagine, there's real variations market by market. We have some markets that are extremely advanced in contactless: Australia, Canada, a number of others where almost all in-person transactions are contactless. The U.S. was later to the party for a couple of reasons. The most significant, in my opinion, was the fact that the acceptance infrastructure was -- it's massive. The acceptance infrastructure was established. And it was a fairly meaningful investment required to enable contactless technology at the point of sale. We've had 2 relatively recent catalysts that have really accelerated growth in contactless in the U.S. The first was the re-terminalization of the market that took place when chip technology was sort of introduced as the market standard. And that's going back to the mid, I don't know, 2015-ish, 2014 kind of time frame. That effectively re-terminalized the entire market with terminals that were capable of handling a contactless transaction. The second catalyst, which we never really could have anticipated, was COVID. And suddenly, hygiene became as much of a driver of changing consumer behavior as convenience did. And people didn't really want other people touching their cards. They didn't want to hand it over. Nobody wanted to touch anything. And so we actually saw a real increase in adoption rates during the pandemic when people were learning how to do new things. We all learned how to use QR codes. We all learned how to be much more digitally savvy online, and we all learned how to make contactless payments. And since that has happened, we've seen a steady increase in the percentage of transactions. So that it's now -- it's a pretty meaningful percentage of our U.S. transaction volume, too.

Guys, I think we're actually out of time. So Craig, thank you very much for joining us.

My pleasure. Thanks.

It's good having you. Guys, next up, we have Euronet here on stage here, and we have Paymentus next door.