Mastercard Incorporated (MA) Earnings Call Transcript & Summary

Good morning, and welcome, everyone, to the Bernstein's 39th Annual Strategic Decisions Conference. I am delighted to be joined today by Sachin Mehra, the CFO of Mastercard. We have about 50 minutes for a fireside chat. Audience members can submit their questions by the pigeonhole link provided, and I'll read those questions during our conversation. And with that, let's begin. Sachin, thank you so much for joining us today.

Thanks, Harshita. Thank you for having me here, and good morning to all of you.

So let's start with the questions, Sachin. As on everyone's mind, the macroeconomic environment, and with everything that's going on, what are you seeing in terms of consumer spending on Mastercard cards?

Yes. Look, I mean, the headline, as we kind of shared with you as part of our Q1 earnings call, was we continue to see a consumer, which is just remarkably resilient, and consumer spending continues to be remarkably resilient. Obviously, we are all tracking exactly what you're tracking from a macroeconomic environment standpoint. And as I look at our drivers, as in the performance drivers, which we -- which drive our top line, what we're seeing effectively is that through the first few weeks of the month of May that our drivers are generally in line with our expectations. It's what we shared with you at the time of our earnings call. They're actually tracking generally in line with that. Now obviously, we're totally aware about what the macro environment is. We're keeping a close eye on various factors, some of which are positive, some of which are potential headwinds. On the positive side, I would highlight the fact that unemployment levels remain at record lows. So strong on -- from an employment standpoint. As you all can appreciate, when people are employed, they get paychecks. When they get paychecks, they tend to spend. So that typically tends to be a tailwind. We also see inflation as generally moderating and coming under control, so that you're starting to see a little bit of that come through as well. But it's one to certainly keep an eye on because, again, the impact of rising interest rates will play out over a period of time. It's something to be actually somewhat cautious about. From a regional color standpoint, I'll share with you, the U.S. continues to perform well. There's a -- we talked about this in our first quarter earnings call. You saw a little bit of impact on drivers come through on account of lower tax refunds in this year relative to the prior few years. So you're seeing that come through. You're seeing the impact of lower gas prices come through as well. But then when I start going around the world and I see what's going on in Europe, Europe continues to be very resilient from a spend standpoint. LAC is wide open, business continues. People are spending. Things are looking good there. And likewise for Asia Pacific and EMEA. And then when I take the other lens around this, which is around what's happening from a cross-border standpoint, we continue to see potential from a cross-border standpoint. We mentioned this as part of our first quarter earnings call. There is still opportunity for a recovery in cross-border travel to occur coming out of Asia, and the other parts of the globe hold up pretty well as well. The one thing which I will share is what we have seen is -- and you've all seen this is that the U.S. dollar has strengthened over the last month. And based on what we're seeing now on account of the U.S. dollar strengthening, we now expect that in Q2, the strengthening of the U.S. dollar will have approximately a 0 to 1 ppt impact as a headwind to our net revenue in Q2. And this compares to what we had shared with you at the time of the earnings call where we said that the FX impact would be minimal. So there's a little bit more of a headwind on account of the U.S. dollar strengthening. The last point I'd make, since you asked about the macro environment, is one thing which we closely track is what's going on from a tax legislation standpoint. And just recently in Brazil, and Brazil is a decent-sized market for Mastercard, in Brazil, the legislature in Brazil enacted -- well, they haven't enacted it. What they did do is they passed a new tax -- a package of tax measures, which basically align with the OECD tax initiatives. And the passage of this is a function of the President signing these tax measures into effect. They will be in effect January 1, 2024. The reason I bring this up is because it's our assumption that the President will sign these tax measures into law in the second quarter. And if that would happen, our effective -- our non-GAAP effective tax rate for Q2 will be in 24 to 24.5 percentage points -- 24% to 24.5% range compared to what we had earlier guided as being about 18.5% to 19%. And the resulting impact on a full year basis from a tax standpoint will be a non-GAAP effective tax rate of between 20% and 20.5%. Again, we had guided for a full year basis at 18.5% to 19%. And the reason is we're going to take a onetime discrete tax expense associated with the valuation allowance, which we're going to put against our deferred tax assets. So look, I mean, I've kind of given you the macro. I've given you what's going on from changing tax legislation, but that's kind of the overall picture as we see it.

And Sachin, let's talk now more about the competitive environment, right? So as I kind of think about the last couple of years, you've had several wins. I'm thinking about Europe, especially the U.K., the most recent Citizens win. Can you just take a step back, talk about the competitive environment and highlight why Mastercard is winning these days?

Sure. Look, I mean, we operate in a fairly competitive kind of environment. That's been the case in the past, and that continues to be the case right now. Our approach to the market has always been one-off. Let's get out there and solve what are the real-world problems for our customers and for consumers at the end of the day. And this has kind of led us down the path of going through with what we call a solution selling approach as opposed to showing up there and saying, "Oh, guess what? You should switch to a Mastercard branded kind of network proposition." That's certainly part of the discussion, but the discussion goes well beyond that. And the way we go about doing that is by assembling the suite of products and services that we've got, which allows us to go and solve for those old world problems that our customers have. And this includes all the services, which we've got from a cyber intelligence standpoint, our data analytics and insights, our loyalty and reward propositions. So there are several assets, which we've got, which we bring to bear. Not all of them are applicable to every customer. So it's about understanding what the customer needs and then actually making sure we're coming up with the right solutions to solve for that. In several instances, it's about our digital enablement tools, which we've got. It's our tokenization capabilities. It's what we're doing from going digital first standpoint, which really resonates with our customers. I will tell you, beyond just products and solutions, what also matters very much for the customers who we've been winning with has been just a meeting of the minds from a philosophical standpoint. And this could be everything from our approach towards financial inclusion and how that matches with what our customers want to do, our prospective customers want to do, our approach towards ESG and how that matches with what our customers want to do. All of those factors come into play as part of the discussion. So I'll give you example. You mentioned the wins with -- in the U.K. with NatWest and Santander. Take someone like NatWest. In the instance of NatWest, the combination of what we were able to bring in the nature of digital-first solutions and our services capabilities was a key enabler in terms of getting us there. You take someone like Citizens. Citizens, too, cares about deeply about our services, but they also had a meeting of the minds in terms of what they're trying to achieve from a financial inclusion standpoint and from an ESG standpoint, which match with what we are trying to do out there. Most recently on Friday of last week, we announced that we have been awarded the business with UniCredit, and this is that they will be our exclusive partner across all of their products, which -- they've been a partner of us for some time now. They used to have a dual network strategy. They have chosen to go down the path of making it a single network strategy, and it's going to be Mastercard. It's across all their products in Europe. It's across 13 banks in 12 markets. So we're very thrilled about that. We think it's a great opportunity. Again, it's the power of all the solutions we're bringing to bear, which has helped us get to be their partner on a going-forward basis, which we're super thrilled about. It's -- their total portfolio is about 20 million [ cards ] and that's -- it's a pretty exciting place to be.

And so Sachin, how should we think about the financial impact of these trends, right? So if I think about your net revenue growth rate, that's been very healthy with client incentives, which is kind of a counter revenue item. It has also kind of grown steadily. So how should we think about incentives as a financial growth strategy?

Look, it's a really good question. I get asked this question all the time. The reality is what we're trying to do is we're trying to optimize our net revenue yield as a company. We're trying to drive accretion in net revenue yield. And net revenue is a combination of the revenue we make from our payment network and the revenues we make from our value-added services and solutions. It is really important that we, in a very disciplined manner, compete on the payment network side, which is where you see the vast majority of the rebates and incentives, right, in order to position us well to benefit from a few things. If you're in the flow for the payment transaction, you get to benefit from PCE growth, you get the benefit from secular shift. Because if you're not in the floor, you don't get the benefit of the digitization effect. So you've got to take those into consideration, right? You get then to deliver the various suites of services with -- that we've created. So which is why net revenue yield has been where we have been very focused on trying to drive our accretion. That doesn't mean -- just to be clear, that does not mean that we will be giving away our switching capabilities for free. That is not what I'm suggesting. What we will do is we will be disciplined in terms of how we compete. We will not win all transactions in all markets and all portfolios, but we will definitely compete because we're looking at the bigger price at the end of the day. And we do believe we've got a very competitive set of value-added services and solutions, which will help us achieve that broader mandate of driving net revenue.

So Sachin, let's switch gears and talk about innovation at Mastercard. And it feels like Mastercard has kind of led to innovation these last couple of years. I'm just kind of thinking about your investments in AI, cybersecurity, data analytics, fraud, et cetera. Tell us about some of your recent innovations that you are most excited about and also those which may be less than understood.

Yes. So look, I mean, I think you mentioned a few already, right? You kind of talked about AI. You talked about what we're doing from leveraging AI to drive our data analytics solutions, our cyber intelligence capabilities. They are clearly paying off, and they're paying off healthily in terms of what you're seeing in terms of the revenue profile, which we're generating. But I don't think we should lose sight of the innovation, which is going on in the core payment side because there's a lot of innovation going on in the core payment side, right? And you might say, "Okay, well, what is that?" Let's talk a little bit about that. Let's take something like our digital-first initiatives. And our digital-first initiative is about trying to get our issuing community and consumers enabled to get digital card propositions enabled on a real-time basis, not only in terms of having the prudential available on a real-time basis, but being able to use it on a real-time basis. In a world which is increasingly digital, that's become more and more important, right? This is part of the reason we're winning some of our portfolio. So that would be one area from an innovation standpoint, which is super interesting for us. The other area is around the work we're doing from a tokenization standpoint. We had mentioned a couple of quarters ago about how more than 2 billion tokenized transactions run over our network every month now. It's important, and the reason it's important is because when more transactions are tokenized, it's driving higher approval rates. Higher approval rates means more volumes coming across our system. It's driving safer and secure transactions, which is, again, something which is helpful for the ecosystem as a whole. So that would be the other area, I would say, which is really helpful for us. The other 2 areas I'd mentioned are around acceptance, which ties very closely to what we're doing from a contactless standpoint. On acceptance, there's a fair amount of innovation going on there. We have grown our acceptance footprint to north of 100 million merchant locations, which has effectively doubled over the last 5 years, and that's been done on the back of innovation. There's a lot of work going on in terms of leveraging our technologies, which we've been investing in to drive that. One in particular I'll talk about is the Tap on Phone capability, which we created and which we've been rolling out in various markets across the globe, which is effectively saying NFC-enabled devices can now become acceptance devices, which is helpful because the more the acceptance locations, the more the volume that can come across the system. When you bring that along with everything we're doing from a contactless standpoint, that's what I -- and we oftentimes kind of immediately delve into innovation going on B2B and in cybersecurity. I think those are really important. But the brass necks of what we do on core payments and the opportunity are there from an innovation standpoint is something we continue to focus very heavily on.

And Sachin, you mentioned B2B, and I want to double click on that, right? So it's a key investment -- investor focus area in my conversations, which is kind of Mastercard's opportunity and new flows. This is an area which I know you've invested a lot over the years. You have -- you're a market leader in virtual cards. You have capability in B2B, remittances, disbursements. I know this topic is very close to you since you used to lead the Commercial business at Mastercard. So tell us about the new flows opportunity at Mastercard.

Sure. So we've defined new flows across 4 areas. We have defined them across remittances and disbursements. It's what we call commercial point of sale as the second area. The third is B2B accounts payable, and the fourth is bill payments. And I'm going to start up first with what we talk about commercial broadly, and that's commercial point of sale and virtual cards, right? And virtual cards caters to the accounts payable opportunity. Commercial point-of-sale caters to the small business proposition, the T&E proposition, the fleet card proposition. I'm going to start there, and I'll go into the remittance and disbursements, and we can take the discussion wherever you want to take it. We continue to see tremendous potential on commercial, and we are executing on that potential. And this is not about creating new solutions and creating new ecosystems and new models. This is about utilizing the four-party model. It's about utilizing our card rails to tap into what is a largely untapped SME universe, which still remains highly, highly underpenetrated from a secular opportunity standpoint. And this is true on a global basis. The way you go about doing it is slightly different than you do it on the consumer side. Do you still have to provide digital propositions, which are world class? Absolutely. Do you still have to provide a debit and payer proposition? Absolutely. But SMEs have unique needs, and those unique needs come around with what we're delivering in the nature of platforms, which help us garner the loyalty of these SMEs. And the platforms are things like our expense reporting solutions, things like our Easy Savings platform. So what is Easy Savings? Easy Savings is a merchant-funded platform -- rewards platform, which basically has got 40 million small business cardholders enrolled on it across 80 countries. And what that effectively does is if I'm a Mastercard small business card holder and I go in a business trip somewhere, and I wish to do a car rental, we've got a merchant-funded car rental proposition, which provides an always-on offer to the small business owner to get a discount or a rebate on what they're looking to do. That's just one example. You could get that at a hotel. You could get that in terms of everywhere where small business owners spend. That's how we win loyalty from our customers in terms of how we go about doing that. So the small business spend proposition is in it on itself a largely untapped proposition, which we're really going after. Then let's go to T&E. Now T&E is something, which we've been in for some time in the U.S. and in several markets in Europe. But when you go to Asia Pacific, the corporate card proposition is slightly unique there because there are trust issues. People don't hand corporate card solutions to their employees. And the reason they don't is they're concerned that people will utilize their corporate card for fraudulent transactions and then not -- make [ whole ] on the payments, which are there. So the way to address that is what we're doing through our mobile virtual card capabilities. That's, again, the innovation we're bringing there, where we're bringing in mobile virtual card capabilities to go after that universe. And the last piece I'll talk about is virtual cards per se, which is going after the accounts payable flow. We are the market leaders in that space. We continue to see tremendous growth. We are going after that opportunity on a vertical-by-vertical basis. And the verticals we've gone after have been in travel, have been in commercial real estate, have been in media, where we see tremendous opportunity to displace both check and ACH-based payments. The result of all of this is the growth you're seeing in our commercial volume. So for example, in Q1, our commercial volumes grew 21%. And we continue to see tremendous promise on this area on a going-forward basis. So that's kind of the commercial sphere. That addresses 2 parts of the new payment flows. Then there's remittances and disbursements and [ visible ] payments. And if you wish, I can go into the remittances and disbursements.

Yes, yes. No, I remember, I think, at the 2021 Investor Day, I think you disclosed that's 2% of your revenue, the remittances and disbursement fees. And I remember it was growing 45% year-over-year. So let's talk more about that opportunity. I guess, so many pain points to solve.

Yes. Look, I mean, the remittance and disbursements opportunity, we tackle that through what we call Mastercard Send and cross-border send. And really, what you're going after is those -- they're push payments effectively. That's what it is. So everything we do otherwise on card rails happens to be a pull payment. These are push payments. And the use cases, which we're actually going after this are -- and we're developing new use cases every day as part of this process is finding areas where you can enable P2P payments with the likes of Mastercard Send, which is what we do, on disbursements in the insurance industry, for example. When insurance claim has got to be paid on a real-time basis, we leverage Mastercard Send to go after that, right? Or let's talk about payouts. So for example, we have struck a partnership with Airbnb. And when Airbnb has to pays its hosts, they leverage Mastercard Send, right? Same for -- in the gaming industry. When there are payments to be made for winnings that people have, when they are in the gaming industry, they leverage Mastercard Send as part of that process. So the growth in this space is going to be a function of identifying use cases, which have got applicability across the globe and then going and penetrating those areas and then identifying new use cases as they come around, which wouldn't typically be dealt with through traditional card payments. Everything I just mentioned is in the context of domestic flows. In addition to domestic flows, there are cross-border push payments, which take place, which is where our cross-border services come into play. And we can -- we see good growth in that area as well. At the end of the day, across both our Mastercard Send and cross-border services, we have about 10 billion endpoints where we can terminate payments. And that's really important because the more the places you can terminate payments, the greater the utility for the services we've got. So we continue to see a lot of promise on this area for remittance and disbursements as well.

So Sachin, I want to switch gears and talk about your recent revenue disclosures, which now can show payment network and then value-added services as a different segment. What triggered this change?

So look, I mean, we interact a lot with our investors. We hear what our investors have to say. And we believe that the new revenue disclosures are -- our objectives around that were around providing greater transparency to you, the investors, around what is our revenue which comes from payment network, what's our revenue which comes from the area of services and solutions. It aligns with our strategic priorities. And it's actually very closely aligned to recent interpretive guidance, which has been put out also on revenue disclosure. So it's a combination of these 3 factors, which got us to that space of saying the time has come for us to actually show revenues and broken down by payment networks and value-add services and solutions. But I would be remiss if I didn't say nothing changes in the nature and the way in which we do our business just because we've changed our revenue disclosure. Payments are very aligned on services. Services are very aligned on payments. New networks work very closely with payments and services. That's the way we've run the business historically. That's the business we are -- the way we'll run the business on a going-forward basis. So that's really the motivation behind showing you that level of disclosure on what's going on across those 2 areas.

Now we found those disclosures very helpful. So let's talk more about services, which is now approaching 40% of your revenues. For those in the audience who are less familiar, can you remind us of the key drivers of your services revenue? And also let's talk about some examples on what is driving that services penetration up in terms of sales, product and growing that revenue stream faster than the core.

Sure. So look, I mean, so I'm going to actually go back to what we just talked about on payment networks and value-added services and solutions. Services are a component of value-added services and solutions. The additional fee -- the vast majority of our value-added services and solutions are what we call services. There's an additional piece, which we've got in there, which relates to things we do from a digital identity standpoint, open banking, our real-time ACH related revenues, which sit in that value-added services and solutions number. And I think it's important to get those definitions right because, historically, we used to talk about just services. Now we talk about value-added services and solutions. But suffice it to say, services comprise the vast majority of that bucket. In services, you've got everything from our cyber and intelligence capabilities to our data and analytical capabilities, to our loyalty and rewards, to our consulting capabilities, to processing, right? We see these as fast-growing parts of what we bring from a business standpoint. They are key enablers of what helps us win share at the end of the day in terms of our business. The reason we got down to as a company to really pursuing a services strategy was -- it was around basically multiple areas. One, they grow faster than the core; number two, they help us differentiate our core; number three, they help us diversify our revenue streams; and number four, they're a great source of talent. So a lot of the talent we acquire through our services capabilities, right, not only through acquisitions, but who we hire as well organically is talent then which rotates through the company to bring tremendous value to us. The engines of growth around this are across primarily 2 big areas, which is cyber intelligence and what we call data and services. And look, I mean, it's really about what we can bring in the nature of the power of the data, which we've got, how we organize that data, how we apply technology, particularly our artificial intelligence technology to that data. And then the fourth leg of the stool on that one is how we deliver that solution to our customers. So being successful in this space requires all of those 4 things to happen. You've got to have the right data. You've got to have the data organized in the right manner. You've got to be able to bring the technology to bear to be able to mine that data to provide high confidence scores and high confidence analytics to our customers and then be able to deliver it in a seamless manner to your customer, all of which we're able to do as a network, which helps us drive growth in the space. So you ask kind of how we compete and how we differentiate. That's what we do. And again, the services portfolio is very much a product-led portfolio. When I say product-led portfolio, there are unique products that solve unique pain points, and I'm happy to talk about what those different things might be. For example, we've got a company which we acquired called RiskRecon. Now RiskRecon, what do they do? They leverage the data we've got and the AI capabilities we've got to do an outside in scan of the digital footprint of any company. So literally, what they do is they go through your IP address to identify where are the cyber vulnerabilities that you have as a company. You can be a small business owner, you could be a bank, you could be an acquirer, where are your vulnerabilities. And they tell them, "This is where you are most vulnerable." That's something our customers really value. So that -- but then you've got something else we've got, which is called Decision Intelligence, which provides a transaction-level fraud score to our customers. So they're very unique services mostly related to what we're doing from a payment standpoint, which is driving that growth.

And Sachin, I think, a key part of your services strategy over the last several years has been kind of acquiring specific capabilities through acquisitions. And so can you tell us about your recent acquisition of Baffin Bay and how that fits into this overall services strategy that you've got?

Sure. It's actually interesting that you asked that question because Baffin Bay is very closely tied. Our acquisition of Baffin Bay is something which we advanced and brought to bear because of our experience with RiskRecon, the company I was just talking to you about. So RiskRecon helps identify where the problem is from a cyber vulnerability standpoint. But when we were talking to our customers, they were like, "You tell me where the problem is, but you're not telling me what the solution to the problem is," and which is where we're like, "This is a great opportunity." This is an opportunity for us to talk to our customers and not only tell them where the problem is, but have them provide the solution. So what does Baffin Bay do? They're basically AI-enabled. They're cloud-based. And what they do is they provide the solution to where the vulnerability sits. And really, what they're tackling is the likes of malware, ransomware, DDoS attacks at our customers. And you might say, "Well, what has this got to do with payments?" Well, what it's got to do with payments is we've got a distribution channel through our payment partners where we can really bring this to bear. So not only do our issuers need to use it for their own infrastructure. Our acquirers need to use it for their own capabilities, but merchants need it. And when you think about the depth at which we can actually go with this kind of capability, whether it's Baffin Bay or RiskRecon, is you use it for your own capabilities, but you also then can market it through to other corporates. So our customers can market it through other corporates. And we see a tremendous opportunity down that path as well.