Mastercard Incorporated (MA) Earnings Call Transcript & Summary

Thank you. Welcome, everybody, to the 43rd Annual William Blair Growth Stock Conference. We're excited -- I'm excited to have with us this morning, Linda Kirkpatrick, who is President of North America for Mastercard. I've known Linda since the IPO of Mastercard. She's been with Mastercard over -- for about 25 years now. And I'm going to -- thank you for joining us. Really appreciate you being here. It's great to see you again.

Thank you for having me. I appreciate it.

Maybe you could give a little overview of your role at Mastercard, I would think that would be helpful.

Sure. I look after all the consumer-facing relationships and operations within the U.S. and Canada, it's our largest market at Mastercard. And as you said, I've been with the organization for about 25 years across a number of different disciplines.

Thank you. So I mean, the #1 question I always get is, I mean, people have been waiting for a recession for 2 years now. But if you could -- could you give us some update on what you're seeing, what Mastercard is seeing on the macroeconomic environment, and how business is trending, I guess?

Yes. Sure. The -- what we're seeing from a consumer perspective is a very resilient consumer. We talked about the fact that volumes in the first 4 weeks of May were largely consistent with our expectations for the quarter. And we've really been benefiting from the shift to experiential-based spending. And so as we look at travel and the return of cross-border, this is really supported consumer spending and trends that we're seeing in the space. Of course, there's some headwinds and tailwinds. From a headwinds perspective, we're saying we're closely watching the economic uncertainty, the stability of the banking system and certainly inflation. But we're benefiting from a lot of tailwinds, and chief among them is, as I said, experiential spending. But also, we're being the shift, from a consumer perspective, to the digitization of payments continuing to support our ecosystem. And while we're seeing some, in the U.S., some moderation of gas prices and in March, the cadence of tax payments and moderation of tax refunds did have an impact, it was largely offset by the digitization of payments in travel. So really a very resilient consumer and again, very consistent with our expectations for the quarter.

I appreciate that. Mastercard has announced a series of significant wins with fintechs, banks and others. What is driving the success that you've been having? I mean really, it's not just recent, it's been pretty continuous, but you've had some recent nice wins.

We have had some nice wins. I'd say, it's largely based on three things. When we go and speak with customers and talk to them about the value that Mastercard brings to their ecosystems, there are 3 areas that we highlight most intensely: The first would be our customer-focused approach, our account relationship management strategy. And that is really getting to understand the objectives of a customer and supporting them not only with their card business but across the entirety of their enterprise, whether that be either data and insights needs or there's cyber and intelligence needs, or their loyalty and rewards needs. And so that ability for Mastercard to look end-to-end into what a customer needs to manage their business and lock arms with them and achieve their objectives in a very partnership and collaborative-focused way has been cited as, by many of our customers, a reason for working with us. Secondly, the way in which we've differentiated our value proposition through services has really been a benefit. And as we look to grow the business both organically and inorganically through acquisition, we've placed focus on innovation, we've placed focus on new payment experiences and really being at the cutting edge of that innovation. And customers like Citizens Bank, for example, who just decided to flip their debit portfolio to Mastercard, really recognize that innovation and partnership that we have with the fintech community as a way to supplement and complement the investments that they're making to create a national and a digital bank. And then lastly, our brand has been increasingly synonymous with inclusion and our marketing efforts and our brand efforts to support financial inclusion across the globe but certainly here in the U.S. to bring the financially underserved into the financial mainstream and have our brand be associated with that is something that our customers are acknowledging as well. Certainly, the Gap, which is -- was a long-time partner of our competition, decided to flip their credit co-brand business to Mastercard last year. We converted 10 million cards over to the Mastercard brand, a brand themselves, multi-faceted brand that stands for inclusion, they saw the benefit of partnering with us for that reason. So it's, I'd say, largely focused on those 3 areas, the relationship model, products and services and our brand in being really synonymous with inclusion.

Great. Thank you. Appreciate that. So Mastercard has 3 strategic priorities: expanding in payments, the expanding its services, which thank you for the new information and disclosures on services, and embracing new networks. Starting with payments, what are some of the key initiatives that you're focused on in that initiative?

Yes. So from a payments perspective, this is really the core of our business and credit, debit, prepaid and commercial. And when you think about the expansion into payments, there is still tremendous opportunity and runway to digitize payments. And we've been very focused on how consumers are paying and where they're paying as a way to expand the pie and expand the use cases for digitization. So when you think about where consumers can pay, we have been very focused on increasing acceptance, the number of places consumers can leverage Mastercard products. And we recently reported over 100 million acceptance locations or points of acceptance, where consumers can use Mastercard products, that has more than doubled in the past 5 years. And this has been both a deliberate investment on our part as well as we've been benefiting from innovation in the ecosystem. If we look at the innovation around Tap on Phone, where any individual who has an RFID-enabled device can enable their phone to accept payments, well, now hundreds of millions of people in the U.S. alone can be -- effectively be a merchant. And so that capability, that expansion of Tap on Phone has been -- has helped expand our acceptance ecosystem as well. When you think about how people pay, again, digitization is happening everywhere. During the pandemic, we saw a large amount of volume shift to digital, to the online space. And we have been investing in tokenization for quite some time. And tokenization, just to get everybody in what that is, it's essentially taking the 16-digit account number on your card and turning it into a dynamic token that changes every time it's used. And so it's a helpful safety and security tool, but it's also the way commerce happens in digital devices. And so fortunately, we have been investing in tokenization for many years. And when the world went almost fully digital, we were well poised to capture that opportunity. When you think about card-present transactions, contactless has really taken off in the U.S. and around the globe for many years. We recently reported that 58% of our card-present transactions are now happening through contactless payments. And in over 100 markets, greater than 50% of those transactions are contactless. And what we know about contactless transactions is, of course, they're just as safe and secure as any other transaction. But they create stickiness and they create use cases in point-of-sale models that where speed matters, like quick-service restaurants and certainly subway turnstile and in taxi cabs. So enabling that contactless experience has also been a tremendous opportunity for us to expand payments again, where people are paying and how they're paying. And we've been at the forefront of that innovation.

Great. Thank you. Extending in services has been a key pillar, second pillar, I guess, of your strategy. I think it's been a differentiator for you to actually -- very interesting. You have a lot of initiatives there. And the information you gave us, the disclosures, I think it's really under the radar still with investors. It's like -- but it's 36% of your business, growing almost 20%, around 20%. I think, 19% last quarter. Can you maybe give a little color on why services are so important and some of the key areas of investment or key capabilities there?

Happy to, Bob. So when you think about services, the way we define it at Mastercard, this is our data and insights capabilities, our cyber and intelligence tools, our loyalty and rewards platforms and our processing capabilities. And the reason why services are so important, there are several reasons. One is they really provide us with an opportunity to differentiate our core value proposition. I mentioned a few of the wins earlier, they were very much grounded in our services capabilities. It provides us an opportunity to diversify our revenue base. As you mentioned, almost 40% of our revenue now is coming from one of those lines of businesses. It definitely provides an opportunity for growth. Services are growing at a very fast clip. And of course, as we do M&A in the this space, it provides us with an opportunity to attract the best talent. And so we've had a services-based strategy for well over a decade. We've been very deliberate about how we've been making investments in services. Across these topics, we've been very focused across the topics that I mentioned. And we see lots of opportunity for continued growth. Most recently, we announced an acquisition of a company called Baffin Bay. In the cyber and intelligence space, we have lots of tools that help identify this cyber readiness of companies. Baffin Bay allows those organizations to act on the cyber readiness of their ecosystem by using an AI-based model to help them protect against malware, ransomware, DDOS attacks. And so as we all know, as payments have digitized, so, too, have fraudsters. And we look for any way to strengthen the tool set of our customer base to protect them against fraud. And Baffin Bay is the latest example of how we're expanding in the services space.

Great. Thank you. So the third strategic priority is embracing new networks. And this includes open banking, which we're very intrigued by, and digital identity. Can you talk about some of your progress in the open banking space? And maybe a little color on your recent partnership with JPMorgan, the Pay by Bank effort.

Sure. So we, as an eco -- we manage networks, and we see that skill set that we have in managing a network as being applicable in other adjacencies. New networks is another adjacency for us. And we're largely focused here, as you mentioned, Bob, on open banking and digital ID capabilities. From our perspective, open banking widens the financial aperture of a lender's -- what a lender can see in a consumer profile. And so -- we purchased 2 companies, Finicity here in the U.S., and Aiia in Europe. Finicity, in particular, provides access to greater than 95% of the deposit accounts across the U.S. And so what that does is when a consumer provides their permission to access their accounts, so consumer provision data, a lender that we work with can access that data for the purposes of connecting them to financial tools and instruments. And Finicity, at their core, they were granted in mortgage payments. So they were leveraging their availability of data to help lenders with mortgage payments, and we saw the opportunity to expand that business model into payments, into account openings and into use cases that have not yet even been ideated. So the opportunity to again look beyond just what a bank sees or what a lender sees with their business with the consumer and look holistically at telco payments, utility payments, car payments as a way to potentially look beyond credit score to provide access to consumers, we believe, is the next frontier in payments. And so providing that choice that optionality, that different rail, this is all very consistent with Mastercard's strategy to grow in this space. Now, as -- again, as you get closer to account-based payments, protecting consumer identity is absolutely paramount. So we see digital ID and open banking going hand-in-hand. And similarly here, we acquired a company called Ekata, which validates that a consumer is who they say they are. And again, this is really, really important. Our Head of Identity Solutions like to say that companies don't have fraud problems, they have identity problems. Because if you can validate business or consumer identity in an affirmative way, then well, you can prevent fraud before it happens. And so having Ekata-based solutions on top of Finicity-based solutions is really, really important to us. And increasingly, our customers are recognizing that as well. You mentioned Chase, a very good customer of Mastercard, and we've recently actually extended our consumer base business -- consumer credit-based business with them, with the Freedom Flex portfolio. But this was an area of opportunity to work with Chase in a different part of their business, where they're looking to provide account-based payments to merchants who are in the bill pay space. So they have a technology called eCheck. And what this does is it's an opportunity to expand the pie in payments to really take advantage of a net new part of the business, where a merchant is not accepting today, a biller is not accepting electronic payments today. And so Chase is leveraging Finicity and Ekata-based solutions to help power eCheck and to help make those transitions more transparent, safe, secure and to give the merchant perspective into when it's appropriate to access the consumer's account to make a payment. And so that capability is all net new and very different from the core carded payment space that we see today. But again, we see it as very much pie expanding, economically advantageous and a frontier that has yet to be explored. It's still new and nascent, but we're at, again, the cutting edge of that innovation with our customers.

Thank you. Another focus, I think, of Mastercard has been innovating on new products. One area is the buy now,pay later space. And I just -- maybe you could give some color on that effort, your thoughts on -- I mean, buy now, pay later kind of has had mixed reviews. And what's -- maybe the product that Mastercard's delivered and then your thoughts around the buy-now--pay-later space over the long term.

Yes. It's an interesting space. We saw, of course, during the pandemic, consumers really embracing buy now, pay later optionality. And again, Mastercard's strategy is all around providing choice and optionality and meeting consumers where they are in their journey. And so as we saw consumers -- merchants increasingly offer the capability and consumers opting into the capability, we saw the opportunity to leverage Mastercard's network to provide installments at scale. And so what do I mean by that? We launched our own product called Mastercard Installments, whereby merchants could have access to consumers looking to make installment-based payments, and our network could be leveraged for that. So any merchant who accepts Mastercard payments, could actually offer installments. And any lender who has access to ecosystem, could benefit from consumers who are interested in installments. So it really supports and benefits every stakeholder in the ecosystem. And the best part about it is it applies all of the goodness that Mastercard transactions bring with zero liability, fraud protection, really responsible lending practices to a buy now, pay later transaction, which many of the offerings that emerged over the pandemic did not offer. So again, we see this as another way to provide choice and optionality to consumers, another way to expand in payments beyond traditional payments and to the extent that consumers want to continue to leverage this form of payment, just really providing that scale that the Mastercard network brings with all the protections that sit on top of it in a very responsible lending ecosystem. And we'll see. The consumer will decide how they want to pay and be paid. And if it continues to be installments, we're ready with that solution. The first bank to launch this capability in the U.S. is SoFi. They launched earlier this year, and that's been a great success for them. And we have a very robust pipeline of buy now, pay later, both merchants as well as lenders who are interested in this capability.

Right. Thank you. The -- I guess, at your Investor Day in 2021, you outlined new payment flows as another key strategy, B2B payments, which is an area that we've been very excited about now for a number of years, but it really seems to have gotten momentum. So just what you're seeing in the B2B payment space for commercial and small business? And what you think the potential for that business is for Mastercard?

We believe the B2B space is largely untapped. And the challenges around B2B payments with respect to identifying, first of all, digitizing, protecting against fraud, providing transparency, ease of use and efficiency, these are very well-known challenges. And digitization in B2B payments, provides an opportunity for businesses to streamline their operations. And again, here during the pandemic, when largely people weren't in the office, the opportunity to use digital payments in B2B -- in a B2B environment context really took off, and we're continuing to see great growth in the space. Last quarter, we reported 21% growth in commercial. So this is, again, terrific runway for continued growth and improvement. In the VCN space, we are largely the VCN leader. We've been working with many of our customers on VCN for quite some time. And I think here, the opportunity to take a carded -- an account and turn it into a virtual card number that can be leveraged between businesses, just unlock so much potential. In the VCN space, we've worked with -- we've made announcements with the likes of Coupa and SAP. We have relationships with partners like Extend and Marqeta in the space, and we see this as an area of continued growth for MasterCard. On the small business front, equally, we see this as a terrific opportunity for growth, both in the traditional sense, from a co-brand perspective, the opportunity to reach consumers who are also small businesses and provide them with unique benefits and capabilities that meet their needs, this is something MasterCard has been at the forefront of for many, many years. I see it as a way to provide big company rewards and benefits in a way that's digestible to smaller organizations, again, leveraging the power of our scale with a different audience. And we've been making terrific progress here, helping small businesses to digitize, helping them to accept payments, helping them to get access to these words and benefits. And we have programs that we've launched with the likes of First National Bank of Omaha and Hello Alice, which is a company that has a directory of over 1 million minority-owned businesses. We have relationships in the small business space with traditional banking customers like Bank of America as well. And so this is an area of the ecosystem that's growing. It's thriving. We -- again, we sit at the forefront of the innovation in this space. Our brand has become very much synonymous with inclusion. And of course, inclusion is important as small businesses continue to grow and expand. So we see this as -- in the commercial space, we see this as an area that is going to -- from an investment perspective, we're going to continue to place a lot of focus and emphasis on it.

Great. Thank you. Real-time payments, FedNow is something that we get -- I think we get asked about that more than anything right now. Personally, I think it's overhyped. But it launches soon here in the U.S. And I guess, your thoughts as to the risks or the opportunities for Mastercard and that's -- present by the launch of FedNow?

Yes. Well, certainly, if you kind of step back and think about the problem that FedNow is solving, we have [ done ] our debit product today that works highly efficiently. It is widely used. There's zero barrier to entry. There's protections like zero liability and charge-back protection and consumer protection that comes along with it. There's zero friction in use. It's low cost. So the reality is that the debit product that so many consumers avail themselves us today works quite well. And so you kind of ask yourself, what's the problem FedNow is actually solving? There's an announcement that they will go live later this year, but availability of a service is very different from scaling of a service. Right now, there's no consumer interface with FedNow. There's no protections. All those protections that I referenced from a debit perspective, those don't exist. And so as we think about what needs to happen, we're still a long way away from FedNow being able to scale in a ubiquitous way that consumers really want. I mean, really, if you think about it, consumers want ubiquitous, safe and secure ways to pay, merchants want access to consumers broadly. And again, debit provides that. So while we welcome the competition. And while this is something we'll continue to watch and observe, we're certainly in the space. We have our own real-time payments assets that we've acquired over the years. There's a long way for FedNow to go to really scale and provide that ubiquity and safety and security that consumers need and require.

Thank you. Regulation, always -- one of the risk factors are -- what are you seeing today in the regulatory front? What's new?

Yes. Well, look, I think the attention that we continue to -- the payment space continues to receive from regulators is a reflection of the critical role that we play in the ecosystem. Payments sits at the center of so much. And I think naturally, that's going to draw attention. So what I see is we continue to work with regulators to educate them on the value of payments and to advocate for their benefit. Most recently, we saw the Fed clarify its rules around Reg II. And of course, just to ground everyone in what that is, the Fed is requiring 2 unaffiliated debit networks for all card-not-present transactions. Again, here, I think -- so this goes live July 1. Our network will be ready to enable banks to comply with this new clarification for Reg II. It's early days. We'll see how this plays out, and we'll see what the adoption drives. But from our perspective, what's paramount is the safety and security that we drive to the ecosystem. And the innovation that we bring and the investment that we've placed in safety and security remains. And so these -- whether it's other networks or whether it's FedNow or whether it's any other regulatory or government-backed system, safety and security is paramount, and that's what we believe we bring to the table. That's a core asset of ours, and we're going to continue to place investment and focus there.

Thank you. I think we have time for one last question. What are you most excited about? What's -- for Mastercard in North America? What -- would get you...

Yes. You mentioned, I've been in the business for a long time. I've never been more excited about the growth opportunities in the payment space. The continued opportunity to digitize core payments, the opportunity to extend into services and new capabilities like fraud and cyber intelligence and the opportunity to expand into new areas like open banking present great opportunity. And it's really -- to be in this space and to be -- to lock arms with our customer partners in the customer-based approach that I mentioned, it's very exciting for us. And we look forward to continuing to see where the market takes us.

Great. Thank you. Thank you very much. Appreciate it.

Thank you so much.