Mastercard Incorporated (MA) Earnings Call Transcript & Summary

All right. I think we can get started. Thanks, everyone, for joining. My name is Tien-Tsin Huang. I'm the payments and IT services analyst at JPMorgan. Really excited to kick off the conference on our side with Mastercard. With us from Mastercard, Michael Miebach, CEO. We were just talking about his travel. He's a busy man. And I really appreciate it, Michael, you being here. I know how busy you are, and it means a lot to me to have you. So as...

Thanks for having me. It's the first slot, and I'm happy that so many people made it at 8:00 in the morning.

I know we're kicking it off. I always want to kick it off in the right way with Mastercard. So as usual, we'll go through a fireside chat, Michael, if that's okay. Gathered a lot of questions from investors and hopefully cover a lot of ground here in the next 30 minutes. So thanks again for being here.

So you've been at Mastercard since, what, 2010?

2010, yes.

And I know you've had a lot of roles, obviously climbed through the ranks there and been a part of some very important divisions within Mastercard. Would love to just hear your perspective on how the company has evolved and adapted since you've been there in, what, 2010, you said?

Right. And the answer to that question could take us 35 minutes long, I'll collapse it a bit. Mastercard today, if you compare to 14 years ago, is entirely different. So when we just take the geographic spread. At the time, I started with the mandate to build out a business in Africa, which we didn't really have. Today, 2/3 of our revenue is from outside of the United States and Canada. So it really flipped around from a fairly U.S./North America-centric business to a very, very international footprint. If you look at it from a product perspective, back 14 years ago, it was predominantly consumer credit-enteric. Today, it is the full range of card-based solutions: credit, debit, prepaid, commercial, into distributed, ledger-based, blockchain-based payment solutions and of course, account-to-account. So geographic diversification, product diversification and that is the intent. This was a very intentional journey at the time because we were coming out of the financial crisis. IPO in 2006. So it felt like there's a business that grew rapidly but was also pretty vulnerable. And with diversification, it's cushioned more. It's showed in COVID how that's actually working. But as we are building out our product set, we said diversification is one thing on the payment side. But we have to think further and say, how do you win the differentiation game versus competitors and alternative payment solutions is when we started to build out that services portfolio. That we learned to lot so dearly, anchoring on big secular trends like cybersecurity and big secular trends around digitizing world, people look for more insight. So today, that's more than 1/3 of our revenue. So it's a very different company from that perspective. When you look a bit further, the technology behind to make all of this work, this is a technology conference, complete rewiring of the network. A brand that's a top 10 brand, so we're not just a large fintech, we're also a consumer brand. A top 10 brand in the world is not something that maybe 9 other companies can say that. So that's pretty significant. So quite the journey, I have to say, and very intentional from the beginning.

So you recently announced some organizational changes as well. I'm sure it's part of that evolution you just described. Why did you make the changes? What are you trying to get out of it, Michael?

Right. So just for everybody's benefit, what we have done is back in -- at the end of 2023, I recast our regional footprint in line with what I just said. So we are a very international footprint and I wanted to balance out the world. So the way we face off to the world is now through the Americas and Asia Pacific, Middle East, Africa as one -- as the second unit, which gives us 2 fairly even-sized businesses and allows us to deploy our resources in that even base, and that was the idea. So we said, okay, we do that. The next thing to do is to fully align our organizational structure with our strategy. Our strategy to be leading in payments and in services. If that is the highest level, that's how we reorganized our products and services' central entities. And here, never forgetting that the heart -- the beating heart of Mastercard is payments, so we have now a core payments unit. That opportunity, the payments opportunity, we needed to make every effort every day to extend that long into the future, and that goes into new payment flows that are not carded. So we created new payment flows as the next -- as the second payments business unit. And we took all of our services around the company, we put them into one. So it sounds all very logical. And like why didn't you do this before? If you think about how we grew through acquisitions, through bolt-ons. So this was an alignment after 5 years, 6 years of rapid growth through acquisitions and so forth, just making sure we take the thrash out of the organization, put together what belongs together. Also did some portfolio readjustments, where we sold a few things off. This was the time to put it in the most organized fashion and just move faster and deliver more value to our customers. No magic behind, it's still the same strategy. It also showed the depth of our talent bench. I turned the team around. We had some departures. We had some people that moved up. And the last thing I should say on that is we were -- we're been avid users of artificial intelligence/machine learning for over a decade. This was a time to really take all of our efforts around GenAI and put them together in a centralized function that will take the more centrally required decisions on where do we have foundational models, what data infrastructure do we need to do, while at the same time everybody is encouraged to use generative AI. So we now have a Chief AI Data Officer function around the table as well.

Right. Good. That's helpful. So I followed Mastercard a long time, and we've always thought of Mastercard as a growth company. And it was a very simple model with spend and take rate. But the algorithms changed. As you just described, the organization has changed quite a bit. So can you maybe help the audience here build up the components of growth in your algorithm?

When I started 14 years ago, it was about, all right, here's the natural growth of the economies, let's try to participate in that. Let's make sure we get an overproportionate share of the secular shift from cash into digital, and let's win some share. That was the growth algorithm. Today, it's rather more complicated, but it's also more promising if you are more intentional about the various drivers of the digital economy. And you take it further down and you really see what other single buttons you can press. And it starts off with capturing the growth in payments, the growth of the economies around the world. It is still about the secular trend. But then we could spend like half an hour talking about the secular opportunity. Let's not do that right now. Then it is winning share. Then it is new payment flows. Then it's optimizing portfolios. Those are things that we didn't think about years ago. It was just kind of be in the flow. Today, the value that we derive from using our services to help our customers to really optimize portfolio performance, what does that mean? It means authorization rates. It means predicting which transaction will actually go at the right point in time. So I can say to a CFO somewhere, "Do this transaction now. We'll save you money in trying multiple times or having some sort of back-end process in your company to do that." Portfolio optimization. New payment flows, separate organizational structure today. That wasn't something that we thought about 14 years ago because it was all about cards and P2M. So much deeper and much more specific growth algorithm. And then the same applies in services, because services and payments interlink. More services, more opportunity to get to into different kinds of payments is more -- payments show up more data on new services and so forth. I talk about this powerful flywheel all the time. On the services side, the growth algorithm is we have, call it, 50 different services. The deepening in the cross-sell into our customer base is part of our growth algorithm because we have a huge installed base around the world. And the more services we put on, that's a tremendous opportunity of growth for us. Then you go and build out and say, well, if this is my existing customer set, we are very actively pushing beyond retail banks and acquirers and so forth. So what are all the new customer types. Let's take our existing services and take them there. Take our existing services and run them across non-P2M payments into account-to-account and so forth. So you can see the growth algorithm is much, much more complex, but it is also full of opportunity. Today, we are very deliberate about every single component of that.

Sure. So you mentioned person-to-merchant payments. So I do want to dig into that and the secular opportunity left. We do get that question a lot, Michael. Of course, the card conversion story, we're so accustomed to examining it. Maybe walk us through the U.S., Europe, LatAm, your big markets, what's left in terms of the secular opportunity? What's ahead?

So I mean we're really good at digitizing the world. So I do get the question as well that you get is, "So once you digitize the world, then what?" Well, the point is the denominator keeps growing. So that's the first thing. We see economic growth around the world in the developed markets as well around. And not everything starts off in the current form or fashion. There's cash. But it also happens outside of cards in different forms of payment, there's a lot more choice in payments today. So you see a landscape that's broad, and there's a lot more opportunity for us to go -- at any given point in time this year or over the next 5 years, to go after payments that we don't have today. So that's the starting point. This landscape looks a little different market by market. Take the United States, this is a market that is highly digitized. But if you just were to look at total payment volume and TAM, the market is so huge that even, let's pick a number, 10% is just such a large number. So we will be busy for years just with the United states. And how do you go after it? You go after it with fintechs. You go after it with neobanks. They're going to look at the underbanked. It's a whole host of things that we could be doing. But it's also looking beyond the volume opportunity into the transaction opportunity. What happened after COVID? Before COVID, you went to a restaurant and you pay your bill. Today, the ratio of order-in is much higher than it was before. That is multiple transactions because they got to pay the marketplace, the marketplace pays the restaurant, and we try to be in the whole value chain of every one of these payments. The same is in transit. The same is in Booking.com, Agoda, the whole online travel agencies. So there's a whole set of business models that are much more prevalent today. That's the transaction opportunity. Remember, we price per transaction and for volume, so we can toggle. You go into Europe, you see some of the same that you see in the United States. But in Europe, you still have a significant opportunity to go after cash as well. So the transaction opportunity is there, the shared economy, the delivery economy. But take Italy, a market with significant levels of cash. Some of the Central Europe large economies, France and Germany, a little less cash, but still, there's still a lot to go after post COVID for us. You go all the way into emerging markets and you think 10 years out, Africa today, you have 80% plus. It's pretty clear that the tools are not the same. If you go into Africa, where is the transaction happening, it's happening on a phone. So mobile-based financial services, you have to really become very deliberate and very local in your approach to go after that. Our investment into MTN, the largest telco in Africa, a previous investment in Airtel, it just shows how we're thinking about that in a very different way. And then the 2 big elephants in the room that we should talk about is China, unlocking China. That's a tremendous share opportunity for us. And then there's Japan. Huge opportunity, not very digitized, friendly government and we're welcome.

Yes. You mentioned China, so let's talk about it. You do have one of the few with the license to perform under a JV structure. What's the latest there and the opportunity? Obviously, it hasn't historically opened up to foreign players?

So there is one other foreign player that has had a license, I think since 2019, which is Amex. Fairly relatively small market share in China. Obviously, there is the big player with UnionPay. And as of May this year, mid-May, we are live in China. So that's great. That's exciting. We are not starting from 0 in China, that's important to know. Obviously, we had a cross-border business for years. We have a services business. We've got all the tools there. But the proposition that we can now offer that nobody else can really offer is a fully domestic issued and usable card, and combined in one single card with the best acceptance globally. Because UnionPay cannot offer that, Amex cannot offer that, only we can offer both of that. And there's another large American payment company which does not have a license today. So it puts us in a very unique position. Issuers are putting our programs because they are excited by this proposition for their customers: Chinese consumers, Chinese business people who are traveling. So we are very busy putting out the issuing programs. We're busy with the acquiring side of things. But it's also important to know that from day 1, every one of these single-use issued cards, those credentials can be used in the Chinese wallets. So you get a bit of a head start on the acceptance side, but we will be very busy building out our own acceptance. That's very important. The Chinese government gave this license after a 10-year journey. And today, we're in a position where the Chinese are looking to connect their economy more -- better internationally. They're looking for inbound tourism and so forth. So this is a good time to engage and help them on that journey. At the same time, we have -- we're not naive. Geopolitically, this is not an easy time and we have to pace this carefully. So I look at it through a medium-term lens, but it's pretty exciting and very unique for us.

Yes. No, for sure. We're excited to track it. No, thanks for going through that. So let's -- I want to make sure we hit a few other topics. On the new payment flows, maybe if we go dig into that a little bit. We have a lot of tech companies at the conference that are going to be going after what you're enabling, whether it be commercial or disbursements, remittances. We have a couple of remittance companies here as well. So what's your goal there in terms of enabling some of these new payment flows? What's your role? And how do you see it forming here in the short, mid, long term for Mastercard?

Right. So when we started speaking about new payment flows, 2017 Investor Day, probably you were there, I was there. I think it was the first time we laid it out, just as a theoretical opportunity. It was a massive TAM. We're now much more targeted when it comes to that. So we're particularly excited around commercial. And here, very specifically, the large market and SME opportunity on one hand; and the B2B accounts payable opportunity. And we're also pretty excited about disbursements and remittances. There's Bill Pay, there's others out there, but these ones we haven't focused. And yes, there are a lot of companies out there. The way I look at this is, this is an ecosystem very much the same that we have on the P2M side. There are people who we can enable and people that are, so to say, the tentacles in the ecosystem because we are B2B2C. I don't want to be with the end user, that is not our forte. But if we can enable a lot of specialist companies very -- then that's a good thing for us. Now that market, if you take commercial POS, I mean T&E cards has been around for 50 years. And it feels like, over the years, we've been driving like with the handbrake on. The market just hasn't come and grown to the level. Why is that? Because a lot of that side of the market was T&E based, and that was never a real exciting topic outside of a few markets -- Australia, U.S., U.K. and so forth. In emerging markets, that was never a thing, most of these cards were on consumer sides and they never took off. I feel we're in a different stage now. We're coming out of COVID. A lot more companies have digitized. A lot more CFOs are very different people who now have a kind of a nick for digital solutions. They're interested in that. They're reorganizing their back offices. Larger companies are looking to take cost out. So B2B payment solutions are suddenly in focus, and they're more exciting than they were ever before. On the SME side, what's the difference to a consumer card? You could argue, well, there's a lot of governments who are now interested who want very specific SME solutions. And look at the working capital side of things. If you're a small business and suddenly somebody can say, well, you can keep buying your supplies, whatever you're buying, and you get 30 days of credit, while they're otherwise not getting good lending support from SME specialist players, there are not that many around the world. So we're at a time where leaning into this market feels a lot more promising than it did 5 years ago. So there's an unlock there, I feel. We've invested in technology. We've got smart data. We got inControl. So there's a bunch of expense management solutions which are leading in the market. We're the leader on virtual cards. So excited. We hired specialist people now. Because talk to these new CFOs, you need different people, you cannot have the retail card person trying to sell that. So specialist sales force, it all comes together. The B2B accounts payable side, there's a few other elements to it that are specific. This is for large companies and the buyer-supplier relationship. There are specialist companies which we are working with. But here, we can tune this in a way through finding smarter go-to-market, through ERP back-end systems, for example, SAP, Oracle. They are now partners where we embed our virtual card capability in the back end of a company as part of their tech stack. So that drives a real different growth model for us. So a slightly different approach. But overall, I feel commercial is that it's an unlocked time. Disbursements and remittances, that's been a captive market between a few global banks. And exchange houses, that is opening up significantly. We're partnering with a whole range from Pay Send to Payoneer. There's a whole list of companies that we're partnering with. And for us, it's really the scale. It's 150 currencies, it's 180 countries, 10 billion endpoints, and that is very hard to offer for any one of them. But every one of them can be an endpoint or a destination point in a transaction, and if we can sit in the middle and facilitate that, that's important. This is a difficult business from a KYC AML FX perspective, so we have those capabilities. We made a few acquisitions in that space, and we feel very well positioned. So I feel we have the tools. It feels it's the time. And our B2B2C approach, where we very clearly say we want to partner and not compete, helps us a lot.

Yes. No, we hear Mastercard a lot. In a lot of those environments, virtual card is obviously very important. We hear Mastercard quite a bit. But you mentioned growing share in general...

Yes, we love growing share.

As part of the growth algorithm. I think I've asked you a lot of questions on the earnings calls around some of the wins that you've had with fintechs and banks, even on the virtual side, virtual card side. So tell us about why Mastercard wins these deals. And I've heard you talk about price discipline as well. So beyond price, what does it take to win in general on the network side?

So we had a few -- well, more than a few, very significant win over the last, call it, 4, 5 years.