Mastercard Incorporated (MA) Earnings Call Transcript & Summary

Okay. Good morning. Welcome again to Day 2 of the DB Tech Conference. And my name is Bryan Keane. I cover the payments processors and IT services here at Deutsche Bank. And we're really excited to have Ed McLaughlin, who's the President and Chief Technology Officer at Mastercard here to do a fireside chat. And nothing going on in technology these days, so I'm sure there's something to talk about. So with that, Ed, maybe we could just kick it off. As the Chief Technology Officer, can you tell us a little bit about your background? I know you've been at Mastercard for a while and discuss your current role, what you're working on now.

All right. I do want to ask one thing for everyone in the room. For everyone who's not here, tell them they missed the best session. All right. Will you do that? Will you do that for me? So quickly -- and let me just do 2 things because you asked about the background, I do think it's interesting. I have always worked at really the intersection of technology, data, transaction processing. The first product I had in the late '80s was what we called an EDI translator where we're linking together isolated computerized systems to move data and the associated payments with that. And there was like 10x, 100x value you can generate by doing it. And you just learned that early on. So having been able to watch what was futuristic become the commonplace, which I know you have all known as investors, has just been amazing. I was in packaged software. We had a company [ Logicworks ] that made data modeling and design tools for the first wave of data warehousing, relational database separating data from applications to generate value from that. We IPO-ed that one in '96, sold it to [indiscernible] Technologies now, [ CA now, Broad now ]. It's hard to keep track. I'm sure you have the same problem. And then I was CEO and Co-Founder of a first-wave Internet payments company called Paytrust. It was online bill pay applications, sold that to Metavante in 2002 and then ran the payments and strategy for the Metavante Group, before I came over to Mastercard in 2005. So I've been at Mastercard about 20 years. But prior to that, it was mostly what we didn't know to call fintech at the time. I think it was e-finance but technology start-up software. At Mastercard -- I'll do this quickly -- I really focus on how do we expand where we could use our applications, taking advantage of new flows and new segments that we could pursue. So in health care, bill pay, transit, which has been just a home run for us. And more and more ways we could apply the technologies we had. Ran the global franchise, including through 2008, kind of a crucible moment for a lot of us in the downturn. And did the digital and emerging. So this was really when the shift to digital first, to mobile was happening. So we did things like MDES, which is our tokenization system. Send, which became Mastercard Move, moving -- linking accounts together faster. [indiscernible] Apple Pay and Square and Uber and Netflix and that whole generation is, we were able to transform I think in many ways, what payments meant. And 2016, went into the CIO role, 2017 CTO -- President and CTO for Mastercard running the tech. Really quickly there. The operations is who we are and what we do, every day, keeping our promises, what the brand means and that trust we have in the brand and then also all the technology to build what we [indiscernible]. So the investments in the modernization of the future of what Mastercard and hopefully, the industry becomes. So it's been great.

Yes. No, it's been a great ride and it sounds -- it feels like there's a lot more to come. And also, maybe you could start, maybe you could just talk about innovation at Mastercard and share some of the investments you guys are making in new tech to modernize the network?

Sure. And I'll start with the network because we've made some amazing investments over the last couple of years. We even won our own CEO award for this one of what we've done to enhance and upgrade the network backbone. So if you think of Mastercard, really, what we're running is a global network fabric, incredibly high speed, incredibly resilient with both our own data centers, public or private and classic cloud, as well as working with the third-party clouds as peers within that network fabric. So it's giving us the ability to put compute, to put data, to put servicing anywhere we need to in the globe for optimization or localization or regulation. So we've really built a tremendous amount of flexibility into the network. Now that helps us to improve resiliency, lower cost, speed everything up. But what it also does is, this is an incredible foundation to build on top of. So one of the biggest things in the last few years is what we call our Cloud Connect or our Cloud Edge. We want our customers to have a single front door for transactions, for services, for APIs and we'll meet them wherever they are. So we've always had edge computing. We could put right in our customers' data center for unbelievable reliability and security. We've now recreated that when they run in any of the major cloud providers and regions. So whether it's traditional customers we've worked with for years, that's shifting some of their important loads into a cloud environment or born in the cloud fintechs like Nubank, which is a great Mastercard customer, we can connect to them directly that way. Second big element of modernization is, we really deconstructed a lot of the services that used to just be part of our transaction flow, things like tokenization, things like the fraud scoring, loyalty services, installment payments and provide direct access to that now. So you can either get it by running a transaction through our network or for private label or other reasons, we have the ability to flexibly provide those services to transactions that we're not switching ourselves. That's been transformative, really transformative for us. The other one I'd highlight is just the virtualization of everything. Our ability to take what used to be relatively fixed or physical things and drive it on a truly virtualized basis, allows us to work with things like tokenized deposits and accounts to creating new, what we call contextual commerce, new ways that you can access the network, new ways that consumers are going to want to interact. One example just because I love it is, we've always talked about your car being a computer on wheels. So we're working with Mercedes, for example, where we can virtualize the connection to the network and literally have your car be an edge device that you can use for payments securely. So I think it's just 1 example of how we can continue to extend the reach and create all sorts of new experiences for consumers.

And how do these innovations that Mastercard is doing, how does it differentiate you versus the competition and some of the peers?

So payments has always been, 20 years at Mastercard, an incredibly competitive marketplace. And I think we've always excelled by providing the best experiences, the most reliable processing around that and making sure the offering was tailored for the environment that it wanted to be in. So there's lots of different methods that are out there. But I think for the core consumer experience, what we have is, even with the existing payment products we have, we have things that people love, that work great. And now we can extend it to all kinds of new environments for them to be able to use it. So as digital experience has become more immersive, as more and more of our life becomes device-based, those all become extensions to the network we already have. So we can compete by having value-added services that are based on data and experiences that no one has. We have consumer propositions like 0 liability, settlement guarantees, dispute handling, the experiences and the extent around the brand really puts us in an incredibly unique and I'd say, advantaged position from what we see in other alternatives.

You mentioned the virtualization of everything, whether that's tokenization or cards or other technologies. Maybe you could just help us discuss how Mastercard is driving these capabilities, kind of explain how it works, the technology and discuss why it's important to your strategy?

It is essential to the strategy. And for those who have been following us for a long time, I think it was [indiscernible] 2012, where the foundation of our Investor Day is, every device is a commerce device. And at the time, there was even questions that we have -- you're card based. And we had to explain no one benefits more than Mastercard from being free from the tyranny of the physical world because the whole point of the card was just to get payments on to the network. So we built the technologies. We pioneered the technologies for the industry, to allow us to basically instantly issue a secure Mastercard credential into any environment or any device. And that has been profoundly transformative. So what it allows us to do is, everything from the mobile phone you had, to your account with a streaming service, to your Mercedes, make that just a natural part, an extension to the network. And what we've seen by moving to the virtualized credentials because a lot of times I get the questions, what compromises do you have to make to move into the digital world. Digital is better. It's digital supremacy. So I see the plastic card as sort of a backward compatibility device to the infrastructure that already we have in place, that people love. But if you look at what we're now doing with tokenization, we have a platform we call MDES, Mastercard's digital enablement services. We launched it 1 decade ago. Now over 25% of our transactions are tokenized. It's growing at 50% a year. When a transaction is tokenized, we see 3% to 5% greater authorization rates, that's you as a consumer having a better experience. We see reductions in fraud, that's -- everyone is doing better because the systems are safe to work with. And we can create and craft all of these new contextual commerce experiences like we've talked about. So when you have a tokenized card with, say, your streaming service, you don't have to worry about it being expired. If the card for whatever reason is replaced, we can automatically update it up there. If anything happens to the number that's stored there, it can't be used anywhere else and we can simply reissue it. So what we've done is taken the opportunity to move fully into the virtualization in the digital world to create a much better consumer experience, greater authorization rates and reduce fraud around it. And that virtualization applies now into all sorts of new segments like commercial. If you think about B2B payments, you have another flow, which is [ never carded ]. It's open for us. But the type of capabilities we have in our network apply amazingly. So 1 great example is the online travel agencies. They need to, in a B2B context, pay hotels, pay airlines, pay travel services and cards and things like that, they all take cards. So the ability for them to automate their systems by pushing card numbers out and using that to work with the existing payment mechanisms, with all the capabilities of the Mastercard network, again, it's transformative and it's been a great growth business for us. So the whole movement of procurement to payment, we can provide an essential component to that. So companies like Oracle and Coupa and SAP are all embedding in MasterCard's virtual card solutions because there's a segment of the payments that are poorly served today that we can do a great job addressing. And the unlock is, it's not a card anymore, well, it's a fully virtualized Mastercard credential that we can embed anywhere. So these are just 2 examples of that. But whenever people say, well, what about this new environment. I always go back to our foundational premise, right, every device is a commerce device to make and receive payments. And that's really what the network is enabling.

So I got a surprise question.

All right. Cool.

How are you thinking about GenAI? You've never heard that question.

Although, I was asked that a while back and I did say, I think, speaking for technologists everywhere, one of the greatest things about GenAI is, we got to stop talking so much about the metaverse. So that was just win right there. Now, GenAI is an incredibly powerful new technique that we're looking to take advantage of. But I also think -- and I think it's important, maybe even for your investment thesis, we need to put it in context because AI; is white hot again. Mastercard has been working on this for well over a decade and it has already transformed our business. It is already the source of incredible value-added services that we can put in the network. So let me talk a little bit about how we're using AI in general and then how I see generative AI really extending and augmenting what we're doing. Because if you're a Mastercard, one of the big advantages we had and yes, I think we've used AI better than most but we also had an opportunity that wasn't available to many is, we had an incredibly strong signal coming in. Was it fraud, right? We adjudicate all the time. We know that from our training set, was the transaction authorized, should have been authorized. So we had incredibly rich data and we had really big data. We did 143 billion transactions last year. Our transaction has been doubling every 5 years [Technical Difficulty] transactions, as a percentage are flowing into our network. So we had a really big training set. So when we applied AI, we could create value-added services for our customers, things like what we call Safety Net. It's a circuit breaker, we run in the network. When we see a fraud pattern, we know. We can stop those transactions before human agent could even get a [ page ] like -- and we do that, protect everyone in the network. Our Decision Intelligence. When we moved from the old rules-based systems to AI-based systems, we had tremendous increase in the precision by which we could spot fraud. I think it was about 3x. But we had a 6x benefit in removing false positives. That's more business going through the network because we could tell, hey, this actually is good even though we might have thought it was dodgy in the past. Better experience for consumers, more revenue for our participants. We've doubled down on that, what we're calling auth optimizer. Well, if a transaction is declined, we can say, "hey, here's when you can retry it. Here's another way you could do it." We get a point or 2 more authorization rate, again, more business, better for everyone, from using the sophisticated AI techniques. So we won Forbes Magazine Innovation of the Year in 2019 for our decision management platform, for the AI engines we're running. And we've reached the point today where we have over 1 trillion parameters running in our in-memory decision management system that we can apply and use AI for. And we're constantly using new techniques. So we have 14 techniques we're using today. We'll run on what we call silent mode, where we validate, are the new techniques doing better than what we had before. And then we can cut over to that. We're constantly maintaining those things. So AI has been massively transformative for us and allowed us to generate a tremendous amount of value. Now, in GenAI, new set of techniques. We have what we're now calling Decision Intelligence, when I talked about earlier, DI Pro which we're using recurrent neural networks and other generative techniques to just like a ChatGPT works by guessing the next word and, therefore, generating incredibly compelling and sophisticated text. We can now look at anonymized payment histories of any actor in the network and guess what's happening next in the way we could. So it's taking the attention, spreading it wider and getting much more fidelity. So again, we've seen a 20% increase in fraud detection on top of all the amazing things we had already been able to do with AI. So that's why we're saying, when we talked a little bit about it earlier, it's not a new game but it's an amazing new club to have in the bag, to apply to those use cases where it makes best. The other thing it does is because of the natural language interface and the ability to work with unstructured information, it allows us to apply to new areas of the business. So I'm obsessed with being in a place where everyone can do their best work. It's one of the greatest parts of my job. So we've talked about workbenches, what's a knowledge worker's workbench, what's a sales workbench, what's a software development engineer's workbench, what's data scientist's workbench. And how we can use these new AI and generative AI tools to make them more effective, to make them more efficient. And that whole human computer interaction and the augmentation, which goes all the way back to when I saw spellcheck in the late '80s and thought it was the most transformative thing. This whole idea of this computer assistance for being able to do better work, we're seeing huge, huge potential there. We're also using it for the product set. One example we have something called shopping [indiscernible], which can look at your behaviors, talk with you about what you like and then do massive research to give you recommendations for things you might want to do. You couldn't really do that before at scale. You'd have to have a personal shopper. But now these type of things to help aid commerce, to help our merchants sell more, to apply the technology in that sector makes a whole lot of sense. And then there's this last one, I don't think people are talking about, as much as you'd like. I think you'll see a lot of benefit across a lot of sectors with this. And it's combining AI techniques. So generative AI -- we just won a CIO 100 award for this one. I was really happy for that. So combining things like the ability to handle unstructured information and then bring it back into your workflows. So we did one, where we get all kinds of requests in from our customers through a variety of channels. Getting that to the person most qualified to solve that problem, it's always tough. And if you route it to the wrong place, customer gets delayed, as you got to figure out where it really should go. And like any -- I've been at Mastercard 20 years, long-standing company, names changes, people call things, different things in different regions. So what we were able to do is, use, again, generative AI techniques to look at all the different ways tickets had come in and where it was actually finally resolved. And we're now able to get with 1 hop from the request directly to the person who is qualified to do it. And we had 10 people -- about 11 people, I think it was, who all they did was route and try to get things to the right place. We've now shifted them. So they're all working on the quality side of things, we guide it to the right place, how well did we service that customer? So those are the kind of compounding benefits I think you'll see. So already transformed our business, already driving a tremendous amount of value. And I think these new techniques are going to give us all sorts of capabilities to extend that.

Yes. I'm sure we could probably talk the full time on GenAI.

Yes, I would love to.

I do want to move on and ask about Mastercard increasing the percentage of total transactions that you switch on the network. And I know that's really important focus of the organization. Just maybe -- can you help us, what has helped you guys move those switch transactions?

Yes, that's -- I'm glad -- that's something that's been transformative for our business, which I actually think might be a little bit underappreciated.

Yes, I think so too actually.

So if you look back 5, 6 years, we switched about half of our branded transactions, which has been great for us. Now we're -- almost 2/3 of our branded transactions or over 2/3 -- I am looking at that, over 2/3 of our branded transactions, we're switching through the network. And that comes from a lot of places. We've opened up countries like Mexico and Japan, big economies where we didn't switch before. In a lot of markets where there's domestic players in switching, those transactions have actually come to our network. Why? Well, maybe because a lot of the investments I talked about earlier, where the things we do on the backbone, the speed, the reliability as payments become more and more critical in environments around the world. Well, we just talked about with AI, right? I heard the phrase, AI works opposite of Moore's Law. Every incremental improvement you want, you have to double your data, you have to double your compute on that one. So our ability to scale, to see across the entire network and then apply that to every transaction that flows through makes the network that much more valuable. You asked earlier about competition. That's incredibly unique capability. So what it does for us is we now see more and more transactions in real time being switched through the network. And we've generated all kinds of new value-added services we can apply to that, whether it was the tokenization, the virtualization we talked about earlier, the AI-based fraud scores, the safety nets to prevent runaway fraud. So what you've seen in the numbers over the last 5, 6 years, is around the world, people bringing more and more transactions to the Mastercard network. And as those transactions are in network, our ability to apply more and more value-added services to them.

Is there still room to go to switch even more than 2/3? 9/10 or...

So it grows in a couple of ways, right? One of which is, all the new segments and sectors that we're going after. So it extends us into new ways, opening up transit -- going back to where I started at Mastercard is, billions of taps now all coming to the network. And that's great for us. We're in economies which are [indiscernible] shift economies, so a lot of things happening in Latin America. Like I said, the cash that's still there in a Italy or a Germany or a Japan, are all wide open opportunities for us. And by having those transactions on the network, we can also do a much better job ensuring the consumer experience using that, which, again, differentiates our products in and of itself. So I think you'll continue to see more shift coming to the network. You'll continue to see -- I talked earlier about -- addressed services access. So even if we're not switching the transactions, we can apply value to other transactions, which would be another growth driver for us. So on us or private label transactions now becoming scope for our services. So we'll be touching more and more transactions around the world. And that's a great business driver.

Yes. Another kind of highly debated topic is account-to-account payments and bank payments. I'd love to get your perspective on some of the threats and opportunities of that, both in the U.S. and internationally.

Yes. First thing I'd say, particularly in A2A is, we all know like one of the hardest things to do is take something that works incredibly well and replace it with something which appears substantially similar, right? So I'll start with what we talked about earlier. We have 100 million acceptance points around the world. We're providing 0 liability for consumers and payment guarantees for settlement. The investments we've made and the scale and the services and the AI, it's a really unique environment we have, where in many, many sectors, we are the best way to make the payments. But A2A is also something we know incredibly well. Vocalink, for example, is a Mastercard portfolio company. I'm on the Board of the Vocalink U.K. The U.K. has had one of the most advanced A2A faster payment systems in the world since 2008. It's also one of our biggest and most vibrant card markets. So if I want to move from my investment account to my transactional account in near real time across institutions, and I used an A2A connection for that, that's great. When the money is in my transactional account and I want to get on the tube in London, we have 180 milliseconds to make sure that gate opens. And if it doesn't, there's going to be a riot, that is an incredible application of our network. So I think you look at the sectors or things are best and you see more of a combinatory effect. The other thing is, we work with governments around this. There's 12 economies. I think about 30% of A2A transactions in the world are running on Mastercard technologies. So we can apply value-added services to that, some of our AI skills and capability, working with 10 banks in the U.K. for financial crimes on the A2A systems by, aggregate the data and applying Mastercard expertise for us. So we see real business opportunities in everything we know about the art and discipline of running a high-scale national critical infrastructure payment network, can apply here as a business opportunity for Mastercard. And then if you look at what's going on, really interesting stuff with, for example, a Pix in Brazil, or a UPI in India, a lot of that is going after financial inclusion, which helps us because as more people come into the system, we are the aspirational product. They will want to move into credit. They will come even more firmly into the formal economy. So our long-standing, how do we bring more people in and how do we encourage sustainable economic development, that helps us. So Brazil is still a very, very solid market for us. And Pix in some ways can give me a little bit of a tailwind for that. So getting more people in the economy is getting more merchants transaction electronically. In some ways, creates opportunities for us that we couldn't do by ourselves. So I think you'll see a continued modernization of these 30-, 40-year-old archaic ACHs, I think most of that wave has come through. And then we'll figure out what's the best way to do which transactions on behalf of consumers and how we can add value to that.

Got it. You've obviously touched on and mentioned value-added services a couple of times. So I just want to ask you directly, just that being a big part of the business and one of the fastest-growing business in -- at Mastercard and helping accelerate growth, how do you think about tech and data assets required to maintain that strong growth rate in value-added services and your leadership position there?

Yes. And thank you for asking about the tech side because I think that is where we have such structural advantage for that. So when I think about VAS, it's also kind of like a big topic, what's a value-added service. So I'll really break it down in 2 ways. We have all the things which are around our transaction and all the things we do during our transaction. And we talked a little bit about that when you asked me about the switching side of the business. So when I look at -- and I'll start with what we can do during the transaction because it's a huge scale driver for us, where we can create a new capability and it can apply to over 3 billion accounts globally, right? That multiplier effect, that scale, the ability to take value and have it impact the home network or the transactions we're seeing across the network. So the fraud scoring, the authorization approval rates to help people drive their businesses, the tokenization and virtualization. Those are all value-added services that we can apply in real time to our transactions. One of the biggest investments I'm making is, how do we get to event-based streaming environments where we can do all of this in real time during the transaction and interact with our customers and other business partners in new and more flexible ways. So a lot during the transaction. When you think about around the transaction, before we have gateway services, we have all sorts of ways to make it easier for people to access and bring transactions to the network. I talked about Cloud Edge and things of that nature. And then after the transaction, the data is such an incredible asset. And I will say when we talk a lot about AI I think we have an advantage in how we've always emphasized responsible AI, right? AI is data, data is AI. So the data usage bill of rights AI is data, data is AI. So the data usage bill of rights we've published out to consumers. The work we're doing with governments and we've published out to consumers, the work we're doing with governments and regulators around the world to have same and safe policies for how we use it. To let consumers know we only use it to make the service better. We use it for your benefit. And again, this isn't new to us. This isn't fashionable. We -- I was fortunate enough to be one of the founding members of Harvard's Kennedy School Council for ethical use of AI in 2017, I think, is when we kicked that off. So it's been an central part of how we do it and how we handle the services and doing it right, that asset that the data is to train AIs, to generate new services, to provide analytical capabilities, to help merchants with their marketing, to have more compelling loyalty services for our consumers, all of those come from after the transaction. And then there's adjacencies, things like open banking and digital identity and working with those types of things to, again, enhance the whole ecosystem. So that's when we talk about value-added services and I think it was 19% growth last quarter that we were driving through that. Those are all the opportunities. But the thing I think has missed the most is the flywheel. We touched on it when we talked about why are more and more transactions being switched by Mastercard. We switch more transactions, we get into new flows, we get into new segments. It generates more data. We can apply services to those transactions. We can use that data to new and compelling things to make our customers more successful. And in doing so, that generates more transactions for Mastercard. So if you think about how the play works, more transactions gives us more data, which means we can have the most sophisticated services in the world and our customers can be more successful and we can apply it to new segments. And as we do that, it grows more payment processing on the network, which strengthens the services again. So that's really where it's not you have payments and services. It's that flywheel and that interaction, which I think becomes so powerful.

I wanted to get your perspective on the future. When you think about some of the -- just the simple future. Now -- but when you think about other key technology trends that you guys might be exploring, what might have an impact at Mastercard and the broader ecosystem, some of the things that you guys are looking at and developing.

So in my job, we are constantly looking at what are the new technologies that can help us do our job better. And it's never technology for technology's sake. I think that's a mistake, which -- fallacy is often there. GenAI, how can I use it? No. What is a really, really hard problem which will generate a tremendous amount of value that this can let you solve in a way you never could before. So we do a lot looking at how do we lower our cost, how do we increase our resiliency, how do we have that global network fabric that we can have incredibly fast, unbreakable payments around the world. And we're bringing a lot of technology and a lot of investment to bear for that and a lot of things which are happening with streaming techniques, with event-based architectures, all of that helps but we do that every day to say, how can we be the best at what we do. So there's also new opportunities, which are opening up. So not only can we do that, how do we apply to new segments, how do we expand into new markets, leveraging capabilities that weren't there before. So everything from passkeys, transforming biometric authentication and e-commerce to create better user experiences and open up even more places where we can use cards. We talked a lot about contextual commerce. How do we say it's digital environments? I made a metaverse joke earlier but digital environments are becoming progressively more compelling, progressively more and more stuff. We are living more and more of our lives device-based. How do we have the right technology and able to do that? It's a -- it's doing a Joe Strummer line, right? The future is unwritten. So the other thing that we're spending a lot of time on is how to make sure we're architecting our networks and services. So future government requirements or compliance requirements or optimizations for speed, line we always say is, instance getting a lot faster. So our ability to make sure that we have the fastest -- continue to have the fastest systems that are out there that we can clear transactions through the system faster. We leverage that global fabric that we've talked about, where we can put incredible intelligence at the Edge, I'm a big believer in Edge computing, bringing it back to hubs that we can distribute either in third-party compute or in our own private cloud and the ability to locate that around the world. So we're really designing for an architectural flexibility, for an acceleration of everything and constantly looking to what I call applied research, we'll never be a pure research shop. But we've already done work on quantum key distribution to make sure that we have the right techniques for potential future environments. We validate that in the environment, how we handle biometrics better, how we handle network resiliency and the testability better. All of those things just create incredible, really wonderful new opportunities for us.

Well, Ed, I think we're a lot smarter now after that discussion. Thanks so much. Thanks for being here.

So much more I'd love to talk about. Take care and thank you for the time.