Mastercard Incorporated (MA) Earnings Call Transcript & Summary

All right, guys, we're going to get started. My name is Will Nance, I cover payments and fintech here at Goldman. We're delighted to have Michael from Mastercard today. Michael was a last-minute addition to the schedule. We're obviously pleased to have him. Sachin couldn't make it. Michael joined Mastercard in 2010, served as Chief Product Officer and President, before his current role as CEO. And Michael, it's great to have you here.

Thanks, Will. Happy to be back.

So I guess let's jump right in, start with a question that is top of mind for a lot of people. Macro has been very choppy over the summer, a lot of noise around some of the employment prints. What are you seeing in terms of consumer spending trends?

Very much top of mind question to think about what we do. Certainly, consumer health is an absolutely central topic. When we last spoke about where the consumer is, on second quarter earnings, we shared that generally remains healthy -- consumer spending remains healthy. And the reason for that, that we highlighted was a strong labor market supporting consumer spending. Last week, the labor market was in focus. Jobs report for the U.S. came out. Obviously, there's other parts of the world, but that always central for the discussion, what we've seen is kind of slight moderation of the unemployment rate from 4.3 million to 4.2 million. Jobs were still added some 142,000, I think, for the month of August. So the support of the labor market continues. What's also continuing is that we see still elevated interest rates and elevated prices. So we continue to monitor that. We continue to monitor the actions that central banks are taking and there's a lot of speculation what might happen in September. So for us, for now, we monitor that. Routinely, the Mastercard Economics Institute takes a closer look at what is the consumer doing? If you peel the onion, what do we see, high income bands, low income bands? And it's true that when you think about decisions that consumers can take if you're in a higher income bracket, you can have more discretion on the decisions that you take. But it's also true that higher income or lower income, the job market supports both. What we've seen is that across both these segments, consumers find ways to make ends meet. This summer, we talked about the services industry booming, we talked about some of our experiences, it actually has happened. Post our second quarter earnings call, you saw the concert season, you saw the sports event, Olympics, EURO, et cetera, and it's showed in the numbers. The last number that we gave you on travel was 15% in local currency terms year-over-year. So that was a strong travel month. So this continues. How do lower income bands make that work is there are empowered consumers that you really use the benefit of the digital economy trying to figure out the best offers. They try to make ends work and look for the best offers, leverage their points and all of that. So this is -- it's not a bad state. This view that we believe that consumer spending remains healthy continues. We now have the benefit of the first 4 weeks of August that we looked at. Last thing we shared with you was the first 4 weeks of July. And if you compare the trends in what we saw in July and the trends, what we see in August, they're very consistent. So overall, our outlook remains positive on that.

That's encouraging to hear. You recently made some changes to your organizational structure. Can you talk a little bit about what changed and why you chose to make those changes?

Right. So we announced -- for everybody's benefit, we announced a set of changes starting at the beginning of this year. First of all, we reorganized our regional go-to-market structure. We are a very global business. We are literally everywhere around the world other than in U.S. sanctioned territories. So go-to-market was important. We aligned the world away from something called international, if you're a truly global business that shouldn't exist to start with. So we have the Americas and we have Asia Pacific, Europe and Middle East, Africa, America is under Linda Kirkpatrick and the other region under Ling Hai. We did that in order to optimize our go-to-market be more efficient and be with the right kind of expertise with our customers wherever they might be. We then went ahead and said, okay, let's relook at our products and our services portfolio and really bring them in line with the strategic priorities that we have been talking to you about for some time now. That's around core payments, it's around commercial and new payment flows and it's around services, and it's exactly how we align the organizational structure. Sounds very obvious, and it is exactly that. We aligned after a set of acquisitions and new ventures that we put out, we aligned our organizational structure with the priorities that we had set out for the company. So there's a bit of kind of a rewiring of the company. And the big headline is this is not a change in strategy. The strategy is clear, and it's consistent, and we execute against it. We wanted to ensure that we will enable ourselves to grow for the years to come at similar strong rates and just make this more efficient. So that's the idea. And we're in the middle of that. That will mean that activities that matter less than others, we will stop them, and we we'll reallocate funding to the things that truly matter. So I'll give you a couple of examples. What matters is invest stronger in market with more cash potential, invest more in our services portfolio, particularly around cyber and data insights. And there will be other activities that will just stop and reshift those resources. That's the idea.

Got it. That makes sense. You've referenced your kind of long-term earnings growth algorithm several times in recent earnings calls. Can you help us understand the various components of how you view the earnings growth algorithm over time and maybe how that's changed over the years, if at all?

So strategic priorities, I just talked about them, core payments, new flows and services. That's what's fueling the growth algorithm. What is the growth algorithm? It is basically the drivers that lead out to a financial outcome and in the end shareholder value. When you think about payments, it's a pretty simple formula if you think about it. And it's -- but it's worth repeating to our employees repeatedly and all the time and make very clear how do we go after the payment opportunity. First of all, it is capturing the natural flow of economies. You just have to be in the transaction. That's number one. Number two is that we not only capture, but also accelerate the secular shift from cash and checks into the digital forms of payments. And the third thing is that we extend that opportunity by also reaching the tentacles of Mastercard's network into previously underpenetrated or new verticals and new flows. So you're basically growing the pie and you're participating in all transactions related to that. Then from there on, this is winning as an industry. We win within the industry by winning market share. That's the fourth pillar of the growth algorithm and payments. And the last one is to go ahead and optimize the portfolio. What does that mean? The 3.4 billion cards out there. We do things at scale. If you optimize the performance of 3.4 billion cards, there's tremendous potential there. There's a similar approach across our services portfolio. This is a highly curated set of services that we have, how to grow them, what's the growth algorithm there in conjunction with payments. First of all, it is growth services related to payments. If you're in the transaction, you can grow those services that makes a lot of sense. The next 1 is penetrate our existing customer base with the services portfolio that we built over time and do the same by extending that not only into existing customers, but into new customers and into new payment flows. That's the growth algorithm there for payments and services. And that's like a mantra in Mastercard. This is -- if you're in services, that's what you do. You got to drive penetration into existing customers. If you're in payments, you're going to go and optimize the portfolio or pick any 1 of the ones that we just talked about. Yes.

So maybe we'll go on the first pillar of driving that kind of cash-to-card opportunity over time. I think that was the second pillar actually. Diving into the growth algorithm in more detail though. A question that's been top of mind for a lot of investors has been the opportunity around cash-to-card particularly in the U.S. And just how much of that opportunity is remaining. So can you kind of talk about how you view that maybe specifically in the U.S.? And then maybe how you frame outside the U.S. as well.

I'm just fascinated by this focus on the U.S. We're a truly global business. I'll take the liberty to talk about some other parts of the world as well. But starting with your question, just go back to the first -- the second quarter results. Revenue grew 9%. Volume grew 9%. So by any means that's a strong growth. So it shows that not only we're winning, but we're -- also there is tremendous potential for us to apply our services and generate that revenue and generate revenue from payments themselves. So that's the starting point. But it's also true as a function of years and years of work to digitize cash, there is less cash today that there was, let's say, 10 years ago. That's a fact. But it's a fact that it's true for a set of market, and it's not a fact that's universally true for all markets. So I spent some time in the earnings call talk about Africa. Why Africa? First of all, it's 1.4 billion people in 54 countries, but also 90% cash. So it's a long-term opportunity, and you make your way around emerging markets, you find a lot more of that. But if you look into Europe, developed economies like Italy and Germany, sizable amounts of cash. Japan, there is a massive digitization opportunity in Japan that the government has taken on cashless Japan is a program over there. Take Mexico, you take Brazil with high levels of digitization. Mexico is trailing that, new government there, yet again, a tremendous opportunity. So there's plenty of opportunity beyond emerging markets, you can layer that up, but it's not just a volume opportunity. I was on this stage talking about the transaction opportunity. It's always good to remember we charge on volume as well as on transactions. The growth rate in transactions have always been higher. PCE is not a great reflection of a transaction opportunity because the cash penetration in transactions was historically much lower. So there's a lot to do there. And then you looked at this in time and see what has happened since COVID. There's a lot of new business models that have emerged that drive higher transaction numbers for us. Take media streaming, take online delivery or public transport as in national transit systems and so forth. So there's a tremendous opportunity that I believe is there in specific wins that we have shown. We talked to all of you about our transit wins. We talked about our partnership with Netflix. We've talked about a whole range of things. So I don't want to repeat that here. But I'm not sure where this skepticism is coming from, and we see it in our growth rates. I have a suspicion we talked about it in a hallway earlier out, is this comparison of PCE and the carded growth rate. I think it's always important to see where does PCE take place. It takes place in carded and non-carded categories and that changes over a period of time. Let's take insurance. And let's take housing. That's not a highly card penetrated category that had high inflation. So you saw high PCE growth. And that reflects in relative terms on the carded growth, not very positively. We were still growing quite significantly, in relative terms not so. As inflation the inflation landscape changed, that will change again. Take a highly carded category like travel, we come out of COVID. Highly card penetrated, that was growing fast, that looked better at that time. So points in time and the specificity of what we're looking at to really assess what's growing and what's not, is also important. And I stick to my point, I think, this is a long-term opportunity.

Maybe just to follow up on some of the nontraditional carded categories of spend. I know when you think about continued penetration of those verticals, I mean, could you maybe talk a little bit about what's different about those types of spend that has kind of led them to be stragglers in terms of carded penetration? And how do you think about the opportunity for -- to get deeper into those -- maybe the next time this happens, there's not that same disconnect because you've made more progress in those verticals.

Right. The P2M opportunity was huge, is huge. I talked about that and it felt like a natural area of focus for us. So in terms of relative importance and relative ease to drive growth, breaking into, let's say, housing or health care wasn't necessarily kind of the hour of the day. As we have developed more technology as we've developed better go-to-market partnerships, different kind of infrastructure, vertical specialists show up, software providers for certain verticals, we start to build out those partnerships. And suddenly, entering those verticals seems like a very different ballgame than it was maybe 10 years ago. So we have identified housing and rent in particular. Here, we have a partnership that was built with Wells Fargo. It's a great model for us to go in with them and start to drive acceptance of card payments in the category of rent. For health care, we see partnerships in the U.K. We see partnership in Germany. We talked about what we're doing with Square in the U.K. Recently signed up with the medical tourism association in health care globally for paying out to providers globally. So there's a whole set of very special agreements that come through where we have identified an unlocked for the go-to-market for us. Telcos, telcos is a big segment that was not in the carded space. You saw us partner with MTN most recently, where we took a strategic -- made a strategic investment in MTM, the largest telco in Africa. We've had partnerships with Bharti Airtel, with Vodafone. That's more for emerging markets. So here's yet again a different vertical approach to get into payment flows that we haven't been in. I would say it's also true to say that across these segments, some of those happen in the account-to-account space. Others we can bring a lot of value through our carded solutions. It's a bit of a mix. And you know we are a multi-rail provider. We don't really -- we do care. We love cards. At the same point, we do have opportunities to also open them up on the account-to-account side through open banking and so forth. So it's attractive. That is the reason why we broke out new payment flows, so we can get more of a focus on these kind of verticals and build a long-term growth opportunity beyond P2M.

So I think you have hit on being in the transaction flow, driving the cash to card opportunity. Market share was another thing you mentioned, and you've been sharing a number of noble wins on the past couple of earnings calls. Can you talk about why you have been so successful at that continuous stream of competitive takeaways? And what are you seeing in the competitive environment more broadly?

Right. So the market has been -- the market is competitive. My predecessor would sit here, he would say, "Well, it was when I was in the seat." So it was always competitive. I mean that's for sure true. We've always competed in a competitive market. What is also true, though, is that it's a market that has -- that offers more choices today in terms of a much, much wider range of payment options that we compete against. That doesn't necessarily drive the intensity of the competition to a different level. But it makes -- it forces us or it allows us rather to compete in different ways against local [ gyro systems ] and so forth. It's very interesting when you look at our switching rate, the percentage of switched volume and transactions that has increased from 55% about 2/3 over the last couple of years. And that just shows that we're winning in this market against these alternative tools. When it comes to a broader global competition. We fight hard for deals. We want to win strategically relevant deals. We have to have relevance in a given country. The U.K. is a fantastic example, where we won a few significant debit deals and we're now really well positioned in the market. And we have no intention to win every deal. In the end, it is about relevance. It's about discipline around our financial returns, and it's with a focus on our overall net revenue yield. So nothing much has changed on that front. We're pretty strategic about it and pretty disciplined around it.

So I think the fourth part that you mentioned was around portfolio optimization. And I don't know that I've heard you talk about that as much before. Can you maybe explain what that is and explain kind of what the scope of that part of the strategy is?

Maybe we haven't talked about it before because it doesn't sound all that exciting. But if you start to put numbers around it, it is exciting, 3.4 billion cards. So what makes the 3.4 billion cards produce for a cardholder, for a bank as an issuer or an acquirer, for Mastercard, for our shareholders. Is, for example, if they're active cards versus dormant cards. If there are cards that are card on file, if they're top of wallet, digital wallet or physical wallet. If there are cards that in the moment of the transactions are tied to a set of services that ensure that the transaction, it has to go through, goes through because it is actually Will, who is making the transaction and should go through instead of a false decline et cetera. We do this in an automated fashion. We use artificial intelligence to produce solutions for our customers and we engage with our customers and say, "Here's your benchmark on how you're performing with your portfolio against the market and we can help you do that for the sake of your customers." This is a very, very structured program in Mastercard through our teams. That's part of what our sales teams and our customers success groups are engaging our customers on, and they love it and consumers love it. Because the irritation of when your card doesn't work is obviously not good for anybody. So overall, portfolio optimization in the end closes the circle of the flywheel on payments because of that. This is the best-performing part of a multi brand issuing bank, then they like that, and they want more of it. And more of that drives more payment volume that allows us to differentiate with more services, et cetera, we're back to the flywheel that we like to talk about.

Got it. Makes sense. Switching back maybe to more some of the nontraditional competitors in the space. Could you talk about some of the A2A schemes that have become prevalent in markets such as India and Brazil, how do you think about this? And maybe as it relates to sort of that international cash to card opportunity, has that gotten any more difficult in terms of going after it with some of these schemes coming up in different markets around the world?

Right. So we -- I talked earlier about into our global footprint rather and we see all forms of markets. We see markets, take Europe, however, as a set of local card schemes. I talked about our switching ratio showing that we're winning in those markets. You have a set of countries around the world that have to deal with very specific issues, for example, lack of infrastructure, high levels of financial exclusion and so forth. That's again, a different set of circumstances where sometimes governments step in and set up their own payments because the private sector isn't doing it. And then you come in a highly competitive market where also choices are there, everybody competes. So it's a wide landscape. The conversation around government-induced account-to-account payment systems is 1 that's really concentrated in a few small markets and ones, particularly with financial inclusion challenges. The ones to call out and the ones that are often talked about is India and it's Brazil. Here, India has been hugely successful in creating literally the largest digital economy in the world by pulling in hundreds of millions of people into their ecosystem. In a way that is long-term market building for us. We have not seen any significant impact on our credit proposition, for example, but we see a whole set of emerging consumers coming into the ecosystem. That over time, obviously, you want to graduate with their solutions and participate in the broader economy than just a simple P2P payment in the context of a rural store front. So that is something that we closely monitor, but we engage in those countries. I'll give you an example from India, most recent from the week before last. One of the issues there is you have to deal with fraud as these ecosystems grow rapidly. And what is the 1 of the best ways to deal with fraud, particularly in areas where your password, infrastructure and things like that are not fully developed. It's in the biometrics. So we launched passkeys which is a tokenized biometrics that allow -- that work on any channel. We launched it in India of all markets, and we're very welcome there with this kind of solution. So there is ways to continue to engage, especially on the cybersecurity side. So that's about the APMs. The alternative that we bring, particularly through the carded solution is 1 that continues to grow. In Brazil, we are very successful with the Santanders with the neobanks of this world, with Itau and we see no impact on our credit proposition. So that's looking good for us. But we always stay in the dialogue to see where does the government want to go, how can we potentially partner. So it's a bit of partner compete wherever we can compete. We like to compete, but we also respect the choice that countries make, which is why in 2016, we bought Vocalink because real-time payments are real. And we would be making a great mistake if we ignore that. So we build out that capability, and we use it whenever we feel we should and need to.

Got it. Makes a ton of sense. Switching to new flows. Specifically maybe on the commercial side. Can you remind us of some of the components of how you think about the building blocks of new flows. And I'd also like to kind of pick your brain about some of the recent trends in carded B2B if that makes sense as well.

So commercial and new payment flows, 1 of those 3 areas where we reorganized our company. We broke it out direct report to the CEO now because it needed to. It was, it's not new any longer, actually. Probably should have dropped the new. So we had a whole range of new emerging flows that we specifically honed in on commercial and we specifically honed in on disbursements and remittances or money movement. Those are the 2 areas that we find the most promising at this stage. Commercial, if we start with that, so commercial payment flows really has a couple of components to it. First is commercial POS and the other part is the B2B side of things that you just asked about. So when we just look at commercial POS, there's the large market stuff. Most of you or many of you will have a T&E card in their pocket, as you travel for your company. Hopefully, it's a Mastercard program. And that is something that continues to grow. We have differentiated assets in this space on the expense control side and so forth. With the ups and downs of business travel coming back, yes or no, after COVID, there was a bit of an up and down. But the fundamental truth of the matter is that this business has been growing with us -- for us, significantly, 13% was the last growth rate that we shared with you, and it's 13% of the GDV. That's growing faster than what we see on the consumer side. And it made some progress from a GDV perspective. I think the last number that we put out before that was in 2019, and I think that was 11%. So we're making progress on that side. That is fundamentally good and that T&E businesses in there, the purchasing card and fleet cards. So that's an important component. If you look around the world, this is highly concentrated in Western economies, U.K., United States. The emerging opportunity around T&E cards, it's never been in the emerging market discussion. It wasn't understood. It wasn't really needed. There wasn't that much travel, but that is also changing. So we started to see this pick up in being a broader opportunity around the world. The other side of commercial POS is 1 that I'm particularly excited about and that governments are particularly excited about, which is small business. Small business is the backbone of many of the global economies. Small business, in many ways, rides on consumer cards. There's no specialist solutions. These companies want to digitize. They want to have -- take control of their data and understand the flows around that data. So tremendous upside and pull that we see out of that. So that's -- those are the 2 components really around commercial POS. The other side of the commercial opportunity is large market B2B invoice payments. So buyers and suppliers. That's a really fragmented environment. There's different kinds of solutions. There are specialist players, and it's 1 that hasn't grown consistently in -- at attractive growth rates. But we feel the time has come with a younger generation of treasurers with the push on productivity and profitability in companies. They're looking at these tools, looking at the tools that's now available through specialist players and saying, "What can I do for a supplier, what can I do for a buyer to really unlock this opportunity." It has been talked about for years and somehow it feels like you're driving with the hand break on. So I think we've reached that point. We're excited about it. We go after it with virtual cards. We are the market leaders around virtual cards. We are quite excited about that. What do you have to do for a buyer. If you're a buyer and you want to pay through your ERP system. You don't want to have some sort of separate process. So Oracle, SAP, we signed out those partnerships, and that's how that works. But that only works when the supplier actually accepts cards and how do you make that easier for suppliers to make it easier for them to plug into their back-end system and really straight-through processing would be the answer here. We put out Mastercard receivables manager to kind of fix that issue. So we're on both sides of the transaction. And we have the right kind of partnerships through these big ERP partners to push that out. With the general trend that this now matters for the segment, we feel pretty bullish about B2B as well. So those are the various elements around commercial. As I said, it's growing at 13%, that's attractive, and we've added 2% of GDV since 2019 overall on our scale, that's a lot of GDV.

Sure. Okay. So let's pivot, talk about value-added services. It's become an increasingly important growth driver to the company. Can you just remind us about the different components within your services portfolio and just how you think about the growth algo going forward?

Right. So I laid out the growth algorithm earlier. What's in it? So let's unpeel the onion a little bit on that. So it's a highly curated set of services, not commonly understood how we put them together. So let's start off by taking this growth algorithm one by one. Actually, no. So I'm going to give you the -- first of all, the overview and then let's take a look at the growth algorithm. So overall, we have a set of cyber security-related services. And we have a set of data insights related services, and we have a set of processing and gateway related services. That's broadly what we have. It all adds up into our services number, which is part of something that you see as VAS, which is our reported number. There's also something called other solutions, which is generally our open banking and real-time payment, which grows at different growth rates. And is not generally what people want to hear about when they talk to us about services. It's the cybersecurity stuff, the data insight stuff mostly. So how do we grow that? What do we do here? First of all, it's the piece around staying close to the payment transaction. We choose our services very purposefully close to the transaction because that is where we have a differentiated proposition. We're close to the transaction and with the cybersecurity solution that allows that this transaction happens and then we can capture that data. So that's what's happening. On the cybersecurity solutions, there is a correlation to our transaction growth, and that gives us a good starting point on the growth side of things. When it comes to the second part of the growth algorithm and services, which is about penetrating into existing customers. So I'll give you a couple of examples. We have a wide array of cybersecurity and data insight solutions that I talked about. So let's take Revolut, for example. Revolut, large fintech, neobank in Europe and initial -- by now, I think, globally. I think, Nick would dispute the Europe part, if he were to sit here. So -- they work with us on their marketing strategy. So we have a consulting business as part of our services, and that's why we engage them within -- on them. That's penetrating into existing customers, but they're also a customer of our cybersecurity solution. So you start to build out and you penetrate. We gave a stat not too long ago where we said our top 50 customers use up to 2 to 3x more services than our average payment customer, so that's a tremendous opportunity. Then you go into new flows and new verticals. So take account-to-account flows. We talked about our multi-rail approach. We have account-to-account payment solutions. What kind of services have we made available that work for those. Consumer fraud solution in the U.K. is a good example. We're working with 10 U.K. banks together to apply a consumer fraud solution that runs across the account-to-account flows of the country. which we are involved in through our Vocalink proposition. So that's a good example that you can extend that portfolio. Cybersecurity solutions are needed for all types of payments. And then you go into the set of building out whole new services solutions, which is the last aspect of that growth algorithm in -- we do this organically in part, and we do it through acquisition in part. On the organic side, we have recently launched a set of AI-driven solutions around our cybersecurity offerings where we use generative AI to predict what is the next likely be frauded card number. That sounds a little wonky, but that can actually be done. That is what we do through our over decade-long experience in generative AI and AI solutions actually out of an acquisition that we made many years ago out here in the West Coast called Brighterion. So that's a way on how we build solutions organically. Inorganically, most recently, we bought the world's leading company in personalization, Dynamic Yield where we help our customers engage their consumers in a cluttered world. So yet again, there are solutions. And you should expect us to continue to invest in services going forward. The cybersecurity space is always 1 that is of great interest to governments, to our customers and we have a natural position of credibility in the cybersecurity space to do more in this space. So we build out our solution set there.

Got it. We've got about a minute left here, so I'm going to combine a couple of questions. But I guess there's been more headlines recently around the litigation with the rejection of the litigation settlement a few months ago. Also an election year that kind of brings to mind some of the different proposals out there on market structure around the Credit Card Competition Act. So just broadly in big picture, how are you thinking about kind of market structure, regulatory, legal risks and ramifications.

Will, it's a way to look at it by putting it all together and painting a picture that all this together makes the market more difficult. But the points you just talked about, they're all fairly separate and not closely linked, and it's important to look at them on their own merit. So you take elections. Our network doesn't see politics. So 1 way or another, people will pay and the secular trend is a prevalent trend. So we look at -- we monitor elections for very specific policies, but overall, the fact that more than half of the population of the world went to the polls this year hasn't really had a dramatic effect just yet. Needless to say, we need to engage stakeholders on different political ends of the spectrum and so forth, we do that. So I'm not too worried about that. If we take the Credit Card Competition Act, no news to report. There's 2 senators here that -- Durbin-Marshall that continue to push that. I think they've heard from the grassroots. They've heard the concerns from consumer banks. They've heard the concerns from small businesses for community banks. To say this is a harmful legislation, and we haven't seen any progress. The industry is very aligned on engaging stakeholders and making sure this is -- it should it ever come to pass and it's fully understood that it's technically difficult and it hurts the consumer, et cetera. And the settlement, I was on the record to say we disagree and we're disappointed with the judgment. This was a multiyear negotiation with counsel, with oversight through a government appointed oversight. And deal was reached that everybody agreed on that would have bring clarity on cost and predictability to merchants, and this is not happening. We're not discouraged by it. We're engaging, and we continue to find a solution that really puts this to rest so we can all move on and put our solutions out for consumers out there.

Great. Well, with that, we are out of time. Michael, thanks for joining us today.

Thank you, Will, all right. Thank you.