Mastercard Incorporated (NYSE:MA) UBS 2022 Global TMT Conference December 7, 2022 12:30 PM ET
Company Participants
Craig Vosburg – Chief Product Officer
Conference Call Participants
Rayna Kumar – UBS
Rayna Kumar
All right. Good afternoon, everyone. I am Rayna Kumar and I lead U.S. payments, processors and IT services equity research at UBS. I know that was a mouthful. And today, I’m fortunate to have Craig Vosburg, Chief Product Officer, Mastercard keynoting UBS’s TMT Conference. Thanks for joining, Craig.
Craig Vosburg
My pleasure. Great to be here.
Question-and-Answer Session
Q – Rayna Kumar
So to start out with, could we get your perspective on the macro environment and what you are seeing in terms of recent consumer spending trends?
Craig Vosburg
Yes, happy to share a few thoughts there. The macro environment, obviously, is uncertain to say the least, I guess, when we look across the horizon and see potential questions raised around impacts of inflation and interest rates and geopolitical implications, et cetera. But notwithstanding all of that, as we look within our business, we continue to see real resilience within consumer spending, pretty healthy dynamics as far as how we see consumers’ balance sheets and savings rates being sustained and that’s translated into pretty consistent spending growth that we are anticipating to continue as it had been, as we shared at the end of the third quarter, expecting that to remain pretty resilient through the balance of the year.
What we have seen is some modification in how people are spending, which isn’t really surprising given the impacts of inflation, there’s some increase in the share of the consumers’ expenditure. First, it’s going towards daily essentials. But there’s also continued really strong demand for spending around experience related categories, travel, airlines and lodging continue to be very strong, restaurant spending. And so we continue to see what feels like this release of pent-up demand for the experiences that we all sacrificed at various stages during the course of the pandemic, a little bit less spending on things related to the home improvement, home furnishings, electronics, which got a bump in the earlier stages of the pandemic. So not surprising to see a little bit of reallocation of how consumers are spending there.
When we look at our — the data that we produce through SpendingPulse, which is a reflection not of Mastercard spend but of all tender types, all forms of spend across the U.S. in November, year-on-year spending increased 8% from the prior year. So that’s a pretty healthy rate of growth. Continue to see healthy bounce back of cross-border spending. That’s always an area that’s obviously very important for us, particularly cross-border spending related to travel. And across most regions, we’ve seen a really strong recovery in that over the course of the year. Asia lagged in Q3. We shared that Asia was running at about 75% of pre-pandemic levels. That’s continuing to improve. And as everyone is aware, there’s still some markets that are in relative stages of lockdown there. And so we see room for continued recovery there. But on the whole, cross-border travel-related spending is at 124% of 2019 levels. And so it sort of underpins that positive momentum that we see in terms of people spending on experiences, in particular, travel to reconnect with friends and family.
Rayna Kumar
As Asia starts to put back COVID-19 travel restrictions, do you expect any impact there on the cross-border?
Craig Vosburg
Well, to the extent there are actual lockdown, certainly that’ll have some implication. But where we’ve seen lagging recovery obviously with respect to China, Japan has had a lot of restrictions. Those have been moving in the right direction in terms of easing — increasing the number of inbound and outbound travelers on any given day that are permitted. Other parts of the region, Australia, New Zealand, the demand has been very strong in some time. So it would be a little bit of a patchwork, but hopefully, we’re beyond the point of significance on at least the reintroduction of lockdowns. COVID feels like something that we all have just learned to and need to learn to live with, foresee.
Rayna Kumar
As Mastercard’s Chief Product Officer, can you discuss your product development and go to market strategy?
Craig Vosburg
Sure. The way we think about products and product development is grounded in a couple of things. Clearly, our corporate strategy revolves around expanding and developing, obviously, value-added services and building out new networks. Within the payments piece of that, we focus on clearly understanding where consumers are, what consumer needs and expectations are, in particular, how expectations have changed among all of us as consumers in an age of increasing digitization and really different kinds of user experiences that we’ve all come to expect by virtue of the interaction with the devices that we all have in our hands or in front of our noses for most of the day.
And so a product strategy that’s grounded in making our products fit for purpose and delivering on user expectations in a changing environment in terms of what we expect, combined with the commitment to choice and increasing the number of choices that we make available for consumers to make payments and for businesses and merchants to be paid. And doing that with a steadfast commitment to improving safety and security or at least maintaining safety and security among payments types, which is so fundamental to all of us when we think about payment transactions.
And so those are the kind of the macro themes that underpin the payment strategy. Within that, we’re focusing on investing in things from a product perspective, it help us continue to drive growth in our core consumer to merchant payments business, the payment for goods and services that many people associate Mastercard with. There’s a number of new payments innovations that we lean into things like account-to-account payments, buy now pay later, digital and cryptocurrencies. And then a number of new payment flows that kind of go beyond the traditional reach of the cards network, but things that we’re very focused on to expand our opportunity to address a larger market of payments flows and have those be important revenue drivers for us in the future.
Rayna Kumar
You recently announced a partnership with J.P. Morgan Payments on a new Pay-by-Bank offering. Can you give us some detail on that — some details on that partnership and discuss how Mastercard is involved?
Craig Vosburg
Yes. It’s an exciting partnership for us for a number of reasons. One, obviously, Chase is an important partner and one that we’ve been continuing to deepen our relationship with over the recent number of years, both across the business and their commercial business and the consumer payments business, and this particular partnership is in the Merchant Services part of the organization. But beyond the partnership with Chase, it’s really interesting for us from a number of perspectives in as much as it sort of sits at the convergence or the confluence of a number of important element of our strategy. It rides on the back first and foremost of open banking as the connective tissue between consumers, their bank accounts and the permission to use of that data to different service providers to enable new kinds of financial services, experiences. And that’s really what’s underpinned our interest in and the investments we’ve made in open banking as a part of our product portfolio going forward.
That, combined with things that we can do in value-added services around data and analytics, around risk and fraud management in a multi-rail environment where consumers and businesses are exercising choice around how they get paid and to do that in a way that takes an account-to-account payments solution and points it toward a new payments flow; in this case, bill payments.
And so that’s a lot of pieces of our payment strategy sort of coming together in one very tangible example that we’re excited about because of the obvious potential of deploying that at scale with a partner like Chase. But at its core, it’s an account-to-account payment functionality that you as a consumer can activate in a recurring bill pay environment, subscription payment for e-commerce type transactions. So think about your monthly digital transactions that are hitting your account. That we can provide value in a couple of different ways, establishing the linkage to the DDA with the — at the consumer’s request, helping things like verify balances that are in the account to provide value-added analytics related to things like confidence scores that the transaction will actually settle, which is a really important consideration in an ACH funded transaction because the cost of a rejected transaction for the merchant who initiated it is substantial.
And so having the ability to offer for a price to that merchant, a settlement confidence score based on visible balances in the account to increase the confidence that it’s actually going to settle, there’s real value in that. And through our testing and through Chase’s testing in the market, merchants are eager to avail themselves of that kind of a service and are willing to pay for it. And it’s something we can provide with transaction economics that are attractive. And on an overall basis, we expect to be accretive from a revenue perspective.
Rayna Kumar
Mastercard has announced several wins across issuers, fintechs, digital giants and co-brand partners over the last several quarters. What do you think is driving those wins?
Craig Vosburg
Well, I think it’s a combination of things, but certainly as the Chief Product Officer, I have to say, of course, products, of course, but it’s not. It’s much more than the products. That’s a piece of it. I think it’s the way the products are coming together to enable engagement with our partners, consumers, whether that partner is a financial institution or whether it’s a merchant that’s sponsoring a co-brand program to enable engagement with consumers with the right kind of digital experience, with leveraging things like open banking functionality, leveraging things like Digital First to be able to deliver a digital credential to the consumer almost instantaneously, to be able to activate that consumer at the moment of demand when it’s actually applied for the product in the first place. So there’s — to offer a choice in terms of how money is moved within a consumer’s environment, not just with the card products, but other products like push payments through Mastercard Send.
So there’s a number of things related to the product portfolio. Equally important, I think, is the range of value-added services that we’re providing in conjunction with that to enable our partner, again, whether it’s a bank or a merchant or a fintech to be able to drive more value from that portfolio through optimizing its performance and supporting them in other parts of their business and engaging with their consumer and executing their strategy to serve their financial needs better, if they’re a bank; sell them more things, if they’re a merchant. And drive growth in that core business.
And then finally, I think we’ve developed a really good muscle just around having a partnership orientation and working collaboratively and constructively with partners of all ilk in various segments of different shapes and sizes to understand what it is they’re trying to accomplish with their business and what role we, as Mastercard, can play in helping them achieve that with our products and services with our reach, with our network of partners, in many cases, innovating alongside them, co-creating new kinds of products and solutions that they can put to work in their business to differentiate themselves from their competitors.
Rayna Kumar
Let’s switch gears to talk about Mastercard’s three strategic priorities, which you outlined at your Investor Day last November: Spending and payments, extending your services and embracing new networks. Starting with payments, what is your strategy to continue penetrating person-to-merchant payments?
Craig Vosburg
Well, this is what we think of and is at the core of our business for person-to-merchant payments drives a very significant part of our revenue and is sort of at the center of what has been a long-running secular migration in payments from paper-based forms of payment to digital and electronic. That’s a growth runway that we remain very confident in and very enthusiastic about. And so, while you can look at different penetration rates and different countries or different markets on a global level, there remains tremendous opportunity to continue to lean into that migration as a driver of growth. And then to see that complemented by increased frequency with which payments are a part of all of our lives as a result of digital — digitization of commerce.
And so our payment strategy and continuing to benefit from that consumer to merchant payments opportunity is grounded in a couple of important priorities that are aimed at continuing to benefit from that migration. One is to continue to focus on and lean into and invest in the expansion of our acceptance network. Mastercard accepted at more than 90 million merchants around the world today. The rate of growth in acceptance locations has been — it’s been an 18% CAGR over the last three years. We’ve more than doubled the size of our acceptance network in the last five years. And there is an opportunity to continue to drive that growth through things like cloud commerce capability we deployed that enables a cloud-based point of sale to be easily and quickly activated in a low-cost way to enable more locations to be able to accept payments in a cost-effective way through tap-on-phone kinds of capabilities, to enable any smartphone to effectively become a terminal to accept payments, to continue driving acceptance through things like upgrading the quality of acceptance with contactless technology at the point of sale, which is not only secure, but is a great consumer experience and is enabling the reach of our products to tap into more low-ticket cash — traditionally cash-based transactions within categories like transit and USR, for example. And so there’s a whole vein of focus targeted towards acceptance and acceptance expansion.
And what we’ve seen for years is more places we make possible for consumers to use their Mastercard, in more places they’ll use their Mastercard. And so there’s a really clear return in continuing to expand that. And it’s obviously a very valuable strategic asset for us as a company.
The second area really revolves around the digital trend and equipping what our core business — what’s always been our core business, be fit for purpose in an increasingly digital world. So that is investing in things like tokenization to convert physical card credentials into dynamically encrypted credentials that can be used in a variety of context-specific locations in a very secure way. There’s a great parallel to the power of tokenization when combined with the expansion of acceptance, particularly when you think about acceptance going beyond what we think of as a traditional retail environment and into an environment that is effectively reflective of the Internet of Things and all of the connected devices that currently and will exist in the world. All of which are capable of communicating because they have — they maintain persistent Internet connections, any device that can communicate can transact. Any device that can transact, we can point a tokenized card credential towards to activate that as a channel for commerce and for payment. And so enabling our credentials for use in that kind of environment is really important area of focus, the one where we’ve made huge progress in scaling over the last decade or so.
We’re processing more than 1 billion tokenized transactions a month at this point, and that continues to grow at a healthy clip. So I can go on and on about digital and Digital First and the instantaneous issuance of credentials. But I’ll pause because I know there’s other topics you want to get to.
Rayna Kumar
Great. That was really helpful. Moving on to cryptocurrency, that pick has been in the spotlight for the last few months. Can you talk about your approach as it relates to digital currencies? And recent events impact how you were thinking about the opportunity longer term?
Craig Vosburg
Yes. Well, it’s an interesting area. We think of this broadly in terms of digital currency, not specifically crypto, digital currencies being inclusive of CBDCs of stable coins, tokenized bank deposits as any digitized form of currency that can be — that can traverse the blockchain. Our approach to this has really not been changed by recent events because our approach has been grounded in a couple of really important principles, and those principles exist for a reason and exactly to help to protect against some of the volatility that we’ve seen. It starts with recognizing that crypto — there are some crypto-related activities where crypto is an asset class. There’s some crypto activities where crypto could theoretically be used as a payment instrument.
To the extent we’re focusing on payment instruments since we’re a payments player, we have adhered to and continue to adhere to some really strong foundational principles around ensuring that any digital currency we are enabling as a payment instrument can demonstrate stability of value. Stability is an important element, obviously, when counterparties are agreeing on the price or something, the price needs to reasonably reflect what we agreed upon once the transaction actually settles. That there is strong consumer protections in place, consumer protections with respect to data privacy, data usage, dispute resolution fraud protection, those kinds of things. And that there is a clear adherence to regulatory requirements and compliance. And that’s an important area because, obviously, the regulatory framework for cryptocurrencies is still very much in development. Something we’ve been advocating for and working with policy makers in different markets around the world to share our point of view on the appropriate approach to regulation as it relates to digital currencies for payments. And that’s what we’re focused on.
And so what that’s translated into in terms of actions and where we are engaging in crypto-related transactions. One is, it comes back to crypto as an asset class, positioning Mastercard products to be available for use to the extent consumers want to invest in or redeem value from crypto as an asset. In this case, we’re transacting in fiat currency, but we’re enabling connectivity between different accounts and currencies to either facilitate the purchase algo, or redemption of crypto for the consumer and that’s through making Mastercard products available, is through working with exchanges and having Mastercard co-brand programs through enabling Mastercard Send as a way to push money from one account or from a wallet into another account. So that’s one area of focus.
The second relates to services that we can provide to the crypto sector, particularly those that revolve around risk management, identity management. Our acquisition of CipherTrace plays a critical role in this case, where we’re effectively scoring every transaction that is conducted on public blockchains and helping to identify patterns that would suggest risk and work in helping our partners, manage their own compliance obligations more effectively. And then looking to enable the network to transact natively in select stablecoin that meet the criteria that I described at the outset of that. So that’s what we’re focusing on.
Obviously, the events of the last few months have certainly — it’s altered, I guess, the way potentially the level of demand and the breadth of demand for crypto. But it’s an area that we continue to focus on. There is demand for it globally and consumers are interested in it. We’ve — as a part of that, actually, we’ve just recently launched something we call Crypto Source in partnership with Paxos. It’s an infrastructure player in the crypto space to provide our partners with an opportunity to offer, buy, hold and sell capability to their consumers. We’ve launched something called Crypto Secure, which leverages the CipherTrace technology that I mentioned earlier around scoring. And so we’re continuing to lean in, but in ways that we feel reflects the principles inherent in our brand and a lot of that ladders back to trust for consumers.
Rayna Kumar
Anyone has any questions for Craig, Feel free to type them into the UBS TMT Conference app, and I’m happy to read them out. Continuing on my question. Beyond person-to-merchant payments, you’ve outlined a targeted set of new flows that you are pursuing. Can you give us an update on your strategy here? And what are the key milestones we should be looking for?
Craig Vosburg
Yes. The flows you’re referring to, and we spent a decent amount of time on this last year at our Investor Day outlining areas where we see real opportunities for future growth, participating in payment flows that will drive future revenue growth in areas that are in some cases served in part by cards, but at least there’s some meaningful portion of that opportunity that — where we need to be able to operate beyond our card rails to be able to effectively target them. And you’ve seen that reflected in our strategy over the last number of years in expanding payments capabilities, be it debit and credit rails, into things like real-time payments and push payments and account-to-account payment, blockchain-enabled payments. And that’s very specifically with the intention of being able to target these flows in categories like disbursements and remittances, in B2B accounts payable, commercial point-of-sale transactions and in consumer bill payments. And those are the four specific areas that we’ve called out.
As being of interest to us in as much as they represent a really sizable addressable market in the aggregate, there’s about $80 trillion in flows that we feel are addressable through products that we currently have in market or in late stage of development. And we see those as really nice sustainable runways for growth with needs in the marketplace that we can help meet and satisfy and at attractive economics for us as we’re able to do that in the ways that we intend to.
And so what you should be looking for, things like new product announcements, things like new partner announcements, new markets that we’re entering associated with these. These demonstrate a path to validating a product proposition, engaging with the partners that we need to enable distribution of those products and then ultimately, usage of them by consumers and businesses that will drive revenue.
And so just by way of example, if you look at an area like B2B accounts payable, just on our last earnings call, we announced a partnership with SAP and Taulia, has a way to further benefit from virtual card capability that can play a role in facilitating B2B payments and is actually increasingly applicable broader range of use cases in the B2B space. A partnership with someone like SAP Taulia that embeds that capability into the ERP systems and lots of businesses they’re using already is a great example of extending the reach of that sort of capability; and disbursements and remittances, an area that we serve through Mastercard Send, our push payments product, our cross-border services capability. This is an area where with cross-border services, we’ve invested in capabilities through acquisitions through Transfast and HomeSend that we’re integrating into a single a proposition and continuing to invest in extending the reach of that combined capability. And in the remittances business, access to endpoints at scale is a critical differentiator. And we’ve enabled access at this point to just short of 10 billion endpoints around the globe. Now that’s a combination of accounts, cards, digital wallets, cash out locations. In some cases, those endpoints overlap as it relates to serving the needs of an individual consumer, but that’s okay because that comes back to the choice and providing optionality in terms of how consumers actually access those funds on the other end in as much as they’re typically P2P or in some cases, me-to-me kinds of remittance payments. In a number of instances, remitting funds to underserved or unbanked consumers and having that variety of endpoints, particularly those that relate to digital wallets, mobile phones and cash out location is really important.
So those are the kinds of things you should be looking for. We shared some data last year on how much of our revenue those flows represent and we’re very focused on growing those and we see a lot of opportunity there.
Rayna Kumar
Wonderful detail. Let’s take a few questions from the audience. Can you talk about where the credit/debit mix is? And are there any implications for Mastercard with that mix?
Craig Vosburg
Credit/debit mix varies. It fluctuates a bit through the cycle. And so I don’t — I can’t say that there’s anything that I would view as being a sustainable shift that’s altering the mix. We see variations based on where — kind of where we are in the economic and credit cycles based on the extent to which consumers have the funds for and are interested in paying for things now with money they have versus leveraging credit. They’re both very attractive products for us. They’re both growing at healthy rates, both as a function of the secular trends that I noted earlier, as well as through success that we’ve had in the marketplace and winning share with some of our key distribution partners. Even some of the areas where over the course of the last 12, 18 months, there’s been questions raised around what’s the impact of like the buy now, pay later phenomenon, going to be on debit and credit usage. And even in that case, we see the vast majority, I think there was a CFPB report recently that indicated 99% of buy now pay later repayments are made using the card. Most of that is debt which you would expect that people are going to use debit to repay what’s effectively alone. Some of it’s credit. But again, it’s just — it’s sort of reinforcing established — I’d say, established elements of the mix and how people are using those products.
Rayna Kumar
Got it. Can you talk about competition? And do you think there’s any scenario where digital wallets bypass the network?
Craig Vosburg
Competition, competition is obviously not a new phenomenon for us. There’s been competition in various forms for a long time, including various different kinds of technology-enabled competition. The question, I think, is core to sort of getting at a particular application of technology, the potential that, that creates a disintermediation threat. I mean what we’ve seen I mean again, as new technologies have emerged, as new players in the technology space emerge is that we have real opportunities to partner with players like that and work to the mutual benefit in serving the needs of the consumer that they’re working with. We’ve seen that with digital wallets. We’ve seen it with big tech. We’ve seen it with fintechs. We have seen it with telcos. We’ve seen it pretty much across the board. And there are some elements of that, that are I think, pretty foundational in terms of why a partnership like that actually make sense. And it goes back in part to the earlier comments I was making about acceptance and the breadth of our acceptance network. It’s not easy to establish an acceptance relationship with 90-plus million merchants around the world and to have all of the technology and capability that underpins that.
And so working in ways — working with new partners that are leveraging technology to bring a different kind of consumer experience is — it has been and I think will continue to be a really nice runway of growth opportunity for us, more so than a competitive threat. And that’s what we’re focused on across the board.
Rayna Kumar
You’ve completed several acquisitions over the last few years. How do you think about M&A as a component of your strategy going forward? Are there any areas or geographies that are most important in the acquisition plan?
Craig Vosburg
Yes. M&A has been an important part of the strategy. Obviously, it’s informed by the strategy. And when we think about how we’re building out the business across payments, services, new networks, we look at where there’s opportunity. We evaluate speed to market, capability, investment required, et cetera, to build versus buy. And in a number of cases, we’ve concluded that it’s the right thing for us to do to buy and there are acquisitions that we’ve made that support each pillar of that strategy. We’ve made important acquisitions that support our payments capabilities with things like VocaLink and the Nets assets, with Transfast and HomeSend, as I mentioned earlier, that have enabled our cross-border services capability.
We’ve — in our services lines of the business, data and analytics and cyber and intelligence with a number of companies that we’ve acquired that provide access to data for things like identity enhancement and identity management, Takata, CipherTrace I’ve talked about in the crypto realm, Dynamic Yield. And a number of other companies in our data and analytics area that are just bolstering our capabilities in being able to provide different kinds of value-added services to our partners.
And then our focus on building new networks and open banking, for example, while we started out with some organic efforts in Europe, we’ve really accelerated it pretty significantly through the acquisitions we made in the U.S. of Finicity and Aiia in Europe. And so we’ll continue to look for acquisitions as things where we can bolt on new capabilities, new talent and scale — combine that capability with other things that we’re doing to create a very unique proposition and then drive scale through the Mastercard global network to accelerate growth. I think you can expect to see our future interests will align with the stated strategy around payment services and new networks.
Rayna Kumar
Going back to NPL. So you said you’re seeing a lot of transactions being funded with debit, and that’s what we’re seeing. The UBS Evidence Lab, they ran a survey for us, consumer survey and that says 70% plus able USD NPL transactions are funded debit and credit. Can you talk to us a little bit about the profit you’re making with Mastercard Installments?
Craig Vosburg
Sure. Yes, Mastercard Installments is a program of product really that we announced late last year that is intended to bring the power of buy now, pay later to the market at scale. And it does so by allowing lenders to provide either preapproved or at — or in real time at the point-of-sale credit offers to consumers, to enable consumers to avail themselves of those kinds of offers from a variety of lenders, in many cases, financial institutions, they know and trust and have existing relationships with and then be able to use that at any merchant where Mastercard is accepted. And so it gives the merchant the opportunity to benefit from the obvious appeal of the buy now, pay later proposition without having to do a tech integration, without having to enter into a bilateral agreement with a particular partner, in as much as the transaction is being funded at the merchant level with a Mastercard virtual card transaction, which the merchants are capable of accepting.
And so it’s a unique proposition that brings together the power of our distribution reach and partnerships on both sides with lenders and merchants, give consumers that ability to use the buy now, pay later proposition virtually anywhere they would want to. We have a number of partners who have signed on to the program and are in the process of coming live, both in the U.S. with a number of financial institutions and fintechs. Of course, Apple is a partner as well with their Apple Pay Later program. We have partners in the UK. We have partners in the Middle East, partners in Australia, all of whom are working to bring that product to market in the months ahead. So it was very well received by the market, and I think we’ll be very well received by consumers, too.
Rayna Kumar
We’re reaching the last minute of our conversation. So this is the final question. What are you most excited about as we enter 2023?
Craig Vosburg
Well, I’m most excited about the breadth of opportunities for growth that I continue to see across the payments landscape and driving growth in our core business with the things I described around expanding acceptance, leveraging the power of digitization to put our products in the hands of more and more people through an increasingly diverse range of partners that’s both our great banking partners we’ve had for many years, with fintechs and big tech players and merchants themselves, as well as the opportunities with these new flows that we touched on briefly represent for us. And those are things that have significant runway for growth. There are all things that will take some time to build, but we’re seeing real traction and real signs of progress, and I’m excited to see the trajectory that those are going to put us on what I hope will be for many years to come.
Rayna Kumar
Craig. Thanks for joining us today. It was a pleasure having you.
Craig Vosburg
Thank you.
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