Mastercard Incorporated (NYSE:MA) Citi 2020 FinTech Conference November 16, 2020 2:15 PM ET
Craig Vosburg – President, North America
Conference Call Participants
Ashwin Shirvaikar – Citi
Good afternoon. This is Ashwin Shirvaikar, Citi’s payments, processors and IT services analyst. I know many of you have been waiting all day for this next company that we’re going to host.
So without further delay, I want to welcome Mastercard to our virtual stage. From Mastercard, we have Craig Vosburg, who is President of North America. Welcome once again to our conference. Appreciate you being here.
Thank you, Ashwin. Nice to see you. Great to be here again.
Q – Ashwin Shirvaikar
Yes, absolutely. I want to start actually with the topic that’s dominated news all year, which is the pandemic. How is Mastercard navigating the pandemic, especially some of news that you’re seeing, the trends you’re seeing across the business as well as specific trends within the U.S.?
Well, certainly, the pandemic has been story in 2020. And like most in the industry, we’ve dedicated a fair amount of time and energy towards navigating our way through that.
There’s a couple of areas we focused on really throughout the course of this year since things got, I guess, most intense in the U.S. back in March, initially focusing very hard on just ensuring that the network continued to operate flawlessly amidst a period of really unprecedented change in spending patterns, spending behaviors and how our various partners and customers, consumers, merchants around the world were using the network. And that was an important area of focus.
We’ve, beyond that, spent a lot of time and energy leaning in with our partners and our customers in a variety of ways with our data and analytics and insights, our products, our technology, our team and our expertise to initially just help understand what was happening amidst a period of really significant and dramatic change. And then beyond that, to help identify ways to adapt to and manage through that changing environment and we’ve continued to execute on our strategy.
We — while this is a very dramatic short-term event, we are continuing to be focused on the longer term and executing to continue to grow our market share and execute on our digital strategy, which is now more important than ever, adapting our services portfolio and how we’re working to provide value-added services to our partners and executing on our multi-rail strategy and deploying that in markets around the world. All of that has been happening with — against a backdrop of very, I guess, divergent kinds of — and shifting patterns in spending behaviors.
We — if you go back to the March, April period when we first went into the containment stage of this whole event, we obviously saw a very dramatic drop-off in spending levels as economies around the world went into lockdown. And certainly in the U.S., that was — we were no exception. We did see that stabilize in late April into early May and begin a process of normalization of coming back to where spending levels had been in the period since then.
And as you’ve seen through some of the interim operating metrics that we’ve released, including up through the week of October 21, we see moderate levels of growth through that period in overall transaction volume and in spending levels and transactions, moderate levels of growth but with lots of noise beneath the surface, some strength, some areas of strength and reasonably solid spending at the domestic level.
And in some categories, real strength in hardware and home improvement, in furniture, in grocery, all the areas where we’ve been spending money these last few months, offset, of course, by some significant weakness in travel-related spending categories and in particular, cross-border-related travel.
And so in the period since then, we’ve seen that — we’ve seen a couple of things emerging over the last couple of weeks. Caseloads are beginning to increase in various parts of the world. With that, we’ve seen some slowdown in spending in Europe, where there are some fairly aggressive restrictions being put back in place to try to contain the spread of the pandemic.
Here in the U.S., the trends have remained more or less consistent, although we’ll have to see as caseloads are increasing, and we’re seeing governments — local government taking action to address and try to curtail the spread of cases. The one difference that it seems to be, at least thus far this time around, those actions are a little more targeted. So whereas we saw widespread systemic lockdowns back in March and April, we’re seeing more targeted activities to focus on, in some cases, micro geographies even at the neighborhood level, restricting activity, restricting certain types of gatherings, operating hours in some businesses as opposed to widespread lockdown.
But we’ve said from the beginning, as we would work our way through these phases of recovery, that there’s certainly a possibility that the recovery is not linear. And we’ll have to see as we head through these next couple of months how caseloads continue to behave and what impact that may have on the pace of that normalization.
Got it. Understood, and then thank you for that incremental update as well. When you look beyond COVID though, what structural changes do you see in the payments landscape going forward? The obvious part of the answer is e-commerce, e-commerce acceleration. But hopefully, we can also touch on other things like buy now, pay later has come up quite a bit, the targeting of affluent customers via rewards, things like that, other factors. Can you talk about those factors?
Sure. It’s a fascinating time in terms of the dynamics around the industry. One of the things in my experience that’s hardest to in payments and introducing new things and payments is changing consumer behavior. Consumer behaviors tend to be fairly sticky, particularly when the things that they’re doing already work reasonably well.
What we’ve seen over the course of these last few months since the pandemic struck is a fairly dramatic change and a rapid change in consumer behavior that I think will have lasting impact on some structural issues in the payments industry. And that’s true for both consumers and businesses, frankly. And it stems from a desire, frankly, just to avoid touching things. So there’s an aversion to cash that we see. There is an increased adoption of contactless forms of payment that have accelerated well beyond what our — what we would have anticipated, I think, a year ago. And there’s an ongoing acceleration in digital and e-commerce.
And the things that we hear from consumers and businesses through the various surveys we conduct and that we see others conducting suggest that these kinds of changes and attitudes will be pretty durable, large-scale numbers. 70% of consumers saying they expect to continue or even increase their level of digital and e-commerce shopping, more than 60% of consumers saying they expect to use less cash. Two-third of business is saying they’re actively encouraging their customers to pay in ways other than through cash and check.
These are pretty substantial shifts. Will all of that stick? Maybe, maybe not, but I think some meaningful portion of it will stick. And with that, as more payments behavior becomes digitized and electronified, it enables these different kinds of experiences that are richer, more value-adding to consumers and businesses because of the nature of digital versus a physical transaction.
Some of those kinds of enhancements involve introducing new components to the value proposition like what you alluded to with buy now, pay later. An interesting example that’s it’s not exclusively a digital proposition, but it’s more easily deployed through digital shopping channels, where consumers can be offered these opportunities to pay for things in installments over time. And that’s clearly a proposition that’s resonating with a lot of consumers. That’s one that we’re certainly attuned to and supporting as well through a variety of actions, including working with our issuing partners to enable the credit lines on their — on credit cards to be used for installment-based lending.
And we recently announced a partnership with TSYS to enable our mutual customers to be able to do that pretty seamlessly as well as working with other partners, third parties who are active in that space, people like Afterpay and Divido and others who we’re working with to enable those kinds of propositions. So structurally, I think there’s just — there’s the opportunity to introduce more value-added things into the value proposition, loyalty offers, different payments options, more optionality and flexibility in how the consumer completes the transaction.
There’s a flip side to that, though, which is in the digital space, we’re also exposed to some risks that are higher in digital than physical, the cyber threats, of course, and the risks of fraud that go along with digital transactions. And that’s another area we’re very focused on as part of the structural migration to bring a higher level of cybersecurity into the payments ecosystem with things like RiskRecon and being able to provide some insight into cyber vulnerabilities of merchants who are selling things online and enhancing things like our ability to authenticate cardholders through artificial intelligence and more informed kinds of fraud solutions. So that’s a trend that we expect to continue and continue growing pretty aggressively and one that we’ll continue to invest behind.
Got it. Got it. So shifting gears a bit. On Mastercard’s last earnings call, you announced several new issuer and co-brand wins in North America. Can you tell us a little bit more about these deals? Why are you winning, retaining business?
And a kind of an adjunct question to that specific to co-brand is given that airline and hospitality partnerships tend to be very important to the co-brand market, those companies, obviously, have been tremendously hurt by the policy response to COVID. Are the new generation of co-brand relationships different? How are they taking this into account?
Yes. Well, I guess, back to the first part of your question was some of the wins we shared on third quarter earnings. We’re thrilled to see and be able to share those, really a continuation of what we feel has been a pretty good run over a number of years in adding customers and gaining market share in our core product areas.
We’re thrilled to be able to be back in market with Chase with our first proprietary consumer credit product that we’ve had in the market with them in more than five years with the launch of the Chase Freedom Card, extended our partnership with Barclays. We’ve added some co-brands with the likes of Wayfair and AARP and a number of others. So — and there’s more to come that we’re excited about.
I think why are we having that success? I think it’s a continuation of the formula that we’ve had in place for some time. We work hard to partner effectively with our customers to really understand what it is they’re trying to do, what their strategy is, how they want to win in the marketplace and how they want to create deep and meaningful relationships with the consumers and businesses they serve and then seek to bring the right portfolio of products and value-added services to bear to help them execute on that.
Some of those product capabilities are focusing on things that are very aligned with this migration to digital, things like the digital-first product capability, where we can have the initial instance of provisioning the card being digital and virtually instantaneous to some of the kinds of things we’ll be able to do with open banking to things as basic as sort of rearticulating and recrafting some of the core product benefits that historically have focused on things like different kinds of insurance coverages that many consumers, frankly, don’t even know that they have to incorporating more relevant partners in — who are aligned with this shift towards digital engagement, people like Instacart, people like Lyft, who we’re embedding as part of the core product proposition as a means of engaging consumers.
All that, of course, combined with the value-added things around data analytics, consulting, loyalty services, et cetera, are helping us continue to deepen those partnerships. On the co-brand front, it’s an interesting question. There’s another layer of what I think what’s helping us be successful on the co-brand front, which is in addition to having the right kind of partnership orientation and product portfolio around the card program itself.
It’s partnering with the merchant more broadly on their core business and helping them attract customers, deepen their relationships with customers to sell more to those customers and retain them more effectively. And that’s something we focused on for a number of years and I think are continuing to having good success there.
The travel question is an interesting one as well. Travel is down, certainly, but it’s not out. I think travel will be back. Travel will always hold a special place in the hearts and minds of consumers as an aspirational category.
And while spending levels across the board are down today, people are still thinking about that trip. It might not be that trip next week, given that we’re all kind of still dealing with the pandemic, but it might be next year or if it’s not next year, it’s the year after that, where people are thinking about the big trip. And that’s largely been what the appeal of those travel programs has been.
But more broadly, I think the changes in consumer attitudes at the moment are broadening the range of merchants for whom they may be interested in engaging with a co-brand proposition. Ultimately, the success of any co-brand product rests on the extent to which that brand and that merchant resonate with consumers.
And as consumers, we’re identifying and resonating with a broader swath of brands now. Some big digital players, whether that’s an Apple or a Samsung or a SoFi or somebody like that or other players who are emerging now in the delivery space, for example, we’re just engaging with them in different ways as consumers. So I think that universe of relevant co-brand partners has broadened somewhat.
Got it. Got it. Now you referred to a couple of these things in your answer, but your approach to working with fintechs with neobanks and digital wallets and so on has been quite successful. Could you — I mean, is it the same success factors as what leads you to success on the issuance side? Or are there different factors, given that these are newer companies, newer tech tax?
Yes. I think it’s at a certain level, broadly, they’re similar, but I think we have had good success in the fintech and digital partner segment. And I think that is largely attributable to early recognition that, that is a distinct segment of partners that is playing a meaningful role in shaping the payments ecosystem in part because of the kind of technology they have and their own business models and the role that payments can play in that business model.
And in part because of the — the value of the brands that many companies are establishing in that space and the connection that we as consumers have with those brands puts them in a position of being really important distribution partners. And they’re delivering new and creative and innovative kinds of value propositions to consumers and businesses.
So I think early recognition that, that’s an important segment, dedicating an important part of our team to focusing on that segment and understanding what motivates them. And what motivates them it is different in many ways from what motivates some of our other important B2B partner segments. They’re very focused on speed and creativity and flexibility. And we’ve aligned ourselves to be able to try to meet those needs as effectively as we can with the right kinds of product proposition.
Some of the things I touched on around loyalty assets and analytics and insights that they can deliver and capabilities through things like Mastercard Send in enabling certain kinds of payment transactions, our multi-rail strategy, increasingly going forward, open banking and the role that will play for us there and then creating the right kind of environment within Mastercard to have on-ramps to engage with these partners.
Engaging with the big guys is easy. It’s with the Apples, the PayPals of the world. We know them, and they know us very well, and we have great relationships. But engaging with a broader group of innovative creative partners requires the right kinds of on-ramps to get that connectivity, whether that’s through our Start Path programs where we’re working with early-stage companies or through our Mastercard Accelerate program to just get these fintechs and digital players engaged with and using our products, connecting to our APIs to be able to ingest our products and services more effectively is an important part of that success as well.
It’s been interesting actually because engaging more deeply with that segment has also helped us learn a lot and helped us be better. We are, after all, arguably one of the world’s largest fintechs ourselves. And being more closely engaged with that fintech community and particularly the earlier-stage ventures has helped us learn a lot about ways that we need to be prepared to compete more effectively and innovate more quickly.
Okay. No, that’s really useful to understand the difference between those 2. I want to move to open banking, and we get a lot of questions about this one. Talk about your strategy in open banking and your planned acquisition of Finicity.
Well, let me just start by saying we’re extremely pleased that we’ve received confirmation from the Department of Justice that they’ve completed their review of our intended acquisition of Finicity and have informed us they will raise no objections to that. So we’re clear to proceed, and we expect to close on that acquisition very quickly.
And we’re excited about that because open banking is an important part of of how the payments and financial services landscape is evolving in different ways in different parts of the world. Obviously, in Europe, it’s been driven predominantly from a regulatory point of view. In the U.S., we’ve seen it being driven more by the market and competitive dynamics in the market, in part as a function of consumer need.
Consumer wants and needs for new and innovative kinds of products and services, meeting with a very timely way this explosion in innovation that’s taking place because of technology and digital capabilities that is just enabling both new entrants as well as traditional players alike to leverage the power of open banking to innovate products and services to meet consumer and business needs more effectively by providing more choice, by providing more flexibility and control over how those parties manage their financial relationships.
We see for Mastercard a role to play in being an intermediary in facilitating those flows of data and information that enable those kinds of propositions to be deployed and where applicable, some, not all, but some of those different propositions include the movement of money where payments are taking place. And we think that also lends itself very well to aligning with our multi-rail payment strategy, and we think there’s a role for us to play in facilitating those payments as well.
So broadly, our strategy is to be able to be in a position to be a trusted intermediary of both the data and the movement of money where relevant. Finicity for us is just an ideal partner and soon to be part of Mastercard in attacking that opportunity. We’ve obviously gotten to know them extremely well, and there’s a high degree of alignment and synergy on really important principles as it relates to open banking, principles around how data is accessed and collected through direct API integrations with banks as opposed to through an over-the-top screen scraping approach.
In terms of the principles around data privacy and data usage and ensuring the right degree of consumer consent in exactly where and how their data is being used, the right approach to data security given the value of the kind of data that is involved in these exchanges and the right sort of collaborative approach in working with the industry, with all stakeholders in the industry to establish a standards-based approach to exchanging this information.
And they’ve played a leading role in the formation of FDX to establish those standards and continue to be a very constructive proponent to create the right kind of environment where all the various stakeholders understand and can, frankly, benefit from that capability. So we’re looking forward to welcoming them into the Mastercard family, and we’ll be working quickly to continue to grow their business, diversify the product suite that they have already developed and expand their reach into new markets around the world.
Okay. Okay. Got it. You want — you’ve touched on multi-rail a few times. We’ll get to track in the — and today’s announcement in just a bit. But I mean, that’s been a key part of Mastercard’s strategy has been to become a global multi-rail provider. Could you sort of give us an update on where that stands, what that means, how you’re executing against that? And if I can make it for the global and North America question, you could talk about that.
Sure. Multi-rail is an important part of our strategy, and it’s really centered on a couple of things. One is the increasing importance in our view of choice, choice on the part of consumers and businesses in terms of how payments are made.
We love cards. We’re fully committed to and see a very long and bright future ahead for cards as an important means of facilitating payment. But we do recognize there are other ways that people pay for things. There are push payments. There’s real-time payments. There’s ACH payments. There will be, at some point, blockchain payments to become a more mainstream way of exchanging value.
And we see all of those as being important to offer to consumers and businesses to meet the specific needs of any particular occasion for moving money based on the speed of the movement, the familiarity with the counterparty, the data that needs to be exchanged, the cost of the transaction. There are a number of different things that determine what the right or optimal way to move money is. That’s one.
And two is by participating in that, it just gives us access to a much larger addressable market on the order of $235 trillion worldwide that we’re very interested in playing a role in and not just the movement of money, but then the delivery of value-added services that go along with that. So that’s at the core of our interest around the multi-rail strategy.
And we’re attacking that in — through three distinct components or aspects of the strategy. One is through targeting participation in payments infrastructure. Second is through payments applications, and the third is through value-added services.
So on the infrastructure front, this is an area that gets a lot of attention and one that we continue to focus on because it’s a very dynamic period around the world as governments look to modernize payment systems. Many governments, principally governments, in some cases, it’s nongovernment entities, but principally, governments are looking to modernize their domestic payment systems. And that’s driving a focus on real-time payments.
We, through our capabilities with VocaLink and soon to be Nets when we close on that transaction, we’ll have really deep capabilities in being able to provide real-time payments infrastructure in various countries. And we’ve — we’re continuing to show success around the world in building out wins in important markets.
We have countries in every region of the world that are using our infrastructure, our capabilities to power their real-time payments infrastructure. We announced last week the most recent win in this space is with Canada, where Payments Canada has selected Mastercard and the VocaLink technology to power their new real-time payment system called the Real-time Rail, which we’re really excited about. That’s our 12th country market where we’ll be powering real-time payments. Those 12 are 12 of the top 50 markets by GDP around the world, and they’re important and sizable markets.
We won’t target infrastructure plays in every market, but we want to be the infrastructure provider in important markets. And so we’re continuing with that, and we expect some other wins to come in that area.
With respect to applications, which are — you can think of as the value-added kinds of functionality, specific use cases that would run on top of the infrastructure, there’s a variety of things we’re pursuing. Pay by Bank is one that we’re making good progress within the U.K. Partnering with the likes of Barclays and HSBC, we’ll have that available to about a third of U.K. mobile banking users in the very near future and continuing to add merchants to enable direct account-based payments for goods and services at the point of sale.
And we’re continuing to build out things like the Bill Pay Exchange, Mastercard Track, each of which we can think of as being applications that run in whole or in part on top of real-time payments infrastructure but also through other rails, hence, the multi-rail approach. They incorporate cards. They incorporate Mastercard Send. They’ll be built to incorporate things like blockchain.
And then the services piece has largely focused on things like utilizing the visibility across the broad payments infrastructure to identify things like money laundering and prevent money laundering to help prevent fraud and combine that, the visibility into those data flows with artificial intelligence to be able to enhance the overall security of the payments infrastructure. So we’re excited about how things are progressing. This is a long game for us, but we’re building out each one of those rails with a very specific focus, thinking about how we tie them together to make Mastercard the single point of integration to provide choice and optionality in terms of how a payment is actually routed across whatever is the optimal rail to move the money based on those specific characteristics.
Right. Right. And obviously, whether it’s consumer or business shouldn’t necessarily matter. I mean, you kind of think of track, for example, in the announcement you had today with the multi-rail. Maybe since that’s very recent just basically announced today, can you talk a little bit about that one and talk about track and update? And I think we probably might turn out of time at that point, but…
My answers are too long. Warren always tells me my answers are too long. So I…
We do the same thing with questions. We come up with about 75 or so.
Yes. Yes. So Mastercard Track is a really — it’s something we’re really excited about as you can think of it as an application that helps deliver on the promise of the multi-rail strategy. And it is a B2B play that is addressing needs in the marketplace that are unique to the B2B space that really hinge on complexity around, I think, the lack of transparency around payments preferences between buyers and suppliers, the complexity of matching invoice data with payments data to be able to reconcile those two and a variety of other things that have made the B2B payment space fairly inefficient.
And Mastercard Track is really aimed at doing a couple of things. Bringing together both the buyer and supplier communities with Mastercard being able to facilitate the flow of payments and the flow of information between the two through establishing a directory that helps to identify and clarify supplier pain preferences and what their various forms of payment acceptance are by being able to provide data flows, rich data flows that will help reconcile invoice and payments data and being able to provide the optionality to make the payment using the multi-rail approach across whatever means is most appropriate in the optimal way of moving the money in that particular circumstance.
We announced in May of this year in the U.S. that we launched Mastercard Track initially with card-based payments. We announced earlier today that we’ve now expanded the U.S. functionality to go beyond cards and include account-to-account payments so that we can help facilitate payments via the real-time payment rail in the U.S. and by ACH. And at the same time, we’re extending the card-based functionality globally through a number of our partners that we’re working with, and we’ll continue to enhance that.
This is a build-out process, and we’ll continue to add rails, geographies and richness of information into that supplier directory to enable a more robust network effectively of connecting buyers and suppliers through their respective financial service partners, buyer and suppliers, banks, that will connect into Mastercard Track in the form of a network. So we’re really excited about where that’s going. Again, its early days, but we’re making some really tangible steps and tangible progress towards building out the functionality and beginning to deploy that in important markets like the U.S. and others.
Okay. Got it. With that, we’re kind at the end for our time, but I got to say, getting to 8 out of 13 questions if it is to have this level of insight, so thank you for your insights. And appreciate you doing this, and enjoy the meetings the rest of the day.
Thanks, Ashwin. We’ll aim for nine next year.
All right. Take care.