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MasterCard Incorporated (NYSE:MA)

Future of Payments & Commerce Conference

June 11, 2014 11:00 a.m. ET

Executives

Mario Shiliashki - SVP & Group Head of U.S. Emerging Payments

Analysts

Question-and-Answer Session

Unidentified Analyst

Good morning, everyone, and thanks for joining us on the second day of our Future of Payments & Commerce Conference. On behalf of George Mihalos and our entire team here at CS, thanks. This has been a very successful conference for us. If you have feedback for us about things we could do differently or better, we'd love to hear about it, and we look forward to kind of a good day today and continuing this in coming years.

We're very pleased this morning to have MasterCard with us. Mario Shiliashki, who is the SVP & Group Head of U.S. Emerging Payments; Mario was responsible for payment product platforms in e-commerce, mobile, ship, person-to-person, transit, PayPass, bill payment, so a long list of things that I think are of interest to people in the room. He had been at PayPal as well as a consultant and an investment banker prior to coming to MasterCard has obviously very, very robust background and experience in this area, which obviously is very topical, and so we're really thrilled. Having here with him also Barbara Gasper, and we've got some questions and we'll also take questions from the floor. So we're just going to jump in.

Maybe just to give us a little bit of an introduction, I read a long list of things that you're responsible for. When you think about them like, how do you think about them in terms from a prioritization standpoint? What are the things that are the most interesting, burning kind of forward moving in that portfolio right now?

Mario Shiliashki

Of course. Well, first of all, thank you for having me. It's great to be here, and thanks for getting my name right. I generally don't get that often, so thanks. So as we think about in general the commerce space, we see a real transition right now from physical to digital. We see what we call a convergence between physical and digital world, where more and more people are transacting in different ways, merchants are connecting with their customers in different ways.

What we see is a new set of transactions that are happening, that don't necessarily fit within the construct of even five, ten years ago. If you think about how we transact, but beyond transaction, how we talk to each other, how we connect with merchants, how we travel, how we check-in to the hotel, how we check-in at the airport, all these experiences are very different today than they were even a short five years ago. And optimizing our network to harness the power of our network and to drive these new experiences is really where our focus is.

As we think about it in kind of what we call emerging payments, we think about it in three different steps. One is optimizing our network and making sure that the platforms we provide to our customers, both traditional and non-traditional are as integrated into their solutions and as robust and flexible and scalable as we can make them. We have a good start there.

The second piece is then building the product on top of these platforms. They can provide both merchants and consumers, our traditional and non-traditional customers the ability to build their businesses on top of our platforms and on top of our products, and drive innovation that way.

And the third one is working with traditional and non-traditional partners from Telco to handset manufacturers, from digital giants to start-ups to independent developers and helping them drive innovation through our products and on top of our platforms. All of this is really in an effort to drive a faster pace of innovation, drive new experiences and the point of sale of new experiences, online, those worlds are converging, right, as more and more of us are shopping on our mobile devices whether we're walking down the street to where -- in our apartment and our office or at a store. And so, integrating those experiences in driving that change and making sure that we are embedded within each and everyone of these new innovations is what I focus on.

So, one of the things that's always been interesting to me is that we obviously can go about that by developing things internally, by partnering or joint-venturing in some cases, in other cases by actually (indiscernible) making an acquisition.

Unidentified Analyst

Do you have a thought process as to what types of things work best in each of those three constructs when you think about advancing those three objectives?

Mario Shiliashki

We do. And of course it's often on a case-by-case. So we always look at capabilities that we need to drive into the market, and whether it's a platform capability or product capability, and we always evaluate, do we build this in-house, do we partner with someone else to bring a joint solution or do we outride by someone that can get us there faster.

And then of course on a case-by-case basis we have a long list of acquisition criteria that we go through, making sure that those on strategy, making sure that it's a viable financial investment, making sure that we can integrate it easily into our processes and our products. Those are the things that we of course look at every time.

Unidentified Analyst

Okay. One of the topics that we've discussed over the course of yesterday has been the U.S. rollout of EMV. I was hoping you could first just give us a little bit of your view as to how you think that evolves, what -- perhaps if you have thoughts about what the various constituents to think about the costs and benefits and the timing, and maybe we will talk, drill into that a little bit?

Mario Shiliashki

EMV to us is important and a long time coming. One of the things that we stand for is safety and security. The trust that we have in system, the trust that we have in our brand is built on that, and for that to continue and to enhance, we need to continue to build the safety and security of the network of transactions and everything that's attached to them.

So EMV and moving to EMV in the U.S. is one of those critical milestones and on the path to better safety and security. U.S. is the only significant market that is still reliant on the Mag Stripe. And so, moving to EMV, it's happening, we see it as one of the ingredients for us to improve the security and safety and beyond that what we can do with the network and what we can do -- the types of data we can pass-through. So it's absolutely critical, and I think we're on the good path.

The great thing is this is not just a MasterCard initiative. It's an industry-wide initiative. Right? It's adopted by all the players within the ecosystem. And so we see it happening. What that of course then drives is our thinking around, okay, so EMV in the physical world, we need to make sure that transactions in the digital world are as or more securer. And for the first time, it's like I can take a little bit of a sidetrack here, for the first time with all of the -- with the power of the devices that we all walk around with in our pockets and our purses on a person we can finally marry the security and safety and the convenience and additional features and functionalities that prior to this has really been -- we need to choose one or the other.

Unidentified Analyst

You either want it to be really safe, but then make it a crappy user experience or you wanted to be -- technical terms or you wanted to be really convenient and really easy to use, but then it's just a vector for fraud. Do you see that Mario as having potential -- are there potential revenue opportunities in there, that services that you could sell in that type of whether there is fraud prevention or other kind of related things?

Mario Shiliashki

We constantly look at new revenue opportunities, and of course having additional data that goes through the network and gives us those opportunities, fraud prevention and detection solutions is one of the things that of course we have an interest in and have very good access in. With that, I think, again the number one priority right now is increasing the integrity, safety and security of the network overall and the entire experience end-to-end. If we can then sell additional services on top of that, that of course is great, and we focus on that all the time, but that's not the primary driver at this point.

Unidentified Analyst

I think I'd like to spend a couple of minutes talking about tokenization, something that we just discussed again by a number of participations yesterday. Maybe you could give us your thoughts on the progress of that, what it actually means and kind of drill down a little bit on that?

Mario Shiliashki

Of course. So let me take a little bit of a step back though, and I just thought little bit broader, and Barbara tells me that there has been some confusion and a lot of questions around tokenization and what a token is and maybe we can dig into that first to level -- so, generally as we think about the move to EMV in the U.S. and as we said earlier, making sure that transactions across any channel and across any mode of payment are as secure and safe as they can be.

In the digital world, in the online world, one of the bigger [kiwi's heels] (ph) has been just the -- having to store your credentials, your card number and credentials across multiple servers, across multiple players. And that of course exposes us, merchants, consumers to fraud.

We have as we said earlier, fraud prevention and protection tools that help with that, but ultimately the best way to solve the fraud is to remove that information from the processor's hands or make it completely unusable. And the way to do that -- one of the ways to do that is tokenization. So, what a token does is it basically acts as a certificate for the card number that you have. It replaces that card number, and so rather than storing your actual card number, 16-digit card number, it will store a token that is linked to that number.

That then allows us to not just have better security for us, but also allows us to segment and block transactions that are away from a particular device or particular environment that token was meant to be. So, let's say you have a token for e-commerce transactions only that is stolen, and is used offline at a physical point of sale, we can take that and block it much quicker than just the actual physical PAN number would use.

On top of that, to digitize that token, we can attach a pictogram or a key to that token that makes it even more secure so the equivalent to EMV transaction offline in the online world. And so, that then makes a extra layer of security such that without the token and without the key you can actually transact, a processor taking just the token cannot transact without the key. And so, that makes online transactions much more secure, EMV level security online or better.

Unidentified Analyst

I think some of that perhaps confusion that you're alluding to related to the question around will this be a revenue opportunity and for whom, do you have thoughts as to whether this is something that we'll involve fees that are being charged either to issuers or acquirers and -- your thoughts on that?

Mario Shiliashki

Well, first of all, let me just say that the great thing about tokenization and the effort we are driving right now is it's an industry-wide effort, right? (Indiscernible). All of the players that are driving this that I think have to be industry-wide.

For us, this is again about optimizing the network and about getting better security and safety and the ability to then have a lot more transactions through the network. So just unleashing the -- what we think is [spend of] (ph) demand for people to spend, but some of them are worried about safety and security and so are either reverting the cash or other means, because they don't feel it safe and secure to transact. That's certainly a revenue opportunity for us and just more transactions.

Then, the next piece of it is we are building our MasterCard Digital Enablement system as we call it. And through that we can have on behalf services for our issuers and other parties in the network to tokenize and digitize those transactions. If they choose to do that through us of course that's a revenue opportunity there, but generally again driving more transactions through the network that are much safer will I think be the main driver of (indiscernible).

Unidentified Analyst

And in terms of timing progress to see just what your thought system, over what timeframe this might …

Mario Shiliashki

We are actively at work. The specs are out there. We think that later this year we will have the system up and we will be in market.

Unidentified Analyst

Just talk a little bit about one of the other areas in your portfolio and MasterPass Wallet. We are aware of that today; just give us a little bit of an update there.

Mario Shiliashki

Sure. So, MasterPass is our digital platform for wallet services. We are actively driving that into the market. Right now we are in eight markets and over 40,000 merchants across those markets. We have a pipeline of many additional markets and many additional merchants. Ultimately, the goal is to be everywhere MasterCard is, and our goal of about 75% of all of the GDV coverage to be in the next couple of years.

So we have aggressive targets there. We are driving additional features and functionalities into that platform, were the ones that we are excited about coming on later this summer is the ability to embed MasterPass in app. So on the mobile apps as more and more customers browse or do commerce through apps in their browsers, an interesting statistic came out earlier on recently that over 80% of all browsing on mobile devices is in apps in mobile browsers. And so the ability to embed our products and particularly MasterPass in app is one key for us.

So, later this summer we will have that live. That is a big push, that is a big drive of course the ability for us to engage with consumers directly through our channel partners and through our issuers and others is key there, so we have a lot of interest from both large and small issuers across all of the markets which is great. Like I said we are in over 40,000 merchants and expanding rapidly.

Unidentified Analyst

Okay. One of the other topics that always comes up in this type of forum is the newer kind of entrance that can utilize ACH to essentially bypass the traditional payment networks. Can you talk about your thoughts as to the development of ACH whether you think those transactions will be spend up, will they be more limited, is that going to be something that accelerates. Just talk about your thoughts there.

Mario Shiliashki

We talked about ACH for quite some time. One of the players that I know well that's adopted ACH and driven into the market is PayPal, and we've seen the funding mix or the percentage of transactions that go through ACH there kind of stayed steady at about 20% according to (indiscernible) over the past three of four years. Still the overall majority of transactions that go through PayPal and others is cards, right? And so that's driven, I think, by two things. One, that's just a functional benefit of the way our system works, it's real-time. You get authorization in real time. The merchant is then -- end consumers are protected by low charge back rights as well as payment guarantee. So, all these things that we've built on top of our network and of course the payment industry in general don't exist with ACH today.

The second piece of course is consumer just prefer to use cards certainly through in the U.S., through in most places around the world. They get benefits by using cards, they feel more secure by using cards, and so that has been the second driver of why we haven't seen really an adoption or an increase in ACH in place of PayPal. So ACH was build for a very different purpose. So repurposing that system is not an easy challenge, right?

It was build for infrequent large payments which is why it's a batch process system that happens daily or in some cases much less frequently especially if you are crossing over a weekend. And so that's something that and especially in the world that we are today where you can get it instantly. We are more and more moving to digital goods. That leaves the merchants inventory. The moment you had done -- there is not even shipping involved. It's there. You are consuming it immediately have to wait for an ACH batch process to do that is just not feasible.

Unidentified Analyst

Got it. So any -- I'll take some questions from the floor. I've got more if there aren't, but I would like to give people the opportunity to ask a question if they would like. Go on.

Unidentified Analyst

I just want to understand one of the functions there of tokenization. It will be up to a processor flow at the moment, those traditional technologies versus department (indiscernible) that's how you envision it.

Mario Shiliashki

No. The way you -- should we repeat the question? No, the question was is it up to the processor to rollout their own tokenization technology for chosen hours. We see it differently. We are working across the industry with our competitors, with our partners to make sure that this is an industry-wide initiative. It's part of the Vigo for a reason.

We like it to be -- of course anyone can rollout a token system. But utilizing the system that is approved and being promoted by the industry will drive benefits to everyone. When I was talking about I think what you are referring to is we are developing our MasterCard Digital Enablement system. That is -- part of that system is on behalf digitization and tokenization service. Our customers, our partners can choose to use that instead of developing on their own, again, according to the standards that we Visa and Vigo have laid out.

Unidentified Analyst

So with respect to interchange and we talked a little bit about card not present transactions. There are categories of transaction I guess where the card is not you have got other methods of verification, other kind of recognition. One of the things that we've heard is that those have not yet been kind of a company by any sort of change and interchange levels. I mean is that something that the associations would do to kind of spur that type of safety. What are your thoughts there?

Mario Shiliashki

My thoughts are, the world is changing. So we used to have or we still have card present, card not present transactions, right? Right now the experience is that consumers go through and merchants are trying to engender the omni-channel experience both from consumer and a merchant perspective walking through the isle of a shop with your mobile phone and transacting with your mobile phone is kind of a person present if you will, but a card not present transaction in today is far less.

This is an industry-wide kind of challenge, right? And upgrading the rule set and all the standards that go along with that in making sure that we can enable all these introductions both from just experience perspective, but also from a new authentication methods whether it's biometrics, whether it's different types of pins and so forth, environmental factors that the device can affect. We can think you are somewhere where you are not all of the both active and passive factors that we can include in the multi factor authentication set of methods.

Those are all of the things we look at and explore and figure out how do we put the right set of standards, the right set of certification criteria across the industry. It's all well and good to say I can pay with my face. But if that is ultimately breakable you can't really -- or by your face, but the device you are using, and a hacker can actually access it. He can easily change your face. It's not as easy as changing your pin or thumbprint, right?

Then it becomes the real problem. And so making sure that these are as robust in the technology, in the providers they are certified and all the process there is not an easy process to go through, and we need to go through that before we can think about or alongside our thought process on how do we then change the rules, the standards as well as the pricing.

Unidentified Analyst

Your thoughts on host card emulation, do you think that we will see the payment credentials kind of stored in the cloud or do you think it's still going to be kind of limited to the phone in a …

Mario Shiliashki

When it comes to mobile, we try to be as technology agnostic as we can be. We think host card emulation is a great set of technology. We are putting out our specs out there for that to support that. We think it will drive greater adoption of contact less payments in the market. But it's not -- what we like to drive is the solutions that makes sense for the particular situation environment or mode that you and the merchant are trying to transact. And we don't think that there is one single solution that goes across every device, every situation, every environment.

There are times when the cloud simply isn't available. And it's better to have something on the phone that is stored on the phone in a secured way. There are times when the cloud is fine and actually it be faster. So certainly in terms of time to market and adoption by a wider set of participants, I think HC will drive the adoption faster. But again I think we are focused on a wider set of technologies and solutions to the various environments and payments -- and commerce and payment mode methods.

Unidentified Analyst

We talked about this a little at the front end of the chat that the -- are there any kind of capabilities that you would like MasterCard to have that they don't currently have like is there kind of a wishlist out there that …

Mario Shiliashki

We obviously continually look at various new business opportunities and always look at enhancing our technologies, our products and platforms. Some of the ones that we have focused on lately are in the loyalty and rewards base. That's one of the areas where we think we can add a lot of value just by the virtue of data that exist in our network, but of course the power of our network and the global distributed nature of our network. Safety and security is one that is absolutely paramount. And so, increasing our capabilities there is important.

Our digital infrastructure of course as well we recently announced an acquisition of C-Sam, that was all with the intent of bringing in talent and technology that can help us get to markets faster, get to market with better products. Those are some of the ones of course information services is another one that is I think we the just starting to service. We have a whole set of products initiatives going on there.

Unidentified Analyst

Okay.

Unidentified Analyst

(Indiscernible)?

Mario Shiliashki

The question is with EMV rollout that puts NFC at the top the list of transactions that we will see. There is certainly a connection because ENV and contact list go hand in hand. It's in terms of safety and security that's the same transaction also as terminals get upgraded. The majority of new terminals out there are both contact and contact list ENV enabled. But again like I said earlier while we see NFC and contact list payments driving some of the new experiences that we all would like to see at merchants and for our consumers.

There are other technologies that will be out there and we are actively adopting whether it QR codes, whether it's the biometrics and so forth. Those are in our stable of products in our R&D labs. We look across the spectrum and I see I think is going to take a leap given the migrations that again I think depending on the experience we are going to drive depending on the merchant. We will see different technologies coming in.

Unidentified Analyst

Okay.

Mario Shiliashki

I got one back here.

Unidentified Analyst

(Indiscernible)?

Mario Shiliashki

Let me see if I can summarize the question. No, no, it's fine. It's a great question. So, do we see tokenization and digitization as a way to replace traditional card and Mag Stripe or do we see it as expanding the pie and getting cash out of the system. That's just the question, right?

Unidentified Analyst

(Indiscernible)?

Mario Shiliashki

Right, so two parts to expanding the pie, just repeating it to the audience, one is making it easier for people to transact so they transact more than currently today by any means. And of course the second one is converting cash to digital. Certainly converting cash to digital is one of the big initiatives we drive, right? Today as we've all run the statistics shopping statistic like 85% of the world's transactions are still in cash. Driving that to digital is one of our big opportunities, and opportunities ahead of the entire industry, and so that is certainly what we are aiming at doing with all of the things we are doing in digital and in emerging payments and across MasterCard.

Whether we then drive more spend for merchants, we certainly would like to believe that that's the case that we can drive new transactions by making things safer and more secure and with a lot less friction and much more convenience for the consumers and the merchants. That is the longer term play, right?

Bending the curve on PCE, Personal Consumer Expenditure is a much tougher thing to do than, I think in my mind is driving what's currently cash for various reasons into digital. And so I think we'll see a much shorter term drive from cash to digital, and hopefully in the longer term a bent on the PCE curve for consumers to actually spend more because it's easier and it's more meaningful to them.

Mario Shiliashki

Okay. This will be the last question.

Unidentified Analyst

(Indiscernible)?

Mario Shiliashki

The question is what is MasterCard doing to address the underbanked to unbanked population especially in the U.S? So we have a number of programs that we work with both government institutions, private institutions in driving better access to financial instruments for those consumers as well as more convenience for them when they transact.

One of the reasons people don't transact is they don't have access to those instruments, so we have a whole set of initiatives especially around prepaid that we drive with governments, with universities and including those constituents into the financial system and through the MasterCard product, whether it's distributing social security benefits on a card rather than through other means, whether it's having the ability for parents to put in extra funds to a student's card that they can also use as an ID on campus and purchase goods and pay their tuition electronically.

Those are kinds of things we are doing with constituents around the U.S. and of course around the world. If you look beyond the U.S., we are driving partnerships with Telcos, with governments. We've talked before about our successful launch in South Africa with a biometrics, we learned about prepaid card with the social security agency of South Africa, therein allowing not just we believe to load money onto that card, social security benefits, healthcare benefits, but also then creating the whole ecosystem of merchants that can accept card payments, that here before has only been accepting cash. That's when we grow the pie, and the ecosystem is actually moving forward, because it's all well and good to give someone a card and have money on that card, but if they have to just go to the ATM and take money out to use it in a merchant location, that's actually almost more competent, right?

Enabling these merchants to take electronic payments via our mobile PRS programs and partnering with Telcos and other entities that already worked these merchants, that's what we are trying to do in those markets including the U.S.

Unidentified Analyst

Great. Unfortunately, we're out of time. FIS will be presenting here in a couple of moments, so Doug Brown, Head of Mobile, and please join me in thanking Mario and Barbara for the presentation.

Mario Shiliashki

Thank you.

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