Mastercard's Management Host MasterCard PayPass Wallet Services Conference (Transcript)

 |  About: MasterCard Incorporated (MA)
by: SA Transcripts


Good day, ladies and gentlemen, and welcome to the MasterCard PayPass Wallet Services Conference Call. My name is Catherine, and I will be your operator for today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes.

I would like to turn the call over to Ms. Barbara Gasper, Head of Investor Relations. Please proceed, ma'am.

Barbara L. Gasper

Thank you, Catherine. Good morning, and thank you for joining us either by phone or webcast today for a discussion about last night's announcement of our PayPass Wallet Services. With me on the call today is Ed McLaughlin, our Chief Emerging Payments Officer, who is joining from the CTIA Conference in New Orleans. We are only able to allocate about 30 minutes this morning for the call due to Ed's other conference commitments. However, we wanted to give you all an opportunity to hear directly from Ed about our new PayPass Wallet Services. We will then have a few minutes to address some questions.

The press release on last night's announcement can be found on the Investor Relations section of our website, We have also posted some hotlinks to a few things that Ed will refer to in his remarks. Also, a replay of this call will be posted to our website for one week through May 15.

Finally, as set forth in more detail in today's release, I need to remind everyone that today's call may include some forward-looking statements about our new services based on our current expectations and beliefs. Actual performance could differ materially from what is suggested by our comments today. Information about the factors that could affect future performance are summarized at the end of our press release, as well as contained in our recent SEC filings.

With that, I'll now turn the call over to Ed McLaughlin. Ed?

Edward McLaughlin

Thanks, Barbara, and yes, we're calling here from CTIA in New Orleans, which if you're not familiar with, is one of the largest global telecom events of the year. Last night, we announced the PayPass Wallet Services, and it's a great response so far. Also, in about 2 hours, we're going to be demonstrating the PayPass Wallet Services to probably a few thousand people as part of Gary Flood's keynote here at the conference. And this will be streamed live if you'd like to see it in action. So we put the link to this. It's available up on the Investor Relations website. So about 10:20 Central, 11:20 Eastern Time, we should have the keynote streaming.

But first, let's take a little bit of time to follow up on any questions you may have on the wallet services announcement from last night. So I think it's probably best to start with a quick recap of what it is and who it's for.

So the PayPass Wallet Services, our new global offering from MasterCard that extends PayPass beyond the Tap & Go, the e- and m- and other types of commerce. With PayPass Wallet Services, it will be faster, simpler and more secure for consumers to make purchases, both in-store or online, with a click of the mouse, touch of the tablet or tap of their smartphone.

The PayPass Wallet Services are comprised of 3 distinct components: the first of these is enhanced merchant payment acceptance capability, which includes both our PayPass Contactless NFC technology for in-store and a new PayPass Online checkout service for e-commerce. These provide consumers and merchants with better shopping experiences in-store and online, which will reduce queue time and helps to turn more browsers into buyers. It eliminates the need for customers' detailed bit -- to enter detailed shipping, card and other information. And that's a great benefit, particularly when you're on a smaller mobile screen.

The PayPass acceptance benefits are also specifically designed to be very simple for merchants to integrate into their current store and online business. They accept MasterCard today. It's very easy for them to adopt the PayPass Wallet Service. So that's the merchant acceptance.

The second component is the PayPass Wallet. This will enable banks, merchants, partners to offer their own wallet to their customers without needing to build out an infrastructure. We want to enhance the relationships that our partners have with their customers, not interfere with them. So for example, consumers could use the same login and applications they have today from their bank and seamlessly get great new payment capabilities and other service.

The wallet is also open so consumers will be able to use any card they have: MasterCard, Visa, American Express, others, and store their addresses, offers and other information in one familiar, convenient and secure place. And merchants adopting PayPass acceptance know there will be any number of wallets the consumers can use, and will take advantage of them.

The third component is the PayPass API, which will enable partners to connect their own digital wallets into the PayPass Acceptance Network, leveraging MasterCard's checkout, fraud detection and authentication services and enabling their customers to make purchases wherever PayPass is accepted, online or in-store.

And finally over time, the wallet services will be expanded to include other value-added services like our inControl alerts and spending control, MoneySend, MarketPlace offers and coupons, enhanced loyalty programs and others.

So these are the PayPass Wallet Services we just announced. And before we open up to the open questions, I'd like to take a moment to address some of the -- a few of the specific questions that I know you have. One of the first question always is, well, what's the distribution model? You know, it sounds great, but how would I be able to get one? And as I mentioned earlier, the PayPass Wallet is designed to be white-labeled and branded by financial institutions, merchants and other partners, and this is key.

The integration services will allow issuers and our partners to connect their proprietary wallet offerings to our network and enable their customers to pay wherever PayPass Online and PayPass Contactless are accepted. Now while our primary method of distribution will be through our partners, we're actively testing the PayPass Wallet with our employees, and we will have it live later this year on

So consumers will be able to get PayPass simplicity and enhanced security from MasterCard through any number of global partners. And I think you've seen from the announcement we have out, they can range from a Banesto, a Citibank, Bank of Montreal, Westpac, Commonwealth Bank of Australia and many others who have already signed on.

And as we want to emphasize, the PayPass Wallet Services are designed to enhance, not to interfere with, the relationship our banks and other partners have with their customers today. We believe the integration model will also greatly accelerate the reach to consumers we can bring to merchants, so the merchants can take advantage of a better checkout experience online and in-store. We've been working closely with merchants to design the service, particularly to make it easier for them to implement. And you should check out some merchant testimonials, which I believe we're posting on our YouTube channel. You can find the link to this in the Newsroom section of our corporate website.

Our acquirers are also key partners of it, along with MasterCard's DataCash and MiGS Internet Gateway and a large number of other payment service providers we are already working with like Ogone, Sage Pay and CardinalCommerce. And as you've already seen with the work we're doing with Isis, with Google, with others, there will be ongoing announcements of places and partners where the PayPass services will be used with digital wallet.

Another question which came up is, so why did you go with the PayPass branding in digital service? And the answer is pretty simple. We asked consumers. They loved the ease and convenience of Tap & Go in the physical world and wanted the same security and simplicity online and responded really well to extending PayPass into an open, online in-store wallet, particularly when they knew it was from MasterCard.

Our merchant partners also talked about the growing convergence in shopping. A term that was used a lot was omni-channel, we're not even multi-channel anymore, where consumers shop online and pick up in-store or in-store shopping online to have shipped home or any other combination in between from any digital device they may have in any account. Our converged PayPass digital wallet services provide a secure way to support any number of digital wallets, both online and in-store, which really met their needs.

And a few more that may be on your mind. So what about the iPhone, my Kindle, tablet, other smartphones that I have today. How does my existing equipment fit in? And the good news is, PayPass Online, the online shopping component, can work purely browser-based, so you can use it with anything that connects to the Internet: a PC, tablet, game system, smart bridge, whatever device. As we've said earlier, every device will be a commerce device. And this is really an infrastructure that enables it.

Now to use the PayPass Contactless in the store directly from the phone, the phone will need to be able to support secure NFC transaction. And I think you saw last week, the PayPass ready certification program we announced, working with handset manufacturers like Samsung, HTC, Nokia, RIM and others to make sure as their new NFC-equipped smartphones come to market, they're all ready for PayPass enablement.

So you can use PayPass Online today from any smartphone or other device and upgrade your phone to use PayPass NFC in-store when you get a new one that would be PayPass certified. The key is, the integrated PayPass services will be ready for you when you are.

And of course, what's the economic model? How does MasterCard make money in all of it? And the PayPass Wallet Services we've just announced are natural extensions of our business model, optimized to digital world. First, we increase our volumes and transactions as we capture more share of consumers spend on MasterCard, particularly in the e-commerce space. Second, in the future, as we add new features such as inControl, we charge for these value-added services. And we believe by delivering value to banks and making these product available for white-labeling, we'll provide on-behalf services that they will get a lot of value from. And even when a competitor's card is our wallet, we're providing value to the payment's ecosystem by providing infrastructure and routing services that make it all work. We have always been supportive of economic system, and this takes the MasterCard business model and simply extends it to support all of these new device.

And the last important question is, when will all this be in the market? And as I said at our Investors Day last September, we've been working diligently on the PayPass Wallet Services for quite some time now, getting them ready for the market. As you know, innovation is a very iterative thing. And you may have seen, we've been working with partners already like American Airlines, Barnes & Noble, using DataCash and other payment service providers and are currently in beta in the U.S.

The production platform in the PayPass Wallet Services will be in-market and available to our partners in the third quarter of this year, with the United States, Canada, U.K. and Australia as the initial launch markets. And as you saw in the release with partners like Swedbank, BBVA, Intesa Sanpaolo and in the announcement yesterday, other global markets will soon follow, particularly in the support of cross-border e-commerce.

So I hope I was able to give you little bit of a feel for what the wallet services are and directly address some of the questions I know you may have had.

So with that, Barbara, I think we still have some time to open it up for more questions.

Barbara L. Gasper

Right. Thanks, Ed. At this point, we do have a little bit of time for your questions. [Operator Instructions] Catherine, you want to start the Q&A session, please?

Question-and-Answer Session


[Operator Instructions] Your first question comes from the line of Bryan Keane from Deutsche Bank.

Bryan Keane - Deutsche Bank AG, Research Division

Ed, maybe you could just help us, what differentiates the MasterCard Wallet versus and the others that are out there in the marketplace?

Edward McLaughlin

Absolutely, and there's been so many different announcements in the marketplace. If you look at, there have been quite a few announcements for Visa Inc. and Visa Europe. So for the specifics on the initiatives, I'll really have to defer to them. But from a MasterCard perspective, what we want to do is design these services for integration. We're not trying to get in front of our partners' brands but rather enable commerce to happen, and that's very important for merchants. We've also been emphasizing the ease of the integration for the merchant. Make it very easy for them. They accept the MasterCard today, begin working with the wallet service. But unlike some of the other initiatives we've seen out there, I don't have to rewire my settlement systems or address my consumers in a new way. The other thing that's important for consumers is, the PayPass Wallet Services delivers genuine digital card transaction. So all of my liability rights, my settlement guarantees, my rewards and other things are there. So I'm not subject to some sort of transaction randomization or other things that may interfere with the transaction itself. And probably the most unique feature is rather than saying there's going to be one wallet here that will rule them all, what we're enabling is a network of wallets. We're doing what MasterCard has always done. Think of it almost as the digital equivalent of the lower right-hand side of the card. We're giving merchants a great acceptance experience they can rely on. We're standing behind those transactions. We're ensuring the reliability of the overall service, but we're letting lots of our partners either use our white-label wallet services or even develop their own wallets and hook it into our network of wallet's. And that's where, I think, we get to scale. But it's also, though, where we allow consumers to get any number of experiences in environments that are specifically tailored to the relationship they have with that partner. So being able to use the same login that I use for my mobile banking application and not having to learn something else is a great benefit. Being able to get real financial information in real time from whoever has issued the card, while I'm making my shopping -- while I'm shopping. Again, it's a real benefit. So our emphasis is on partnership. It's on integration. It's on building a network of wallets and adding a lot of value to merchants. The last piece I would emphasize is this convergence that's going on right now. And merchants will tell you, I'm not e-commerce or in-store, it's both, and sometimes even both simultaneously. Because the amazing thing about a mobile phone is with your handset, you're always online, and online is always with you. So we've integrated in PayPass in-store, which is the gold standard globally for contactless transaction to turn that mobile into a payment device and along with what we've just announced with PayPass Online to give the same ease and convenience from any channel that consumers want to shop.


The next question comes from the line of Darrin Peller from Barclays.

Darrin D. Peller - Barclays Capital, Research Division

Ed, while the wallet use in physical point-of-sale in NFC terms is probably still some time off due to the need for acceptance at point-of-sale, can we expect to see the click-to-buy online move more quickly and enable material increases in your online market volume, maybe take share from PayPal? And then how easy is it for online merchants to really accept it? How many merchants online do you need to have for this to be a broad acceptance of scale where consumers are comfortable using it?

Edward McLaughlin

Yes, we see several things happening there. One of the primary is there's been a lot of shift in behavior. I'm sure you've seen the research on it, where people are moving away from using traditional keyboard and PCs to alternate device. Search is moving that way. Shopping is moving that way. And in that case, merchants are now looking to mobilize their site. So the form-filled data entry is not really optimal sometimes for the smaller keypads you'd see. So as merchants mobilize their site, there is a tremendous amount of interest in putting up the button for a one-click checkout. So it really is in line with the merchant objectives we see for that. Also because where a lot of the shopping is today is using these device to go online, we do think that's where you'll see a lot of the initial usage. But I wouldn't discount in any way the PayPass in-store. We've had 40% growth in just the last year in the number of merchants that are adopting to over 400,000 merchants. We have countries like Canada, where over 10% of our transactions are already contactless. And this is something we've been working on. If you looked at the announcement for our EMV framework that we issued earlier this year, we're talking about not only upgrading the infrastructure to a more secure EMV cryptogram-based transaction, but also for contact and contactless. But just like we saw in Canada and other markets, merchants don't have to retrofit their equipment to do this, but it will be part of their natural upgrade cycle. So we'll see merchants where it brings a lot of value to their business, I think, doing it earlier. But we're on a path on market-wide levels around the world to have mobile and other devices supported seamlessly at the sale.


And the next question is from the line of Craig Maurer from CLSA.

Craig J. Maurer - Credit Agricole Securities (USA) Inc., Research Division

My question is, if you have many, many, many branded wallets offered by consumers' respective banks around the world, how do you handle the targeted marketing that a merchant might want to do into a wallet but you have huge fragmentation among the actual wallets that are out there?

Edward McLaughlin

Certainly, and that's where publishing mechanisms are so important. So the wallets that will be using the acceptance mark will all be connected through the MasterCard network. So you may have seen with the offered services we have today where it's offered through specific destinations, but it also has the ability to publish out. So it will provide a distribution channel for merchants. Now the specific consumer experience will be up to our partner, and we expect there'll be a lot of tailored experiences out there. So consumers can choose what works best for them. But the ability to connect merchants to consumers through the PayPass network is not only for the transaction itself, but also for other services.


The next question comes from Glenn Fodor from Morgan Stanley.

Glenn Fodor - Morgan Stanley, Research Division

Just trying to gauge the appetite for some of these banks, large banks who already have wallet capabilities. So can you give us a sense -- you listed a bunch of banks that have signed on from the get-go. What percent of those already have their own wallet technology and you're going to just integrate yours with their technology? And is it almost easier from your perspective if a bank does not have a wallet perspective -- wallet setup already and you just start from scratch? Does it matter?

Edward McLaughlin

It doesn't matter. I mean, this is a market that's going to evolve. We've seen banks that have wallet initiatives and they embraced, they love the idea that we're building an open acceptance network to allow that wallet to be that much easier to use at a wide range of merchants. We have other institutions that say they're interested in the white label now, but may progress to their in-house version later, which we think is great. I do think in the future, we may have some banks that have put this size of application in place and realize it isn't to scale and will be looking for on-behalf services from MasterCard. So that's the key to the architecture that we have here. We can either provide those on-behalf services or link in to what financial institutions have. And economics and market timing are really going to drive all of those positions. So I wouldn't say it's a hard percentage yet.


That's from the line of Chris Brendler from Stifel, Nicolaus.

Christopher Brendler - Stifel, Nicolaus & Co., Inc., Research Division

Can you talk at all about sort of the future as you see -- I love the open architecture. I just want to know if you think that in the future when we're shopping online, do all these wallets get integrated. Like what if I have a MasterCard account at 2 different financial institutions, or if I have a Visa account online? How do we see the future? Obviously, we're not going to have that many wallets. And does your product actually give the opportunity to use different passwords to access different institutions but all link into the same wallet?

Edward McLaughlin

I think what you'd see there, and I get to use the word disambiguation in a sentence, which is great, but consumers may have more than one wallet, just like you may have more than 1 card that you have for whatever reason that you do. So when we get a request for a wallet, if a consumer's registered more than one wallet in the MasterCard network of wallets, we'll route it to their default, but we'll give them the option to switch between them. And I think you're absolutely right. What merchants want to say, is, "I want to provide this mechanism." And that's why it really is like the acceptance work that we've always done and know that a consumer that has a wallet that is participating in the network, I can use it anywhere we see. So it really a natural extension of that. I think the relationship that banks and partners have with the consumers will just be enhanced to incorporate online shopping and a lot of the benefits that we have and people will naturally orient towards who's serving them best.


That comes from the line of Julio Quinteros from Goldman Sachs.

Julio C. Quinteros - Goldman Sachs Group Inc., Research Division

I was wondering if you guys could sort of think about or help us think about what this means for your efforts, along with Google Wallet, as you guys think about the mobile efforts there? And then in terms of competition in the online world, is the competition purely aimed at kind of that sort of one-click effort, and I guess, eBay, obviously, would be the most relevant there. So I'm just trying to think about the competitive dynamics both against the Google Wallet and the eBay PayPal?

Edward McLaughlin

Sure. And I'm really glad you asked, because what we're doing with Google, what we're doing with Isis, the work we're doing with our other technology partners, this is all part of that. So at the heart of every Google Wallet is a MasterCard prepaid card that I can tap using PayPass anywhere in the world that that is accepted. We're working with Isis. We're working with others. So we believe by making this things work better, by generating the value from MasterCard, that's what's best for people who have MasterCards today. That's what's best for our organization. That's an important part of our strategy. And I think the other thing which is important, when you look at any specific way of interacting, whether it's the online button, the tap in the store or any of the other things you see coming out of MasterCard Lab, in my mind, it's not that transaction itself, it's the overall MasterCard number. It's the account you have and the relationship you have. So I think saying, "Well, there's a battle for who has that single online transaction," it kind of misses the consumer. And what we're building for, and the reason we talk about this converging world is, this is already happening. I could be in my cab -- in a cab with my mobile shopping online, tap to get out of the cab, and when I get into that restaurant, maybe just slip my existing piece of plastic into the folio to pay for the meal. For me, as a consumer, that's great because I get to use whatever interface makes the most sense for whatever specific thing I'm trying to do, but it's all tied back to the same account, all handled by the MasterCard network. They have the same rights and rules and everything that comes from genuine MasterCard transactions. So I don't think there's a battle for specific transactions. Really, it's providing what's best for consumers in all of the environments they want to shop. And our ability to give better experiences and more secure experiences online in your new NFC-enabled handset, and still anchor that on the great acceptance we have in the plastic world today, which people love. That's really strength across the board. So I wouldn't focus so much on one specific edge on device or transaction.


That's from the line of Tim Willi from Wells Fargo.

Timothy W. Willi - Wells Fargo Securities, LLC, Research Division

I had a question going back to sort of the economic model. So I was curious if you could talk about within the wallet, there's often the talk of slotting fees for hosting cards and then the battle to be top of wallet. Could you talk about that concept and then to what degree that is also a part of the economic model for the products you've launched?

Edward McLaughlin

Yes, and I said earlier, we see this as just a logical extension of MasterCard's business model. And you do need to be careful with some of the proposals we've seen out in the marketplace for aggressive routing of consumers transaction and forcing them and all of that. We believe the consumer absolutely has to choose how they're paying and how they want to pay, and this is designed to enable them. So again, if you think of this from a MasterCard perspective, we'll have the ability to provide on-behalf services. We'll be generating a lot of value in new transactions for merchants, and I really see that as the basis for the economics, here. And if you do a great job for merchants in reducing dropout, reducing queue time, driving more sales and give consumers the experience they really want, the bits in the middle will sort themselves out.


And that's from the line of Gil Luria from Wedbush Securities.

Gil B. Luria - Wedbush Securities Inc., Research Division

It seems like to make the mobile payment attractive to consumers, you're going to have to have a bigger install base of NFC promo. You mentioned the 400,000 number. That's a very small percentage of retailers. And much of that has either been installed in the past or was subsidized by Google. How do you see the adoption and the upgrade to NFC progressing over the next 3.5 years to your first deadline? And then after that, do you see it as a gradual same level of upgrade that's always happened over, let's say, a 5-year period or do you see an accelerated process that's already starting? Do you have evidence of that? Do you expect more of a back-end loaded upgrade cycle in 2015? How do you see that and at what point do you see the critical mass that's going to compel consumers to feel like they can use an NFC-based wallet anywhere they want to shop?

Edward McLaughlin

We have thoughts for that, and I think we have a great strength as you can use your existing payment credentials anywhere you want to and with alerts and other things we can tie it back to the phone. And then you can use an NFC-enabled phone wherever PayPass is accepted. So I would point to a few things, one of which is the 40% growth year-over-year we've seen in merchants adopting them. So it this at your 7-Eleven and McDonald's. It is at Subway. It is at Macy's and Bloomingdale's and Home Depot. I can go in a Home Depot today and tap my PayPass-enabled smartphone and it works great. The other thing is, if you look at, as I said earlier, markets like Canada, where 1 out of 10 MasterCard transaction are already contactless. And phones and other markets are catching up to that. So we are actually seeing that momentum. We also will see millions of NFC-enabled handsets coming into the market, if you look at our PayPass ready certification program that we also talked about last week. And the last thing I'd highlight, and if you haven't seen it, we've just prior published some empirical research from our MasterCard Advisors, where we looked at consumers who were using PayPass and those who weren't. And there was a 30% greater spend, 30% greater usage of your cards when they were PayPass-enabled. So it's a great piece of research, and those types of value are what drives decision. Carrefour, one of our big retail partners, they said they were getting 20% to 40% faster time through queue using PayPass. So obviously, they moved all their store loyalty and other cards to take advantage of contactless. And to your critical point, it's critical mass when I can use it today in any cab in New York. And so it becomes a near daily transaction for me when I'm around the city. But I do think it's something that will build over time. I do think, as we said earlier, rather than trying to retrofit gear for a single value proposition, this is going to be part of the normal upgrade cycle. All of the major terminal manufacturers are including contactless as part of their standard mill. All of the incentives and the model we have to provide benefits of the adoption of EMV incorporates moving to a contact and contactless. I think the real answer is, we'll be more than ready when consumers and their equipment are.


That comes from the line of Ramsey El-Assal from Jefferies.

Ramsey El-Assal - Jefferies & Company, Inc., Research Division

Understanding what you just said about handset manufacturers are starting to build in the NFC capability, now that we see PayPal at the physical point-of-sale using -- they're connecting with the digital wallet with a PIN code or plastic card, enabling consumers to transact that way. Can you contemplate using your wallet to transact without NFC and some future modality or is really NFC the way you see the physical point-of-sale that gets connected to your wallet?

Edward McLaughlin

Well, I guess, from a MasterCard perspective, it's hard to see using a physical card at point-of-sale is breakthrough new innovation. You can always use your card. We have 31 million merchant locations globally that work flawlessly with the cards you have today, and it's all against the same account. So the digital is simply a way of having a virtual version of that card, if you will, that could be optimized for online and in-store shopping. So that's why I want to get back to this converged experience. As a consumer, MasterCard is providing a great option that I can use that card anywhere, anywhere MasterCard is accepted today. As you know, that's a great experience. And we can make it even better, even simpler, even more secure with allowing PayPass Tap & Go or PayPass Online. But they're all just more secure, simpler and smarter ways to use the same account that you have. So as a consumer, it's exactly what I want. I get one set of alerts. I get one way of -- one account that I access in any number of ways that makes sense. So when we think about the future, we have sort of the as of yet unimagined edge device in the network. And what that really means is, how do we bring the value of the MasterCard network and bring that experience to consumers. So I'm really not worried about people trying to recreate or replace the plastic experience we have at the point-of-sale. We've been perfecting that for 30 years. This is about extending into the new environment.

Barbara L. Gasper

Thank you, Ed, for taking time out of your busy schedule this morning to join us, and thanks to everybody who's on the call. We hope that you will be able to listen in to Gary Flood's keynote address at about 11:20 New York time today, where you can see a demonstration of this technology. And as always, if you have further questions, please don't hesitate to reach out to Investor Relations. Thanks, and have a great day.


Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect, and have a good day.

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