Mastercard, Inc. (NYSE:MA) Bernstein Strategic Decisions Conference May 30, 2018 8:00 AM ET
Martina Hund-Mejean - CFO
Harshita Rawat - Bernstein
Good morning. I'm Harshita Rawat, Bernstein, Senior Analyst covering payments and IT services. I'm delighted to be joined today by Martina Hund-Mejean, the CFO of Mastercard. The focus of our fireside chat today will be on Mastercard's strategic opportunities. Questions from the audience are very welcome. Please write them on the note cards on the table and pass them to the ushers in the room.
So, great. So, Martina, you have been - you and Ajay have been highlighting sort of three core aspects of your strategy, which is grow, diversify and build. So, can you briefly talk about the elements of that strategy?
Sure. Good morning, everybody. Nice to see everybody here at a bright 8:00 AM. And thanks, Harshita, for having us.
The grow, diversify and build strategy that we have laid out many, many years ago still holds true, of course, for the company. On the grow vertical, really what it means is that we are focusing very much on our core businesses. This has everything to do with the 16-digit account numbers that is on many, many cards around the globe.
So, in terms of the credit space, the debit space, the prepaid space, and the commercial space, it’s all of this stuff that we’re doing there in order to continue to expand and to develop the solutions that many of our customers, as well as consumers are really requiring.
In addition to that, this vertical embraces the physical is digital, the digital is physical. So, I’m hardly talking anymore about parts. I’m really talking about the 16-digit account numbers, and that we want to make sure that many, many of you as well as consumers out there and companies get connected to their 16-digit account number and can use those accounts in any shape or form that they need to be using them and making sure that they can address their payment needs. So, that's kind of on a grow vertical.
From a diversify vertical, really, what we’re focusing on is expanding into geographies, different geographies where we might not be yet as big as we would like to be. So, for instance, in Africa, many of you know that we have been doing quite a lot of investments there. There's still a lot of opportunities in some other emerging countries, India itself where there's a lot of expansion opportunity.
And then secondly, diversifying customers so, that means I know we're going to get later maybe into the B2B space, what we're doing not only from a consumer point of view but also from small businesses point of view, middle businesses, et cetera.
And then, there is the build vertical. And in the build vertical, we've been focusing on that maybe for the last six, seven years. And at first, what we have in the build vertical was really what we call our advisors proposition. And what it is, it’s a consultancy company in the payments industry.
We have a lot of consultants working for us who are helping, financial services companies as well as corporations, government, merchants, et cetera, to be figuring out what they need to be doing in the payment space and, of course, utilizing our assets and tools in order to do that. And that was kind of the start of the build vertical.
But then, we started to expand from that and really added a lot of capabilities in the data analytics space. We added a lot of capabilities from a loyalty point of view and we added capabilities in the safety and security space from a product point of view. And that has been expanding very considerably and growing quite nicely.
Okay. So, let's dive more into B2B which has the potential to sort of expand your addressable market from beyond consumer to business payment. Now, over the last couple of years, you’ve almost sort of doubled down in B2B. So, you made an acquisition of VocaLink. You have Mastercard B2B hub and then Mastercard Send rails.
Now, I guess the industry has been talking about B2B for a number of years, but they have been just very hard to address. So, what do you think is different now which gives you greater confidence in addressing that market?
Yes. So, first of all, I mean, that is really what we did at our last investor conference back in September, right? We said so the majority of the company has been focusing on the consumer space, retail payments, right, which is about $45 trillion in the world of personal consumption expenditure, many of which are available to be electronified and quite a bit of that is obviously penetrated with these 16-digit account numbers of cards portfolio.
But what we've said is, look, there is a big world beyond the $45 trillion of personal consumption expenditure. In fact, there is about $225 trillion of other payments. And out of the $225 trillion, there's about $120 trillion which is in the B2B space, right? So, it is the $45 trillion of personal consumption expenditure plus $120 trillion of B2B payment plus $60 trillion of P2P payment, both domestic and from a cross-border point of view.
So, if we just deep dive into the $120 trillion of B2B, there's about $20 trillion that is available probably from a card rails point of view. So you can electronify it probably on cards. Fairly a little of that has been yet electronified on card.
And then there's $100 trillion available that's probably never going to go on card. Okay, maybe a little bit, but I doubt a lot of it will be ACH and checks, et cetera, et cetera. And then we really look at what can we do in this space. And you're absolutely right Harshita, it’s a very difficult phase, and I'm not going to tell you here, sitting up here, that this is going to be any less difficult just because we are able to use our assets and tools to be going into this space. So, what we have been doing is, one, we look at our normal portfolio, our core portfolio which is the 16-digit account number on and look at what can we do there.
This is the $20 trillion right out of the $120 trillion, and what we have been able to do is, we have been able to explore and enable ecosystem. So, one of the examples that many of you have been hearing me talk about is what we have been doing in the travel industry especially with travel agencies. So, about 80% of consumer spend for travel is actually still done by travel agencies which is amazing to hear that kind of number.
But when the travel agency takes the payment, they need to figure out how to get the money that they took from you to the hotel or to the airline or to the tour operator that you booked. And that used to be a very paper-intensive process. And we have a product which is of course, which is card number and you can actually because of the field that are available in terms of sending data, you can use that product and get in a much easier manner to those partners being paid. So that was one of the more traditional products I would say, but that is really utilizing the card rails and trying to figure out how to expand from here.
So we found a number of those kinds of things. So, by the way, when you look at our volume, the growth out of volumes, about - when you look commercial cards in totality, it’s about 11% of our volume and it’s growing - so that’s about - that’s a 2017 number and it’s growing around 15% or something. So this is very, very nice area to be in.
But then we look beyond that and said, what can you really do? What is really happening in the space? And given that with today’s economic environment, the small businesses and the medium businesses are really the engine, the growth engine and many, many countries around the world and they have been expanding, many of them have been trying to figure out, how could we have other payment solution?
And so we have been really studying this sector in a very detailed manner and we are not going to be able to go after all of this $120 trillion. We really figured out some of the areas that we could bring our assets to bear and actually identify the needs and serve the needs together with our partners and those kind of areas we’re really focusing on.
So, one thing that you have mentioned which is the B2B hub which we have been doing with an investment in AvidXchange. They’re our partner on that. And developing a product where for a smaller business or medium-sized businesses, so those businesses who really have trouble figuring out how to pay the suppliers in a seamless way, we have basically been putting a product together where we can take the payable file of those kind of companies, and then depending on how the company wants to pay their suppliers, and what kind of payments means the supplier actually wants to accept, we can optimize that payment file and then basically send in a process.
Sometimes it could be a card payment, right? Sometimes, it is ACH payment. Sometimes, it’s an ACH class payment of - by the way, sometimes it’s a check. But for that service, we can get paid. And that's what we have been expanding on. And so, we've been trying to find a number of those kind of things that we could be doing in that particular space. It’s not easy, right? I mean, we're going to have to figure out the solution, and then you’re going to have to distribute it.
So, for instance, the B2B hub distribution is going via banks. A lot of banks have these small businesses and medium-sized businesses as customers, and they - I mean the banks are basically is distributing that kind of product.
And then, we’ve been really stepping back and looking at the flows and said, can really all of those flows go on card? And I already told you, it can. A lot of the flows will be just account to account. And that's about 3, 3.5 years ago got us really interested into the ACH rail. Right.
So, we said like, gosh, we can probably do only so much, but from an account to an account point of view, you're probably going to have to add some other network to our core network. And that’s how we’ve been thinking about VocaLink.
As we were studying the whole area from a strategic point of view, we looked at these both from an organic point of view, could we build this organically, but also could we be doing an acquisition in this space. And given what happened in the U.K., so VocaLink is still the preeminent fast ACH company. It’s located in the U.K., but what it really had done is it had developed a number of products from a data point of view, from a bill payment point of view, and it had also expanded its product into other countries.
And so, that was really interesting for us, right? Because we are not just interested in developing one country. We want to make sure that rails can be put into many, many countries around the world because that’s how you get to scale.
VocaLink is doing about 92% of the payments in the U.K. - for all of the U.K. There are lots and lots of connection points, and they delivered the software for the TCH here in the United States. So, that will be rolled out at this point in time. They have been also developing the Fast ACH rails for Thailand and for Singapore. And we think that that will be a critical thing for us to do from a B2B point of view.
Now, it’s not just the rails, right? When we look at the property and then we bought it, we really thought about three different ways that we could be using this property. One is infrastructure, of course. I just talked about it. In certain countries and many - it’s about 25 countries who are really interested in the Fast ACH infrastructure.
Some of those countries already have the old ACH. Some of them don't even have an ACH, but they're really interested, and it's mostly the central bank that is actually looking at that and trying to put that into a particular country. So, from an infrastructure point of view, we will be participating selectively in certain countries.
But the second thing is, on top of the infrastructure, you can be building certain applications. You can be building a scheme. Mastercard, for instance, is a scheme, right? You see the brand everywhere.
Everywhere where the brand is showing up, you can basically use your payment mechanism and that is one of the things that we are now doing with VocaLink. There is a product which is called Pay by Bank, really what it is. It's a push debit product.
So, when you look at the card rails, you do a push debit product. This is a push debit product that means when you actually pay as a merchant, you as a consumer are pushing the payment from your bank account to the merchant and we've been starting to roll that out. It's still in pilot phase, but a number of banks have been signing up. So, in the U.K., there will be a rollout coming on this one. That you can probably put on a number of Fast ACH. It has to be Fast ACH. It can't be slow ACH.
And then the third area that we have been looking at is in the data analytic space. In terms of how could you help be it bank, or be it businesses or in the B2B space, utilizing some of the data that is running over those rails in order to be more effective. So, it's really at the beginning.
At this point in time, I think you going to have to see over the next two, three, four years how we are going to roll this out, but we feel that given that in the B2B space, a lot of those $120 trillion are never going to go on a 16-digit account number with a card that’s going to go account to account. That will be a really good arrow in our quiver quite frankly.
The last thing that I just want to touch on is MoneySend or Mastercard Send. We’re changing these names. But Mastercard Send is also a tool in the B2B space and that is - this way it's really the card rails, but what we have been able to do is we have been able to figure out how to do push payment over the card rails. And what it is, is mostly utilized in a cross-border context.
So, we have been connecting a lot of the accounts. You can also do mobile accounts in about 100 countries, a little over 100 countries. And there is where you can actually move money. You can do remittances on that, et cetera, but it’s also good tool that we can use from a B2B point of view.
What I'm trying to say is that there are a number of different ways to be addressing the B2B space and we cannot just do it one way. You’re going to have to figure out what is the need, how do you put the asset together and how can somebody easily connect to be utilizing this so, very early on still.
And so, when should investors start to expect seeing an inflection point in terms of how the market is being addressed? So, what are the things that we should be watching out for?
I think you’ve done - I think you should continue to watch for volumes and transactions. I mean, I think these are very good indicators in terms of what is happening in this space. And beyond that is obviously what we’re doing with services in the B2B space too but we are usually putting out quite a good - quite a few very good indicators so that you can see that.
I don’t think actually that you’re going to see certainly a groundswell that something is changing from today to tomorrow. I look at this very similar to what we have been already doing in our traditional core space that you just see growth-over-growth, but you’re not seeing an inflection point. It’s how we are adding points to the board and continue to grow what we can do from a volume and from a transaction point of view.
And then, how do you think about new technology such as blockchain, and their applicability in the B2B space?
Yes. I think blockchain is a very important technology. You guys know that we build our own permission-based blockchain. We have been rolling that out. In fact, at Money20/20, I think we had 60 developer teams who have been using our blockchain. We also are in the process or have been connecting our blockchain to our settlement engine, and they’re actually piloting that with three banks.
I think the issue still is, what kind of use cases are we going to see in order to use the blockchain? So, one of the use cases could be, for instance, provenance. That means where are goods coming from? And you can actually do that identification by a blockchain.
So, there are many, many things that we’re doing from an innovation point of view organically investing, connecting it to our assets, but also working with a lot of partners who has assets in this particular area, as well as making our own investments like the Digital Currency Group, et cetera, to see how you could actually use that into - well, it’s not only for the B2B space, anywhere in the payment space.
And then switching to, I guess, the build new businesses, I guess sort of focusing more on this building new businesses strategy and specifically on services. So, the last time you disclosed it, services was almost 25% of your revenue, growing it greater than 20% year-over-year growth rates. Now, how should investors think about your services portfolio? So, is this a good stand-alone business or do you see that as a business to support your core business?
Yes. So, first of all, the services businesses were developed because of what we’re doing in our core business. So, when you hear me talk about the various services, the lines of services that we have developed, we couldn't have done that without actually seeing the underlying transaction on our network. We couldn't do that if we wouldn't have the portfolios with many, many financial institutions around the world.
So, when we started this many, many years ago first in the consulting business, the consulting business is so powerful because we added not only what we're doing on the ground with many financial institutions around the world, but we added this data that we're seeing on our network, and what we do is - so the data that we see in our network, by the way, is not in private data.
It's really - we don't see a name, we don't see your e-mails, we don't see your address, we don't see your phone number, that is the bank or the merchants that has that kind of data. What we do see is we see a 16-digit account number, and we do see at which merchants you are buying what, we see the total amount, we're seeing at which day, on which time of the day.
What we do is we actually anonymize this 16-digit account number, and then we aggregate the data. And that is actually - can be used in a very powerful way because what we did before we do that, we cleansed the data. A lot of data comes in and it has to be cleansed in order to make sure that it is identifying the right merchants, et cetera, et cetera.
But we’re cleansing the data then anonymizing, and then we’re aggregating it. And that, our consulting company can basically use and do a lot of different assignments with financial institutions. That's how we started out.
But then we bought a number of properties like APT, for instance. And APT, what it is, it's a test-and-learn platform and that is where actually a lot of retailers are utilizing the test and learn platform to figure out what kind of pricing they should be putting out for particular products or they're actually looking at what kind of products should they be actually launching where.
So there's a lot of test and learn capability which again was powered by a lot of external data, by the data that the retailers have and that our anonymized and aggregated data. And then when you build from that so for instance in the fraud services business, we call it safety and security services, a lot of the tools we have used in-house.
And really what we have done is, we looked at the tools and said well, these tools could be really used by many stakeholders around the world like the financial services institutions, a lot of merchants can use it.
But in order to have our fraud product actually works, you have to see the data on our network in order to make sure that you put the algorithms right in such a way that you can catch fraudulent transactions.
When you look at our loyalty platform, a lot of the loyalty work that we're doing, so we're running a platform worldwide. I think we have about 140 million or so customers on that - consumers on that, we couldn't be running this if we wouldn't have the card portfolio from many, many institutions around the world. So there is a real connectivity and at this point in time, I think it feeds off each other.
Now how the services portfolio really arose is when we went five, six years ago to many of the financial institutions as well as to many merchants as well as to government and large corporations around the world, they didn’t really want to talk about a card product anymore. Cards were already getting, at that point in time, everybody understood it. They were really looking at what can you do to help me solve a number of other problems.
And that is where we got into the solution selling, and that’s a different sale than just selling cards. You have to figure out what is really the pain point of that particular customer and what can we do that, yes, it might be a card proposition that is at the core of the solution but what are the other things that you can actually put around it.
I’ll give you a fairly simple example that might be simple at this point in time. But, more recently, merchants like Netflix, for instance, they've been using a couple of our solution. One is an account, it’s called Account Billing Updater.
And what it is really is many of your card numbers, the 16-digit number that I'm talking about, changes when you get a new card, when your card has been compromised, et cetera. Well, it's a pain in the neck to be updating your card for any of these subscription services that you might be having.
And at this point in time, you really don't have to do it. If your bank as well as your merchants or Netflix, for instance, is enrolled in this particular product, your card gets updated in an automatic way. In addition to that, Netflix is using our tokenization services. , tokens, as you know, is a digital way. So, it's really the chip on the card. It's a digital way of keeping a transaction safe.
It's making sure that your numbers and your information that is stored on the card does not get put onto the Internet, right? So, that's the tokenization service and Netflix is using that too in order to make sure that really your credentials are kept in a safe way.
So, there are many of these kind of propositions that can build on top of each other. So, I don’t think - so, it's not a stand-alone business. It's not going to happen if you don't get engaged in these kind of discussions from a payments point of view, but I also don't think that you can really sell your payments proposition without understanding the pain points of your customers and having solutions around it.
And then I guess that I’m switching to one of the hot topics over the last two months, which is your common checkout button. Now, the clutter in the online space has been around almost sort of more than decade. And you have been, over the years, investing very heavily in Mastercard's. And then your peers, I think, are investing in this similar product. So, my question to you is, what has led to the rethinking of your approach to go after this online checkout?
So, it's really in terms of enabling to implement a product in the easiest way possible. So, what you have to think about is when you go into a physical store, right? In the physical store, at this point in time in pretty much all countries, I think Brazil was probably the last country that de-cluttered its counter in the physical store, but you see one POS device, right? And all of the networks, anything, works really over that one device.
And then, yes, if you've been to Brazil maybe 10 years ago or 12 years ago, you probably still saw these four or five different POS devices. Eventually, that’s got canned up too, but it's one POS device.
What you have to think about that single checkout button, it's just the digital version of one POS device which means actually that it’s only one implementation for the bank, one implementation for the merchants, as well as from a consumer point of view, it's much easier because the consumer just expects that whatever they're doing on one website would be just similar on the next website, right?
So, it's really simplifying it for the market and for the stakeholders which hopefully will lead to scalability. And that's really what we all have been working on, that we wanted to make sure that the digital services get scaled in a way.
And so, you're going to see that rolling out, it's quite frankly. I mean, it doesn't change in terms of what people can do from a choice point of view. It's very similar to the physical space. And something like this will not change from today to tomorrow. So, implementation is not going to go like next six months or something. It's probably going to start sometime later this year, and it will take some time to scale that up.
And I know this is still very early days, but can you give us a sneak peek of what that product could look like?
Well, it's again basically one - when we introduced the product, there were actually some visuals available, but basically it is very similar to checkout button that you already see on the merchant’s website, but you basically click on it, and then you can utilize the various networks and the various payments means that that you might have in your wallet.
Great. So, switching gears to the competitive landscape. Now, we have been seeing this consistent three to four percentage points delta between your purchase volume growth and Visa's. So, if I look closely, a lot of that delta is being driven by international. So, what do you think is driving your faster growth relative to your biggest competitor?
Yes. I think there are really two regions maybe where I can make that a little bit more transparent to you. Europe for us is a very vibrant and growing region. Europe, by the way, is everything including Eastern Europe all the way down to Turkey and Israel. So, it’s about 55 countries that we’re including in Europe. So, it's not just Western Europe.
So, of course, you have a lot of "emerging markets" in our European region. But Europe by itself is, from a payments point of view other than the U.K., an emerging market for us. Still, after many, many years of work there, we have depending which quarter you're looking at, always around in the low-teens, the mid-teens or the high-teens kind of volume growth.
And where this is really coming from is three factors. First of all, first off, consumption expenditure is growing in Europe even though it’s always much less growing than what you would be seeing in the United States but it does have growth at this point in time.
Secondly, the very big factor in Europe is secular trend. And that's why I'm saying, in Europe other than the U.K., we are treating it really like an emerging market because there are lots of Europeans who are still paying in cash. And there’s not that much checks going around but it’s cash. And there's a huge amount of opportunity to get a lot of Europeans to be utilizing a 16-digit account number be it via a physical card or be it in your phone. And I would have you consider that - so that trend has been very much a growth driver for us and will continue to be for many, many years to come.
And then the last add to this is really from a market share point of view. We've been gaining market share in Europe, and what you have to think about, Europe, has a lot of domestic schemes. Okay. They have a lot of domestic systems, and very local. I actually don't have cross-border functionality. And given all of the investments that you have to do at this point in time from a digital point of view or from a cybersecurity point of view, it's really hard for those kind of domestic systems to stay up-to-date and to be offering the kinds of solutions that consumers and companies would like to see.
And so what we have been able to do, right, I mean they can't scale, they’ll only see a country typically. So what we have been able to do is we have been able to clip quite a few engagements away from the domestic systems to our network and have been able to expand in many, many countries in Europe on that.
In addition to that, where we're growing very significantly in Europe, it's obviously in these various service offerings. In fact, Javier Perez is our president of Europe, he was kind of the first one who really grasped what I was talking about this consulting company that we have, and it was, because it’s such a nascent space from a - or was 10 years ago, such a nascent space from an electronic payment point of view for consumer payments in particular, not for ACH.
And he really needed some help to be talking to many companies in Europe on how you actually build something like that, right. And then it just went off with the other services that we are providing
The other area from an international growth point of view that has been fairly significant for us is Latin America, and it's very interesting. In Latin America, so in particular Brazil, right, Brazil - and I really constitute the effort to a lot of things that the government and the central bank have been doing, because for the last 15 years, they really have been spending a lot of time from a regulatory point of view to be opening up electronic forms of payments.
And you are seeing therefore a fairly considerable growth coming out of Brazil for many, many years. But what happened to us is that we have been also able to grab some market share in Brazil. When you look at the last three years or so where Brazil has a bit more economic troubles, we've been growing that very nicely, but that was mostly because of the market share gains that we had with a number of customers like Itau, et cetera.
And then lastly, let's like pick out maybe another market, India, right, because we've been talking about India a number of times on our cards. India, from a revenue point of view, is still a relatively small market, which is quite interesting, right, because you have a billion plus people, you have now a government who is really interested in electronic forms of payments.
And last year, they have been also so to say over the last two years almost, 20 months maybe, they have been also thinking about how they could open up their market, so it’s not just focusing on the domestic system like RuPay.
And that obviously gave quite nice growth opportunities, but there is a lot of things that have to happen in order to make that come to fruition, right?
We have to make sure that that 16-digit account number can be used by many, many people around, and when you look at the portfolio - India, as you know, is not really a credit market, right? It's much more a debit and a prepaid market. You’re going to have to get people to be utilizing those kind of numbers, again, be it via physical card or put it into their phone, but you also have to figure out how actually people accept those costs.
And lo and behold, in India, only very few merchants have been accepting electronic forms of payments for various reasons. But with a number of the changes that the government has been driving, more and more merchants are interested in doing that.
And one of the numbers that have been put out by their merchant association is there's about 60 million merchants, and I'm sure there's more merchants, but that's the number that they have put out. Only, maybe 18 months ago, about 1.5 million or so have been enabled to be accepting these kinds of products. And now it's a little over 3 million. That's still very, very small.
So, something like this will also continue to contribute to growth. And for that, you're going to have to get into different forms of acceptance, right? It can't be just the traditional POS terminal. It might be the QR code, which is much easier and much faster to roll out because it's relatively cheap.
You don't have to pay the $100, $200, $300 for euro-dollar equivalents for a POS terminal. You can basically pick it up at your bank, or you can download it on your phone, and then just put it on your food cart, and off you go.
And staying on the topic of India, and I guess emerging markets including India, by our estimates would probably constitute about 25% of your growth going forward, and on one hand, as you highlighted, these are greenfield markets a huge wide space ahead of them. But on the other hand, they’re sort of leapfrogging traditional forms of acceptance to QR codes which reduce the barriers to entry, and there are also sort of these constructs that’s just payment banks which sort of may or may not be a disruptor. So what’s your strategy to retain and grow your market - sort of grow your business in these markets?
I mean, what really counts in any of these kind of areas is that you have a scale of proposition, right? I mean you might see a lot of people trying this or that on the other, but then you see those payers that are really serious and trying to figure out that they're building scale, right?
And that's really where we are in terms of making sure that we have at this point the time over $2 billion of the 16-digit-account numbers out there connected to consumers and businesses that you are at over 40 million merchants that you're working with 25,000 financial institutions, et cetera.
So, you’re going to have to really continue to go back to how do you scale a business. And in order to scale the business, you’re going to have to make sure that you're going after every type of technology that actually can be incorporated in our system. So we are not - we are not like a company who just says, well, this is how we have done it always. And therefore, we are going to do it this way.
We are a company who are embracing new technologies and new ways of doing things in order to make sure that in the emerging markets, but also in the more developed markets, we can put out these propositions from a scale of growth point of view.
And that is why the QR effort by the way is very significant, very important. We know that in China it's obviously very big. We know that in India, it will be very big. But also when you look at all of the agreements that we struck in many countries around Africa, it will be very big, too. So, it was any means of acceptance that you can roll out and then any means that you can get 50 people connected to that 16-digit account number. That is really important.
The other thing that we really stand for is choice, okay. So that people have a choice. Many people will be using the payment means that is closest to them. And by the way, the 16-digit account number, I have talked about using it as a card proposition is just one thing. You might be wanting to use Mastercard Send.
You might be wanting to use pay by bank, right? You might be wanting to use different means and that's really what we want to make sure that choice is there for everybody both on the consumer side - corporation side, as well as on the merchant side.
And then moving West to Europe. So, the European being payment regulators has the sort of stated objective of leveling the playing field in payments in Europe. And that suggests greater competition, so what’s your view regarding the evolving regulatory environment in Europe specifically PSD2 which went into effect by this year?
I mean, look, Europe has been at regulations now for many, many years. So PSD1 came actually in - this was January 2008 or something where it's just after I started in Mastercard. We had to grabble with this. But then even before PSD - well, it’s part of PSD2. I mean, there are a couple of things, like, for instance, interchange fees got regulated in the EU countries, so it’s 20 basis points of debit, 30 basis points of credit.
And in addition to that, we actually have to separate our schemes, our brand proposition from our switching services which is really processing the transaction. And you have seen us finding our way through that and still producing very significant growth in Europe simply because electronic forms of payments are sorely needed there. There's a lot of innovation that's going on and this is what the regulator really wants to do.
So, now, with the next few implementation items on PSD2, open banking, those kinds of things, they really impact more at this point in time financial institutions, right, because financial institutions are being asked to be opening up if they get consent from their customer - so from the consumer who has that bank account - to open up the bank account both from a payment point of view, as well as from a data point of view. And I would suggest to you that there's a lot of innovation, a lot of thinking that is going on right now what you can actually do with that.
On the bank side, first of all, they are trying to figure out how to do this in a safe way, right? So, if I were to be asking my German bank, yes, X, Y and Z can basically do a ding via an API onto my bank account and they can see what kind of balances are or transactions that happened there.
And yes, they can take data from time to time because I have that particular company do whatever they're doing for me. The bank wants to be sure that this is a codified authorization and so they're having a lot of - and so, we’re having a lot of advisory engagement via our consulting company in terms of helping them how to do that in the right way.
But then, a lot of these institutions are thinking about well, if you have a person who has maybe two bank accounts, maybe he has a mortgage here, maybe he has an insurance there, how could I be getting that type of data from my customer so that I could potentially do a better sale or cross sale, maybe a more targeted sale, maybe a more efficient sale to that particular consumer, right?
So, there's a lot of thinking about how you're working for, let's say - or your bank account, for instance, with Deutsche Bank, let’s say that, but the Deutsche Bank doesn't know your entire financial health. This kind of opening up, and as long as you as a consumer gives precision to the Deutsche Bank, they can actually ping other financial institutions or insurance companies and gather all of the data on your financial health, and then they can maybe say, oh, you know, Martina might need to have a higher mortgage or something. Maybe I'm just going to give a differential proposition to Martina because now I'm seeing a lot more in terms of what kind of financial health she has, right?
But that's really only the beginning. And what I just told you about, what a bank is thinking about, believe me, a lot of the fintechs in Europe are thinking exactly those kind of things and trying to figure out what kind of propositions they can do, including from a payments point of view.
Now, the one thing that you should not forget, in Europe, direct debit, which is basically opening up your bank account, has been there for 40 years, okay? So, it has been there for many, many years. Many Europeans, by the way, pay a lot of their utility bills, even merchant bills with direct debit, okay?
Basically you just give your bank account number and they could do a direct debit on it. And so, that has not really changed. It's more like, now you give a permission for - to the bank as a consumer that somebody can actually do an inquiry on your bank account and what could you develop from that.
So, it’s in the spirit, so at least that's how we take it. It's in the spirit of opening the market even more given the relatively nascent electronic forms of payments that you have in many EU countries.
Great. And I guess no discussion in disruption is complete without disruption from Internet giants. So what do you think about players such as Amazon, Google, Apple trying to build their own payment offerings? Is that an opportunity or long-term risk?
So, we look at it as an opportunity, right, because really what these companies are focusing on to make it easier for the consumer. And in order to sell something, you're going to have to make the payment easier, right? I mean, I don't wake up in the morning and be excited that I can pay for my Starbucks coffee. I'm excited about my Starbucks coffee, not really about the payment, right? So, the payment has to be just done in an easy way.
And that is how many of these companies are looking at it. And when you look really underneath a lot of those Internet companies, they’re using other ways. Again, I'm coming back to, as long as we can have the connectivity between the merchant and the consumer via the 16-digit account number or in a different way from a Fast ACH point of view that means the account to account, that enables us to scale and to get these kind of propositions.
But you should continue to see the market develop and you should see everybody to be making payments easier both on the merchant side, as well as on the consumer side.
And then, we talked about a number of sort of strategic opportunities for Mastercard over the next several years. What are you most excited about?
I think for me, it's really two things, right, that I think is just fantastic. So, one is this whole - these many, many services solutions that we're developing and really going and training the company, many of our salespeople are on that to be really in solution selling. Believe me, that is a cultural shift. That is a change. That is something that we've been honing now over a number of years, and there is more work to be done, but I think that can be extremely powerful for the company.
The second thing is really the whole opening up beyond retail payments. So, the whole B2B spaces, super exciting to me. When you look at how - and I used to be treasurer of a number of companies - when you really love what's goes on not necessarily in a domestic payment point of view in the U.S., but when you look from a cross-border payment point of view, how difficult it is for any particular parties, be it a consumer, be it a company to be making this kind of - we’re making this extremely difficult.
So, I think there is a lot of opportunity that we can go after, and that going from the 45 trillion to the 225 trillion of volume potential and then really focusing on the spaces where we can bring our assets to bear, I'm super excited about that.
And then my final question for you is on the flip side of that sort of opportunity, what's the biggest disruptive risk do you see for Mastercard over the next five years?
So, I always look at two things in a very particular way. One is regulatory environment. We need to have regulators who really understand the payment space. I think many countries, they do. But we need to make sure that regulators continue to work similar to what I just said about Brazil, to open the system.
We stand for open standard, and we stand for standard, and anybody can use them and anybody can innovate off them. And not getting into things where they basically are moving around the parties and making some people be able to take more advantage of payments and others, right?
For us, it needs to be a mutual industry. It needs to be open with open standards, and regulators from time to time have the tendencies not to go this way. And you can see that in a number of regions and in a number of countries. And so, this is something that we are really going to have to work on very hard.
In addition to that, on the regulatory side, you can see a lot of nationalistic - a more nationalistic tendencies at this point in time. So, that means that regulators really want the local networks, the local schemes, and I would be remiss of mentioning that when you only have something local if you can't scale it, where is the money going to come from for all of the things that the population in these countries will be demanding i.e., digital services, i.e., making sure that whatever you have locally is safe and secure.
Of course, the international players who have a lot more scale, they have the money available, and they have done like us, we have done huge amount of investments in order to make sure that this space can be more and more safe. And when you have to put everything locally, it's a much more difficult proposition to be executing on that. We can execute on it, but it's more difficult.
The second thing that I always worry about is really technology, anything from a technology point of view, simply because we are a technology company. We're running a giant network. And we need to make sure that we understand in-house because we are not going to create everything in-house for the company.
We need to understand what's going on out there, and that's why you’re seeing us doing a lot of investments, they’re not a lot of money, but a lot of investments in the venture capital space, in the private equity space. We are taking minority stakes here and there.
We have our product managers and our region managers out there to really see what people are doing. This can be the two kids in the garage. It could be a bigger shop, but we really are very, very interested in making sure that we get our hands around what is being innovated out there and that, from a select point of view, we bring it in.
And the couple of examples that I would like to mention is Brighterion and NuData. Brighterion, we had a very, very small stake in Brighterion many, many years ago, I forgot, but it’s probably 2009 or 2010, something around that time. We put a really small stake in it because we really thought that they’re a fantastic AI company.
And only last year, we basically bought them and because we really understood how they could be helping us from a data analytics, especially from a fraud product point of view but do you know what? We wouldn't have gotten to that if we wouldn't have done that tiny stake at first and really works with them from a commercial point of view and that allowed us to really blow out the proposition that we have.
New data, a little similar - a little bit different. We didn't have a stake in new data but we have been scouring this space in a fairly significant way trying to figure out what are the other things as we have the Internet of Things coming together i.e. every device in the future will be enabled with a payment capability.
What that actually mean from a safety and security point of view and what new data does is, total bonuses when you hold your phone, new data actually picks up how you hold your phone, how you type things on your phone, and whether it's actually you who is using your phone which is hugely helpful that when you make actually a transaction from that phone to know that it's you who is making that transaction because you have been holding this phone in a particular way, you've been typing in it in a particular way and that can be expanded to many, many Internet devices around the world.
And we can figure out whether your phone is possessed by boss, or whether it’s really you. And that is just absolute fantastic. I would never think that Mastercard would be developing something or that we would be developing this by our own. It's these kind of engagements that lead us to pick interesting prosperities in companies.
Great. And I thank you everyone for coming and thank you Martina for joining us today.
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