Mastercard, Inc. (NYSE:MA) William Blair Growth Stock Conference June 13, 2018 9:00 AM ET
Martina Hund-Mejean - CFO
Warren Kneeshaw - EVP of IR
Robert Napoli - William Blair & Company
Okay. We're going to get started. My name is Bob Napoli. I'm the analyst for William Blair that covers the financial technology and services space. For a complete list of disclosures, some potential conflict of interest, please go to www.williamblair.com. We're very excited to have with us again this year Mastercard. We have Chief Financial Officer, Martina Hund-Mejean, and...
That was pretty good.
And we also have Warren Kneeshaw, the Head of Investor Relations. Mastercard, obviously, has been a wonderful story, went public in 2006 at a market cap of about $3.5 billion. Today, we're sitting at about a $210 billion market cap, and growth has actually accelerated.
Martina, could you walk us around the globe, share your thoughts with us on the economic environment and key business trends?
Sure, Bob. And good morning, everybody, and thanks for joining us. And yes, this is a kind of a lowball question that's just starting out with, right? So there is not a lot new that I really have to say versus what you heard at our last earnings call, as well as we did participate in a number of other conferences.
But I'll just walk around the world a little bit. I mean, the world still feels pretty good. And if I start in the United States, it looks like that consumer sentiment is still pretty good.
When you look at our spending cost kind of results, in the first quarter, we had a little bit over 5% growth. That is ex auto and ex gas, any of these numbers that I'm quoting you. It did go down a little bit in April, but that is pretty much of where Easter fell. So it went down to about 3.9%. And in May, the number went back up to about 4.6% growth. So by all imagination, the U.S. consumer still feels pretty good, and we see similar kind of sentiment on the commercial spend that we see in the United States.
If I go to Europe, Europe does still feel good. There is a lot of domestic traffic going on, a lot of cross-border traffic going on. In particular, we often get the question about the U.K.
The U.K. is still doing well. There is a local retail spend increase inbound into the U.K. It's obviously fairly strong given where the pound is. But even outbound of the U.K. is also relatively strong. So we are not really seeing any issues.
From that point of view, we are watching out fairly carefully what the developments on Brexit could be. And obviously, I don't know what that - what could happen. But that is kind of the one callout that we would make for you at this point in time.
If you're asking me about Southern Europe, there is really no news to report despite some of the political towing and throwing in those countries. The consumer is still spending nicely and we see some growth there, too.
If I go to Middle East, Africa, good growth there. In the Middle East, obviously, from an affluent perspective, we are seeing some very good growth in the UAE, a number of other countries around there.
Africa has been coming back a bit. You might remember that there were quite a few foreign currency restrictions, Nigeria and some other countries, and those had been lifted in the latter part of last year. And therefore, we are seeing a bit more cross-border spend.
Asia, we are seeing good economic development there, good transaction growth, volume growth, really nothing new to report. And if I go to Latin America, the two callouts that we make is really around Brazil and Mexico.
Brazil had a bit of an issue late, late that seems to be behind us, the trucker strike. But that seems to be behind us. It didn't have too significant of an impact. And Mexico, we are watching very carefully, too, but the volumes and the growth have come back a little bit.
So overall, you can hear a good economic environment worldwide. The watchout factors for us is obviously what might be happening from a trade protectionism kind of point of view because if that takes off, our business is very much built on that - the growth trends act with each other and that people go from country to country and that there is a lot of economic environment or got a lot of economic growth locally. And if you start to have some trade wars coming in, you should expect that there might be some impact to the kind of growth that we are seeing.
Thank you. Can you maybe give us an update on the competitive environment in the United States? I mean, Mastercard has had quite a few co-brand wins over the last couple of years and what is it, is it pricing? Or what is driving those wins? How...
Yeah. So what Bob is referring to is really that we had about 30 co-brand wins over the last two, three years. And really, I have to tell you, this has not much to do with price because anyone who is bidding for this kind of business has to come up with a similar price, okay? Price is just a given. You're just going to have to do what it takes in order to really even go further in the RFP process.
I think what really happened to us is we obviously had a couple of high profile losses five, six years ago, and our North America operations have really sat back and thought about how we go differently to market, and at that time, a lot of co-brands came up.
And Mastercard, many, many years ago, at least when I came to the company almost 11 years ago as a CFO, we were never really pronounced in the co-brand space. We kind of knew some stuff, but we didn't really do as much as some of our competitors have been doing.
So the - we really started the market, we really changed in terms of how we went to market. In particular, what we did is - and you can see that maybe from the American Airlines co-brands, and some of you might have it in your wallet, and you can see all of the goodies that come along with that kind of product.
So we really looked at how does a company, who - a merchant, a retailer, who puts out a co-brand, what are - do they need is beyond a co-brand. What are their pain points? How can we help them, be it from a data analytics point of view, be it from a safety and security point of view, be it from a loyalty point of view?
And when you look at all of these co-brands that we won, be it American Airlines, be it Cabela's, be it Crate and Barrel, be it tons and tons of names there, it's really because of what we did from what we call services, you know, solving the pain points that many of our customers have beyond really the "simple payments product."
But in addition to that, we also doubled down on winning more business from some companies, banks, financial institutions, so this is not co-brands, financial institutions that we haven't had as much business with. So for instance, Bank of America, the one, two, three cash reward product, and there's another product from Capital One, the Savor card.
So there are number of things that our people really double down. And very similar theme to what I have been telling you about the co-brands, it's typically the financial institutions, even the really big ones, who you could argue can do a ton from a data analytics point of view or from a rewards point of view or from a safety and security point of view, even there we found that the businesses or the lines of services that we build, that they have been very, very instrumental in winning some of these deals.
Now in line with that, I think - and partially due to some of those wins, I mean, your - the growth rate at Mastercard has - is very strong, and I think over 20% in the first quarter.
I mean, your competitors who speaks in a couple hours here, I think at noon today, Visa - we'll have Visa here, is growing - is doing well, but you both end up kind of a growth gap. Is that sustainable and is it driven by…
Okay. So first of all, let me just explain this number, this over 20%, okay, because I don't want you guys to have like outsized expectations, right? There's another quarter coming up.
So the underlying growth rate, if you strip away the acquisition contribution to that 20% that you were quoting, which is VocaLink mostly, and if you strip out the revenue recognition, so we have to already implement as of January 1 the new revenue recognition rule courtesy of the FASB, and that contributed about 4 percentage points. When you strip that stuff out, the underlying growth rate is 12%, right, and that is still a fairly significant kind of growth rate.
20% of Q1…
Right. So 20% on an underlying from a net revenue point of view, that's true. So what - from a growth rate point of view, what we have done is a number of things. One, market share. You guys know that we have three drivers to our business, right? One is personal consumption expenditure growth. Two is secular trend, which is basically going into verticals to be - changing what people are doing from a cash or from a check point of view or even from an ACH point of view and really using our wares and electronic forms or payments point of view.
You could argue that many networks are basically participating in that equally depending on what kind of verticals you actually - you're actually trying to develop, and I'll get back to that point in a minute.
But thirdly, it's obviously market share. And there is like kind of two areas that I really would like to point out. One is Europe. In Europe, we have been going after market share for a long, long time. You can actually see that in our volume and our transactions, which is double-digit every quarter. And that is truly not because of the PCE, right? So it's not from a PCE point of view that we have been adding to that Europe. They have personal consumption expenditure growth of 1% to 2%. That is actually fantastic.
So it's really the secular trend and the market share wins. But the market share wins, often enough, it's versus a domestic provider. Europe has many, many domestic schemes. And so what we have been able to do is really brought the ware of our international scheme to bear, i.e. what we can do from a digital point of view, what we can do from a data analytics point of view, all the investments that we're doing from a cybersecurity point of view.
Domestic schemes just do not have that kind of investment amount available to do what we can do as international schemes. And I would suggest to you that, that was one of the big drivers in Europe.
And the second area I want to kind of point out to you is really in Latin America. And Latin America, when you look at Brazil, we have quite a few wins in Brazil. So very recently, the American Airlines co-brand, but also Itau, a number of the digital banks that have developed kind of five or six digital banks in Brazil. And we got our hands around all of that, and that, obviously, drives growth.
And what I'm talking to you right now is all - still the core business, right. And it drives growth from a domestic point of view, but also from a cross-border point of view.
So if I get to that area of cross-border, you saw some very, very high numbers from a cross-border point of view and a 21%, 22% kind of growth rate, and when I divvy that apart, there are couple of things in there.
One, for many, many years, we actually developed a specific core competency, a center of excellence in Mastercard in terms of going after cross-border. And again, that's from what cardholders are doing with their card over the 16-digit account number.
But in addition to that, we have done a lot of things in the commercial space. And when you attack the commercial space, which, by the way, is around 11% of our total volume, growing at 15%, this is like 2017 numbers, there's a lot of cross-border in there, okay?
So the - you see the domestic add, you see the cross-border add. And then beyond that, what you really can see is what we did - what I loosely call these services. I mean, there are many different lines of competencies in there, but that is what I called out as the data analytics service, safety and security service, loyalty.
When you look, in particular, quite a bit of that - not everything. The safety and security, you see in transaction fees. But when you look at the other revenue line for us, which has been growing very nicely, you see quite a bit of that coming in.
And what those services are, they are very tightly connected to what we do in the core business, i.e. typically in order to do something like this, we have to see the transaction, and then we can do the value-added stuff. But I would say, there was probably an extra lever to our overall growth because it is growing more than the core business.
Great. Thank you. Just touching on Europe. Your - Visa Europe acquired by Visa, took it from a not for profit to a for profit business, and they've now owned that for close to two years. Have you seen a change in the pricing in that market or the competitive environment subsequent to Visa's acquisition?
Well, I would say, first of all, we all in the market price for value, right? I mean, that is really the overarching thing. It's not like that you can suddenly go to your clients and just really increase price. It's price for value.
I think what we have maybe seen is Visa, obviously, had to do a very big integration, which they say is pretty much done. And I think what we have been able to do is really go to market and look at - we could. Now that it is more on a level playing field from a competition point of view, given that they were in a, as you say, not for profit, and Visa is already for profit, Visa - Mastercard Europe was already, since the IPO, a part of the publicly traded company. So obviously, they had to perform the same way as our other regions had to perform.
I think what we have been able to do is that more financial institutions were willing to talk to Mastercard, and we have been able to convert a number of them more on the smaller size and medium size in terms of taking at least some Mastercard portfolio on, and that has contributed to some of our growth rates. We tried also with the bigger ones. I have to tell you, that was a heck a lot harder to do.
I think there was really one win that I want to put out, which is kind of very important for us, which is Santander in the UK. It's a debit win. And many of you know that while we have majority market share in the credit market in the UK, we are really very, very small in the debit market in the UK. It's mostly a Visa market, and we had won two portfolios. One is the TSB portfolio and one is the Santander portfolio, which gets us to a little bit more normalized market share in the UK.
And that - I can tell you, that wasn't easy to do. But because Santander had dealt with us on the credit portfolio and had seen some of the things that we were able to do over the last couple of years on that one, that allowed us, honestly, to be bidding on the debit portfolio because some of the similar things we are bringing in. And it's very important because the Brits pay with their debit card for many every day purchases, right, and so it's important for us to have something in there.
And then in addition to that, we obviously are putting out also differentiated products, like a push debit product that we're doing via VocaLink, which would be another choice, quite frankly, for financial institutions, for consumers and for the merchants when this product gets rolled out.
Thank you. The - we feel like one of the largest growth areas in payments is the B2B payments market, the corporate payments market. I think Mastercard shares that view. I think at your Investor Day last year, you pointed out - or Visa - Mastercard pointed out a TAM market of about $120 billion. I think you suggested just now that it's 11% of your business, growing 15%.
Can you talk a little more about the opportunity, how much of that $120 billion - $120 trillion, excuse me, is truly addressable?
Yes. So it's a $120 trillion estimated market, right? I'm not sure. I think directionally, right, we can talk about those numbers. And $120 trillion, there is about $20 trillion in there that we think can be addressed from a point-of-sale point of view, i.e. the 16-digit card number. It doesn't need to be a card. It can be virtual. It can be via phone, whatever. But that - about $20 trillion can be probably, with a more traditional network, addressed, right?
The other $100 trillion, we really think, cannot be addressed by card. It's mostly account to account. There's a lot of cash. There's a lot of check. And so we've been spending a lot of time on both of them.
On the $20 trillion, of course, where we would be using our traditional network, examples such as, for instance, what we're doing with eNett and WEX in terms of enabling the travel space, right?
So when you go to a travel agency, which seemingly a lot of people around the world still do, and buy a package for your holiday, the travel agency is going to have to get your money, so they charge it one way, hopefully via Mastercard, but one way. And then they're going to have to get your money to the hotel and to the airline and to the tour operator, yada yada. That used to be all a very paper-intensive ACH type kind of wire transfer kind of effort. And we have been working with those companies to really enable it via our virtual card product, and that's part of the commercial space that you can see in the traditional stuff, right?
So that - we're not going to give up on that, right? I mean, there's C&E [ph], there's procurement, there's the VPN, which is the devoted card number. But when we look - when we sat back and did a lot of strategic thinking over the last three, four years, we said, like, Gosh, you know, there's so much more to be done in this sector.
So in the $100 trillion sector, there is so many pain points. And I'm not going to tell you we're going to go after $100 trillion. We're going to go after certain slices, where people are willing to pay for something that makes their lives a heck lot easier, right?
And so I'll give you a couple of examples. One is when you go to a small company or a medium sized company and you try to figure out how they actually pay all of their bills, so their accounts payable file, how does that all get done, you find a lot of pain points. There's not - no real easy solutions.
And I'm not talking about the large companies. The large companies pretty much have figured it out, but the smaller companies have not. And so that is where we got about the idea of the B2B payments hub, which we are doing with AvidXchange. And really, what it is, is AvidXchange is connected to 130-plus ERP systems. So most likely, the small company has implemented that small - that ERP system so they can take the file, the accounts payable file very easy.
And then depending on what the buyer - how the buyer wants to pay and what the supplier wants to get paid, so there's a supplier directory in this thing, they can very easily make the payments. And you can make a card payment, you can make an ACH payment, you make an ACHplus payment so - with additional data. It could be a check, by the way.
But for that fluidity of the service, of the efficiency of the service, people are willing to pay something. And so there is a revenue share that is between AvidXchange and ourselves based on the transactions that are going through this thing. This is being rolled out. I think we're starting at the end of the month with Fifth Third. And that will be rolled out probably with a number of other financial institutions. That's kind of the distribution channel, but it's making people's lives easier.
And quite frankly, they don't want to have all these people stuck in the accounts payable department. They want to sell in the front, and so that is kind of a really nice decision service for a pretty low fee, quite frankly. So that's one example how we go after this.
And by the way, that is only in the United States at this point in time. If that really works, we could see ourselves taking it into Canada, the UK, et cetera. First, the English-speaking countries, and then you can probably expand from there.
The second example that I want to give to you is cross-border payments, right? I mean, all of you have done cross-border payments. It's pretty painful, especially with what you have to pay from a fee point of view. If you will go over your financial institution or even some of the other houses, and you're not getting the word greatest foreign exchange rates. We either, right?
So there's a lot of issues in terms of how cross-border payments are being made, a lot of businesses. And again, I'm talking not about the large businesses. The large business have figured this out. They know exactly what they need to do.
But it's more the medium or the lower medium-sized and the small-sized businesses. Given that we are connected everywhere in the world, 210 countries and territories, 22,000 financial institutions, we feel like that we can probably offer services that allow you to make a payment that you eventually know when - that you actually know when it will arrive to the destination and that you actually know in which amount it will arrive to the destination. And those are like two very big pain points that can be addressed.
Again, there's a lot of work in progress, as I call it, but we're going - I mean, so you should be rest assured. We're not going to go after everything. We're going after the stuff where there is real need for something to happen in a different way.
Thank you. It's been about a year since your VocaLink acquisition, fast payments, very important in the payments business. Can you maybe update us on VocaLink, the Pay by Bank app effort?
And then how does VocaLink compete against - their target competing against Visa Direct, which seems to have a lot of traction?
Yes. This is - so let me take just Visa Direct. This is not card to card. This is account to account, what VocaLink does.
Visa Direct is comparable to the Mastercard Send service, okay? So Mastercard Send is - it's a push debit payment. We can basically reach every single bank account or debit - bank account that has a debit card attached to it. So it's debit card to debit card.
In the United States, we have connected about another 100 countries around the world where you can do that, and you can do it actually via mobile. That is Mastercard Send. So you really should think about it as a push debit payment.
What VocaLink is, when you look at - so we had shown for you in the Investor Meeting in September of last year how we go from $45 trillion of personal consumption expenditure at $120 trillion of B2B that we just talked about and adding another $60 trillion of P2P or B2C kind of payment.
So it's $225 trillion "flow" in the world. We truly believe that there are many, many instances where you can never run something over a card rail. I mean, we have a great card rail, and we really came to the conclusion that you cannot do that.
And I just gave you some of the cases, this $100 trillion out of the $120 trillion in B2B. Much of that will never go on cards. The $20 trillion out of the $120 trillion will, we think, but the other $100 trillion won't. People would send from bank account to a bank account.
And then when you look at that with what's going on in the economic in the regulatory environment, a lot of countries have ACH systems, but they're old, right? It takes two or three days to be getting something to that. And VocaLink happens to have immediate payments, so Fast ACH basically, so where the transaction gets cleared in an instant.
And a lot of countries, it's about 25 countries around the world, they are actually thinking about renovating the old ACH system. So for those of them who don't even have the ACH system go and skip immediately to Fast ACH.
And in addition to that, when you look at what's happening from a payments discussion point of view, a lot of people are thinking about how could Fast ACH, given that it's now instant, right, so that you can make an instant payment so that you can actually count on good value of funds, right? I mean, that is very important for the seller of any goods. How could you use that in a bigger way from a payments point of view, right?
So it's way beyond push debit payment. It's really account to account. And so with that very short two-minute strategic thinking on Fast ACH, that's why we were really interested in VocaLink. And to this day, VocaLink is still the pre-eminent Fast ACH company in the world. They have more than one country. They're doing it in five countries, some from a software license point of view, not from an operating. So in the U.K., they really operate, right? But in a number of other countries that sold a software license, which is already up and running. You can look at Thailand. You can look at Singapore. It's now up and running. It's still in the pilot phase in the United States.
So we just thought like that we could see that this platform is capable to enable a number of countries, right? I mean, we are not in a one country kind of thing, right? We want to have to grow, right. And so we needed to have a platform that is able and capable of doing that.
Having said all of this, this - nothing of this goes fast, okay? This is like a three to five year journey or something like this, and we are really focused on three things in terms of what we want to do with VocaLink.
One is infrastructure. So obviously, they're operating in the UK, the infrastructure, and a lot of other countries wants the infrastructure. And what we are thinking through - and there's RFPs out there. What we are thinking through is, how do you want to put the infrastructure in, right, because the infrastructure, nobody really pays you for. It's like the railroad, okay?
It's like you just put some tracks down basically, but nobody is willing to really pay you such stuff - a lot of stuff for that. So we have to smart - and you - by the way, you can look at that when you look at VocaLink's numbers before we bought them.
So we really looked at this and go, like, it's a must in certain countries or in certain regions, but how do we go about this smartly so that we obviously make some money on it. And that really gets me to the second lever that we are really heavy duty going after and investing, which is on the rail, you're going to have to put some stuff. You're going to have to put some coaches, you're going to have to be able to sell tickets, a conductor has to come through, right? This is the example that Javier Perez, our European President, always uses.
When somebody pays you something for that value, and in fact, when you look at some of the more alternative schemes out there, they - people are paying for this stuff. And so what we have been doing, that means we took over what VocaLink had been starting to do, is - to give you just one example, which is this Pay by Bank example.
What it is, it's account to account, a push debit payment. It's not card to card. It's account to account. And what it is it's in pilot at this point in time. But what it is, it's a appropriate [ph] payment. It's better price for the merchant. And we have a number of very big customers from an agreement point of view.
And we're trying to think through whether we have all of the feature functionality in it because you can do a lot of stuff, you can do bill payment, request for pay. You can do a number of things because the VocaLink network is with its ISO standard 20022, can carry a ton of data, okay? So there is something in it that people are willing to price, which is more analogous to what our model is, right, which is transaction pricing.
And then the third lever on VocaLink is really in terms of what can we do from a data analytics point of view. So VocaLink sees 92% of the UK payment flows, and there are certain things that we have been featuring in our Investor Day, such as, for instance, helping the banks to identify money mule accounts. This is where fraud people wash money through.
If one bank sees their own traffic, they might be able to identify some, but we see all of the traffic. And usually, these fraudsters, they only touch one bank one or two times, but they're running a lot of transactions to multiple banks.
And when we can see that via the VocaLink data, then we can be, obviously, helpful to those banks because they have penalties and regulatory issues if they don't identify that, and that is a product that people are willing to pay for.
So you should see us, over time, do a lot of things in the data analytics area with AI, et cetera, literally really taking what we have done from the data that we see on our card networks into there.
Great. Thank you. I believe we're out of time. So we're going to move to the breakout room in LaSalle B downstairs. Thank you very much. Thank you.