Mastercard Inc. (NYSE:MA) Evercore Payments and Fintech Innovators Conference March 5, 2020 10:40 AM ET
Paul Stoddart – President of New Payment Platforms
Conference Call Participants
David Togut – Evercore ISI
Welcome back to Evercore ISI’s Fourth Annual Payments and Fintech Innovators Forum. I’m David Togut. I research the payments, processors and IT services industry for Evercore ISI. Delighted to have with us here today, Mastercard, Paul Stoddart, President of New Payment Platforms. Welcome, Paul.
Thank you, David.
Warren Kneeshaw, Head of Investor Relations; and Seth Pruss from Investors Relations as well. So welcome, gentlemen, and thanks for being a part of our conference. Just to kick things off, Paul, could you talk a little bit about your background and your current remit at Mastercard?
Sure. Thank you, David. Lovely to be back. It’s a great conference, so I’m sure it will be again. I joined Mastercard through the acquisition of Vocalink. I have basically been for most of my career in banking with RBS and Barclays and at those two organizations within the sort of transaction bank, spent a bit of time with Worldpay and then at Barclays with Barclaycard. And so I kind of reformed my banking ways and moved into payments more specifically, which naturally really and then Vocalink and now Mastercard.
And really, the acquisition of Vocalink by Mastercard was the opportunity for Mastercard to expand beyond just the card space in payments, and it’s a very large space. And so Vocalink provided a good, quality asset to make that step for Mastercard. And so after leading the acquisition integration of Vocalink in to Mastercard, I then took on the role of President, New Payment Platforms. And the new payment platforms business is really the growth engine for that move by Mastercard into the wider payments world. So it includes our interest, obviously, in ACH and real-time payments. It also includes cross-border and various other use cases in payments, so bill payment, as an example, Open Banking, so the things that we’re doing that take the business into the wider payments landscape.
Great. Before we go deeper into each of those growth areas within payments, can you talk a little bit about the leadership transition that was announced last week at Mastercard and what the changes might have on your strategy, particularly in multi-rail capabilities?
So yes. And some big news, obviously. Michael Miebach, our Chief Product Officer, being appointed President initially and then becoming CEO in 12 months’ time. So Michael has been – in fact, led the acquisition of Vocalink at Mastercard, so I’ve had a great opportunity to work with Michael for the last few years since being part of the organization. So in his Chief Product Officer role, he has led the product for Mastercard for the last few years across all product areas and prior to that was out in the Middle East, running Middle East and Africa for Mastercard and again, I think brings a solid banking career behind him into that new role.
And it’s exciting time for us. Mastercard has consistently, I think, led in the market with its thinking around how to evolve the space and how to evolve the space and how to evolve its participation in the space. A lot of the principles that Michael had previously communicated and Ajay had previously communicated really centering around the customer, leading with our innovation agenda, et cetera.
Yes. Michael will continue to advocate strongly in the market. And being a big fan of real-time payments and the wider payment space, I think, from my perspective, it provides an extension of the support and the excitement and the enthusiasm that the Board and Rick and Ajay had already demonstrated towards this side of the business. So there’s a lot of opportunity for us to go after. And Michael knows he has my support, and he has the support of the management team.
Can you help frame the opportunity that exists in the new payment flows and explain your strategy for going after those flows?
Yes. So the way we look at the – as I said, Mastercard’s role outside of the carded space is we look at the payments landscape. We look at the size of the flows, something of the order of $235 trillion of flow. And the carded space represents probably around $30 trillion-ish of that flow. So firstly, the – I think the first point to note is just how much upside there is. So $30 trillion to $235 trillion is a significant uplift in volume of payments that we can go after.
By bringing together assets and capability, our multi-rail strategy is very much the core to driving that growth and the opportunity. And if I look at that $235 trillion, you take away the carded space, and that breaks down largely between B2B disbursements, bill payments and other related flows, most of which today are typically flowing over the ACH and real-time payment rails.
Yes, there’s still a lot of cash there, and we continue on our mission to digitize more forms of payment. And so with a load of cash to go after, there’s a great opportunity in and of itself. But now expanding our capabilities into the ACH and real-time payment space, it gives us the – another $150-ish trillion of flow that we can go after with the capabilities that we have and also by building organically and looking at other acquisitions over time to bring product capability into that portfolio.
And so as we think about that space and as we think about that significant runway of flow, we start to organize our thinking in our go-to-market around three different layers: the infrastructure, applications and service layers, as we describe it. So I see significant runway for the business. We have a number of assets and capabilities within the business division that allows us to tackle those flows, and we continue to execute across the three layers, as I outlined.
Great. Can you just start by giving us an update on your progress? On the infrastructure front, why do you think it’s important for Mastercard to own infrastructure leases, obviously taking a different path? But what value does infrastructure have at Mastercard?
So actually, in the card space, we own the infrastructure, and auth clearance definitely is an important value chain for the cards business. ACH and real-time payments is very similar. It has some different characteristics. We always own our infrastructure. In a lot of markets, we operate the infrastructure for a domestic scheme or for a domestic consortium of banks. We own the technology. We own the intellectual property, and we hold a number of patents in that space. We also license our technology to domestic operators.
So obviously, in those scenarios, we are licensing our software. And those operators are implementing our software, and we work with them on an ongoing basis to maintain and evolve that software solution. So that kind of talks about how we play in the infrastructure space. Why is it important to us? So when I think about the markets we operate in and I think about the global trends that we see, in and of itself, the infrastructure presents a significant scale play.
So as the infrastructure provider, everything that’s going on in the application layer is driving volume through the infrastructure. So in and of itself, before you get into synergies and other value related to it, it is an attractive commercial opportunity basically on the assumption you can drive economies of scale through the significant payment flow that you can bring to one or several regional harbor-based technology platforms. As I then think about beyond the commercial opportunity, in and of itself, I look at a number of other key factors. Firstly, customers. So what are customers saying to us? A lot of our banks are saying, "I would like to simplify my technology. I would like to simplify my commercial and contractual relationships. I’m looking for a small number of strategic providers with whom I can concentrate my efforts, who can offer me access to all of the payment rails that I need access to."
So the multi-rail strategy is about giving choice and being able to offer the different rails, and I include some of the newer blockchain, digital currency-based ecosystems evolving there. And it’s about allowing our largest customers to think about us as a strategic partner across multiple markets and across multiple rails. So I was just thinking this morning that we’ve probably got 5 of the top 10 banks globally that are using our infrastructure in more than one market. So those sorts of signs to me say they – and they all say to me how can we simplify our technology relationship with you and our commercial relationship with you by pushing our payments to you through one technology stack and so on.
So there’s a really important customer angle that I look at it as we’re being responsive to customers who are saying we want those relationships and can see the benefits, more importantly, of those relationships sitting with one party. The second point is really relating to the data. So I sit here operating an infrastructure. I get to see all the data. Obviously, I have some very strict rules and policy and permissions around that data, so I don’t do what I like with that data.
But in partnership with the participants in the ecosystem, we’ve been able to develop a very rich set of services that we lay on top of the payment rails. And I’d like to also think that, and we’ve seen this through real examples in the market, every opportunity we’re winning globally to implement a national payment system, those opportunities include opportunities for services and applications bundled with that play. So all of these signs tell me that we can play in all three layers. We don’t have to play in all three layers, and we’ve designed our portfolio to ensure that we can play independently.
I recognize we’ll never own every ACH infrastructure in the world. Obviously, I’d like to, but I don’t think we ever will win all of them. But where we can play in all three layers, we want to play in all three layers. And that uniqueness of the data view that we can see allows us to develop very powerful fraud, money laundering tools that banks find extremely helpful because we can see the relationship between payments within the account ecosystem. So, any single bank can only see one set of accounts, i.e., their own, and they can see the payments coming in and out. What they can’t see is the relationship between payments going between different accounts
So, we launched this in the UK two years ago or 18 months ago with our MIPs service, which is really looking at money muling in particular. And the banks are delighted, to say the least, with what we’ve been able to share with them about how to manage fraud within that payment system. And of course, The Clearing House here has also decided to buy that service from us, and so they’re in the middle of implementing that. And as I said, in every modernization program that we’re running around the world, it’s almost the first one off the shelf for the banks who say we must have this operating on top of the infrastructure.
There’s a couple of other that I’ll just mention. I think the standardization point is key here. So we all know that standards make our lives easier. It allows systems to talk to each other more efficiently. And in particular, the ISO 20022 standard is gaining real traction globally now. There were one or two markets that were leading the way. Now we’re seeing most modernization programs incorporate and adopt this standard. Obviously, being able to flow the standard through the full layer really enables you to reduce the inefficiency and the barriers for participation within each of the layers. So, developing applications using the ISO 20022 message standard that work with an infrastructure that operates on that standard really allows the rich data to be carried into the infrastructure and for all the participants to benefit from that enhanced and increased data-carrying capability
So, I see – I could go on for a long time on this one, but you don’t have to own the infrastructure. Let’s be clear. We’ve never said you must own the infrastructure in order to be successful in this space, and I think that would be foolish to do so. What’s important is that where you can participate across those layers. Commercially, we’re participating in three commercial opportunity layers, and there is synergy between them. So for us, we think it’s an attractive space. And as I said, our capabilities in those three layers are designed to work independently and work together.
So before we go to applications, I’d just like to dig into this point on data monetization, which has been a key part of your services business. You anonymize the data. You anonymize the transactions. But is there any way to help us think about how much additional revenue might you derive from owning the infrastructure where you can then take the data and monetize it through services? Is this prevalent?
So, as I said, every commercial modernization program that we now win around the world includes this capability. So, the way we should think about that is it’s an additional layer, an additional layer of revenue opportunity. Now it’s not priced in the same way as the underlying payment transactions are. So, you have to think slightly differently about how you structure that commercial opportunity. But as you rightly say, Mastercard has developed a very strong services business model and has grown that side of the business aggressively over the last few years. And so a lot of those services are built off the underlying data being transported through the payment systems. In the most case, that was originally card. So, think of it as a catalyst or an accelerator in the assets and skills that Mastercard has built up over the years in the services business applied to the card network can now be applied to the ACH and the real-time payments network, priced differently, but nevertheless very critical in building that overall revenue stack for the business.
Understood. If we turn to applications, what are the – what is the biggest use cases that you’re seeing?
Yes, yes. So the way we think about applications is they drive transactions to the infrastructure. So, I want lots of applications in any market that I am operating or providing infrastructure, and so I’m designing the infrastructure and the bank partners that we work with in markets, we’re designing that infrastructure to be as open and as accessible to participants in the application layer as possible. So, I am both an enabler of the application layer through my infrastructure, but I’m also a participant in the application layer with my own portfolio of applications, and they’re heavily competed. There are hundreds of application providers in any market. Where are we seeing traction?
So, the first types of transactions that we see moving through real-time payment systems tend to be – tend to have a business and a consumer involved in some way, shape or form. So they tend to be one-off payments, bill payments. They tend to be disbursements, payouts, insurance payouts and gig economy and those sorts of things. And we’ve seen traction, not only on the real-time payment system, but also with the Mastercard Send platform, which kind of operates in a very similar use case space using the card rails to drive disbursements and bill payments and gig economy payments and so on. And so by having both, we actually have ubiquitous reach in a given market. We can reach all the Mastercard cardholders, and we can reach all the bank account customers by bringing the two services together.
So, first use cases we tend to see involve some sort of consumer-to-business or business-to-consumer use case. Obviously, there’s P2P as well. P2P tends to be in a real-time payments world, tends to utilize at some sort of an alias or directory that we make available as part of the infrastructure. So, I can use your e-mail address or your mobile number to route your transactions. We see that as being an important component that enables the application play. And we’re seeing P2P grow very strongly all over the world, particularly in Europe, actually, and in markets that have modernized their real-time payments infrastructure.
The next – so – and the bill payments space really allows us to – particularly with recent assets we’ve acquired, the Transactis business in North America, gives us the ability to drive bill payments into the market. Our bill payments exchange product that we launched last year provides a very exciting consumer play on bill payment by delivering a request for payment message, which is essentially a bill to the consumer into their mobile banking app. So we see bill payments either C2B or B2B bill payments, because small businesses have bills to pay, too, we see that as a very attractive set of use cases that we can drive traction through the assets and capabilities that we have today.
The second area I’d talk a little bit about – I think we might talk about it more later is cross-border because wherever there is a domestic use case or P2P or C2B or disbursement, there’s typically a subsection of those in the cross-border. So by ensuring that we can participate deeply in those flows domestically gives us the reach to be able to then participate in those flows internationally. So we have – we work very closely with, for example, Interac in Canada, some of the Canadian banks. We’re working very closely with banks in the Middle East on the cross- border side. We’re expanding the network through the Transfast acquisition that now reaches over 130 countries directly into the payment clearing systems, some of which are those clearing systems that we operate that gives us the opportunity to bring that reach and those capabilities and assets to bear on those flows, so we can participate in both the domestic and the cross-border flows.
Just expanding on that a little bit, the focus on cross-border. You have a lot of assets here. You touched upon the acquisition of Transfast. Collaboration, also you announced recently with R3. Can you talk a little bit about the opportunity kind of with these two assets? How big could this be?
Yes. So the cross-border space, fast-growing space, significant in size of flows. We’ve talked – I forget the number. In this case, I think it’s several hundred billion of flow in the space. The way we think about it is to break the flows again into different transaction sizes. So over 80% of cross-border transactions are below the sort of $100,000 mark in terms of ticket size. So the assets that we have with Transfast are explicitly targeting that sort of ticket size, the up to $100,000 ticket size. And we have an extensive network, and we support or we drive over that network all different types of flows: bill payments, remittances, B2B, et cetera. And the assets we have today are focused almost exclusively on driving transaction growth up to that sort of ticket size.
Now the reason we distinguish in ticket size is the liquidity challenge becomes much more of a challenge when you get into the very large cross-border payments. And again, because we are very focused on enabling our banks, and supporting our bank customer base, we are looking at liquidity optimization solutions. We’re looking for ways in which we can help those banks better manage and optimize the liquidity they have. So with R3, we are working on a real-time to real- time solution using the Corda platform. And what that will allow us to do is to connect our real-time payment systems in markets together to create a real-time, cross-border payment network that optimizes liquidity at either end for the participating banks and their customers.
So, we’ve made real progress with that in the first quarter of this year, and we would expect to be talking about rolling that out towards the back end of this year as a live service on the basis that all of our testing and our bank partners want to go in that way. So that initiative is very much focused on enabling the faster to faster because that plays back to my – if I’ve got faster infrastructure in a market, I can deliver a faster broader application, then again, I’m optimizing my layers. I see the data. I can put the fraud services wrapper around that proposition. We’re also working on a further project to look at – really look at the optimization of liquidity at high transaction values, the B2B payments.
So again, we see the opportunity to support other initiatives Mastercard like our Mastercard Track service, which is very much B2B focused. We know that businesses don’t want their providers to say, yes. I can only support your B2B flow if it happens to be domestic and it happens to be below this transaction type. I mean you’ve ruled yourself out of the game pretty early on. So when we talk about being a provider in this space, we actually want to be a holistic provider, bank oriented. So this is supporting our banks as the primary relationship channels to end customers, and we want to be a holistic provider. So we want to be able to offer all transaction sizes or flows into the market.
How much traction are you getting with Track? I know you just launched it quite recently. But maybe you could talk about the steps to build out Track? Distribution is a key part of that, and it’s very different from the traditional C2B business. How do you build out the distribution and make Track a big business over time?
I mean, you made a very important point, one that I am spending quite a bit of time on within Mastercard to help more broadly educate the organization, but – and some of our customers on the role that the corporate and the treasury bank plays in all these other flows. And so in order to show up with credibility in the market, we need to be able to demonstrate to our customers that we’ve got some experience and we bring that experience and capability to their benefit through the solutions that we’re developing. So I think you’ll see us talk more about how important the corporate bank and the treasury bank is in the future of this expansion into broader payment flows.
So on Track, specifically, we launched a pilot last year which went very well. And off the back of that, we are literally in this quarter, in this month, even launching some of our Track services into the market. How does that work? So it’s a two-sided ecosystem. And really, it’s focused around optimizing the data flow linked to a trade transaction and then being able to offer their payment capability linked to that. And so that requires the build-out of the network. It requires the build-out of suppliers and buyers coming into the network, and we’re working with our banks to bring those supplier and buyers into the network.
So you’ll hear a lot more about that during the course of this year. And certainly, once we see some flow moving between participants, we’ll start to talk more meaningfully about it in the market. We always want the supplier-buyer ecosystem to build quicker, but it is about bringing relationships to the table. And so I think we’ve seen a lot of positive engagement from the banks. It’s definitely something that they have tried to do individually, and in most cases, not being able to do that at the scale that they’ve wanted to do it.
So by working with us, they like the role that we can play, and it’s really trying to extend the role that we play on the consumer side into the B2B side. And I think that’s why they believe we can be successful.
Open Banking is an important emerging trend. It started under the PSD2, Payment Services Directive two Framework in the U.K. Now it’s sort of moving to Continental Europe. Can you talk about Mastercard’s approach to Open Banking? You seem to be taking a very different strategy, certainly from an acquisition standpoint than your primary competitor?
Yes. So if we step back for a minute and look at what is Open Banking, what is PSD2 trying to achieve in Europe, so it is trying, quite fundamentally, to give you and I control of our own data. That’s its objective. Now lots of people have interpreted that objective in many different ways. Initially, the banks all thought this was the regulators trying to further hamstring them or tie one hand behind their back. That is not true. It is trying to introduce greater competition into any given market. That is one of the stated objectives, but the primary objective is about giving you and I and businesses greater control over their own data.
And I think it’s important that we do take as individuals and as businesses accountability for the protection of our own data. We can be tempted to trade experience over security in many different ways, in many different parts of what we do. And I think we have to think very carefully about that. And I think there are participants in this ecosystem who have a responsibility to educate us on the risks that we’re taking.
So that’s the objective, give the consumer and the business greater control over their own data. So if you sort of evolve beyond the intent and the objective, this has required the banks in Europe, anyway, under PSD2 to make available to anyone, anyone that’s authorized or eligible and has been given permission by you or I or another business. They have to provide access to your data that they hold. Now again, the initial reaction from the banks and from the market was this is – isn’t this going to create huge risk, and people are going to be losing their credentials everywhere?
And so there was a little bit of fear initially, I think, about are we somehow requiring banks to create a easy path in for the bad actors to get access to our data. And so the industry in Europe has been through a couple of cycles here now, and it’s now – what I’m really pleased to see is that it’s now starting to recognize where the opportunities are that this brings, and we’re also starting to see this trend grow significantly across the world. So what we’ve seen we’ve seen now happen in Europe is there are some 2,000-plus banks that are up and running with Open Banking APIs which enables access to the data that they hold for you and I in their accounts.
We’ve seen around – I think it’s over 250,300 third-party processes. So these are the fintechs of businesses that on yours or my behalf can go and access the data in the bank. So those players are all registered with what they call competent national authorities, so they have been granted a license to develop services to work with yours and our permission to go get that data. I think we saw somewhere around 100 million calls to those APIs in December, so we’re really seeing some traction building, and that’s growing very fast.
And if you look at the stats in other countries, in South Korea and Australia and so on, we’re really starting to see this ecosystem build. So ultimately, this is regulatory driven in Europe, and so we have to be very conscious of the fact that participants are being forced, required to do things, which actually can be a good stimulus for activity. It isn’t the only one. Here in the one. Here in the U.S., we’re seeing the industry take the first step rather than the regulators, and the industry brings different perspectives as to how they want the ecosystem to evolve.
What we’re very clear about is we have a very strong set of data principles for how we, Mastercard, will manage, participate, protect, et cetera data that belongs to you or I or businesses. We also have some very strong principles around how parties should connect from a technology perspective, and get access to that data, and those principles are guiding us with how we participate in different markets within this Open Banking ecosystem and also drives the types of businesses that we may want to acquire or invest in or indeed just partner with.
So the first set of services that we brought to market are Connect and Protect and Resolve. So Connect enables third parties to connect to banks, so it provides a directory of the banks that are available, what their APIs can provide you with, and if you like, a paved path to those banks. It’s a very simple service, but it’s very important because it provides the trusted highway for those third parties to get to the banks. The second part of the service is Protect. This is for the banks. So connect is really for the third parties. Protect is for the banks. The banks need to know who is trying to connect to them where they are authorized, so each of those third parties has to be authorized or registered with a national competent authority. And somebody needs to tell the bank that they are okay, that they can be trusted and are authorized to connect and to manage consumers’ credentials on their behalf.
And so we see the ecosystem building. We bring trust into that ecosystem, and you’ll see us start to build other services and make available to the ecosystem to sit on top of those rails. The Resolve part, we see – probably we see transactions that may not always work. In the cards world, this is like a chargeback, where the transaction doesn’t happen in the way we want it to. If there’s a problem with the transaction, then you have the concept of a chargeback. We see that very similarly in the Open Banking ecosystem, and so we see transactions that will require some degree of resolution, and that will be the third service that comes out. So exciting ecosystem, one that’s very important for Mastercard to play in.
Great, Paul, thanks so much for being with us here today. We greatly appreciate it. Thanks also to Warren Kneeshaw and Seth Pruss.
Thank you. Thank you.