Mastercard Incorporated (MA) Management Presents at RBC Global Financial Services Conference (Transcript)

Mastercard Incorporated (NYSE:MA) RBC Global Financial Services Conference Call March 9, 2021 12:00 PM ET

Company Participants

Ajay Banga - Executive Chairman

Conference Call Participants

David McKay - RBC Capital Markets

David McKay

Well, good afternoon, everyone and welcome to our keynote fireside chat. I'm David McKay, President and Chief Executive Officer of RBC. And I'm really pleased to be joined today by Ajay Banga, Executive Chairman of MasterCard. Ajay, it's so good to see you. Welcome to our fireside chat.

Ajay Banga

Thank you pleasure to see you as always, Dave.

David McKay

It is great to see you, albeit digitally. We didn't get to see each other around the world fairly frequently. Ajay as I was preparing for today's interview and this first time we've had a chance to do it in this forum, I was just amazed at the last 11 years you've been the CEO of MasterCard, just recently stepping in Chairman and CEO, just recently stepping into the Executive Chairman role. And I looked at your history over those 11 years. From a shareholder perspective, revenues tripled, profits quadrupled, and the share price is up almost fifteen-fold. You must have a bunch of really happy shareholders. It's amazing the stock trading, I think near high is at $375. But what I've seen you lead over the last 11 years is you've really lived multi-stakeholder capitalism before I became a real fanatic in the last two years. And I looked at the transformation that you lead inside MasterCard as a customer of MasterCard, and the innovation, the value creation, thinking about consumers -- as you always described, you're a B2B2C company. And you've even braced that model, you've innovated around that model creating enormous value. So you get the culture, how you let your employees very approachable, how you thought about the innovation quotient and then externally, whether it's helping communities, building a more inclusive society, more diverse society. As you think about supporting communities, you've walked the talk for over a decade now. And I think we're so thrilled to have you here as a true champion of multi-stakeholder capitalism. Welcome.

Ajay Banga

Thank you. Thanks, Dave. It's a pleasure to be with you and you've kind of been a friend as well as a client. And I've watched you and I've watched how you conduct yourself, and I think we're both two have a kind. So I'm delighted to be anytime, anywhere with you, whenever you want me,

David McKay

Oh, that's really kind of -- particularly, coming from such an esteemed leader and I have enjoyed our friendship over the years, to say the least. We've got a lot of questions here. And hopefully we will have time to take a few questions from our online audience. But, Ajay, I'll start where we're starting with so many questions that we get as CEOs, we've come through a year as pandemic almost a year. In New York last year, we had the first signs of it. It's been a difficult year to lead, but so much has happened. How do you feel about where we are and where we're going, given the vaccination rates, the economy you see the world and the economy through a very unique lens and kind of global payments activity. Just kick things off, how do you feel about things?

Ajay Banga

So it's actually a year. I remember, March 12 or 13 is when the U.S. began to shut down last year. And you and I were in Davos in January and this looked like a very long way away. And boy, were we wrong. That happened right then and there. And it's been quite a year. I did right at the beginning of this whole event, firstly when we are announcing my transition and Michael Miebach was becoming the President and CEO elect, all of this happened at the same time. And here I sat down and said, 'That's defined how we going to run the company' so that there's transparency to employees as well as to investors, and we said we'd have four phases that kept playing through as we speak. The first phase was containment and that really was literally the shutdown -- mostly March, parts of April, when really, we were all in free-fall, there was nothing happening offices, cross border, everything was just slamming the brakes on. And then we talked to the next phase, which we thought would come, which was meant to be stabilization, which was like which you thought would come, which has been to be stabilization, which was like -- at the bottom, it's not really stable, this bot, there's nowhere else to go.

And people are still buying groceries and toilet paper but they are not really doing a lot else. And then normalization and 'normalization' because I would say the living through some phase of normalization, but this is not normal. The way you and I talk to each other right now and neither is your daily life in Toronto normal or by New York. Or I went to my office in Miami yesterday and have come back today that is four days from now. I have to do a COVID test again as per New York state rules even though I've had one vaccination. So, nothing is normal, there is no entertainment, there is no cross-border travel. There is no mass entertainment anyway. And so some form of normalization better than stabilization. And then finally grow, which we always said would happen when vaccines and the like would be freely that equitably distributed.

I'd say most countries are currently in normalization. People have moved back and forth. This is not linear. Singapore and Japan, if you remember came out of it very quickly, then slipped back and then come back out the hard way. The U.S. has gone back and forth with our second wave. People are scared of a third wave in Europe, whether it's true or not. So, I think it's not linear, that's the second point. We cannot of run our company for those phases. So if a country is in normalization phase, what does that mean for investing in the following things, not doing the following things? That's the idea of creating the phases. So, consumer spending currently seems to be in decent shape when you talk about domestic spending. Obviously cross-border, it does not exist. Canada and the U.S., one of the biggest cross-border corridors, people driving across, people going back and forth and shopping, that's just gone to zero, right now. That's the cross-border ecommerce that's happening, but there isn't physical spending.

So the consumer appears healthy, savings are up, we are still spending a fair amount -- January was a record month of growth on consumer spending in the U.S., for example, up almost 8% or 9% ex-auto and gas. February then a little slower, March seems to be somewhere in between. I think if you get another stimulus standard checks coming through, you'll probably see a pickup again. That's the back and forth thing that's going on. But all that doesn't make up for what people would have spent on holidays and travel and of course business travel. So the whole, I'd say, there's more savings than you would otherwise have, but there is a reasonably healthy consumer under that despite the K-shaped recovery, despite the digital divide, despite the inequities, despite all things that have happened during COVID; that's kind of the big picture it.

Merchants seem to have done something interesting. They all seem to have figured out how to go omni-channel at least most of them, even the smaller ones. They've been helped by companies like yours and mine, but they've also been helped by governments and NGOs to find a way to do that. This is an interesting sort of segue. At a point of time in New York City at the beginning of the pandemic, as much as 50% to 60% of small businesses have no transaction for up to two months; zero.

David McKay

About 60% [ph]?

Ajay Banga

Flat lined out. That number now it's about odd-20% [ph]. The partnership for New York City, which I used to chair partnership for New York City, said that somewhere around 20% to 25% of New York City small businesses will probably never come back. So you get a process of reinventing or we will call it creative destruction. I think that's a horrible word to use when there are people's lives and livelihoods at stake. But I think that is going on as we speak; so much have since adapted, but not all. Those who are doing okay and of course, government largest in the form of fiscal inputs and Central Bank lodges have done a pretty good job of creating a safety net at the bottom for the economy in so many ways. So that's my take on what's going on.

David McKay

That's fascinating. And maybe just a quick follow-up question. That 20% we talked about a lot, so many are females and women in our society who've been displaced by this. They're attached to service-based industries that require proximity. As you look at past recoveries, you look at this recovery, that 20%, we would expect that to recover fairly quickly in the restaurant sector in the domestic accommodation. What percent do you think will lay in the cross-border tourism accommodation? I know it's off the top of your head. What part of that do you think won't come back?

Ajay Banga

I mean I think travel will continue to improve and start with personal travel rather than B2B corporate travel.

David McKay

Right.

Ajay Banga

Which if you'd ask me at the beginning of the pandemic, I wouldn't have been so sure for which one would recover. I kind of concluded that the risks in the corporate sector, having your employees travel is just not there right now. So I think people don't have the appetite for that. So I think personal travel on the other hand, there is a lot of pent-up demand there. People have been locked up at home, and they don't have a chance to go with families, friends and basically get what they want to do with travel, that will come back quicker. My sense is that the vaccination increasing availability will help to drive that. Obviously that lack of equitably distribution of these vaccines causes some stress on travel destinations, as well as on the challenges in our variance developing in those locations, which by the way, comes back to hurt everybody, even if you've been vaccinated in the past. So I think that's a little bit of a hiccup we got to keep an eye on. But on the whole, I am relatively optimistic on personal travel, recovering it towards the second half of this year. Business travel, more next year than this year.

David McKay

Yes, I think you're right. Business travel will lag. We saw it lag significantly, turn the financial crisis of 2008-2009. Took about four or five years for it to come back and I think we've seen some structural change. I think as soon as one team loses a deal to another team on the customer because they didn't travel and everyone will get back on a plane [ph].

Ajay Banga

You're right.

David McKay

But additive ferocity of our business world will create some of that coming back for sure. I don't know how you feel about that.

Ajay Banga

Pretty much the same. I have said for a long time that the demise of physical offices and the demise of relationships that get built with travel, that demise has been called too early. It's not the case and I think actually in working from office, work to locations where creativity, innovation, culture, absorbing new employees, putting our arms around people, equity quite frankly, ensuring diversity and equity in your promotions, I think a lot of that is going to depend on being back in an environment where we can meet each other. I think with more flexibility in most companies because they have seen that we could manage through the prior year without having the world kind of go under around us. And I think companies will reflect on that and provide some greater flexibility to their employees, which I think is excellent. It's about time, but I do think that we'll be back there. And David, you are, too, correct that [ph] the day I don't show up to you and the deal goes to somebody else or did, which is entirely possible then, I think the next time I will make sure I'm there. So, I think that business travel will come back, sooner rather than later.

David McKay

And vice versa. Absolutely. It's so well said. So why don't we pivot to strategy, the world of payments? You're the infrastructure; you're the B2B2C model, B2B2B model in so many ways. You've kind of redefined the Mastercard strategy. Can we talk about the evolution of payments under your leadership, how you position Mastercard to be well-positioned obviously, as structurally we're seeing payments change, we're seeing new competitors, new platforms -- which we'll talk about next -- but just from a Mastercard perspective, where do you see payments going and how you position the company?

Ajay Banga

So Dave, one of the things that I think we've done reasonably well over the past decade is we have navigated this changing environment with a level of luck and dexterity. Luck, always, dexterity is to make sure you take advantage of your luck. But you need both, as you know. No one is all seeing 10 years ago or where life will be 10 years later. So the profile of our revenue mix adjusted on that adapted, we've done that navigation. So over 10 years back, a very small single-digit proportion of our revenue came from data analytics and the services around that -- AI, cyber security, loyalty -- that space was a relatively small portion of our revenue. It's now in the last quarter close to a third of our revenue. Now, maybe a third exaggerated because cross-border was down to the relative share of business that grew really well in the pandemic, which was this, it's probably over-exaggerated from a normalization phase. But you know, a third is not going back to 30, it will be maybe a couple of percentage points lower and in fact, given the energy Michael's putting into that space, it's probably going to be growing over the next few years as a percentage of our revenue.

Similarly, B2B payments used to be a single-digit lower number of our revenue. It's now in the lower double digits. And I think there's a scope to grow substantially over the next period to come because of the capabilities we are building on -- multi-rail payments and I'll come to that in a minute -- but that's kind of another big phase. And then in our traditional consumer payments space, as you know, we don't make any money whether you use a credit card or a debit card or whether. Bank manages the risk and owns the revenue from that risk arbitrage as they feel most appropriate for their willingness to absorb that risk. But what we have seen is the ratio of debit to credit has changed, debit's become more popular particularly with younger people. We've also seen prepaid, which did not exist for the category really for the effective purpose 10 years ago has now become a fairly substantial category in its own right largely for people at the lower end of the financial spectrum. But also for cross-border travel where people like to lock in their FX costs when they feel that gone. So whether you'd be online, or you pay with Apple Pay, or phone, or card, that doesn't matter. I'm talking about the underlying payment stream. We have seen our revenue mix change quite substantially over this period.

Now going forward, my sense is there are three or four things that will play very strongly in this space. The first one is increasing regulatory and national interest in the entire space and that's mostly caused by the realization among governments that the digitization of payment is an excellent part of improving their own revenue streams, but also increasing the transparency of the economy and increasing the formalization of their economy. And so, almost all governments in some way or the other today, as compared to a decade ago, speak to payments being a national priority and therefore, it gets attention that it did not get a decade ago. Now, with that comes all kinds of vested interest in some cases, people trying to protect local markets; they will, I mean, that's par for the course you get that, but you get the idea that you'll get this aspect.

The second which is pretty strong, is the level of connected devices and the Internet of Things and what's that doing in 5G will only accelerate that trend. But estimates are that the more data created in the last two years than all the years of the Internet, whichever way you counted, there will be 50 billion devices connected and all that stuff that people talk off. The real problem here, Dave, is your phone is relatively secure, but when we are on computer is relatively secure -- relatively. But when you start connecting a refrigerator to your phone, or a music system to your phone, or a blinds to your phone, you're connecting the relatively unsecured devices on different scales of security to what was a relatively secure system. That's creating a whole bunch of new vectors of attack and compromise. And I think therefore both cyber security, as well as the privacy of your data as a human being are coming into play in this entire space. And we'll talk about Simon [ph], I'm sure, so I'll keep some of the commentary for that.

But the third space to me is the new technologies that are emerging. Everything from Instant Payments -- we just won the contract for Payments Canada to provide instant payments to all of you in Canada. It's our software in the U.S. in the Clearing House VocaLink in the UK and P27 [ph] in the Nordics and Saudi, and The Philippines, and Peru, and Argentina. But, 10 years back, Dave, when you and I were bankers as well, who talked about instant payments? ACH, that settlement was what you talked off. With all these idiosyncrasies and challenges and we all learned how to navigate those. But instant payments is coming, it's not going to go away, it's coming; ACH just tended to be unipolar by country. I think more interconnect; country connectivity is also coming on instant payments. And I think that will change over a period of time, the speed and reliability of B2B payments for everybody. And I think that therefore means more players are coming in, because it's not just instant payments, there's all that's going on with cyber currencies, with the Central Bank digital currencies at the one end all the way through -- unsettled state or crypto currencies of all types at the other end.

And so I think this idea of multi-real solutions of choice is going to be very important. What I mean by that is where their consumer sort of Dave, looking on his phone and is scrolling and saying, 'Actually I want to pay my credit card. Or no, I want to pay account to account. Or no, I actually want to pay with my CBDC account, or my DM' or whatever you choose to pay. I think the consumer is going to want more and more being the driving seat of that choice. Merchants are going to want choice of routing depending on what they're looking for B2B payments. If you want factoring or you want credit or you want payments made in advance or whichever gives you the best reconciliation capabilities, all that will determine how you get your payment. And so I think choice underlying all this, reviews to all talk about the consumer at the center. How do you think this technological evolution and revolution is going to definitely put choice at the center of what you and I do over the next decade? So I think those are the broad factors that are playing in mind. A lot of things in fact, David -- you get the idea.

David McKay

No, I know. It's so well-said. I'm going to spend a next hour just pushing on that and then kind of flushing it out. One of the concerns that we have and I'm kind of bridging to the platform effect on payments and the Social Media companies, ecommerce companies is brand. The way we think about brand historically is daily engagement with customers who are used to come into the branch, two or three times a week 50 years ago and then less, but they pulled out their credit card every day and they saw my brand on it and they saw your brand on it every day. You have that brand reinforcement, that value proposition reinforcement. Now increasingly were being entered once into different ecommerce sites, different service sites -- whether they're apps. And our brand isn't coming out as a payment vehicle every day. Do you think about that? The Mastercard brand and how to maintain its presence. I know it's a B2B2C, but you think a lot about that C brand and invest in that C brand. How do you think about it?

Ajay Banga

All the time, Dave. In fact a lot of the technology that we worked on and developed over time has been to make sure of that the consumer knows which institution they have a relationship with -- truly the institution is you, not me because it's you who decides whether they get my branded card or somebody else's card. And I think we as a company have to respect that the consumer came to you for that relationship, not to me. So my definition of where my role has lines drawn around it is that I use your distribution system, or the distribution system of a fintech, or a merchant in a co-brand, or somebody else -- that's my way to market. My way to market is not by myself and that's been part of what's guided us over the last period of time. So therefore making sure that the merchants brand, or your brand, or the fintechs brand, doesn't get lost in the process of making the transaction frictionless and simpler, is the point. Because I think consumers still get faith [ph] from the brand they connect with. While they search for the simplicity of a frictionless transaction, they still want to know. We look at all the research; they want to know that their bank was behind that, all the financial institution were behind that. It matters to them. So all the things we've developed go from there.

And I think banks and fintechs have got to view their role of being a conduit to that experience. So you've got to make sure that the standards we put out there depict your brand as part of that connection to the consumer, as compared to getting lost the back. It doesn't always work. Sometimes a number of the digital players actually believe that having the brands there is suitable for them, too. You could see that with a number of players, others start one way and come another way and so this is a shifting target and I think it all depends on whether you bring value to the players involved. If you do, they will show your brand. If you don't, they will begin to obfuscate [ph] it. So I think our real task here is to work hard to keep showing the value we bring to a transaction and that allows our brand to be valuable at the point of sale, whichever the way have we done.

David McKay

Now, that's such an important point. As our world have evolved and we need to kind of rethink what we mean to a customer. So that allows me to pivot to the next kind of major intersection with payments and the economy and the online versus physical world. And that's the effect the platforms, the social media, ecommerce platforms. As we see these platforms go from their initial incarnation of evolution to an extensive customer value creation strategy. Payments increasingly gets pulled in first and foremost, because the data around what a customer actually does is one of the most important parts of our value creation strategy. So we see a lot of these platforms originating, an advertising platform, or an ecommerce, or a social media platform wanting to create value for our customer, but needing the payments data, needing the understanding of what the customer decides versus intent and we stand here is an industry and partnership starting with what we know exactly what they did, but we didn't know what they start to thinking down here and we're trying to evolve the other way. From a network platform effect you are the orchestrator here. I know partnerships are really important. How do you think about this equation, how it evolves over time?

Ajay Banga

Yes, I think that's a terrific question. Different players in this value chain are playing different roles. For example you as my bank, you don't know what I bought. And you do know that I bought something because I chose to have that relationship with you. You know that I paid X amount and I've paid this much at this time using this instrument of the choices you gave me on that day.

David McKay

Right.

Ajay Banga

But you don't actually know what I bought. The merchant on the other hand knows what I bought and they should because I'm buying it in their reps, whatever. And so I think the important thing here, again, is the value. If somebody in between tries to go past there, judge there, trust with the consumer all the merchant, all the bank and intervening on that data, I think that's actually in appropriate and it's wrong. It should not be what's on our behalf [ph]. Because when you start doing that, trust breaks down and this entire system works on trust, Dave. When consumers stop trusting the players in the ecosystem, that's going to be hard day than it has been. As you've seen a number of stumbles in the tech world have happened that around trust and integrity and that's caused its own image. It happened back in the financial crisis when consumers trust financial institution for a while; you guys have done a great job to rebuild that trust. And so I think there's a lot here to be set for knowing your role and understanding it.

Now, my general sense of the tech players, big or small, is that if they provide great value in reaching consumers that you couldn't reach yourself, then most often you'll be a billing partner. I have no doubt that your institution has partnered with a number of fintechs in so many ways because they either extend your reach or you can give them something they don't have. And I think from balance sheet strength, to sourcing systems, to safety and security, to whatever, an open banking as it's rolling around the world is actually designed for that symbiotic partnership -- if it's rolled out in a fare level playing field kind of way for you. It's not done that way and essentially you as the bank have to provide everything, but you don't get anything in return, or you don't have a choice, and you could end up that, but you end up being responsible for fiduciary safety and security. That's not a level playing field. So I think a level playing field requires give and take from both sides and that's one of the things that we advocate for because to me, that creates a better competitive environment and creates a better long-term solution in the industry. So that's how I view this.

I think there's a role for a number of players. I don't think the power dynamic of how the economics have shared could change as the role played by these different players, waxes and wanes [ph]; I think that's just reality. So if we have with the other someone who's capable of, let's say, managing the transaction in a stronger way, well then they will want to extract some of the value of the transaction from you. And I think that's part of business negotiation as in any other business we do. But that to me is how I think about, it's going to look everybody's going to roll, let's give an example, more tangible example. Take Buy Now Pay Later advent [ph] in the last few years. I would say it's not that installment lending was not known. Banks have been in installment lending business from as long as I can remember.

David McKay

Yes.

Ajay Banga

But the idea of delivering it at the point of sale right then, right there and enabling it to happen on the point of sale for the consumer to make a choice, that's a different environment from say a credit card, revolving credit or a pre-approved installment loan, or a pre-part through loan by a consumer who came to your branch, took it and then went shopping. So a market is where you can do instant decision at the point of sale -- which is not all, but a number of them -- Buy Now Pay Later has really taken off as an alternative way. But banks play that, too, and fintechs play that, too. So I don't see that as a whole new thing. I just see it as a puzzle of who can provide that better. The same with alternative, also with artificial intelligence-enabled ways of underwriting small businesses with consumers. You traditionally rely in the develop on something like a FICO score, or credit bureaus and the truth is that we learned in the last financial crisis, they tend to be more backward-looking scores then forward-looking scores. And so we all looked at trying to find ways to use our decision analytics unit -- whatever that be called in each institution -- to try and find intelligent ways to use AI to underwrite better. This is really important in emerging markets where Mastercard is working with tons of people for micro SMEs and people who don't get credit by underwriting their transaction flow. You grew up as a corporate banker; so what's the best way to underwrite risk in a corporate bank, transactions kick the tires, right?

David McKay

That's right.

Ajay Banga

So I think that kind of thinking AI, BNPL, or B2B payments, where I think there's a lot of scope to improve the efficiency of banking as a service can we look -- what we're doing with Citi and Google in the US, where they're going to offer a bank account, Google, through Citibank, bundled with debit, where instant issuance, debit card, as well, all running on our platform. So long answer to your question, the point I'm trying to make is, I think big tech, small tech, new tech banks are all in this together. The value we all bring to the party will determine how the economics get shared. But if we can reach more consumers in a way that's better for them, then that's actually good for our society. And that's how I think about it.

David McKay

You've pivoted so seamlessly to my next question, but I still want to kind of sum up everything you say, because it's so important. And I know how MasterCard is -- has really done a lot of work here. And that is -- you're right there is going to be a greater opportunity to serve customers. What's changed, as you know, and what you've adjusted to, and we're adjusting to is the moment of truth -- transactional truth, the point of that thing from being -- you know -- since we started MasterCard and the payments businesses in the 60s to largely the last five years, has been in the physical world. And as we move online, as we move into different platform ecosystems, the moment of truth is moving and where the transaction happens, where the customer actually makes the decision for the exchange of value and services. And, therefore, the evolution of payments for us and for MasterCard, new position so successfully is to evolve to be part of that new moment of truth, which could be in someone else's ecosystem or ecosystem that we curated physically over the last 50, 60 years with the credit card, and with a debit card. So that has changed.

And you're right, that dimension and who creates value and who kind of controls a new moment of truth will dictate kind of the squeeze on who gets paid. How much rate? Banks still take credit, banks will still advance to merchants, banks will do a lot of things. We talk about the fact that let's not build the best digital bank in the world to have a plug in to look into our room. And if no matter what the plugs into, we have to make sure we plug into where the -- where the moment of truth is moving to. And that requires partnerships that requires partnering view and the network's always being at the customer moment of truth. So, such an important takeaway for our audience.

Ajay Banga

Dave, I'll add one interesting angle to -- as of everybody in my company over the years. You know, nobody wakes up in the morning trying to make a payment. No consumer does that. And by the way, no, merchant open that store in the morning, dying to interact with you or me, as a bank or network; what they're really doing is trying to do their daily life, the consumer is trying to lead a life. And in that life, the payment is just an instrument of facilitation. And the same for that merchant, it's the way to facilitate their business. So really, what we have to do for the payment is make it safe, simple, smart, and reduce the friction. But if you want to play with a greater role in the value chain, then you have to extend yourself a little bit beyond the payment on all sides of it. So you're more valuable to everyone. I think that's exactly the insight that you were just summing up, which is bring something else to the party -- it's the payment. And I think that's really important, really.

David McKay

So, that -- yes, well said. So pivoting to he started us going down the path of how you're leveraging AI, I was going to ask you because you've done so much work. As you think about some of the new technologies, you just gave an example of leveraging the data and AI to be more predictive on risk going forward for your partners.

Now, how have you thought about where have you invested in new technologies? Where do you think you're taking us? So, AI and blockchain as two examples?

Ajay Banga

Okay. So let me give you two sets of technological investments -- one to make our company operate and connect better to merchants, banks, governments and the like and fintechs; and two, the kind of things that I think would be useful in the marketplace. So, let's just put them into two buckets. I think they're both very important because if you only invest in what's in the marketplace, you don't fix what's inside you. How is that plug going to connect to your point? And you don't have an outlet in your room, doesn't work; so same kind of idea. So for the company itself, we've been putting a lot of money into three places. First, protecting the company's systems. Everything to do with data encryption, and more motion are addressed in the cyber system of our own company, and it's resiliency and reliability and that kind of space, right?

A second big investment has been connected to that is in moving computing power to the edge of the network. And that's because I think in the advent of 5G then, if the days of bringing everything back to some monolithic central place to things to get massage and underwritten with AI and approved and sent back, I don't think that works. And I think 5G requires you to have computing power at the edge of the network. And we have what's called MIPS, and a -- your bank has our MasterCard systems embedded with you, retailers in Canada to residents choice does and so on. And what happens there is that the transaction gets approved, in our case, different from our competitors, 80% of our transactions on the average get approved at that server, because of intelligent logic that we download into it a few times in a day, that this kind of card does these kinds of transactions, it fits for right ahead.

It's very few transactions that don't fit the pattern that will come back into the mother ship, to be massaged, or thrown out for a manual call by somebody in Dave's shop, calling the consumer saying, "Hi, I'm calling from your friendly institution, just checking where you're trying to buy that right now. Or let me text you for a second factor of authentication," or something.

David McKay

Right.

Ajay Banga

That process of seamlessness is facilitated by this moving computing power to the edge also facilitates, by the way COB. So the undersea cable between Taiwan and the US got zapped in an earthquake some time back, I was able to, that time, turn our local servers in Taiwan to approve 100% of transactions locally. We ran a risk on the 10%, 20% that didn't come back or guess what, we were up and running without one issue.

David McKay

So, resiliency?

Ajay Banga

Correct. So any angles to this? This idea of a -- although think of this, like a hybrid cloud, where we are effectively a cloud, as well as operating servers. And we in turn, can use other people's clouds for enabling computing power to go up and down, as compared to only using us. So think of this whole spectrum, hybrid cloud all the way to moving computing power to the edge, as the second big investment that's going on in our company all the time. The third big one is in everything to do with open APIs, so that institutions like yours, and merchants and governments and transit authorities and fintechs can connect with us in forms that are much easier than used to be the old way of hard coding your systems. And they're just such a clunky way of doing business today. So it required us to change a lot of the things we did over the years. And I think we're still in the journey there in some places. But those three, security, edge and hybrid cloud and open APIs, that's Intel.

Outward facing, I think the single biggest investment is going into multi-rail choice. And what I mean by that is guard rail, instant payment rail, or blockchain-enabled rail; I should be able to give your institution a single pipe into me through an open API, so you don't have to build three pipes for three different access points. And then you are in the driver's seat of offering choice to friends.

David McKay

Yes.

Ajay Banga

That you can price for that choice. You can operate the features and benefits of different elements of that choice. So you can build what you want on the railroad. I'll give you the railroad, you build the rail card, you decide if it should have a first-class character, or third-class guides, air conditioning or not free betting, free mail [ph] or not, that's up to you. But I can give you the rail. And so this idea of a multi-rail, true multi-rail system, which enables domestic and cross border payments to happen. You can see that's why we were interested in payments in Canada because it's an essential part of being that for you and your other institutions in Canada; so that's one big investment. Second big investment is in B2B payments. So as you know well, correspondent banking developed for a very good reason. But correspondent banking tends to, over the years, has moved the economics of the system more away from use taking the risks and a lot of things, to the one who has the distribution at the other end into a developing country where these products are coming from. And I think that's inefficient, it takes many weeks for the payment to come through. It's expensive for both parties. Reconciliation is a nightmare of these payments, as you know well in your cash management business.

So we can -- we can help with that. So we are building what we call BPS, which is the business payment system. And the idea is to enable electronic payments and invoice -- a presentation of invoices, a payment optimization engineers using these multi-rails, a pricing engine. And also therefore reconciliation for ISO 222 rails with thicker data feeds and doing that to make B2B a little easier, less challenging. That's one of the reasons why we bought a couple of companies over the last few years that enable us to connect account to account with Central Banks in a number of countries to enable that payment to happen seamless. So that's the second big space of investment. And both of these are connected to open banking, which is another place where they're investing, attaching it to both lease. So the purchase of Felicity [ph], which attempts to big deals with banks and consumers enabled for open banking to be facilitated, for data transfer to be facilitated. That's another space.

And that the next one is everything to do with cyber, and data, and privacy, and the management of that data. And its encryption at motion addressed and the cyber solutions of preventing attacks, identifying threats sort of detecting if they're coming in through the system, and cauterizing them and helping you deal with them as a merchant, or a bank is kind of a big space for us. Then the last one connected to that is digital identity. And there when I -- when I -- if you've got a minute, and I'm not taking up too much of your time in this question.

David McKay

I got all day.

Ajay Banga

Okay, so...

David McKay

We have all the time. We have tons of time, we got 20 minutes.

Ajay Banga

I think you and I talked a little bit about this during one of our prior conversations, maybe a year or so ago. But the idea is that today, if you buy a case of wine, and it's delivered to your house, along with somebody from one of the courier companies, FedEx or UPS, they come, they ask you for proof that you are above the legal age, that you are who you say, and if you are standing right there, so nobody can accuse them of having delivered it to your son who's under age or whatever. So what do you do, you pull out a driving license or some proof of ID, the guy takes a photograph. Now, your photograph, which is in your driving license, your exact date of birth, which he didn't need to know, your full name, which he didn't need to know, obviously, your address because you're there, but maybe even your driving license number, or in some countries, your National Security Number is on that document; that's enough to open a bank account.

That to me is weird [ph], it's got to stop. And the way to do this in a better way is to allow you as the consumer to say, hey, trusted provider, it could be a conglomerate of banks, people like us, cell phone companies, like we're doing in Australia, saying, "Just please tell FedEx that I'm above the age of 21. And I am who I came to me and I am standing here." So, we would go to all these individual providers, bring back a pictogram-protected. Yes, new answer [ph], also unlock those pictograms and give the answer of FedEx saying, "Go ahead." I think that gives citizens back their privacy. And I think this idea of universal digital identity that's designed for privacy is another big investment that we're trying to do. So lots of stuff going on.

Michael's [ph] got a few important things to get done. And the good news is it's not his problem. Yes.

David McKay

Yes, you -- there's so many themes there. This I do want to kind of recap. So you're positioning the firm to compute and to be ready at the periphery of this explosion in device connectivity. This -- just prove if you got 50 billion devices connecting, there'll be economic activity and payments occurring at the fringe, that's expand -- expanding so you've got to prepare in a computing resilience perspective to do that. You've got a cyber-wrap that which I'll go to next. You've got the core B2B capabilities that you're doing. And as a whole concept, you're absolutely right of -- I call it aliasing because that's what we've seen so -- inside whilst at alias that information and allow us refractions of -- proceed seamlessly without divulging too much information authentication and ID management to your point has to pursue an aliasing. And who better to do that than the networks and trusted providers through APIs.

So it's a -- it's an amazing kind of how you're seeing the world and how it's going to change and how we're all going to have to change so that -- that's exciting. How do you cyber protect this? Because if there's one conversation that I've had with every bank CEO today and through the last years but even this morning, we all started with how do you see the pandemic? They went to cyber. The risks are closing in and you have to read the newspaper this week, last week. Solar winds, this is becoming an nation to nation issue not just an ecommerce. How do we have to work with our regulators, with our governments, with society to stop this progression?

Ajay Banga

Yes, I had the privilege of serving on President Obama's cyber commission the last six months have a second term, with an effort to produce a set of recommendations that could be implemented, irrespective of who came into power. And a number of them have got implemented, others have not. And they're saying that. But if you look at the idea behind it, it recognized some years ago now that this explosion of connected devices, combined with a relatively ill-informed consumer, combined with a large number of small businesses, providing the interface of commerce, who are unable to think in terms of how to protect themselves. Or from a small business, the proprietor is everything. A guy or the lady is CFO, Treasurer, buyer merchandiser, beggar, seller, everything, right? And where's the time to then worry about all this? So, when you go to your dentist and you fill up that form, and you put all that stuff to the dentist, receptionist, it has your Social Security number in the US, what you're allergic to all kinds of stuff about your history, there's no way that's safe. Yet, we all fill it up.

David McKay

Right.

Ajay Banga

And so I think there's this combination of explosion of devices, relatively uninformed consumer, and the role of SMEs and their importance, which is creating too many vectors of attack in the system. And that's -- and then we've been complicated by the password generation. So I mean you probably have to tricky passwords here. So guess what? You're not going to do it all, you write it down on a sticky and put it behind your computer, which is the worst thing, but lots of people do that. Or even worse, you'll make your password, they have capital D and then McKay capital M, hashtag one. And the next one will be hashtag two. By the way, your kid can break into that. Or as you know, in the US, the...

David McKay

I have to say...

Ajay Banga

Or the single most popular password in the U.S. is password. That's not very safe. And I don't blame consumers. We make it difficult. [Indiscernible] change in every 30 days. How's the guy going to remember? So then you have password keepers. And then people don't trust that and there's this whole thing. So, I think there's a series -- the way this industry has evolved, which is not designed for the ubiquity of connected devices.

And for the convenience that consumers want, and for the convenience that merchants want. And the idea is to reduce friction, and increase trip throughput, all that leads to stress in the system. Social media makes it more complicated, because as you know, well, if you call a bank and say you forgotten your password, they'll ask you four or five questions. If those questions are things that you put on your social media feed, or your mother fed on to your dog, your alma mater, the books name, and so on, why you're dead. So there's a lot going on here that we have to be thoughtful about in the coming ages. And I think both protecting your enterprise with what we call starting from threat scanning, which is the ability to be able to see how your website and your inward systems are open to threat. We can actually -- people like us can help, others can help too, all the way to designing layers of security, which you do as an institution, and having ways of checking those, all the way to, to the session intelligence tools that we have, which allow you to look at patterns of behavior and patterns of attack and look at those. All these identification systems from the digital identity to 3DS2 [ph] that we've deployed for consumers. All these tools are really important. And I think the challenge is how do you do it in a safe, simple way? So there were three recommendations or four that go beyond your institution in mind that I think we really need to be talking about as people.

One, greater cooperation between government and the private sector in the space because the TED actors tend to be nation states, more than just common criminals; those we can try and fight, it's the nation states, that are hard for guys like us. And so, closer collaboration that allows that collaboration to happen in a legal way is going to be really important, and there is a series of things we could go into on that but that's a topic for another day. Second, is the idea of putting together all these connected devices; how does a consumer know that this television is safer than that television even though this one is actually cheaper than that? You have to be a geek to read, or a nerd to read all that stuff and figure it out, and even many won't. So can we create the equivalent of food nutrition label, you know, X-percentage of your cholesterol, Y-percentage of your vitamin; can we create or an ABCD stamp on that TV certified A+ or A- through cyber [ph]. And then you as a consumer can say, hey, you know $1,000 for this one, $950 for that one; I think it's worth the $50. So that's kind of another space. And then the third space is getting out of the password generation, we really need to move on from this to other forms of authentication; digital identity, biometrics, that kind of stuff while protecting citizens' privacy. And then finally, I think the idea of educating people early; so we don't really have cyber education for kids, especially getting cyber educated in kindergarten because they're using devices in kindergarten. And the habits they are building in the next five, six years will be very difficult to break on how they think about their ecosystem, and their privacy, and as safe case.

So, under the whole series of things and beyond, what institutions like you and I can do on preventing, identifying, detecting and making it seamless; there is other stuff that needs to happen.

David McKay

But it's so important. Again, I call it the Bionic future; we're going to build technologies, use AI to defend the perimeters, at the same time behavior is our most vulnerable aspect. You referenced passwords, and as we do cyber phishing testing, we -- we have red teams and blue teams that are defending/attacking, seeing we're vulnerable we're trying to train our employees not to respond to emails or instructions, and then, even here in Canada recently we've seen federal and provincial levels at government take out general advertising campaigns anti-phishing campaigns to say, you know you're getting phished, this is a criminal, there is no way someone is giving you $12 billion. Yet we have citizens in our society that believe there is $12 billion; we can't account for them if they hand over $200. So, it's -- we have to get the literacy -- the cyber financial literacy of our community up or else will -- both avenues are so important. I mean this is -- this is the very fabric infrastructure for our society, our democracy, our economy that is at-risk right now. And you're right, businesses and governments have to work together. I'm running out of time but I do want to…

Ajay Banga

Get around the trade-off between security and privacy, that's not [indiscernible]; as a citizen, you deserve both.

David McKay

Yes, so important. I'm going to try to hit a couple of more topics. We have a few minutes left. Crypto; digital currency, we all get asked the CEOs, am I launching an RBC digital currency, Central Banks launching digital currencies, is MasterCard launching a digital currency? Quickly, how do you see the future of digital currency?

Ajay Banga

So, I -- you know, I think of digital currencies as one use of the blockchain, and I think of them as being all the way from the bitcoin type of digital currency, which has a series of interesting problems with it as a currency, forget about an asset class, but volatility, the lack of transparency for KYC-AML, the kind of protection for consumers that you need in a payment system; there are some challenges there. All the way to Central Bank digital currencies at the other end, which now a number of countries are thinking through, or in the case of China have already been experimenting with Canada, Sweden, the UK, Singapore, or a number of countries that are thinking of how to play with this. I think in between stable coins of different types which take away the volatility, but they don't all deal with the transparency or the data privacy angles of citizens with equal transparency. And I think if you move therefore a sliding scale, my own take is that CBDCs have probably got some life coming their way over the next few years; this is not something will happen tomorrow, but I think it will, and engaging with them and creating which we've done, we've launched a Sandbox for Central Banks and commercial banks to connect on how to work on CBDCs together.

I generally believe that some form of two-tier payment system where commercial banks have a role to play, the Central Bank puts a digital currency into it, and the commercial bank provides the connectivity for the business from the consumer, some such thing is probably going to come over the next period of time. And figuring that out and putting it into the choice segment of multi-rail is going to be quite important. I suspect stable coins will also attempt to play there, and the question will be; how will they get accepted by the citizenry and the governments depending on their feature functionality, and how many of these safeguards they build in or they don't build in. And that's kind of where I am. I -- I am -- we as a company, there we hold among the largest patents in this spaces of blockchain through CBDCs, both actual patents granted and patent supplied for, because I believe that you ignored this at your parent [ph].

David McKay

Interesting. That's a powerful statement because you're right, you have to view Bitcoin as an asset class now but the underlying technology, and the need for various digital clearing capabilities and liquidity in different formats, and this whole world moving to the fringe [ph], right, and the safety of connected devices; does it require different solutions, and you're saying absolutely, and you're well prepared for it through your recent development [ph].

Ajay Banga

We're trying to be. Having said that, and adoptions -- we've got a whole bunch of other users which I think are actually very interesting, proof of provenance; you know, it's really interesting. I think change of ownership where you can figure out how to solve for the legal rights of the transfer and dispute settlement defect comes up, right, and so on and so forth. So there is lots of things that have to evolve in the ecosystem for this has become more ubiquitous. But I don't think that movement will not happen, I think it will happen, and I think institutions like us that understand these rules should participate in the creation of the next round of rules around these spaces.

David McKay

It's such an important point because some of the flaws in the current kind of crypto environment; you know, lack of recovery, if you lose the keys to the asset. When we think about a Bitcoin ETF, the first question, who is going to be custodian of the underlying asset? And if so what happens if you lose the key, the asset is gone.

Ajay Banga

Yes.

David McKay

So there is no recovery. So, do you place that with a third-party custodian who has got $50 million in capital or do you even want to take on that risk yourself if whatever a cyber-breach or if an operational error, and there is no recovery later as an equity asset or obviously offset fixed-income assets. So, the [Technical Difficulty] working through solutions and their problems?

Ajay Banga

But you wouldn't thought of that right at the beginning when the product was being launched because you're trimmed in your business to think through that angle; and I think that's the role we can help play, which is to enable what looks like a very interesting technology. Find a way to the market that has all the right safeguards, but also the right enablers to make it -- make a difference for consumers. So I think there is something there, the question is can we do it the right way without stifling innovation.

David McKay

Can I ask you one more question, we're almost out of time, and I guess some more questions. But I'm going to pivot to my last question; out of 11 years as Chairman and CEO of MasterCard, very successful career with Citibank, and I think that's the code [ph] before that for many years, and -- but when you think of leadership and you've learned so much, and I've read about a lot of your ideas, can you talk about kind of some of the big things you've learned about leading others, whether it's through a pandemic and a challenge or how do leaders, CEOs prepare for this future? What have you learned? I've heard you talk about managing expectations of markets through short term-ism versus long term-ism, I want to touch on how do you motivate individuals? How you connect with your staff? How do you manage personal time? And there is always-on world that we're on, so if you could leave us with a few messages on what you've learned with this amazing journey you've been on as CEO?

Ajay Banga

Oh boy! I'll tell you what I've done mistakes along the way, plenty. So the first one I've learned is humility, because you know, we both make mistakes. I'm sure you've done a few in these two and a half, three months, let alone the prior years. But you are very successful CEO with an enviable track record as a banker, right; but you've made your mistakes and so humility to recognize them and move on from them and learn from them is kind of it, and that is luck. So I'd say that's why luck is so important. Luck is 50% of your success. The question is, do you grab the luck when it's going by or do you let it go by?

Two, there is a good chance to make something off it, and that requires you to have one of the three traits I tell all our managers to have. First trait is the ability to have thoughtful risk-taking inside your system, because there is no perfect information; and risk-reward arbitrage is the only way to make money in anything we all do and -- but if you don't listen and understand the thoughtfulness behind those risks, well you're going to be on the wrong side more often than not. And so that connects to the second one, which is a sense of urgency, because the system is moving pretty fast around us and if you keep waiting for perfect information; first of all, you are not taking any thoughtful risk, but secondly, you will be left behind, that Luck will pass you by. And so the ability to listen while also making a call with a sense of urgency, that's what I describe to everybody as god gave you two ears, two eyes, and one mouth for a really good reason. It's kind of a nice ratio there and you should apply that ratio in your life.

And then the third angle to this is empowering people, closest to the customer; but then they should be willing to be accountable. There is no free ride; you want to be empowered then stand up to be accounted. And I think that's really an important aspect of who you are as a person. And so, if you're a leader of people, you won't be empowered to manage your people, than standup and be counted in treating them well, and making them successful. And so -- that connects to bringing your heart and your mind to work, and that's why I talk about decency quotient, when I was young IQ was everything and then at business school we started talking about EQ; and I'm saying bring your decency quotient to work so that people follow you, and they feel your hand on their back and not their face, they feel the pleasure of your company. You know, like -- I don't want to say that differently, it's who you have to be, you're going to manage by touching, feeling and walking around; and COVID is very challenging in all that, very.

So my view of this kind of leadership has all to do with being part of a system with people, with humility, with luck, with this risk taking and listening, and urgency, and the degree of empowerment.

And the final two pieces are; it's very attractive to -- if you lose your humility to start giving short-term sound bites [ph]. And the truth is, nobody will remember your sound bite when you're gone, it just won't matter; what they will remember is the net result of what you did. And so you should think beyond the sound bite with a longer term implications of the foundation you are building, and that's all that matters finally. And so that matters to me enormously, and I'm kind of devoted to that in every which way I can, I have a Sikh [ph] -- and I was telling someone the other day; in the Sikh religion -- Sikh have one of the most important sayings, is that you -- you reward yourself by serving others. And that's a very deep thought but if you kind of keep it in you and you imbibe it, then all these other points become that much easier to embrace and a live with.

And the last point on managing personal time; I know what you've listened through, that's the example of me saying that I don't take my phone with me when I go out for dinner with family and friends, that is actually correct. So, I don't actually carry my phone; when I'm out with family and friends, I leave it behind because I don't -- I'm not tempted to touch it and I've always been like that. And even when I'm on holiday, my wife likes to watch my phone into the safe deposit box of the hotel rooms, and keeps the code; and I get the phone early in the morning before the kids are up, and then in the afternoon nobody gives a damn for me, they're all kind of relaxing somewhere. And during those two buzz [ph], you are getting lots of emails for me, and then I go silent; that's kind of my way of finding a balance between life in non-office life.

David McKay

I can probe each one of these themes with your -- because I know you live all of these humility, listening, urgency, empowerment, decency, and what more and more as we go into this pandemic, and our employees, our clients are isolated; this moral fiber, this decency that's being there as a support network for your employees who are struggling is so important. You know, as I think in the last hour and 10 minutes; I think you just showed everyone how a CEO raises revenue by three times, profits by four times, stock up 15 times, brings our community with them, brings our employees with them, through the -- the vision, the attention to detail carrying the leadership, this has been a wonderful hour with you. Thank you so much. I just love listening to you, and you've left us so many thoughts from payments to cyber, to crypto, to the pandemic, to pay [ph], to individual leadership lessons. Thank you, a sincere thank you from all of us.

Ajay Banga

Thank you, Dave. Thank you for what you're doing, and thank you for the example you've set for so many of us over the years. And just keep going, keep doing it.

David McKay

Let's keep doing it, exactly. Look forward to seeing you soon.

Ajay Banga

Thank you. Bye.

David McKay

You're welcome.

Question-and-Answer Session

End of Q&A