Mastercard, Inc. (NYSE:MA) UBS 2023 FinTech Leaders Conference September 14, 2023 8:20 AM ET
Company Participants
Sachin Mehra – Chief Financial Officer
Conference Call Participants
Rayna Kumar – UBS
Rayna Kumar
Alright. Let’s get started. Good morning, everyone. I’m Rayna Kumar, and I lead U.S. payment processors and IT services equity research at UBS. Today, it is my pleasure to introduce our keynote speaker, Mastercard Chief Financial Officer, Sachin Mehra. Sachin thanks for being here today.
Sachin Mehra
Well, good morning, everyone. And, Rayna, thanks for having me. Happy to be here.
Question-and-Answer Session
Q – Rayna Kumar
Maybe if you can just start up telling us a little bit about what you’re seeing out there from a consumer spending perspective at Mastercard?
Sachin Mehra
Sure. I’m happy to do so. So, look, I mean, what we see from a consumer standpoint is that the consumer continues to be resilient. They continue to be spending on travel. They continue to be spending on experiences, even as we look at the data through the end of August. Candidly, the way we kind of think about this is, what’s the shape of the economy broadly speaking? What are we seeing from a labor market standpoint? And we all know that the labor market continues to be strong. We are seeing strong wage growth to take place. Yes, inflation is at higher levels, although it is moderating. So overall, as we see the consumer, the consumer continues to be resilient. As we mentioned in our second quarter earnings call, what we are seeing is with some level of moderation in inflation, that there is a little bit of moderation which is taking place in domestic spending in select markets. But overall, if I kind of step back and think about the health of the consumer, still very resilient.
When you think about what’s going on from a cross-border standpoint, cross-border continues to be strong. In the second quarter, we saw cross-border travel indexing at north of a 150% of our 2019 levels. And then when I think about cross-border non-travel, as most of you know, cross-border non-travel had actually seen a very nice uplift take place during the COVID years. That continues to be the case. So again, very healthy levels from a cross-border standpoint. We continue to see some level of potential in terms of recovery in cross-border, particularly in Asia Pacific, more specifically in China, both inbound and outbound China. But broadly speaking, that’s where we are from a macro standpoint.
Rayna Kumar
We have seen a lot of movement in FX lately, especially with the U.S. dollar strengthening. How do you view that impacts the guidance that you have given?
Sachin Mehra
Look, it’s interesting. I mean, I think all of you know the way FX impacts our business. We are a global business. We’ve got a presence in the U.S. We have got a huge presence overseas. And, at the time of the second quarter earnings call, I kind of shared with you what our expectations for FX were for both net revenue and operating expenses for the third quarter. Since then, the dollar has strengthened. I had shared at the time of the second quarter earnings call that for Q3, we thought that FX would be approximately a 3 ppt tailwind to net revenue. We now see that being approximately a 2 ppt tailwind, because of the dollar strengthening which has taken place. And then from an OpEx standpoint, we had shared that we saw our OpEx be impacted from a headwind standpoint, from FX, about 1 to 2 ppt. We now see that about 1 to 1.5 ppt of a headwind from an FX standpoint.
Again, the FX markets will move around. We do our best estimates in terms of what we think the impact for a given quarter will be. This is what we have seen thus far.
Rayna Kumar
Got it. Very helpful. You noted a number of wins over the last few quarters. Could you share some details on those wins, and help us to understand what enabled Mastercard to be successful? And then maybe if you can talk a little bit about the financial impact of these new wins? And are you finding the environment more competitive than it used to be?
Sachin Mehra
Sure. First, I got to say I am incredibly pleased with the level of success we are having with our client base, as it relates to the wins in the market. As you know, we are out there. We are competing in a market which is competitive and has always been competitive. We are thrilled with the level of responsiveness we’re getting from our clients. When we step back and we think about why we’re winning, it all starts and stops with are we meeting our clients’ needs? And that’s kind of the first, second and third order of business to meet our clients’ needs. This is not about what we want to do. It’s what we can do to actually accelerate the growth of our clients, because if they win, we win. And really, we have adopted what we call a solution selling approach to get after that.
So said differently, our approach to winning with our clients is to go in and understand what we can do to drive their top-line growth and manage their expense base. And to drive their top-line growth, what we are doing is we are leveraging a set of capabilities that we have been investing in as a company for some time now, and they range from everything we’ve done, nature of investments around digital capabilities, so the digital innovation we are doing, the tokenization efforts we’ve been kind of putting into place, to the investments we’ve made in our services capabilities, to the investments we’re making in new networks and our multi-rail strategy.
So when I think about the package, not every client needs everything. But then when you go and understand what a client needs and you start to actually tailor solutions to meet their needs to drive their top-line, you tend to garner a level of endurement, which is different than if you just went into a client and talked about, look, I want your switching business, because at the end of the day, that’s what serves our purpose.
And candidly, from a client standpoint, for them to move from a competing network to Mastercard is a zero sum game if they can’t really drive accretion in their top-line as part of that process. So everything we can do with our solutions, whether it’s services, our multi-rail strategy, our new networks, our digital capabilities to drive their top-line growth is what’s helping us win. And we have invested very heavily in capabilities which are actually paying out pretty nicely. And this is true not only for driving their top-line, it’s also true for managing their expense base.
So for example, if you really step back and you think about the cost structure of our clients, yes they pay switching fees to Mastercard, they do have a significant cost element, which comes from the cost of fraud. The fact that we have invested heavily in our fraud capabilities and then we continue to invest in that space to help minimize their fraud levels, goes a long way in terms of helping win with our clients. And you kind of talked about the wins we’ve had, I’ll just share a few which we’ve kind of recently announced.
So in the U.S., we’ve had wins with Citizens Bank and Fiserv just to name a couple where Citizens is now going to be a Mastercard exclusive customer across all products, which we are incredibly pleased with that. We believe that the meeting of the minds between Citizens as a customer and Mastercard in terms of what they need and how our objectives and how our capabilities aligns with them was a critical factor in getting us to be the compelling kind of company or partner of choice for Citizens.
And then I step over to Europe and I think about the wins we’ve had there. We announced the win with UniCredit, which is we’re going to get — we had an existing relationship with them. We have now an expanded relationship with them. It is basically a multi-market, single card approach, which we’re going to be taking. 13 banks are in the UniCredit family involved across 12 countries in Europe. 20 million cards migrating over to Mastercard will be part of the Mastercard portfolio. So that’s pretty unique and sizable. And then when I kind of go into the UK, I think about the wins we’ve had around NatWest where we’ve converted 16 million debit cards off NatWest over to Mastercard. When you combine that with the wins we had with Santander and First Direct, that’s a total of 27 million debit cards, which have translation over to Mastercard.
So anyway, these are just a few examples I could go on and I am not going to kind of give you the laundry list of the wins we’ve had. The reality is the reason we’re winning is because we are working with our customers to understand what their needs are. We have existing solutions to meet those needs, and when we don’t have them, we make investments to actually figure out where we want to go next in order to continue to drive that growth.
Rayna Kumar
Anything you could say on timing of Citizens and UniCredit?
Sachin Mehra
Look, they’re going to play themselves out over a period of time. You don’t — you shouldn’t expect anything in the nature of big bang approaches. These things will play out over multiple quarters. We want to do it right because the idea here is to do it in a manner where you’re driving minimal disruption to the consumer who our customers work with. And that’s kind of part of that. So we’ll work very closely with them as part of the process there.
Rayna Kumar
Understood. Can you talk about the runway that remains in the person to merchant payment space, particularly after the pandemic?
Sachin Mehra
Yes. Look, I mean, we — first of all, I think you all know that there’s been a decent amount of secular shift, which is the conversion from cash to electronic forms of payment, which took place during the pandemic. We continue to believe that not only is there room to grow further in terms of that conversion from cash to electronic forms of payment in in-person to merchant payments in the near-term, but we believe that’s a long-term opportunity which continues to exist. It exists in both developed and lesser developed markets. And very often, the focus has been around what is the volume as in the dollar volume of spend which still remains to be converted. And I think that’s an important metric where we see a decent long-term runway. But we need to keep in mind also that there is another element, which is the number of transactions that have migrated from cash to electronic forms of payment.
As most of you know, our revenue model is, we make basis points on the volume, and we make cents per transaction. The amount of transactions that are converted from cash to electronic forms of payment is actually significantly less than the volume which is converted over. And the reason is the higher ticket stuff is converted first. The lower ticket stuff is actually yet remaining to be converted. We remain very focused on targeting not only the volume opportunity, but also the transaction opportunity. In addition to that, what you have observed is over the last few years, there’s been a shift in the way business models are developed and consumers are spending.
Let me give you an example. So historically when my daughter would go to buy lunch, she would go to wherever in Manhattan she wants to go and buy lunch, she would pay with her credit or debit card, and that would be $10 for a salad, if I’m lucky. I wish. $10 for a salad and one transaction.
Now you will see that same transaction take this as follows: She will get on Uber Eats, she will order that same salad. There will be a transaction which will take place between what my daughter spends on with Uber Eats. That will be a card based transaction. There will be a transaction which will take place between Uber Eats and the restaurant where she purchases her goods. That’s the second transaction which never took place in the old environment. And then there will be a transaction which will take place where Mastercard Send will be used for paying Uber for this — and the Uber delivery person for what they’re doing in the nature of delivery.
So what’s happened is with the shifting of business models and consumer behavior, what used to be a single transaction has now become three transactions, and in some instances, greater amounts of volume as well, depending on what the case might be. So we believe that secular opportunity exists on volumes, exists on transactions, and we’re going right after it. So that’s the what which exists in the nature of the opportunity and then there’s the how we’re going after it. The how we’re going after it is by investing heavily in contactless. We believe contactless is a great way to go out and go after small ticket spend. And that’s what we’re doing. At our last earnings call we had shared with you that approximately 60% of all in-person switch purchase transactions are now contactless transactions. The good news is it’s 60%, which is higher than it was in the prior quarter. The even better news users, there still remains 40% of opportunity to go after in terms of how we can go after contactless to tap into that smaller ticket opportunity. So that’s one example.
We are going after Tap on Phone to increase the acceptance footprint. So there is lots of things which we are doing, because we believe very deeply in the secular opportunity, both from a volume standpoint and a transaction standpoint.
Rayna Kumar
That’s a great example. Let me know where she gets the $10 salad.
Sachin Mehra
I will. I will.
Rayna Kumar
So prior to your role as Chief Financial Officer, you led — it was a commercial business at Mastercard. Can you share some progress that you have been making in addressing commercial?
Sachin Mehra
Yes. So you look — we believe commercial is a — and it’s near and dear to my heart for the reasons you said. I mean, I spent a decent part of my career at Mastercard running commercial products. We think it’s a sizable opportunity. It’s an underappreciated opportunity, and it’s an underdeveloped opportunity from a overall potential standpoint, which is the reason we have been investing heavily in it. So let’s kind of peel back the onion as to what exactly this commercial opportunity is and where it lies, right? The underlying growth algorithm for commercial is actually not meaningfully different than it is for P2M payments, which is there is baseline spend, which takes place just like this PCE spend, which takes place in P2M payments. In commercial, there is the equivalent of what happens from a GDP standpoint, right? The spend businesses do, which takes place.
The secular opportunity we talk about in P2M exists in spades in commercial, because cards have been very minimally used to actually tap into that commercial opportunity. If you look at the potentials for converting cash and check, in commercial spend to card based forms of payment, it is meaningfully higher than anything which we have ever experienced on P2M payments. So the question really is, how are we going after this? And first, let’s define what sits in commercial. There is spend which small business owners do. There is spend which takes place in your T&E corporate card propositions. There is Fleet Card spend. There is Purchasing Card spend. This all kind of is encompassed in what we call commercial point of well. And then there is virtual cards, which is going after the accounts payable flows, that kind of sizes up what the commercial opportunity is.
Just to level set for you as to what the size and magnitude of this is for Mastercard? In 2022, commercial, Mastercard branded commercial credit and debit represented approximately 13% of Mastercard’s total GDV. And it grew at approximately 24% on a local currency basis. So it’s an important part of our business. It’s a fast growing part of our business, and we are going after it, leveraging our card rails. So this is not about creating new mouse traps. This is about taking your card rails along with complementary proprietary systems, which are fit-for-purpose for going after the use cases in question.
I’m going to spend just two minutes talking about what that is, right? When you think about SMEs, in the SME space, every small business owner needs a debit or a credit card proposition to enable their business. But they not only need that debit or credit card proposition, they need that debit or credit card proposition with the likes of what we provide them. For example, they need an expense reporting capability to manage the expenses of their small business. Mastercard has something called our Smart Data platform, which does exactly that. We have invested in this for more than a decade. We have built it to meet the needs of what our small business owners need. And we bring that together with a card proposition to kind of go after that opportunity. That’s just one example.
The other one would be our Easy Savings platform, which is a merchant funded loyalty platform. So I am a small business owner, I have a Mastercard debit or credit card, I’m signed up for Easy Savings, when I travel and I want to get to — I get to a different city and I want to do a rental car, Mastercard has got those rental car companies engaged in our Easy Savings platform to have an always-on offer made available to that small business owner. So you might say, well, how is that unique? How does that differ? Well, that is exactly what it is. You are meeting the needs of the small business owner to have them incentivized to use that card product. So we go after that in that manner. So that’s just a couple of examples just to give you a flavor for how we’re going after it.
On the virtual cloud side, I would say, look, we are market leaders in that space. We love the growth we’re seeing there. We’ve invested heavily in our InControl platform. Our InControl platform is our virtual card platform, which enables us to tap into and meet the pain points, which are there in the accounts payable space. And the pain points are around process efficiency. It’s around availability of data to reconcile payments with the invoices which are being paid. It’s around providing working capital. All three of which a virtual card proposition does. We recently announced the launch of a product called Mastercard Receivables Manager. What Mastercard’s Receivables Manager does is it basically combines and brings through straight-through processing, which deals with the process efficiency pain point. It deals with providing enhanced data to the receiver of the money to allow them to do better reconciliation of invoices. And the virtual card proposition, by its very definition, provides working capital.
So when you bring the package together, you’re taking away reasons for people not to actually convert away from check and in many instances ACH to come into the virtual card side of the business, which is why we’re seeing the growth we are seeing in that space. And then we continue to partner with ecosystem partners such as the likes of Coupa and SAP Taulia and most recently GEP we announced, all of which we’re embedding our virtual card technology into to allow for greater and faster growth in that space. So look, I continue to be very encouraged by not only what the potential is, but how we are going after that potential from a commercial standpoint.
Rayna Kumar
Got it. Just moving on to services, it’s obviously been a great area of growth from Mastercard. Can you share some of the key components of the services business and how you choose the areas you’re invested in and your competitor often speaks about how they have an advantage in the services business? Would love to hear what you think you do better?
Sachin Mehra
Look, I mean with all due respect, I’m going to let the competitors speak about what they do on services rather than me actually going to the back and forth on that. I’m going to talk about what we do from a services standpoint and what our definition for services. Our services portfolio primarily consists of our — what we call our CNI capabilities, which are our cyber and intelligence or fraud management tools. It consists of our data and services capabilities, which is data insights and analytics, our loyalty platform, our marketing services, and our payment consulting capabilities.
We’ve got processing assets. We’ve got gateway assets, that’s part of it. But the lion’s share of what we generate in the nature of revenue and growth comes from our fraud management capabilities, CNI and our data insights and analytics, consulting, marketing services and loyalty, which is our DNS capabilities. So that’s just the definition of what services for Mastercard. It is a fast growing part of our business. We have invested in this part of the business for a few reasons. There are actually four reasons.
One, it grows at a fast clip in terms of revenue contribution. Number two, it helps us diversify our revenue stream. And we saw this in space during COVID, when payment revenues came down, because of all the impacts of COVID, services held up pretty nicely, right? Number three, it’s a great source of talent. The people we’re able to hire in our services capabilities are a fantastic entry point to bring really good talent into the company who then migrates into other parts of our business. And last but not the least, it really helps us differentiate what we do on the payment side and what we do on the new network side.
It goes back to the question, Rayna, you were asking earlier about why we win. Well, one of the reasons we win is because of what we’ve got in the nature of our services capabilities. That’s the differentiation point I’m talking about, which is your ability to actually truly call yourself apart with your customer, with what you’re able to provide them in the nature of data insights and analytics and/or fraud tools helps us differentiate and win at the core. And we think these are very integrally tight.
And look the way we are going after the services opportunity, it’s not rocket science, it’s the following, which is we have a set of existing services. We are going to cause for deeper penetration of our existing services with our existing clients. Point number one. Point number two, we’re going to take that existing set of services and we’re going to tap into and are tapping into new flows, new networks and new customer segments. Really important for us to do. And number three, it’s about while we’re doing all of that, we can’t get complacent that the existing set of services is all that matters. We continue to expand our set of services, both organically and inorganically so that we can keep that engine of growth going. And really that’s what we’re doing. I mean, services continues to actually be a key differentiator for us. We think — when I step back and I think about our focus areas, I think about, our cyber and intelligence capabilities and why I believe there’s a large addressable market which is there for the long-term on this.
If the world is going to go more digital, which it is, right? The reality is fraud is migrating from the physical environment into the digital environment. In the physical environment, there were a set of tools which were previously available for payments such as chip and PIN and things of that sort, which were tackling fraud. As the world has gone more digital, our customers and their end consumers need more capabilities to manage their fraud experiences. And that’s what we’re investing in because that’s where we see the demand coming on a going forward basis. And we see that on card rails, but we also see that on non-card rails. So we launched a solution recently and we publicly announced this, this is a consumer fraud solution. It’s actually being tested out with 9 banks in the UK right now. And really what it is, is it’s about taking our technology, taking our advanced AI capabilities, and effectively leveraging the fact that we get to see through our multi-rail strategy, flows that take place over both card rails and non-card rails in the UK because of our acquisition of Vocalink, right? We get to see that.
We are able to actually preemptively predict for our customers where scam is likely to take place and where scam is taking place. Scam is a big problem. We all know this, we all see this, we all experience this ourselves. And our customers are giving us very good feedback right now on the response and the results they’re getting from that. So that’s just an example of how we’re kind of going after. Again, you got to start off with what the need in the market is, what are we hearing from our customer, and then come up with solutions, which is what we do and that’s what we are doing from a services standpoint.
Rayna Kumar
You just mentioned that the services business held up very well during the pandemic. Could you — are you able to talk about how much of that revenue is recurring of the services business?
Sachin Mehra
Yes, what we had shared with you in November of 2021, right? We had kind of shared with you that a decent component of our services related revenues are recurring. And we had shared with you at that point in time that approximately 50% of our services revenue was linked to transactions. That’s important. And the reason I think that’s important is because that 50% is actually a nice place to be, because it gives you a blend of two things. One, the remaining 50% is not necessarily dependent on what goes on in the payment universe, right? As in directly related to that. But the 50% which is linked to transactions has got a natural secular tailwind associated with it. The natural secular tailwind associated with it is exactly what we were talking about earlier, which is what we expect in the nature of the potential for transaction growth to take place in the payment side.
So if you are able to deliver services that are high to transactions and if you expect transactions to grow at a particular clip, you get that natural tailwind even for your services growth to take place. So we like that mix, which is there and we like the recurring nature of what’s there, more broadly speaking. And just to kind of give you a little bit more color, our CNI capabilities are more recurring in nature and more linked to our transactions. Our DNS capabilities have got some level of recurring revenues. There is a lot in DNS, which we have got to go and win every year, which is important, like consulting, for example, right? They’ve got some which is linked to transactions, but not nearly as much as CNI.
Rayna Kumar
Understood. That’s very helpful. Shifting gears to the regulatory front in the U.S. with Reg II, do you view this more so as an opportunity or a threat to Mastercard?
Sachin Mehra
Look, I mean, first, we are compliant with what was stipulated as part of Reg II, right? I mean, which was really to make sure that there weren’t two unaffiliate — unaffiliated card networks available for card-not-present transactions in the U.S., right? That was supposed to be put in place by July 1. We are fully compliant with that. We view this as both an opportunity and a risk at the end of the day. Look, is there going to be some amount of volume and transactions, where a lower cost alternative network which is less secure goes after certain merchants to get them to actually route across that alternative network? I would argue, yes. But I would also — from everything we are hearing from our client base, including all the merchants we talk to is, they are thinking long and hard about my point about less secure.
The fact that you can actually try and save a few pennies on the transaction switching, and incur a multiple of that in fraud costs is what they worry about. And so I think people have been very deliberate about potentially just thinking about what that fraud experience might look like in the alternative pack, which might be there, before they are actually just migrating away. Candidly, we have seen very little so far in the nature of an impact on this in terms of what we are seeing from a transaction standpoint. It’s early days.
Now on the opportunity side, the reality is we stand and compete. We are not the largest ever network in the U.S. So we do have the opportunity to compete in that space, and we do have the opportunity to compete not only because we have got debit rails, it’s because we have got what we believe are very superior fraud management capabilities as part of that process. So if you can do a good job in terms of bringing together our debit presence, our fraud management capabilities to convince the merchant base about what we can bring relative to what the competition can, I think that’s where the opportunity for us lies.
Rayna Kumar
Got it. Okay. That’s really helpful. How are you thinking about some of the new RTP payment systems that have developed, like FedNow and Pix?
Sachin Mehra
So RTP is an interesting space. We have been in it since 2016 with the acquisition of Vocalink in the UK. So we’re quite familiar with what RTP means. The reason we got into real time payments is because we believe in choice. We believe that we should make available multiple payment rails, and we should let the consumer decide what works for them and what’s fit-for-purpose for them, right? So let’s stop there. Let’s stop now on specifics of FedNow. FedNow is light. Doesn’t mean that FedNow has widely been enabled. Banks need to adopt and connect to FedNow, both on the send and receive side, and it will take time before that happens, right?
Number 2, connection alone to the bank infrastructure doesn’t make FedNow a utility, broadly speaking. But I think we got to step back and get to think about, what this means for P2M payments and what this means for payments beyond P2M, B2B, B2C, so on and so forth. We think there is an opportunity in terms of real time rails across B2B and across B2C. We certainly think there will be use cases such as consumer bill payments, which will take place. There will be other B2B applications where you could use the likes of FedNow or even Pix for that matter, correct?
On P2M, I think you got to kind of just step back and think about the value prop, which exists in the market, which meets the need of the P2M flow today. So FedNow is a pay now solution. It is not a credit solution. It is not a prepaid solution. It is analogous to what people think about as debit. But then when you stack up debit and FedNow, you get asked the question, is debit ubiquitously accepted in the U.S.? The answer is yes. FedNow needs to create that acceptance footprint. Let’s stop there.
Number two, you as a consumer, when you do a P2M transaction, right, get the benefit in debit of the things like zero liability, the ability to charge back, the ability to return your goods. These are important considerations in the mind of the consumer. Those capabilities and those services don’t necessarily exist with the likes of Aetna or for that matter Pix as well. And then the third lever to actually think about is what is the level of investment which has taken place from a fraud management capability standpoint on these rails? And I would argue that a lot of these rails suffer from a fraud management capabilities standpoint. And so when I think about the P2M experience and the competition that a FedNow or a Pix creates to the debit card proposition, I think we’re comparing apples and oranges, which is why we feel like at the end of the day, the likes of FedNow will be very beneficial for use cases in B2B in certain — even in certain P2P use cases, right, to the extent that’s enabled. In some markets, it is.
So for example, you asked about Pix. Pix is primarily used across P2P and in some instances it’s used across P2M flows in Brazil, in the card-not-present environment, not in the — necessarily in the physical environment and in the card-not-present environment for that universe of customers who doesn’t have access to a credit card. Brazil is essentially a credit market for us. We are market leaders from a credit standpoint. Credit is a proposition which is used in the card-not-present environment. What was not available in Brazil was a debit proposition for card-not-present, which is where the likes of Pix have actually come in to actually go after. And we’re going to put in our own debit solution for card-not-present as well.
So I think you’ve really got to step back. Am I saying it’s all for not? No, that’s not what I’m saying. I’m just saying you’ve got to kind of parse out where it actually creates a threat and where it creates an opportunity. And the way we think about it is FedNow, Pix, these are all good important developments. We like the fact that there’s choice being created in the market. We think that there’s a real opportunity for us in areas like P2P and B2B with these rails. And on P2M, we continue to believe that the debit proposition is superior to what a FedNow or a Pix can offer.
Rayna Kumar
Got it. It’s really helpful. There’s obviously been a lot of discussion as a late on pricing. Can you give us your latest thoughts on Mastercard’s pricing strategy?
Sachin Mehra
Yes. Look, I mean our pricing strategy is very consistent and has been the way has been for the longest time, which is around we price for value. If you deliver value in the market, you should have the right to price for it. And that’s what we do. And the reality is, our customers will otherwise push back on us and tell us, well, that’s not okay. If you’re not delivering value, you’re not going to be able to price for it. And that’s really kind of the bottom-line of what our strategy around pricing is, right? It’s always been that way. When we think about pricing, we think about how is the value chain benefiting from it? What is our estimate of the value that that value chain is getting from it? And what’s our fair share of revenues we need to generate?
So when we put new products out into the market, we price for the value we deliver, right? In some cases we might launch a new product. We might not price for it upfront just to go and test the market out and then introduce pricing after the fact, after we’ve really gotten a good handle on what the value we’re delivering is, but it’s value-based at the end of the day.
Rayna Kumar
Got it. Okay. We can now open up for any Q&A from the audience. We have a mic going around. Just raise your hand if you have any interest in asking such in a question.
Unidentified Analyst
I have two related questions. Number one, one of the drivers, cash to electronic payments has certainly been rewards in the United States. I wonder what your perspective is on whether we’re at peak rewards for consumers? And the second one is, we’ve seen the premiums for card transactions — for credit card transactions versus cash. And what do you — where do you think we are in that?
Sachin Mehra
Yes. I probably need a clarification on your second question, but I’ll take your first question first, which is on rewards, right? Look, I mean, at the end of the day, rewards are — consumers care deeply about the rewards they generate by virtue of the spend they do on card based transactions. Do I think we’re at the peak on that? That’s entirely a function of what segment of the population you’re going after with what value prop. There are value props out there where there are no rewards. They’re going after a different segment of the population than there would be if I’m going after call it an affluent segment which is willing to pay an annual fee on the card and the associated rewards which come along with that.
I think there’s the potential for some level of shift to take place in where the rewards come from, right? There’s traditionally rewards that have only been funded from the — by the issuers. There’s a greater focus coming from the merchant community to fund rewards to drive affinity towards merchants in question, right? And this is why we make investments in our loyalty platforms.
The value of delivering personalized offers, both by merchants and by our issuers is rising right to the top of the list of things which our customers care about, based on the feedback they’re getting from consumers. And on top in that personalization piece is how can you deliver rewards which are fit-for-purpose for the customer in question.
So back in the day, if you went back a couple of decades ago, and you probably see this in card propositions today. You’ll see a laundry list of what will be benefits and rewards, which come with a card proposition. I would argue that a lot of those are redundant. Most consumers don’t even leverage a lot of those benefits. So now there’s a level of personalization we’re able to deliver with some of the recent acquisitions we’ve done, where we’re allowing for better catering of both merchant funded and issuer funded rewards to our client base.
And then on your second question, I didn’t quite follow when you talk about premium, what exactly?
Unidentified Analyst
Upcharges for credit card use versus cash?
Sachin Mehra
Oh, I see. You’re talking about surcharging which takes place, correct?
Unidentified Analyst
Yes.
Sachin Mehra
Look, I mean, the reality is surcharging is — for credit cards in the U.S. you are allowed to surcharge. There are states which have a different rule, different states in the country have different rules around surcharging. You cannot surcharge for debit cards, you can’t surcharge for credit. Merchants will make that choice, right?
At the end of the day, what merchants also experience, is they’ve got to make that call as to whether they want to turn away a client, because the client basically says, “I don’t even have cash in my pocket, so I’m not even sure I really want to go to this merchant because they’re surcharging me.” And then other instances, customers might say, “That’s okay, I’ll pay that nominal fee, which is there from a surcharge standpoint.” The merchant really does have to think though about what the experience for the consumer is when they actually put in that decision. But you’re right, you are seeing increasing amounts of surcharging take place. There are rules around that. You cannot surcharge in an egregious manner. So said differently, you cannot just surcharge like ridiculous amounts. There’s a cap to what you can surcharge to. It’s basically mostly tied to your cost of acceptance at the end of the day.
And honestly, we see some of it, but we’re not really seeing a change in consumer behavior a result of that.
Rayna Kumar
We can take one more question from the audience.
Unidentified Analyst
Thank you very much. Just a high-level broad one. If you think about big pockets of growth in emerging markets, China, probably being a very challenging market; India, there is still probably a ton of potential, but obviously a very important government funded local scheme. Brazil also seems — where do you see the biggest mismatch between the market’s perception, perhaps with Mastercard’s growth in emerging markets and the reality on the ground?
Sachin Mehra
So you are right about China. I mean, like, China, it’s kind of binary answer there. Either you can or you cannot play at this point in time. You cannot play into the domestic market in China. We are ready to go. We are just waiting for the right permissions to come through on that. So there is no point. The opportunity is huge. Let’s just speak here. But in the reality, you can’t play there. India continues to be a very important market. We will continue to compete there. It is a interesting market because competition in the context of — we want to compete, where we can do so while actually making sure that the ecosystem makes money. India is a little challenged in that regard when you have the likes of UPI. UPI is fantastic at many levels in terms of what it’s done to create digitization in the economy. It is an incredibly painful experience for ecosystem participants, who all end up losing money as part of that proposition. We continue to see good growth on our debit and credit proposition, and we see there to be a lot of potential on a going forward basis there.
Let’s talk a little bit about Africa, because I kind of almost feel like sometimes it’s the forgotten continent. The reality is there are 1.3 billion people across all the countries in Africa. We continue to invest heavily. Most recently, we announced an agreement with MTN, which is a mobile network company. Well, it’s a telecom company, which has a mobile network operation. We had previously a couple of years ago announced an agreement with Airtel, which is the other big player there. And the reason we are taking that approach in a market like Africa is the number of mobile wallets that are available in Africa is far greater than number of bank accounts with each other. And our approach in that market is, if you can partner with those mobile network operators to get after it to create an open loop card-based environment, right, both from an acceptance and an issuance standpoint, the great opportunity there. So Africa has one to keep an eye on. We certainly think that that’s an opportunity.
But a little known — a little focused on fact is — let’s take a market like Japan. One would say, well Japan is pretty well developed. What’s the problem? Well, why is there a big — there’s a huge opportunity in Japan? There is a lot of cash which takes place in Japan today. There’s a lot of cash which takes place in Germany today. And the reality is, we remain focused on driving in each one of those markets as part of what’s there. That doesn’t mean we will take our eye off the ball in the U.S. and in other European markets. But since you asked a specific question as to where the underappreciated markets are, I will put those out.
Rayna Kumar
Yes. We are reaching the end of our session. So Sachin, I just want to ask you one final question. One message would you like to leave for the audience? I know we covered a lot, but anything we missed in our Q&A?
Sachin Mehra
Look, I mean, first, that was very comprehensive. So thank you for that. It was like rapid fire, like, I haven’t seen. But anyway, it’s a good thing. I had a couple of cups of coffee before I came in here. Here’s what I would say. At the headline, I continue to remain very excited about the growth opportunity that Mastercard presents. And I think we have a very well-articulated and a very sound strategy. I think you are all familiar with that. It’s around expanding in payments. It’s around extending our services. It’s at about building these new networks, which we are talking about, right? It’s for us to execute on, that’s what we remain focused on. So the messaging I will leave you with is, very often we get caught up as human beings with the new cool fun stuff. There is a lot of juice to be extracted from the stuff which Mastercard does from a very basic payments and services standpoint, which we are putting our head down and going after it. So everything you have spoken about today, it’s around happening into that secular opportunity, which is there in P2M. It’s around going after those commercial flows. It’s around going after all these services, which we’re going after, and bringing the power of all of that together to continue to win.
So I remain very excited about that. And I’d just say, like at the end of the day, strategies are great, you’ve got to execute on them. And this management team continues to be very focused on exactly that, which is making sure we’re going after that execution piece.
Rayna Kumar
Wonderful. Sachin, pleasure having you. Thank you for keynoting UBS’ FinTech Leaders Conference today.
Sachin Mehra
Thanks very much. Thank you, everyone.
Read the full article here
