Mastercard Incorporated — 2024 Q1

Sanjay, I think you said it exactly right. First of all, just to be very clear, like I said, our guide for the full year on a currency-neutral basis, excluding acquisitions, is unchanged relative to what we shared at the last earnings call. what we're seeing, generally speaking, is healthy consumer spending. These trends are very much in line with what we expected when we put the guide out in the first place. So nothing unusual to report from an overall spending trend standpoint. Obviously, the U.S. dollar has appreciated quarter-over-quarter. And what you're seeing is really our best reflection of what we think the impact of the strengthening U.S. dollar is going to be on our as reported numbers, which is what we shared with you. That's the only real update. Our guide otherwise is very much unchanged. And as it relates to your question on conversions, the conversions which are taking place are very much things which we had contemplated in our original guide. So that's very much part and parcel of what we had contemplated. So business as usual, I want to be very clear, there's nothing which has really changed from a guide standpoint, when you look at it on a currency-neutral basis, excluding acquisitions.

Two questions. First, it looks in the April trends as if the most material slowdown was intra-Europe cross-border. Could you just confirm if that's the case and if that was really predominantly Easter like you suggested. Secondly, we should be coming up on the 6-month anniversary of your announcement of Chinese domestic market approval. When should we expect the first transaction to be processed? And have you been able to work out whether you'll be able to use existing issued cards in the domestic market after a workaround on the EMV code or will you have to reissue?

Craig, I'll take the first question. Your observation on intra-Europe is exactly right. What you're seeing in the first 4 weeks of April is exactly what you said. It's related to the timing of Easter. Easter has actually a more pronounced impact in intra-Europe and that's why you're seeing a more exaggerated number out there. And then on your second question, as it relates to China, Michael is going to just take that right now.

So on China, we got the license in November, and we shared our excitement about that. So the excitement continues. The teams have been busy building out issuance relationships with our banking partners in China and building out the acceptance footprint. We're obviously not starting from 0 here. We had a strong cross-border business. So we have relationships in play that give us a heads up. There was a time line associated with the license, and we're expecting to go live with the first transactions to a very specific question here in the month of May. As far as using existing cards in China, I think the key question here behind that is -- how can you use existing acceptance in China and start to generate volume. And here, our approach is through the partnership with the digital wallets to have cards put into the digital wallet so they can be used at the whole wide range of merchants in China. So I do want to say we are excited. At the same time, it's clear we're going to start processing, [indiscernible] transactions domestically, this is a medium- to long-term opportunity. In the short term, there's more work that we need to do to build out more acceptance and continue to get more card programs out, but we feel very encouraged about that. Our teams are very busy with that activity.

And Craig, I'll just add a couple of points as it relates to China. One, I think you might have seen in the press that the Chinese government is pushing hard to increase inbound cross-border travel by expanding acceptance of international cards. That's their way of making sure that they're encouraging tourism inbound into the country. And we're actively working on expanding our footprint there, just expanding on what Michael said. That's point number one, as it relates to how we're seeing the China play, play out. The second point I'll make on China is -- it's kind of interesting when you think about a MasterCard card issued in China going forward, that will probably be 1 of the few networks which is most widely accepted across the globe, just by virtue of the fact that those cards are now going to be accepted in China and they're already accepted across the globe, different from our competitors in many ways. So we like what we're doing in terms of pursuing our strategy down there. I just wanted to make sure I kind of brought those 2 points out as well.

Michael, how would you characterize or how do you think about the penetration rate of existing customers when it comes to value-added services. It's more important part of the growth algorithm, how do you measure -- how do you think about how mature the long-term opportunity is when it comes to cross-selling value-added services into your base?

Ramsey, you are hitting on a really important point. value-added services, a key differentiator for our payment solutions, payment solutions. The link is pretty clear, more volume, more data, and I talked about the whole growth algorithm earlier on the call. Now this doesn't just naturally have to us. It requires really focused execution. To your point, we are all at any point in time, very clear what our cross-sell ratios are, what value we can offer to our customers and who we have it offered to and who we haven't offered it to. I give you a stat earlier that talked about that you have 2 to 3x more services with our top 50 customers. So there is tremendous potential in there. And our teams are very focused on that. Across the company, we have our existing relationship manager, sales force out there across the whole world, but we're also having a set of very specific more hunter-oriented sales forces that drive very specific new products with deep value that we drive into separate selling centers into these customers. So it's a pretty broad approach. At any point in time, we see that data, and we drive that because as you said, this is a near-term growth opportunity that we should leverage and we will.

Michael, can you talk about the U.S. merchant class action settlement. I know this still needs to be approved by the courts, but how should we think about the implications from the changes proposed on surcharging for specific brands? And how do you think you stay down?

Right. Thanks, Harshita. So the first word, I would say, relief. This has been long standing, and we are happy that there was an agreement found with the merchant community as well as with Visa and this is behind us. So what this was about is the U.S. merchant rules class. So what was in focus here was the business rules that make up the Mastercard promise. And the conversation was around how can we provide opportunities to merchants to manage their cost of acceptance on 1 hand, at the same time, how do we keep the major promise to consumers of the Mastercard brand and that is, you can pay anywhere and you will not be discriminated against your payment. So that was the toggle over the years and an agreement was reached. And basically, what happens is we're going to have a mild reduction of interchange rates, number one. and we're providing more clarity and simplification around surcharging rules and discounting rules on the 1 hand. At the same time, we retain the promise of [ to ] honor all card rule out there. So that is what is out there. We don't expect any dramatic impact on the business from the interchange changes. And for merchants, they -- we will see what the choices they make on surcharging and on discounting. We've seen in the past that surcharging is not always clear to consumers. It's not always prepared, so we'll see what choices will come up. So broadly speaking, I don't expect a major impact on our business. In terms of financial impact, we have accounted for the legal fees associated with that. Otherwise, there is no impact directly on Mastercard. So all in, a very good outcome, and it proves 1 point. It proves the point that there is a lot of momentum and a lot of competition in the payments market and yet again another moving item and merchants agreed to this, and this is a good step forward for everybody.

So on rebates and incentives, very much in line with what I kind of shared in terms of our thoughts at the last earnings call, very much in line with our expectations as how we ended up in the first quarter. As it relates -- and you know what the usual puts and takes are as it relates to what drives this incentive, so I won't kind of repeat that. But the reality is, we continue to be out in the market, working to win business. We've got a strong pipeline of deals. We'll continue to execute on that. You hear about them on every earnings call. As it relates to the second quarter, as we see it right now, we expect rebates and incentives as a percentage of our payment network assessments to be roughly similar to slightly down from what we saw in the first quarter. So the reality is -- I want to kind of just make sure we put this in perspective, right? We do these rebates and incentives to bring more volume onto our network. When we bring more volume onto our network, it gives us the opportunity to optimize those portfolios to grow them at a faster pace, it helps us deliver more services, which helps us drive net revenue accretion from a yield standpoint. And so it's very much in line with our strategy, and that's what I've got in the nature of thoughts for the second quarter.

Yes. It's a competitive marketplace. So we have to be competitive on the financial side. We clearly see the flywheel effect that Sachin just talked about between payments and services, more volume on, more ability to sell our services. But it's also clear that we are very, very focused on what deals we want to win. So we don't want to win every deal and we're very, very targeted here whatever meets our financial criteria and our strategic focus in certain markets and certain verticals.

Maybe we just hit on some specific travel trends. I mean, and really more broadly, consumer trends. If you could just give us a little more on what you're seeing from a travel dynamics standpoint. It did decel a bit into April. And I know Easter timing was a factor, but it seems like it could be a little more than that. So is there anything you're seeing behavior-wise that's impacting that? Do you expect that to rebound and then maybe just, Michael, if you can give us a sense of your view of where we are in the, the dynamic of conversion on to electronic payments for the consumer payment side. Any changes in patterns we're seeing in terms of the U.S. growth rate in particular and then more broadly.

Sure. I'll take the first part of your question. As it relates to cross-border travel, really, what we are seeing is exactly what we said, which is the lower growth rate that you're seeing in the first 4 weeks of April, as we've seen and we've analyzed as being primarily driven by just the timing of Easter. There's nothing unusual to call out. The only thing I will say is when you think about cross-border travel, you should think about it in the context of also tougher comps, particularly as it relates to Asia because Asia was late to come out of the restrictions of COVID. So last year, you saw a strong recovery take place in terms of cross-border travel in Asia and then it just creates [ for ] tougher comps this year. But fundamentally, the value prop is very sound. We've got great portfolios, we continue to win portfolios which are travel leaning, cross-border travel leaning, and we're executing on this portfolio. So nothing unusual that I'm seeing, travel growth rates are very healthy, and they're actually, I would say, are running at a cliff, which is -- when I go back to the pre COVID days, it actually is running at a cliff, which is pretty comparable to what we used to see in the pre COVID days when adjusted for the timing of Easter and the comp impact.

Right, just a last comment on travel and tourism in general. Sachin earlier mentioned that the Chinese government is really focused on driving inbound tourism. I just came back from a series of trips Indonesia, 1 of them, and you see yet another government that is driving inbound tourism. We see it in India. We see it in Spain and so forth. In order to work with governments and how to actually do that. There's a whole practice around our public sector business to build out, use the data that we have to create not -- in order to aid the portfolios that we have, create approaches with governments to promote their respective destinations. And all this comes hand-in-hand to a much more holistic approach that we're now seeing around travel vis-a-vis competitors out there. So that was 1 thing I wanted to add.

Just wanted to ask on value-added services. The the outlook here. Can you just elaborate on the visibility for a faster growth beyond the first quarter? I know comps are -- is a big part of it. Just curious about visibility beyond the comps. And then is there potential to catalyze growth in the other category within value-added services?

Sure. Tien-Tsin, I'll take that. So like I mentioned, right, I mean, first of all, our overall outlook and the demand we're seeing for our value-added services and solutions continues to be quite compelling and strong. I mean we're out there actively, as Michael mentioned earlier, driving and pushing harder across the various sectors, which we kind of talked about. So I won't repeat them. As it relates to the thoughts I shared as it relates to growth rates for value-added services and solutions for the remaining quarters of the year, which I said that the growth rates would be higher in each of the quarters compared to Q1. It's really based on what we're seeing in the nature of the pipeline, how we're seeing things shape up in terms of the cadence of how we're going to deliver on these value-added services and solutions, we feel pretty good about the outlook there, which is why we're sharing with you what we're thinking about in the nature of this higher growth relative to Q1 in each of the quarters.

[indiscernible] back to the piece, Tien-Tsin, as we discussed earlier about existing customers and the cross-sell. So that's an opportunity. We laid out the drive into new customer segments. So that's pretty clear. In here, give you an example, on the personalization thing, our Dynamic Yield acquisitions dating back to [ 2020 ], you have a lot of high-end retail and commerce brands that I want to engage on that. Everybody is trying to cut through the clutter, take Saks Fifth Avenue, they're using our personalization services. So those are all opportunities to get into certain verticals that we're not even in today in a significant way. So that is what gives us great confidence, there's great demand as we look ahead into services, and that's why we're saying they're going to be higher than the first quarter.

Are you seeing any change in competitive intensity in Europe, primarily for your payment network. Your primary competitor called out share gains local payment networks in the quarter that has long been a source of growth for Mastercard. So either changing competitive intensity from the principal competitor in Europe and/or any initiatives by local payment schemes to become more competitive themselves?

David, Europe's a fantastic growth story for Mastercard, starting off with some of the big shifts in debit in the U.K., some great wins on the continent. Earlier, I was talking about the renewal of [indiscernible], some big deals that are still in flight on conversion if you think about UniCredit, 13 markets across the continent. So we're well positioned here. Obviously, Europe is in focus from a set of competitors that is local players as in local schemes and so forth, but we've long found a way to partner with them. we feel they have a great proposition on credit and debit to compete. At the same time, there are services partnerships that we drive across and then more traditional competitors, of course, we're all eyeing Europe. Europe is too much of a growth story overall for everybody to keep competing. But we, as I said earlier, we try to turn these relationships into win-win partnerships. UniCredit in the end decided to go with us because they feel we have shown better traction in serving their customer needs. So it comes down to that, and I feel pretty confident as I look across Europe. And it continues to be a growth opportunity. Back to this question about secular opportunity. Europe still has a lot to offer on that front, and we have a whole set of solutions to go after that.

Just 1 more point I'll add, David, as it relates -- we've had this long-standing focus on conversion of Maestro to Debit Mastercard, and that's very much the case in Europe as well that we continue to execute on that. I feel like that's going to be one of those things which will continue to provide us a natural tailwind as we continue to execute on that capability. For example, in this quarter, we migrated or converted very roughly 7 million consumers from Maestro to debit Mastercard. And that's a global number. That's not just a Europe number, but I just want to share that with you as another piece of how we're executing in Europe.

I'm wondering, you talked about strong cross-border and travel trends, et cetera. We've seen some more indications of uneven consumer spending development in other parts of the economy generally. I'm wondering if you can call out whether it be in the U.S. or in other markets, if there's anything discernible at your level in terms of consumer shifting, spending preferences or categories that are noteworthy. And if we should take in if there's anything that could impact Mastercard or other indications that we should be aware of?

All right. Let me start off on this and then Sachin can comment further. So you've seen the 18% growth, so this is strong. So there's a travel component to that, and there is an ex travel component to that. Ex travel continues to be particularly strong, it's cross-border e-commerce and the [ likes ]. On the travel side, if you break that down, we talked about the trends. I want to lift it up a little bit to the broader -- I think the broader angle of your question. So what are the various things that consumers think about as they make spending decisions, how did it make ends meet and travel has been strong ever since COVID, particularly strong from a recovery perspective and has been strong even for COVID because the seeking of experience is just a fundamental trend that hasn't gone away.

As it relates to while we're on the topic of cross-border travel, I just wanted to kind of share where we are in terms of where we see potential for some recovery, which is particularly in Asia Pacific, which has got still some room to grow. [ Case in point ] would be China, where we've shared these metrics with you in the past, but I'll share with you what the Q1 metric was inbound and outbound of China. So in Q1, cross-border travel, inbound and outbound into and from China stood at approximately 80% of the pre-COVID level. So there's still room to recover. And granted China is going through a little bit of a slower period in terms of how the domestic economy is performing. But the reality is there still remains an opportunity over the medium to long term to see how this recovery comes through in the nature of travel even from that corridor, per se.

Right, so Tim, great point. We love to talk about debit. You saw the 6% growth rate. So this is good. We're doing well, and the impact of the conversions is felt. As far as it comes to routing and Reg II, this question comes up for now for a couple of calls. And I have to say where we are, we're seeing some impact, but it's not material. That comes to the bigger question that you raised, how do we look at that? So it's not material, that's great. That gives us even more reason to look at the opportunity side of this and you're fighting for back of card. And in the end, it comes down to the routing mandates, such as just distorting the market. I think what's happening here is it's ignoring the fact that in the end, a merchant will make a decision on the basis of a net economic outcome. And the net economic outcome is not just the cost of operating related to some routing costs but it is fraud costs, et cetera, the whole package altogether. And this is, I think, where we score well because we have a better proposition. Last 5 years, we've invested $7 billion into Safety and Security Solutions and that makes a competitive advantage for us. So -- and that makes for a competitive advantage for us. So I see the opportunity, our teams are out. They're talking to merchants that saying, "Here's what the net proposition is if you choice A versus choice B. And so far, that is an encouraging set of dialogues.

Right. So what we're doing here is you heard us talk about the growth algorithm, about our strategic priorities. In the end, what's happening here is we're realigning our portfolio of activities, always recognizing these are all interdependent. We're talking payments and services and altogether, it makes our competitive advantage position. But we basically say, we want to focus on core payments. We want to focus on new payment flows, and we want to focus on an integrated services set of offerings. And that is what is part of this announcement, plus we see tremendous opportunity on the AI side, particularly on the generative AI side, and we've created a central role for that. So these are 4 very seasoned leaders in the company that have tremendous experience around these topics. They're going to take this on and the whole idea is to move faster and drive more value to our customers. In terms of financial impact, what I hope to see is we kind of deliver the growth that we think is out there in terms of potential. That is the impact that I'm looking for. So that's really the play. There's nothing else to say beyond that. I'm looking -- talking to Craig, who's going to lead the services [ saying ], what is going to be on our product road map going forward? How do we drive even more services growth, et cetera. So that's the whole play. It's bringing structure strategy in line and move forward.

Just want to ask about the continued positive yields you're getting in cross-border, your major peer isn't seeing the same kind of positive yield and they talk about low currency volatility as part of the reason. So I think you mentioned Sachin pricing and mix and just helping us understand how much is sustainable of those changes for yield in cross-border and the differences maybe between your closest peer.

Sure. So first, I just want to quickly remind you that as it relates to the impact of FX volatility in our instance, that shows up in our transaction processing assessments. It doesn't show up in our cross-border assessment. So the impact of the, what I would say, the drag associated with FX volatility shows up in this transaction processing assessment line. It doesn't show up in our cross-border assessment line, point number one. Point number two, you're right about the yields. Our portfolios continue to perform well. It goes back to what Michael said earlier, we want to win not only every portfolio, but we want to win the right portfolios. And that's what we focused on doing over the last few years, which is winning the right portfolios for cross-border and what that's helped us do is see this favorable mix come through where we are seeing the inter cross-border grow at a more rapid pace than the intra-Europe cross-border.

Yes. Look, I mean, the A&M spend is typically -- it's a cadence of how we see the promotions we want to do. So let me just step back and kind of think a little bit about why we spend on A&M. You could do it at the brand level, but you could do it towards activation of sponsorships. And depending on when your sponsorship assets are in play is when you want to do the activation around those sponsorship assets. So that influences the cadence of spend on A&M. So you're right, we had lower A&M in the first quarter. I kind of mentioned in my prepared remarks about how it's the timing of A&M. What I was basically alluding to is that as the year progresses, we will be spending more on the advertising and marketing line.

Right. The last comment I want to make on this. So we are a very large fintech, but we're not just a fintech. We have a massive consumer brand. It's a fast-moving brand. It's amongst the top 10 brands on Brand Z, so investing in marketing is absolutely critical. This is not a trade-off that we make to -- from quarter-over-quarter, it fluctuates at exactly the way that Sachin just talked about, when is the Champions League on? When is this on this on, when is that on, and we have a very carefully curated set of sponsorship assets and it drive a bit of the timing. But we love our brand, we invest in it. I think for the fifth year in a row, we have been the #1 Sonic brand in the world. So there's a lot going on, on the marketing side that we are very proud about. And I think that brings us to the end. What a great question to end the call on. Thank you so much. It is Labor Day in most parts of the world today. So when I thank our colleagues yet again, which I do in every call, on Labor Day, it makes even more sense. SO a big call out to the 33,000 at Mastercard, and thank you to you and our shareholders for your continued support. Thank you very much. Speak to you next quarter. Bye-bye.

Thank you.