Mastercard Incorporated (MA) Earnings Call Transcript
August 31, 2023
Earnings Call Speaker Segments
Okay. We'll get started with our next session. I'm Bryan Keane. I cover payments processors and IT services here at Deutsche Bank, and we're really excited to have Ling Hai, who is Co-President of International Markets at Mastercard. So first, welcome, Ling Hai.
Thank you so much, Bryan.
Thanks for coming in beautiful Dana Point here. Can you start by telling us a little bit about your background and your current role at Mastercard?
Sure, sure. First of all, so good to be here. I've been with Mastercard for 14 years now. So this is my fourth job. I joined Mastercard in Beijing, running Greater China. And then I moved to London, had a global job, went to Singapore to run Asia in 2015 and then back to London, I'm back in London again, running all of our international markets, which essentially is everything outside North America, except Canada, U.S., everything else within international markets. But also just maybe very quickly, before Mastercard, I did banking, I worked for HSBC, Bank of America, but more importantly, I started out as a management consultant with Booz Allen, grew up in Shanghai, immigrated to the U.S. 33 years ago and now this job has brought me around the world. So that's a little bit about me. So when people ask me, Ling Hai, where you're from, I ask how much time do you have.
Nice, nice. So just to be clear, everything outside of Canada and North America ends up coming in to you?
Yes, that's -- so it's Europe. Middle East, Africa, Asia and South America.
Got it. Got it. I was hoping maybe since, obviously, you cover a lot of the globe, you could talk about some of the spending trends you're seeing in those markets, international markets, and then also, of course, related to cross-border travel.
Sure, sure. Well, I would start by saying COVID accelerated this whole digitization process but nothing has reverted. We see -- digitization continues. And so this process is here to stay. Secondly, I would say I am very surprised by the consumer resilience we continue to see very strong spend across the board. There is now a shift. So during COVID, I think people were renovating their home, so the focus was more on stuff. Now there's a complete shift from stuff to experience. So travel is a big one. And I think for us, if I look at cross-border travel everywhere in the world, it's way above 2019 level. So that's a very good thing. You see some moderation in spend in certain markets. For example, I live in the U.K., I see this firsthand. Inflation in the United Kingdom is still 7% to 8%. That puts a hit on the pocket book. And then energy prices are still high. And of course, with the interest rate increase in a country like the U.K. and mortgages -- actually people don't have fixed mortgages in the U.K., unlike the U.S. So all of a sudden, your mortgage payment goes up on a monthly basis. So that impacts cash flow. But I mean it's not a significant depression on spend, but you see a little bit of moderation. I would say probably opportunities exist maybe with China. And what I would say is, on the one hand, because if you look at inbound-outbound, it's still way below 2019 level. So there's some opportunity there on the one hand. But on the other hand, you also read about the economy basically seeing a little bit of slowdown. So we'll have to see how that plays out. But it remains a very exciting space in terms of travel for us. And I think Mastercard is very well positioned because of all the travel portfolios we have, products like the Lufthansa co-brand, the Singapore Airlines co-brand, American Airlines co-brand. I took American Airlines here to this town. So those things will actually do really well.
Is there any green shoots of seeing opening of China of travel there, of cross-border?
Yes. First quarter, second quarter, we definitely saw that. And -- but like I said, I think we are seeing green shoots. And I think the issues are severalfold. We talked to some of our travel partners in China as well. I think the issues lie in, one, some visa restrictions still existed. And those are being lifted gradually. I was in Washington, D.C. yesterday. So it's very clear between U.S. and China, they try to sort this out. I think the other thing is very much around capacity. It's both airline capacity, but also crew capacity on the ground. So that's being addressed as well. And I think the third area is really going to be around confidence and the ability to want to travel and spend. So like I said, there's some positives and some negatives. So we have to see how that plays out.
Got it. Got it. So many distinct countries that make up the international business for Mastercard. Can you explain a little bit about how you address each of those unique needs because, obviously, Africa, Latin America, Europe, they're all going to be very different.
Yes, yes. It's a great question. In fact, I get this question a lot from people like, what strikes you about the international markets. I will start off by saying, in fact, I'm really surprised by the commonality, the consistency. I think partly, this is because there's so much more in common than what's different. I think partly, this is because we have a global franchise model. There's a set of consistent routes how we operate our business, right? It's actually -- it brings more consistency. Payment needs around the world are also somewhat similar, right? The things we need to solve on the ground will be around issuance, acceptance, thinking about new flows, thinking about services. So that's very consistent across the board. Every market is very focused on those things. Clearly, there are differences as well. Some of the differences are cultural, right? So for example, I can think about how Germany is more debit dominant, how Japan is more about credit, but people use credit cards like a charge card. They never revolve unlike in the U.S. So those differences definitely exist. From a product perspective, how we think about credit, debit, prepaid makes a difference. There's also countries where prepaid is not allowed, so we [ can ] do that. So those are the differences. And then I think some of the differences are also technical. So for example, you go to China, it's all QR acceptance. You don't really see that other than maybe some parts of Southeast Asia. NFC, contactless is a much more dominant form factor in countries like Singapore, where I lived for 7 years, London, it's everywhere, it's contactless, right? Australia is contactless, fully enabled, fully penetrated. And then, of course, you have the U.S. where we still -- we're making good progress, but we're not at 100%. So those will be the differences, Bryan. In general, I think the opportunity is actually are pretty consistent. But in terms of technical implementation, product preference, cultural preference, there may be some uniqueness there. And I would say one thing, also government regulatory environment, I think you may have different types as well. Japan is much more open. There's not much regulation. You probably have a bit more regulation in countries like the U.K. or Australia or the U.S. And then you have something like China and India, which is much more regulated.
Got it. Got it. You've had a number of wins in the international markets, notably in Europe. I was hoping you could share some detail on some of those wins and help us understand what enabled Mastercard to win the business.
Yes. I would start by saying the way we win our customers' hearts and minds, first of all, I have to attribute to the people, the teams. It's really about sitting down with our customers and having a relevant conversation about solutions that meet their needs rather than just pedaling our own widgets. So that really is the big difference. I oftentimes also hear from customers the difference is our ability to co-create, co-innovate with them. So we stand out as being very different. I do think Mastercard in the last few years have built up a lot of unique capabilities around services, whether that's data and services, whether that is cybersecurity and intelligence, it actually is not just -- these services are not just a revenue driver, they are actually a differentiation in our deal pursuits. Our ability to do a launch pad with a customer. So we put some concept through a 2-week process. At the end, we actually have a prototype, right, a proof of concept, those things actually really matter in how we win deals. And I think some of the recent wins like UniCredit is probably a good example of that. And those deals are oftentimes, we have an exclusive relationship with other products, and it's across multiple markets, we like those a lot. The other point I want to make is also sometimes it may take a while for us to win back a deal. And I think Costco in Taiwan is a great example. When I joined Mastercard, we didn't have it, and we didn't have it for a long time, but we never gave up. It's just about keep working at it and keep talking to customers about why us? And we first made inroads with Costco in Canada and then Japan and now we also have the Costco relationship in Taiwan. If you guys think Costco is very significant in U.S., Costco is very, very significant also for us in Taiwan. So those are all great examples of winning, but you don't win just by pedaling your widgets. You actually really have to deliver solutions that address people's pain points.
Got it. Thinking about some of the markets that you cover, I wanted to go back into China. Just thinking about the opportunity there, there is regulatory issues there often with the government there and there's China UnionPay competitive, and you hear about Alipay, WeChat Pay. What's the opportunity for Mastercard to grow inside of China?
So we continue to remain, first of all, very committed to the market. We've been there for a long time. And I think we still are working towards getting a final approval. I think we're making really good progress. Today, our business there is more cross-border, but the domestic market is hugely significant. So winning that part of the world, winning the domestic piece of China remains our goal. And I think we're making good progress towards the final approval. As some of you may already know, we got an in-principle approval from China back in January 2020. And now the work is really about working with the regulator to ensure they are okay with our readiness from an operational technical perspective. So that work is still ongoing.
And is there a time frame when officially they'll be done?
It's great try. I wish I could tell you. It's very hard for me to predict the future, especially in the context of China, but we're working hard on that.
Okay. Got it. The other country that comes to mind is India. They also have some regulatory and competitive markets there. How is Mastercard doing in India?
Yes. So we're very optimistic about India. We no longer face any restrictions in India. So it's back to our normal business. One thing I would say is -- may sound very boring, but it's really back to the basics, focus on issuance, focus on acceptance, focusing on winning deals, driving market share, focusing on cross-border, focusing on credit. Those are the things we're doing in India. I would say generally, though, we -- I am personally first very encouraged by the whole digitization efforts pushed by the Indian government. I think this is just -- it creates a very good overall operating environment for all the players. So that's a good thing. The second thing I would say is with digitization, though, inevitably, you're seeing more fraud. So that's a great opportunity for us. Mastercard has a lot of value that we can bring to the table in India in terms of solving fraud, managing risk. So that's good. And the third thing I would say about India is today, the whole digitization still is very much payment related, it has not expanded beyond payments into other financial services such as insurance, such as other retail banking products. So I think there's still a lot of runway in India for us to grow with this market.
Beyond winning deals, the growth vector, and you mentioned it here in talking about India, but it's just driving acceptance. And in international markets, there's still plenty of growth, I think, to have. So can you just talk about driving the acceptance part.
Absolutely. And I think the acceptance opportunities actually across the board. People may think in mature markets, you may have less opportunities versus developing markets. It's actually not the case. Again, I give another example in Japan. Cash as a percent of retail is still very high. So card acceptance -- digital payment acceptance is still a big job even in a developed market like Japan, right? Clearly, acceptance in developing countries where cash is still dominant is a huge opportunity for us. Right now, I'm also very encouraged by some of the new innovations that are coming into the acceptance space, for example, tap on phone. I think that is going to be huge. A lot of the small businesses find cost of acceptance for digital payments to be a bit more on the high side. So things like payout -- so every phone will become your acceptance device, right? It's a great way to address this cost issue. So I think that kind of innovation also gives me a lot of optimism in terms of how much we can grow. Globally, we are already at $100 million. So the work will continue on this front. It is a very important value proposition for us. Let me maybe also make one last comment on the acceptance. Acceptance is also where we need to customize a little bit in terms of some of the consumer experience or form factors, right? So I think about plastic versus a phone using NFT versus using QR as form factors or the consumer experience. And that's not going to be one-size-fits-all depending on which market we're operating. We have to invest in the right technical solutions to drive that.
Commercial has been an area Mastercard's targeting for growth. I was hoping you could share some progress in addressing the commercial flows in international.
Yes. So in the international markets, here's what we're seeing. Lots of headroom. I think the whole commercial space is still lightly penetrated. Maybe let me take one step back. I will separate commercial into two buckets of opportunities. One is really just the cards or the point-of-sale solutions we have. So this is like the corporate T&E card, a procurement card, a purchasing card, right? And also small business products. And people will use those products to make purchases or spend on their business trips. That itself is still very lightly penetrated. I see a lot of headroom in international markets, especially in places like Asia, Middle East, Africa. So that itself, we'll be very focused on. It will give us a lot of momentum. Sometimes we need to focus on the right solutions, for example, in the whole SME world, the small business, right? Ultimately, people are looking for the right credit line. If you give a small business a credit card with only $500 credit line. That's not very useful to them because they're using it to finance their working capital. And oftentimes, banks find that a challenge. How do you find the right risk return trade-off. What is the right credit line but also the right risk level for you to manage? And Mastercard can bring a lot of capabilities to this work using our test and learn, using our data analytics, we can help banks optimize their credit line strategy for SMEs. So that's just an example. The second bucket of the commercial opportunity is really in B2B, yes. And this is where I think our virtual card solution is just a great solution. We'll continue to capitalize on that, and we'll continue to ensure our solutions are embedded in the procurement process itself in the B2B payment ecosystem. By that I mean like the SAP or Coupa type of invoicing system. So the conversations, the work on the ground is about how we integrate our payment solutions into the B2B payment -- the B2B procurement process or accounts receivable process because oftentimes, the issue isn't just payment itself. It is also data reconciliation, expense management. And I think this is where we can bring tremendous value to the table.
Got it. Let's turn to competition. I guess, first on competition, we think about the new fintech entrants and alternative payment methods. Do you see some of these players, I mean, Alipay and WeChat have been around forever, but also some of the new entrants in Europe and other places, do you see them as competitors? Or can you guys actually partner with them as well?
I actually see more opportunities to partner. I mean one thing I don't know if you have heard this, I was in Shanghai and Beijing not too long ago. I literally was able to provision my America issued credit card into Alipay now as an inbound tourist, right? I don't have to have a Chinese card. An international tourists that can provision their internationally issued card into Alipay and use in China everywhere QR codes are accepted. So this is actually a real innovation because today, if you're foreigner, you go to China, it's difficult to use a card, right? And cash is pretty much gone from the environment. So it's actually a great innovation. And to me, that is also a great example of our partnership, right? So there are ways we can partner with emerging players. Clearly, a lot of the digital banks like new banking, Latin America, are squarely our customers, right? So I think the point here is this, there are different places -- spaces that we play in. The point is how do we find the right innovation, the right angle, the right complementary places where we can help each other win. So I do see there's actually more opportunities to partner. Of course, having said that, I think we need to compete as well in places where we need to, that is about we have to make our own products and services and solutions competitive. So that is not something we are letting our game down. We have to up the game and make sure we deliver the best solutions to the marketplace and help our customers really win their games and improve their profitability. If we do both, and I think -- this is still a very sustainable play for Mastercard.
The question I often get is some of the government stimulated new domestic schemes, Pix in Brazil. India has got one as well. Do those -- are those competitive to what you guys are trying to offer?
So we have -- Bryan, we have lived with competition throughout our history. We're never the only game in town, right? So I think about domestic networks and all those in a similar category. But guess what, even with some of these domestic schemes through co-badging, through working on delivering services, I think we can still find opportunities to partner as well. And so our own capabilities need to be there. Our own products need to be competitive, and we find a space where we can collaborate.
Great. Want to see if you're seeing good pickup in service offerings. We hear obviously about the big push in services. Most of the time, we think about it as a U.S. push in services, but I'm sure it's going on internationally. Maybe you could just talk a little bit about that.
Oh, yes. So services from Mastercard services and value-added services are definitely not a U.S. phenomenon alone, it's across the board in all the Mastercard markets. The international markets, last 2 quarters, very strong growth. We are seeing a huge contribution from services to our revenue. But services are not just a contributor to revenue. Like I said, services actually become a differentiator in some of our deals and partnerships with our customers. So it's actually very, very important to us, and we're very focused on this. We have the right teams on the ground, delivering services, doing R&D, but also delivering services, doing business development as well. We are also looking at the right acquisition opportunities. So services in general remain a very important contributor to our overall business growth. And that is not just for the U.S., it's for international markets as well.
Got it. Mastercard has been focused on financial inclusion for some time. I know it's been a multiple year effort. Can you just highlight a few recent examples of some of the initiatives that you guys are doing in that space?
Yes. Bryan, financial inclusion, I mean -- I think, for example, we have done a lot of work in India. We have done a lot of work in Africa. But in the end, I think when people think about financial inclusion, the tendency tend to be, oh, it's just about access to bank accounts or access to electronic payments. I think, ultimately, the ultimate thing to solve in financial inclusion is actually access to capital, to credit, to working capital, right? So I may have a bank account, but if I can't get -- I can't borrow the money to finance my working capital, I won't succeed as a small business. So this is, I think, the biggest piece of value-add Mastercard brings, and I think it's multifaceted as well. Partly, we solve this together with our customers through SME cards. I talked about those commercial cards, right? That is a way -- a lot of the times using a commercial credit card, SME credit card is a way for a small business to finance their working capital. Real-time payment is another way to solve this because oftentimes, they need working capitals because they don't get paid until 30 days later or 60 days later. So getting paid faster is another way to solve this issue. But more importantly, ultimately, there's also this credit underwriting strategy, right? A lot of the lenders may be reluctant to lend to SMEs because one, they think they have a higher risk intrinsically. It may not be true at all. Two, it's the lack of information, right? It's almost like when I moved to London, the banking in Britain wouldn't give me a credit card because they don't know anything about me. I don't have my -- I didn't have my history with me. It's all in the U.S. So it's about providing the information. And so on this front, whether it's about creating more visibility and transparency into their behavior, their data, also it's about using analytics to understand an SME's creditworthiness becomes something we can bring to the table and co-innovate, co-create with our customers.
Got it. We can open it up to see if there's a few questions from the crowd. Just raise your hand and the mic will come over. I wanted to ask just on the international opportunity. It's vast. There's a lot of different ways you can go. So where are you most excited? Where are you focused on right now?
Yes. So first of all, I remain very optimistic and focused on services. That's an area that excites me. I think, again, revenue driver but also differentiation for us. The second area, I would say, that's really very exciting for international markets is all the commercial flows. I think there's still a lot of runway. So we'll be very focused on that. The third area is probably specific markets like India, China, Mexico. So I'm just using those as examples. The list probably is much longer than that. But so there are still markets where I think there's a lot of headroom for us. So it's a combination of developing services, thinking about the new flows but also specific markets.
Got it. Yes, go ahead. Yes. I don't think the question -- if you can just repeat a little bit about the question was on Mastercard Send I think the mic...
Yes, sorry about that. Question was on Mastercard Send. Historically, it's been more domestic use cases. So just wondering how that fits into the remit of your role within international markets and where you see the long-term opportunity?
So Mastercard Send is a very important solution for us in international markets as well. And I would say it's not only limited to domestic use cases. For some of the cross-border remittance use cases. Send can be an enablement as well. It's corridor-specific. I can't make a general statement where -- like it's relevant for everybody. But I definitely do agree. Send is not just a domestic enablement. It's also a cross-border enablement as well, right? I can give you an example, for instance, I think about the U.S. and Latin America, there are many corridors where remittance flows are happening, and we think about our cross-border services. We also think about Send as a way to enable those flows.
I think we've got one more question, but let me just ask, when we look around the world, there's -- everybody is trying to figure out what's going on with the economies. So I'm sure there's fits and starts, but is there any pockets of weakness that you could call out that you see that may be getting weaker versus pockets of strength, maybe accelerating growth?
Yes. So if I look around the world, I think in terms of strength is, so probably Asia where the travel recovery was lagging a little behind -- lagging a little bit, and now I think there's probably more room and catch-up for them to do. So that's probably something exciting. But I think China does present a little bit of uncertainty in terms of I see some positives, and I see some negatives as well. But overall, I think with the supply chain shift, countries like Southeast Asia, countries in Southeast Asia, but also countries like Mexico will actually benefit from this trend. Mexico is actually doing very well as an economy. Its currency is very stable. So that's probably where the strength is. I feel Europe is probably where we see a little bit of a weakness and -- but it's not something to be significantly concerned about. I think the question on inflation probably is still on everybody's mind. I think in the U.S., it feels like it is doing a soft landing, but hard to say for sure. The Federal Reserve is also saying they may do this, they may do that. So which means there is completely lack of clarity, I think, in my mind. But generally speaking, I think the consumer resilience is something that's manifested in multiple markets. I talked about the U.K., as probably an example of where you see a little bit of moderation. But overall, I think geopolitics obviously plays a role as well. So how that's going to play out, I think it's difficult. Your guess is as good as mine. So I think those are the things we would have to look at. I would just maybe end by saying one more thing. I do think you're seeing a lot of productivity improvement in the world because of things like AI automation, that has to contribute to some of the resilience we are seeing, right? So I think with that productivity will increase. It's a very good thing. And then the other side is jobs, right? So you have to think about if jobs remain very strong, unemployment remains low, then it probably paints a very good picture. But if let's say, AI starts to replace work and unemployment goes up, that will definitely impact the demand side. But at this point, I'm not seeing that.
Great. Yes, we'll take a question in the back.
I was just going to ask about some of the higher-yielding cross-border products and businesses like what are a couple of things that you're most excited about where that investors can get excited about in terms of helping push the numbers down the road?
Yes. So look, first of all, managing the mix of our business is very critical. So it's very hard for me to say cross-border is better than domestic. I wouldn't make that conclusion. I think ultimately, it's about managing the overall mix but also the overall yield. I remain excited about staying in the flow and being able to deliver value-added services on top of that. So when you look at our total net revenue yield, we are seeing an improvement. The trajectory is really strong. Clearly, I think travel is one area that I remain very, very excited about and very positive. So when travel has two components, right, there's leisure, there's business, and we're seeing recovery. And I think the trend probably, the past trend in Q2 has been very encouraging. So it boils down to, do we have the right products to speak to the cross-border behavior, if that's what we want or the e-commerce behavior if that's what we want or the commercial spend and I look around the mix we have, I think we do. We have very strong travel-specific portfolios and products. We have very strong commercial propositions. And also, by the way, the VCN proposition actually is very relevant for the travel vertical, right? We're actually serving customers like OTAs or travel agencies when they have to -- they get the money from the consumers and when they have to disperse to hotels and airlines, those flows are actually supported by the Mastercard VCN solution. So that remains very, very positive to us.
What about strength in e-commerce cross-border. You mentioned that...
I think if you look at Q2, it still is very strong. So obviously, the growth in physical travel is much higher. But e-commerce remains at a very strong growth rate. It is something we definitely have also a strong advantage in a sense that when you deal with e-commerce, fraud risk become a major issue, right? And this is where our C&I solutions become extremely relevant in the e-commerce space.
Okay. With that, Ling Hai, we'll keep it there. Thanks so much for being here.
Thank you. Thank you.
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