Mastercard Q2 2021 Earnings Call Transcript

Quartr
Provided by Quartr
July 29, 2021

There are 7 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Mastercard Second Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Warren Nischaw, Head of Investor Relations.

Operator

Thank you. You may

Speaker 1

begin. Thank you, Crystal, and good morning, everyone, and thank you for joining us for our Q2 'twenty one earnings call. We hope you're all safe and sound. With me today are Michael Miebach, our Chief Executive Officer and Sachin Mehra, our Chief Financial Officer. Following comments from Michael and Sachin, the operator will announce your opportunity to get

Speaker 2

into the queue for the Q and A section. It is only then that

Speaker 1

the queue will open for questions. You can access our earnings release, supplemental performance data and the slide deck that accompany this call in the Investor Relations section of our website, mastercard.com. Additionally, the release was furnished with the SEC earlier this morning. Our comments today regarding our Finally, as set forth in more detail in our earnings release, I would like to remind everyone that today's call will include forward looking statements regarding Mastercard's future performance. Actual performance could differ materially from these forward looking statements.

Speaker 1

Information about the factors that could affect future performance are summarized at the end of our earnings release and in our recent SEC filings. A replay of this call will be posted on our website. With that, I will now turn the call over to our Chief Executive Officer, Michael Nemak.

Speaker 3

Thank you, Warren, and good morning, everyone. So here are the highlights of the quarter. The strong momentum we started the year with accelerated On that same basis, quarter 2 net revenues are now 10% over 2019 levels, even though international travel is in the early stages of recovery, which is showing the strength of our diversified revenue streams. Domestic switch volumes are well above pre pandemic levels with all regions growing at a healthy rate. We're seeing improvements in both domestic and cross border travel with significant upside potential.

Speaker 3

Within this context, we're making progress against our strategic And have expanded our relationships with key partners like Citi, JPMorgan Chase, Barclays, Stripe and Verizon. Let's dive in. Looking first at the broader economy. Domestic spending levels continue to show improved in store sales and strength According to our quarter 2 spending pulse report, which is based on all payment types, including cash and checks, U. S.

Speaker 3

Retail sales, ex auto, ex gas, were up 14% versus a year ago and up 10% versus 2019, reflecting improved consumer mobility and some residual effects of fiscal stimulus. SpendingPlus also indicated that overall European retail sales in quarter 2 were up 13% versus a year ago and 6% versus 2019. The vaccine rollout has scaled in the U. S, U. K.

Speaker 3

And Germany and several Other countries with over 35 countries now reporting that over 50% of their populations are at least partially vaccinated. We believe that most markets are in the growth phase domestically, while cross border spend is now starting to normalize, Looking at Mastercard spending trends, which volumes continue to improve quarter over quarter with strength across all products. Debit spend remains elevated and we are seeing further recovery in credit, driven in part by the return of travel and increased discretionary spending. This recovery is led by consumer credit, but it's important to note that commercial credit is also improving and has now reached pre pandemic levels as well. In terms of how people are spending, they are definitely getting out more as we're seeing improvement in card present spending, particularly in the travel, retail and restaurant categories, while e commerce continues to be strong.

Speaker 3

Now turning to cross border. Cross border card not present spending excluding online travel spend continues to be very strong. On the travel front itself, it is Clear people want to travel and they do so where and when able to. We've seen this domestically and across borders where there are limited restrictions. For example, we're seeing strength between the U.

Speaker 3

S. And Latin America as well as an increase in travel within Europe. For industry reports, has been a recent increase in bookings for travel between the U. S. And Europe, and the quarantine requirements for entry into Canada are starting to be relaxed, so that's a further opportunity.

Speaker 3

Overall, we expect more borders to open in the second half of the year, dependent, of course, on infection rates, including the recent variant and progress on the vaccination front. Against this improving backdrop, we are focusing on our strategic priorities. 1, growing our core product Supported by our services 2nd, driving digital enablement, both in store and online 3rd, ensuring the ecosystem is safe and secure And 4th, providing choice through our multi rail capabilities. As always, we will do this with an We're driving top and bottom line growth over the long term by continuing to manage our expenses carefully. Let's look at them 1 by 1.

Speaker 3

First off, We're driving growth in our core products and are leveraging our comprehensive services to do so, working with new and existing customers to solve their pain points, both in Payments and beyond. We're well positioned to capitalize on the return of travel and remain focused on building on our strength in this area by expanding relationships Our travel partners. For example, we have renewed our exclusive co brand with JetBlue Airlines in the U. S. We also entered into a long term global

Speaker 2

Of course, we also continue

Speaker 3

to drive growth in the core outside of travel. Here are a few examples. We're excited about our partnership with Citi to launch the new Citi Custom Cash Mastercard, offering card members cash back in their top eligible spend category. JPMorgan Chase, we've extended and deepened our agreement in the commercial space, and we have renewed our Maestro brand relationship with Chase in the U. S.

Speaker 3

We also continue to partner closely with community banks throughout the U. S, including Afflip, our First Southern National Bank's debit portfolio to become their exclusive network brand. On the digital front, we're well positioned to drive the acceleration of the secular shift with our digital capabilities no matter how consumers want Shop in store, online or both. As consumers return to in person shopping, adoption of contactless continues to grow. In 2nd quarter contactless penetration represented 45% of in person purchase transactions globally according to our switch transaction.

Speaker 3

That's up from 37% a year ago. At the same time, e commerce continues its strong growth, and we are providing consumers choice on how they want to pay online. Example, Click2Pay, which improves the guest checkout experience, is now rolled out in over 10 markets, and we continue to launch with significant new merchants, such is the Canadian Tire Group. On to the buy now, pay later space. In Australia, we're partnering with Citi and Commonwealth Bank of Through our tokenization services, tokenized transactions across in store, online and in app surpassed $1,000,000,000 per month throughout the

Speaker 4

second quarter.

Speaker 3

We continue to partner with major digital players to expand the reach of our digital capabilities. For example, we just entered a strategic partnership with Stripe To give businesses more control over how they spend their money by enabling Strut users to create, manage and distribute virtual and physical cards for small business, commercial Consumer across credit, debit and prepaid. We've also entered our partnership with Verizon to bring 5 gs innovation to the global payments Leveraging our services and insights and pairing Mastercard solution with Verizon's 5 gs connectivity will allow us to create better experiences from the checkout line to being built even through how businesses are run. The increased capacity and reduced latency of 5 gs will enable us to take another step towards making every device a commerce device. Now on to securing the ecosystem.

Speaker 3

As more merchants and consumers shift to digital, the importance of keeping the ecosystem safe and secure is Paramount. It is creating a strong demand for our cyber solutions. In addition to organic growth, a number of our acquisitions in the space continue to perform well. For example, Ethoca has strong deal momentum, including a fraud and dispute management agreement with Ebanks, a payment solution provider operating across In countries in Latin America. RiskRecon, which monitors and assesses customers' 3rd party cybersecurity risk, is now scanning millions of companies globally, up 1,000 when we acquired them at the end of 2019.

Speaker 3

The new data is providing biometric fraud prevention tools to Major League Baseball and the new bank, Nickel. And we're very happy to advance our digital identity capabilities with the acquisition of Acarta that has now closed and off to a strong start on the deal front. Last but certainly not least, let's turn to our initiatives focused on addressing a broader set of payment flows with our multi rail capabilities. The key here is to provide choice, essentially the right tool for the job. With our multi rail approach, including our expertise and capabilities in COGS, Real time payments and support for digital currencies were able to deploy the right combination of assets to meet our customers' needs.

Speaker 3

And more than just having this range of capabilities, we're making these solutions work together seamlessly.

Speaker 2

Let me give you a few examples.

Speaker 3

In B2B, we're making progress with Mastercard Track, building out our global open loop network by working with fire agents and supplier agents, such as banks, software On the bank side, we're very excited to have signed Barclaycard payments, so we'll use track to connect their global business Customers on both the buyer and the supplier side of the ecosystem across multiple rails. We've also signed FreshBooks, Premier accounting software platform with customers in over 100 countries. In the bill pay space, we continue to scale the Mastercard bill pay exchange, which Leverages our real time payment capabilities to provide a transformative mobile first experience to bill payments, with Citi, Treasury and Trade Solutions now connecting With Mastercard Send, we continue to penetrate a variety of new payment flows beyond traditional card payments. It enables dozens of use cases and hundreds of programs across every region of the world. For example, we're partnering with We're also partnering with MoneyGram and Checkout enabled near real time cross border P2B transfers Across Europe.

Speaker 3

And on the B2C front, we continue to support the fast growing gig economy and are partnering with Payfair to enable instant earnings payout Some of the largest big platforms in the U. S. Through Open Banking, Mastercard is empowering people and businesses across the globe to easily Our efforts with Tunicity are running ahead of expectations as we continue to enhance direct API connectivity for banks and fintechs. For example, we're partnering with Jack Henry to enable consumers who banked at more than 400 community financial institutions To use its digital platform to access, use and benefit from their own financial data, a namely Federal Credit Union recently signed direct data agreement with Finicity. Finicity is also leveraging its best in class data connections to launch new products in new verticals, such as its mortgage verification service.

Speaker 3

Finally, in terms of cryptocurrency, we're making it easier for It simplifies the conversion of crypto into fiat. Separately, we're partnering with Consensus, the Ethereum Software Engineering firm, to accelerate the development of printer applications and services to our customers. Now summing all of this up, We delivered strong revenue and earnings growth this quarter, benefiting from our revenue diversification efforts. We believe that most markets are in a growth phase domestically and there's upside potential in cross border travel, we're winning significant new deals, and we continue to focus on our strategic priorities to drive growth over the long term. Sachin, over

Speaker 2

to you. Thanks, Michael. Now turning to Page 3, which shows our financial performance for the quarter on a currency neutral basis, Net revenue was up 31%, Reflecting the continued execution of our strategy amidst a strong recovery in spending, acquisitions contributed 3 bp to this growth. Operating expenses increased 28%, including an 8 ppt increase from acquisitions. Operating income was up 34% and net income was up 36%, both of which include a 2 ppt decrease related to acquisitions.

Speaker 2

EPS was up 37% year over year to $1.95 which includes $0.03 of dilution related to our recent acquisitions offset by a $0.02 contribution from share repurchases. During the quarter, we repurchased $1,700,000 worth of stock and an additional $398,000,000 through July 26, 2021. So now let's turn to Page 4, where you can see the operational metrics for the Worldwide gross dollar volume or GDV increased by 33% year over year on a local currency basis. We are seeing continued strength in debit and credit. U.

Speaker 2

S. GDV increased by 34% with debit growth of 23% and credit growth of 50%. Outside of the U. S, volume increased 32% with debit growth of 39% and credit growth of 25%. Cross border volume was up 58% globally for the quarter with intra Europe volumes up 48% and other cross border volumes up 71%, reflecting continued improvement and the lapping of the depths of the pandemic last year.

Speaker 2

In the Q2, cross border volume was 87% of 2019 levels with intra Europe almost Back to even at 97% and other cross border volume at 79% of 2019 levels. Turning to Page 5. Switch transactions grew 41% year over year in Q2 and were at 127% of 2019 levels. Card not present growth rates remain strong and card present growth continued to improve Aided in part by increases in contactless penetration across every region. In addition, card growth was 8%.

Speaker 2

Globally, there are 2,900,000,000 Mastercard and Maestro branded cards issued. Now let's turn to Page 6 For highlights, I'll leave you off the revenue line items, again, described on a currency neutral basis unless otherwise noted. The increase in net revenue of 31% was primarily driven by domestic and cross border transaction and volume growth as well as strong growth in services, partially offset by higher rebates and incentives. As previously mentioned, acquisitions contributed Approximately 3 ppt to net revenue growth. Looking quickly at the individual revenue line items.

Speaker 2

Domestic assessments were up 36%, While worldwide GVD growth was up 33%, the 3 CTC difference is mainly driven by pricing and mix. Cross border volume fees increased 60%, while cross border volumes increased 58%. The 2 ppt difference is primarily due to favorable mix as cross border volumes ex intra Europe grew faster than intra Europe volumes this quarter, partially offset by the lapping of elevated levels of return activity a year ago. Transaction processing fees were up 33%, 1 switch transactions were up 41%. The ATTC difference is primarily driven by the lapping of elevated return activity a year ago and Advers Mix.

Speaker 2

Other revenues were up 32%, including a 9 ppt contribution from acquisitions. The remaining growth was mostly driven by our cyber and intelligence and data and services solutions. Finally, Rebates and incentives were up 49%, reflecting the strong growth in volumes and transactions and new and renewed deal activity. Moving on to Page 7, you can see that on a currency neutral basis, total operating expenses increased 28%, including an 8 ppt impact from acquisitions. The remaining growth in operating expenses was primarily due to higher personnel costs Turning now to Page 8, let's discuss the specific metrics for the 1st 3 weeks of July.

Speaker 2

We are seeing significant improvements To provide you better visibility into current spending levels, we thought it would be useful to once again present the 2021 volumes and transactions as a percentage of the 2019 amount when we were not experiencing the impact of the pandemic. So If you look at spending levels as a percentage of 2019 for switch volumes, the broad based recovery continued through the Q2 and into July. Specifically, in the 1st 3 weeks of July, Switch volume spend levels are at 130% of 2019 levels, which is a 9 DBT improvement over Q1. We have seen a further recovery in card present spending with improvements in Travel related categories, including lodging and restaurants. Of note, in the U.

Speaker 2

S, we have seen consumer airline spend improve significantly Since the early part of Q2 with volumes now back to pre pandemic levels. Trends in switch transactions remain steady and are generally tracking the trends We are seeing a switch volumes. In terms of cross border, spending levels as a percentage of 2019 show an improving travel trend. Cross border travel, which includes both card present and travel related card not present volumes increased from 39% to 66% of 2019 levels from April to July, primarily driven by strength in Europe and between the U. S.

Speaker 2

And Latin America. Asia Pacific has been slower to recover. Cross border card not present ex travel continues to grow at a healthy rate above pre pandemic levels. This has moderated recently relative to 2019 levels in part due to a reduced contribution from the purchase of cryptocurrencies and the lapping of Significant ecom promotional activity in 2019. Turning now to Page 9.

Speaker 2

I wanted to share our current thoughts looking forward. First off, we continue to make strong progress against our strategic objectives and are well positioned to grow with the new and renewed deals we continue to sign. Domestic spending levels are showing healthy growth and we are well positioned for the return of travel with travel oriented portfolios. Further, our service clients continue to grow at a healthy rate. Turning to the 3rd quarter, The spending levels continue to improve along the current trajectory.

Speaker 2

We would expect Q3 net revenues to grow at the As a reminder, Q2 2020 marks the low point of the pandemic from a spending standpoint with some recovery in the following quarter. So we will be facing a more difficult comp of approximately 3 ppt in the Q3. It is also important to point out That this is just one potential scenario as a level of uncertainty remains related to new COVID variants and the progress And therefore, the pace of recovery may not be linear. In terms of operating

Speaker 3

expenses, we will continue

Speaker 2

our disciplined approach to approach to expense management while advancing our strategic objectives in key areas such as digital, cybersecurity, data analytics, B2B and our Material Solutions, including related brand and product marketing investments. For Q3, we expect operating expenses to grow at the High end of mid teens rate versus a year ago on a currency neutral basis excluding acquisitions. As a reminder, We are lapping the spending actions we took last year as the pandemic developed. With respect to acquisitions, we are pleased to have closed on the transaction with Acarta earlier than expected and expect acquisitions will contribute about 2 to 3 ppt to revenue in Q3 and Q4. Similarly, acquisitions will contribute approximately 9 to 10 ppt to operating expense growth in both Q3 and Q4 as we integrate several acquisitions in promising new growth areas such as open banking, digital identity and real time payments.

Speaker 2

As a reminder, We discretely disclose the impact of acquisitions for the year in which they close and the subsequent year, after which time we do not slip them out. Other items to keep in mind. Foreign exchange is expected to be a 0 to 1 ppt tailwind to net revenues and a 1 to 2 ppt headwind to operating expenses in Q3. On the other income and expense line, We are at an expense run rate of approximately $115,000,000 per quarter given the prevailing interest rates. This excludes gains and losses on our equity investments, And finally, we expect the tax rate of approximately 17% to 18% for the year Based on the current geographic mix of our business, an improvement over previous expectation due to some discrete tax benefits realized in Q2.

Speaker 2

One last point. I wanted to let you know that we are planning an investment community meeting for the fall in New York. We are planning a hybrid event on November 10, and we look forward to discussing our future plans with you at that time. And with that, I will turn the call back over

Speaker 1

to Warren. Thanks, Sachin. Crystal, we're now ready for questions.

Speaker 4

Hey, good morning, everyone. Thanks for all the details as usual. Just wanted to just going through Sachin some of the numbers you gave and just Let me get your updated thinking here on operating leverage in the second half of the year, including the Digestion of deals, it looks like there is some, but I'm just curious how aggressive some of the spending will be on the integrations That's a lot going on, a lot of good things going on there with some of the acquisitions you've done and the focus on services, if that makes sense.

Speaker 3

Yes. So, Dijun, it's like I said in my comments, I think

Speaker 2

what we have line of sight on is The acquisitions which we have done, which we have announced and that's what I've given you some level of guidance on as it relates to what contribution they're going to have from a Revenue standpoint and expense standpoint, all of which I just went through in my prepared remarks. Look, the reality is we're running the business for the long term. We're trying to drive long term revenue growth and at the same time long term bottom line growth. And I will do this in a disciplined manner. We have demonstrated over the period of the pandemic that we have sufficient flexibility in our expense base to actually Make sure that we continue to execute on our strategic objectives and at the same time keep an eye on how we're seeing the top line come around.

Speaker 2

So I guess my point to you is the following, which is we will continue to do what's right for the business to drive long term growth by investing in key strategic areas, And that's kind of where we are. In terms of the specifics on the numbers, it's what I just shared with you. We expect that Acquisitions will contribute between 2 points and 3 points to revenue in the 3rd and the 4th quarter and between 9 points and 10 points of expense growth And the 3rd and the 4th quarter. Yes.

Speaker 3

Just something to add, Timshan, here is if you look at the 3 big acquisitions that have come in over the last year or so, Net, the largest one we have done, giving us a real advantage in real time payments around the world. You have Finicity, Open Banking, that's a trend that's very hard. We feel really good about that one. And Digital Identity, Acata, is foundational to everything that we do online. So very critical acquisitions to Sachin's point, we have to do what is right.

Speaker 3

But one thing is not changing, and that is that's very clearly that our discipline on execution, we stick to our 24 months non dilutive measure On all of these. So just wanted to put that out there with you as well.

Speaker 4

All fair points and those are all important areas. Thank you.

Operator

Your next question comes from the line of Harshita Rawat with Bernstein.

Speaker 5

Michael, last week you announced a card offering for crypto companies which simplifies Crypto conversion to fiat and this business and the other announcements you've made in crypto. Take a step back, can you talk about the Value proposition Mastercard is bringing to the table for sister companies, central banks with CBDCs, stablecoin providers and the different ways you're engaging there. Thanks.

Speaker 3

Right. Thanks, Harshita. Great question. Very important topic. It's obviously a vibrant space around digital Let me go back to what we discussed in a previous call, where we said there's broadly 3 different categories that Play here, which is Central Bank Digital Currencies and there's private sector stable coins and there is a floating cryptos.

Speaker 3

So we told you that we want to be playing a role across all of them. We also said in the Q1 call that As far as stablecoins are concerned, we are getting ready to technologically enable our network to carry these stablecoins as settlement currency, Provided they meet one of our all three of our criteria, which is regulatory compliance, consumer protection and So none of that has changed. Let me just give you a view on what has happened since we had that conversation. So on the Central Bank Digital Currency front, Definitely continuing to move forward. You see a lot of central banks engaged on the topic.

Speaker 3

The ECB has just recently announced that they will actually move forward with the digital euro after a period of industry consultation. The Bank of England is in this period of industry engagement at this point right now. So there is clear progress. What is our value proposition to central banks and governments in this space is, first of all, we bring a unique is my existing financial system delivering my existing financial infrastructure and what else is the Central Bank Building Currency solving for? Everybody has different motivations, ranging from financial inclusion to cross border payments, and hence, we are sought after party because we have experience in all of that.

Speaker 3

I think a particularly critical proposition here is our virtual test platform because all of these design choices that governments have to make and that we consult them on We then have to live in the wild, so to say. They've got to work with the existing financial infrastructure, and that's what our virtual test platform does for them. So that's the proposition at this Sage for Central Banks. On the private sector stablecoins, nothing much different other than us engaging with Private sector players as well as regulators on what does the policy look like around private sector stablecoins, because this question about regulatory compliance is still unresolved. Regularities do need to weigh in and we're a part of that dialogue.

Speaker 3

On floating cryptos, here the point of currency stability It's not solved, so we won't be enabling that as settlement currency on our network. But clearly, people want to invest

Speaker 2

in that and want

Speaker 3

So we have all these partnerships out there. Now here's the thing with our announcement last week, and that is that Coin digital currency wallets out there oftentimes prefer to stay in crypto As these transactions are my selling and buying of investments. And here's where our partnerships, for example, with Paxos come in. It is It's our partner that allows the digital wallet to stay in crypto as they settle with Paxos and Paxos settles with us In FIES, that's an interim step for us as and when we reach the point that we might be enabling stablecoins in our network itself. So that's kind of where we are, playing a role across the board.

Speaker 3

This is relevant technology. It's a multi rail player. We got to be in the space because people are looking for answers.

Operator

Perfect. Thank you very much. Your next question comes from the line of Lisa Ellis with MoffettNathanson.

Speaker 5

Good morning. Good stuff. Thanks for taking my question. I have one other question on B2B payments. Michael, in your prepared remarks, you called out progress on Mastercard Track and Bill Pay Exchange.

Speaker 5

Taking Can you just give us a sense right now of where you are in terms of scale and trajectory holistically In the digitization of B2B, especially as it seems like some of that digitization has gotten a bit of a jump start to the pandemic. Anything you can dimensionalize around volumes, growth rates, etcetera.

Speaker 3

Thanks, Lisa. B2B, huge space, obviously, TAM of $125,000,000,000,000 So how are we going about it? One bite at a time, I would say. So the first thing I should say is our commercial business It's there. It's coming back.

Speaker 3

Commercial travel is coming back as I noted earlier in my comments. So here the focus is on small business, virtual card And in the B2B space, specifically virtual card solutions, for example, on online travel agency. So All that is continuing, but it's worth noting. We gave you a number sometime back in 2020. This was 11% of our GDV, and That is we're happy about that.

Speaker 3

Now when it comes to B2B very specifically, the multifaceted approach I talked you through earlier across Bill Pay, Track and the whole list that I talked about. Here I see that If I take bill pay today, if you look at the fact that we have a quarter of all Bills being paid addressable and a third of the billers, so that gives us real scale. So I think we have come To a point of scalability here with the right kind of players, last quarter we added Verizon as a biller to the mix. So That is encouraging. We haven't given specific numbers and we haven't done it this quarter yet, but really see that's going in the right direction.

Speaker 3

And with Nest coming in, We have a significant footprint in Europe. They run a scale bill pay business over there. So when the time is right, we will share some numbers around that. Now at B2B specifically Track, the excitement around a large bank like Barclays joining the track ecosystem is great. We fine tuned our go to market with ERP and software providers.

Speaker 3

So The rollout here is progressing well with the right with both sides, buyer and supplier and buyer and supplier agents. Again, we haven't given numbers yet, but it would be what you would expect when you build it a 2 site network. We're starting to have players on both sides. We We said to you a couple of times this has been this is going to be a multi rail journey. COVID, While there was a realization that B2B supply chains have been affected by COVID and there's a desire to digitize, It wasn't exactly top of mind through COVID, so we're starting to see this interest coming back.

Speaker 3

So that's kind of where we are. Sachin, do you have anything to

Speaker 2

Yes, sure. I'll just make one more point, which is as we think about B2B, we also think about it from a segment approach, right? What is the micro Business environment, small business environment, mid market and then large corporates. And when you actually dissect along those lines, you will see that there's a significant spend which takes place across the Micro and Small Business space. And if you further break that down, you will see that there is a significant amount of that spend which takes place in cash.

Speaker 2

So the only point I'm kind of trying to make is that the value prop of the card rails in B2B still stands and stands pretty strong To displace cash much like it has in the consumer space and the tremendous opportunity for digitalization to continue down that path So I know we talk a lot about the accounts payable flow and I think that's super important, but we certainly internally are not losing sight of the fact that there's significant amount of cash spend, Which still takes place where the value prop of CataCard stands good.

Speaker 5

Terrific. Yes, lots of checks too. Awesome. Terrific color.

Operator

Your next question comes from the line of Craig Moore with Autonomous Research.

Speaker 4

Yes. Hi. Thanks for taking the questions. Two questions for you. 1, any thoughts on The reopening of the Durbin Amendment discussion.

Speaker 4

And second, are you planning to update your 3 year guide at the Investor Day later this year. And I know you just announced it, but figured I'd ask anyway. Thanks.

Speaker 3

Okay. So let me take the last one with kind of like a bit of a cheeky response. I think you will just have to tune in, Craig, to find out if we're going to give 3 year guidance or longer term guidance at the time. On interchange, So complex topic for sure. And the new administration is looking at various Regulatory and lawmaking initiatives, as we all know, we've just seen News developed yesterday.

Speaker 3

From the outset, we've leaned in with the new administration. We've built a Really positive relationship, so that is very good. And we're continuing, obviously, the same kind of interaction and engagement on a topic as important as interchange Change to our industry with lawmakers on the Hill House and Senate on both sides of the aisle. We're monitoring this very Closely, there is chatter here and there on interchange, the topic that's always been focused by What I would say is we've had the benefit of now having many years of playing, seeing the Exchange regulation on debit play out. There's enough data for us out there to say that really What it was intended to do, we can't really see it.

Speaker 3

Costs for consumers have gone up and benefits have been reduced. We Providing that data to lawmakers and other interested parties and figures what the facts are stating. Now when it comes to interchange regulation applied to credit, you would expect the same in terms of cost impact, in terms of benefits impact, but there is another aspect That is the access to credit. You should assume that the access to credit for middle class Americans is going to be impacted And not in a positive way, if this interchange regulation comes in. So it is all something that needs to be thought through very carefully.

Speaker 3

What are the puts and takes? Why does Makes sense and that's the dialogue that we're leading in. The good thing is we've seen this play out in many other markets around the world and have some experience with that and can that bring to the table as well. So

Operator

Your next Question comes from the line of Sanjay Sakhrani with KBW.

Speaker 6

Thanks. Good morning. Obviously, a lot of eyes on cross Quarter travel spending and there were some constructive data points this quarter. Maybe 2 interrelated questions. Understanding the data variant Sort

Speaker 3

of, I'll say, Delta variant adds complexity to a view. But do you

Speaker 6

think that we continue to see progress On travel spending going forward, and I think Sachin, you mentioned in your Q3 view, you expect continued spending trends. Is there a view on cross border as well?

Speaker 3

Yes. Hey Sanjay. Sure. Why don't I go ahead

Speaker 2

and take that question. So really I will preface by saying Following, which is again, it's the uncertainty in the environment prevails given all these variants, which are kind of showing up. But the reality is the following, which is, It has been clearly demonstrated that people want to travel and they do so when they're able to travel and that's been shown in the domestic environment and that's been now shown in the cross So one of the things which is something which we very closely track is how is it that booking levels are taking place? What's kind of that trajectory of spend looking like or that trajectory of kind of data looking like? And then which are the corridors which are opening up based on, For example, earlier this week, there was some dialogue around how the U.

Speaker 2

K. Is going to open up to vaccinated people coming from the U. S. And from other countries. So the reality is the following, which is the data as we've seen it is what we've shared with you through the 1st 3 weeks of July.

Speaker 2

We are positive in terms of our sentiment as we progress through the second half of the year That as people get more vaccinated, more corridors will open up and as more corridors open up, people will exercise their ability to travel because they have the intent to travel. And this is really, really important because as I look at what's going on across the globe, you can see that the U. S. To Latin America, which has the ability to travel with the borders being open, People are exercising that and they're showing that come through. Similarly, now we're hearing about Canada opening up, which will be again something which is encouraging from our perspective in terms of how people play that out.

Speaker 2

Asia, on the other hand, is still, I would say, at pretty kind of subdued level just because of the reality of the situation in Asia Being what it is with the variance now actually getting to higher levels in certain countries in Asia. So look, hard to predict, but Longer term, I guess when I kind of look through all of this, what we feel encouraged about is that the vibrancy of Travel is something which will come back. And most importantly, we are very well positioned to capitalize on that as and when it does come back.

Speaker 3

I just want to add one point as I listen to Sachin. What I find very noteworthy here is, fact that it's About like 35 countries have now over 50% of vaccination levels. So this kind of sequence of you're vaccinated And you are willing to travel, which we have both seen as proof points and then governments finding ways now to enable these corridors As what we've seen with Canada and the U. K, there's a whole stock of people that are vaccinated and want to travel. And until you come to the Who else is not vaccinated?

Speaker 3

There's a long runway for us for this to play out. But as Satya said, Very difficult to predict at this point, but those are facts that are on the table at least that we're looking at and we've seen it over the last 3 weeks. Thank you.

Operator

Your next question comes from the line of Darrin Peller with Wolfe Research.

Speaker 6

Hey, thanks guys. We're now a year and a quarter basically into the pandemic. And like when we think Michael, when we think about the structural and Sustainable elements of what we're seeing in volume and even some of the other aspects of your revenue like some of the value added services, you've really been growing well,

Speaker 2

Can you give us

Speaker 6

a sense now if you revisited that what you see as now sustainably elevated, Structurally better that could persist over the next few years beyond just stimulus and pent up demand.

Speaker 3

Yes. So, Darren, the pent up demand, at some point in time, it's going to level out. I think you're Once you've caught up time and met everybody again, and we're going to come to the back of that. But there's still some more pent up Demand to go particularly on commercial travel. We'll see how that will play out.

Speaker 3

It's interesting. When you look over the last 2 quarters, we see continued elevated levels of digital e commerce spend, but we see in store Coming back, so there is not a net zero game going on. I think this is actually really generally secular trend against Ash, that is going to continue to run for a very long time. So it's good to have these 2 legs to stand on from our business model. I think that will remain.

Speaker 3

You'll see some of the e commerce going to reduce over time, but I don't think we will go back to the levels that we had For the pandemic, because people would have learned better experiences and they would like to continue with that. I think every bit of consumer research that we do tells us And by the way, this is not just for online shopping, it's for digital banking, it's for contactless, it's for everything across the board. Generally, between 60% and 70% of people that we ask, and we ask them every month, say exactly that. With this push towards a more digital world, more data that needs to be kept safe. So I could I see that the path for our cybersecurity solutions is a very clear one and a very good one, and we will not see a reversion to Something there before because you have the elevated driver of more digital just out there driving that business.

Speaker 3

And Frank, that's the same for data and analytics. Data analytics, again, more data, people want to understand it. But back to what Sachin was talking about on small business. Here's a bunch of Players that have traditionally maybe not used tools like that, understanding and managing their business through data and analytics, But now they can't. So there's a whole new segment that's opening up that will we will would like to serve to our partners in terms of Real insights on how do you run a business online from whatever you might have been doing in the brick and mortar space before.

Speaker 3

So I think those are structural changes that are here to Cross border, I don't think there's going to be something dramatically structural. The changing that's really the well, cross border e commerce. I think that is that's again, people would have figured out that this does actually work. They couldn't go anywhere. They were using cross border e commerce platforms and tools, and I think that will continue.

Speaker 3

And I think that will continue. One more thing that comes to mind structurally is the Heightened and elevated interest of government in electronic payments and digital payments. That has started last year. Again, that was driven by the prices initially. How do I get my stimulus payments out?

Speaker 3

To now our conversation, wow, this is an interesting space and I found that my Infrastructure is dated. I need to partner with people. So that is something that I see fundamentally as an opportunity, but it's important To engage with governments as a fair partner and see that local footprints and Things like that do matter. That is we are well positioned with our multi rail infrastructure to do exactly that. So there's a few things that come to mind, fact, to Lisa's earlier question on B2B, I think there's continued interest in digitizing B2B supply chain and therefore B2B payments that will also play out and grow over time over the next 2, 3 years.

Speaker 3

All

Speaker 4

right. That's really helpful. Thanks, Michael.

Speaker 3

Thanks, Dara.

Operator

Your next question comes from the line of Dan Dolev with Mizuho.

Speaker 6

Hey, guys. Thank you so much. I was Very interested in the Stripe partnership and some of the other partnerships. Can you maybe shed some more light on what you're doing with Stripe? It sounds very differentiated.

Speaker 3

The Triumph partnership, as you heard me say, this is really across the board a true strategic partnership. So this is enabling their customer set with basically every payment tool that is available in providing choice. That's in the end what this is about. Verizon, entirely different strategic partnership, but here's another network, but 5 gs network, we said what could we do? We talked about SME on this call on a couple of occasions now.

Speaker 3

Think about an SME that today has a card Terminal and how they're going to compete with the marketplace. This is a if you imagine for a moment, you have a full Internet connectivity with not much infrastructure that you need to bring in and then you can provide a with not much infrastructure that you need to bring in and then you can provide a true omni channel experience even the smallest business can do that. That is what 5 gs can deliver at any endpoint, anywhere, at any situation, and that is the vision that Verizon, Hans and his team and our Folks that we have developed. This is very specific. We've been on it for a while, and we're expecting to make a real difference there.

Speaker 3

So 2 different types of strategic partnerships. I think they both matter. Come back to the point that it's for us, it's about providing choice and payments to Anyone out there that is transacting in payments.

Operator

Your next question comes from the line of Bryan Keane with Deutsche Bank.

Speaker 6

Hi, guys. Good morning. I know we talked about cross border travel. Just thinking about cross border card not present ex travel, I know that dropped a touch in June and then month to date July. Just wondering what the outlook might be.

Speaker 6

Should we seek further modernization or Lower growth numbers there as we head into further through the year as we think about maybe more in store activity, Tougher comps, less e comm promotional activity. Just trying to get a pulse on that number as

Speaker 4

we go forward. Thanks.

Speaker 3

Yes, Brian. So, couple of

Speaker 2

things kind of to point out on that line item really. At the end of the day, there are things which are Hi, Mukul. Episodic, which took place in the months of April June as there's volatility in the price of crypto, There's more purchases which took place there and then as the prices came down then you had the inverse effect of that taking place. The reality is that to us kind of is one of those things which will remain volatile. And I say that only because I don't know where the price is going to go and how people are going to exercise their choice to purchase crypto on a going forward basis.

Speaker 2

What I will tell you is we've seen A decent level of deceleration take place and how people are utilizing Mastercard products to purchase These digital currencies like crypto over the last 3 weeks as reflected in the numbers. So that's kind of one of the factors which influenced that. The second being just a tougher comp where the timing of That e com promotional activity which took place in 2019 happened to be in the 1st 3 weeks of July. So the comp is a tougher comp here. So that I don't view as something which is on a going forward basis going to be impacting what the so called index growth rate is for this line item 2021 versus 2019.

Speaker 2

Suffice it to say the following, which is the trend towards digital continues, it's true in domestic, It's true in cross border. And the fact that that is a positive tailwind back to what Michael just talked about in terms of structural changes is something We are well positioned to actually keep participating in as economies evolve and things start to open up in different parts of the globe. So That's what I'd like to share with you on that one.

Speaker 6

Got it. Thanks for the color. Sure.

Operator

Your next question comes from the line of Jason Kupferberg with Bank of America.

Speaker 6

Thanks guys. Good morning. I just wanted to ask a follow-up on cross border. In the second quarter, the cross border volume growth Century Europe was a really good proxy for your overall cross border revenue growth. So I mean just hypothetically, if July The date trends hold for these volumes for the rest of Q3, it would seem like cross border revenue growth could approach 60% this quarter.

Speaker 6

So I just wanted to see That's a fair characterization or if there's any other moving parts we should be aware of. And then if you can just give us some quick comments on Q3, Q4 rebates that would be great. Thank you.

Speaker 2

Sure. So on cross border, Jason, you're going to mention to you that you're aware about the fact that Intra Europe cross border is lower yielding than all other cross border. And I think that's one thing to keep in mind because growth rates across Those populations of spend will determine what revenue growth rate ultimately looks like. The reality is in the 2nd quarter, we had a tougher comp from elevated level of returns that we had seen in last Which had the impact of subduing our cross border volume fee growth rate some in this 2nd quarter. And again, it's not like those returns and elevated evidence of returns only took place in the Q2 of last year.

Speaker 2

As the pandemic hit, people start to make cancellations in terms of their airline bookings, their hotel bookings, and that's kind of While it tapered, it still occurred going into the Q3 as well. So just something to keep in mind as to what the percent takes out when you're thinking about growth rates. On rebates and incentives, here's what I'll tell you. I think you're very well aware about the focus of the company on making sure We are setting ourselves up to quickly to win market share and winning market share comes through creating fantastic value proposition and then delivering them at great On rebates and incentives, the one point piece of information I'll share with you is that as it relates to Q3, we We expect rebates and incentives as a percentage of growth to be generally in line with what we saw in Q2. That speaks to what I'm going to share with you in terms of where I kind of see the business incentives playing out.

Speaker 2

Obviously, the mix of volumes impacts that line item as well.

Speaker 6

Thank you. Very helpful.

Operator

Your next question comes from the line of Andrew Jeffrey with Truist Securities.

Speaker 6

Hi. Good morning. Appreciate you taking the question. Michael, lots of progress on risk fraud, ID, Etcetera, it sounds like value added services generally are a pretty important growth driver. I wonder if you could compare and contrast what Mastercard is doing versus some of the sort of purpose built risk and fraud Products in the market, different channels, different capabilities, kind of how you coexist and compete with some of those independent providers and to handle like a risk

Speaker 3

Right, right. Thanks, Andrew. Great question. So If you look at our services portfolio to start with, we try to seek an entry point as a sweet spot Leveraging our footprint in payments and our data and then have the technological capabilities And the talent and all of that coming together to a differentiated proposition. So you'll rarely see us compete with Starting point of our strategy and we're looking for adjacencies that just leverage our core competencies.

Speaker 3

Now when it comes to The cyber solutions, if I think about a product like decision intelligence, which basically helps Our customers to make decide what's a good decision and what is not a good decision. It is exactly at the sweet spot of Everything that I said, it's the transaction data, it's the availability of having this in real time in our system available and then using state of the art AI to make the So here, I think we have, from a competitive landscape Perspective, a real leg up versus pure plays. Similar in loyalty, we're one of the largest loyalty players in the world. They are pure plays, but the fact that We see all the transaction flow and we can look at aggregated anonymized data of lookalikes and what they are interested in and how their In terms of rewards, offers, mileage programs and so forth, again puts us in a differentiated proposition. You go, but you see us building out our proposition in cyber coming back to that looking at the whole value Decision Intelligence about the transaction.

Speaker 3

Before the transaction, what we're now doing with EKATA is saying it's a foundational element. So here we go in. EKATA in itself has a set of data that allows us In real time, to help a customer, one of our customers decide if this account opening Request is a good one or a bad one, but it's a very high confidence store. That customer is obviously then interested in working with us on the downstream through the whole value chain of the transaction and other cyber and security solutions all the way to fulfillment where you again say is that address actually a real address or is it somebody that Just ordering something in somebody else's name. So that's how we're thinking about it holistically and leveraging our footprint and payments.

Speaker 3

Crystal, I think

Speaker 1

we have time for one final question.

Operator

Your next question comes from the line of Bob Napoli with William Blair.

Speaker 6

Thank you and good morning. Andrew kind

Speaker 3

of stole my lead question there, but also a question on Open Banking, I think it has been suggested that it's performing, the Finicity is performing better than expected. So I was hoping to maybe get a little bit More color on what's working better than expected and the longer term open banking strategy for Mastercard? Right, Bob. Great points. So Open Banking, important trend.

Speaker 3

What we really like is this whole concept Putting power into the hand of the individual using their own data to get a better choice in services, the financial services and other services eventually. So We like that. We've been active in Europe for 3 years now 2 years now. We went live in 2019 over there, good momentum. You heard us talk about TESSCO and Lloyd's in the U.

Speaker 3

K. You use a set of Use cases that are now live, so happy about that, good footprint over there. And then here with Felicity, that The real kick for us closing that transaction in November last year. And the Finicity team, first of all, They're deep in permission API. They are the adventures of the FDX standard.

Speaker 3

So they live and breathe open banking and that was really critical for us As a player here in the U. S, great incumbent in the market. Now what is going better than expectations? I see a lot of momentum in engaging with banks. They have best in class data, data connections and they had a best footprint in banks.

Speaker 3

But We're now that everybody else is looking at that and said, let's just connect with Finicity. But we also see progress on the FinTech side. This is an ecosystem that works on both sides. So we're excited about that. They had an interesting set of solutions today That account verification, credit decisioning assistance and now with the mortgage verification We're starting to build out at the same time while we're driving on the deal front, we're also expanding the Product set by bringing our data together with their data and our Tektal with their Tektal.

Speaker 3

So on every dimension, Really on around Financially, where we're in my time. Great. Thank you. Appreciate it. All right.

Speaker 3

Stuart, I think that brings us to the end of our time. I gave you a summary of a quarter just earlier on, so I'm not just going to repeat that again. Just want to thank you for all your support all throughout and

Speaker 2

looking forward to speaking to you

Speaker 3

in a quarter from now. Thank you very much and goodbye. Thank you.

Operator

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.

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Earnings Conference Call
Mastercard Q2 2021
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