Operator:

Good morning. My name is Julianne, and I will be your conference operator today. At this time, I would like to welcome everyone to the Mastercard Incorporated Q2, 2024 Earnings Conference Call. [Operator Instructions]. Mr. Devin Corr, Head of Investor Relations, you may begin your conference.

Michael Miebach:

Thank you, Devin. Good morning everyone. The headline this quarter we delivered very strong results powered by broad based momentum across all aspects of our business. Second quarter net revenues were up 13% and adjusted net income up 24% versus a year ago on a non-GAAP, currency neutral basis. These results were underpinned by healthy consumer spending, including strong cross border volume growth of 17% year-over-year on a local currency basis and value added services and solutions. Net revenue grew 19% year-over-year on a currency neutral basis. The macroeconomic environment remains mixed and we continue to monitor the positives and negatives. A few to note, strength in consumer spending continues to be supported by a solid labor market and wage growth. While there are some signs of labor market growth moderating, this is off very strong levels of job creation, as in also, inflation and interest rates remain in focus. We've seen inflation cool, but to varying degrees across carded and non-carded categories. Price levels are still elevated for many goods and services. Interest rates also remain elevated, but many central banks have started to ease and economic indicators support broader rate reductions. While tailwinds and headwinds to economic growth remain on balance, we remain positive about our growth outlook, but that as a backdrop, we remain focused on executing our strategic priorities, which fuel our growth algorithm across core payments, new payment flows and services. You may remember that we recently announced organizational changes to further increase our focus on these priorities. They included the realignment of both regional operations and payments and services to support our growth algorithm. These changes were designed to accelerate growth and unlock capacity to invest in long-term business opportunities. This also helps us continue to deliver positive operating leverage over the long-term. For example, we plan to redeploy resources into growth markets with high cash levels. We will invest in opening acceptance in new verticals, and we will continue to apply technology to help us realize even more of the shift to digital across both consumer and commercial. We will also enhance and expand our value added services, such as in data analytics, fraud and cybersecurity, particularly as we further embed AI into our products and services. As a result of this organizational realignment, which positions us well for the long-term growth, we expect to incur a onetime restructuring charge in the third quarter. Now, moving on to an update on some specific elements of our growth algorithm. In payments, we're driving growth by winning and retaining deals, and we're tapping into the vast secular shift opportunity by expanding in new geographies and further digitizing the payments ecosystem. Let's start with our continued deal momentum. I'm happy to announce that Varo Bank will convert their debit and credit portfolios to Mastercard. They were the first all digital bank to receive a national charter in the United States. Varo chose Mastercard due to our differentiated data insights, merchant funded offers platform and our ability to seamlessly integrate into their technology stack. We extended our enterprise agreement with Wells Fargo and partnered to launch the Attune World Elite Mastercard. This is our first proprietary consumer credit program with the bank. We also want to renew deals this quarter with key US prepaid partners, including our H&R Block, Blackhawk network, relevate and dash solutions. In aggregate, these partnerships will drive meaningful increase in our US prepaid market share. In Canada, we extended our longstanding partnership with the National Bank of Canada across consumer credit, commercial and prepaid for the next decade. And PostaPay, who already issues millions of Mastercard cards in Italy, has expanded our collaboration to drive additional growth across debit and prepaid. Let's deep dive into a few specific verticals and geographies. Travel is, of course a key focus. It has strong growth potential and a meaningful cross border component. Travel is also a natural fit with our virtual car technology and our marketing loyalty and consulting capabilities. We executed several new travel partnerships this quarter. We signed a deal with global digital payments provider checkout.com to enable them to deploy their virtual card issuing solution to their online travel agency customers. We also announced a multi-year agreement with Wells Fargo and Expedia to launch two new co-brand cards with a range of unique travel benefits. And we executed a new co-brand deal with Dashen and Ethiopian Airlines, the largest airline in Africa.This builds on a co-brand deal with RwandAir and INM Rwanda that we initiated earlier this year. I'm sure it wasn't lost on you that these two last deals I mentioned are in Africa. The continent is a great example of the vast secular opportunity in emerging markets. External sources estimate that approximately 90% of transactions in Africa are made in cash. We are committed to the digital transformation of the regions and we're doing so by ranking up our investments, developing new partnerships and rapidly expanding our acceptance footprint. For example, Africa is the world's largest adopter of mobile money accounts. Our partnerships with large Telco's and mobile network operators like Airtel, MTN, Vodafone Egypt and others put us in a great position to accelerate inclusion and cash conversion. On the acceptance front, we've more than tripled the number of acceptance locations in Africa over the last five years. We recently signed deals with the Commercial bank of Ethiopia, the largest bank in the country, and I&M Bank in Kenya. These partnerships will enable us to increase share in both markets. In Nigeria and Ghana In Nigeria and Ghana, we partner with BlueSoft Financial, who will work with fintechs across the region to issue Mastercard cards. Also, our Mastercard move capabilities are the foundation for a new cross-border money movement solution with Access Bank Group. Together, we're enabling businesses and consumers in several African markets to send and receive international payments across over 140 countries. Now this secular opportunity is not limited to Africa, we see opportunities around the globe. Think about emerging markets in Latin America and Asia Pacific. Fully capitalizing on that secular trend requires that we continue to innovate to support the digital economy at scale, and we're doing just that. We're enhancing the checkout experience and expanding our tap-on-phone acceptance capabilities. We're scaling our contactless technology in areas like transit, and we are driving the ongoing conversion of Maestro to Debit Mastercard. Let's dig into one, online shopping. It must be simple and it must work on all devices and all channels. That's why we are leaning into a new area of one-click payments. We announced that we will phase out manual card entry for e-commerce payments in Europe by 2030 in favor of a one-click checkout button. There are three foundational components to this effort, all anchored on driving simplicity and security. First, tokenization. Tokenization replaces payment credentials with a digitally secure token. When deployed, fraud rates decrease and approval rates improve. So launching a decade ago, the technology has been broadly adopted around the world. In fact, we surpassed $22 billion tokenized transactions in the first half of 2024, up 49% versus a year ago. Second is Click to Pay. Click to Pay simplifies online guest checkout by eliminating the need to manually enter payment credentials. Guest checkout becomes as easy as remembering your e-mail address. It also makes checkout more secure using the token technology I just mentioned. We are working with our merchants and bank partners to drive adoption. Click to Pay transactions more than doubled year-over-year in the first half of 2024. And third, up payment passes. Passkeys eliminate the need for passwords or text for onetime pass cold. They allow consumers to authenticate online, purchases using a fingerprint or facial features that you use every day when opening your phone. When combined, these powerful technologies are enabling us to deliver on our promise of a simple and secure one-click online checkout experience for consumers. We also continue to enhance in-store checkout. For example, we are scaling our biometric checkout program to new regions. In Europe, we're partnering with Polish Fintech payee to allow shoppers to pay with a simple glance. And in Latin America, we are working with Ingenico, so that consumers that participate in supermarkets can pay with a wave. We're also working at pace to migrate Maestro cards to Debit Mastercard outside the United States. Shifting to Debit Mastercard is a critical element of our strategy as we see a 2x spend lift on cards once they are migrated. This is primarily due to the ability to capture both cross-border and online spend on debit Mastercard. The first half of 2024, we converted over 14 million cards, which brings us to almost 300 million cards migrated since 2016. These innovations are examples of the investments we are making to differentiate the MasterCard experience versus other payment methods like P2P or local payment schemes. We also continue to capture the large secular opportunity in targeted new payment flows. Today, I will focus on commercial, starting with accounts payable payments. We are operating from a position of strength. Our market-leading virtual card capabilities have been deployed with over 90 issuers worldwide. Additionally, we are integrating our technology into four of the top five leading global procure-to-pay solution providers, completed the integration of our virtual card technology into Oracle Cloud ERP and commenced invoice payments for the first HSBC corporate customer in US. On the supplier side, we signed several acquirers onto Mastercard receivables managers. This includes Elavon, whose customers are using our AI-powered platform to streamline the process of accepting virtual cards. We also continue to expand distribution of our virtual cards, signing new deals with Brex and ad groups world first. On commercial point of sale, we're increasing the distribution of our commercial card products worldwide. In the US, the Wells Fargo small business credit card portfolio migration is now complete. In Europe, we've extended our partnership with Virgin Money to continue growing our small business portfolio, and our partnership with SAP Concur, which automatically integrates our corporate card data into Concur expense is yielding results. Large insurer Score awarded their T&E card program to Mastercard based on the value delivered through this joint offering. And finally, we're executing against our strategy to penetrate new B2B verticals. This quarter, we signed an exclusive partnership with Latin America, with CBC, the largest Pepsi distributor in the region, and the fintech enabler YalloTech Migo payments. This partnership will provide car distribution acceptance and financial education to almost two million retailers. These small businesses can now use their Mastercard small business cards to purchase inventory and other items. In the health care space, we signed an exclusive partnership with the Medical Tourism Association. They will now accept cards from consumers and utilize virtual cards to make cross-border payments to medical providers. Separately, we are working with Square to broaden card acceptance amongst smaller health care providers in the U.K. Now turning to services, payments support our services and vice versa. Services played an important part in winning many of the deals I just mentioned. And the strong payments drivers helped fuel services growth. That, coupled with strong demand drove 19% value-add services and solutions net revenue growth in the second quarter on a year-over-year currency neutral basis, this is our powerful flywheel turning. I'm excited about our momentum and the future potential whether it's deepening penetration of existing customers, launching new capabilities or distributing our services in new ways and across new customer and transaction types. A few examples. First, our services help to improve MasterCard issuer portfolio performance, thereby supporting our customers' core business objectives. For example, SEB in the Baltics is building their customer loyalty strategy together with Mastercard and Revolut is working with us to develop and execute their marketing strategy, launching campaigns across the U.K., Ireland and Italy. We're also deploying our services across non-FIs, helping to diversify our business and capture a new set of growth opportunities. Customers as varied as Paramount and McDonald's in Taiwan are using our test and learn capabilities to address core business needs, including media measurement and new product introductions. And we're working with LATAM Airlines in Brazil to optimize their co-brand portfolio and develop innovative marketing campaigns. We're partnering to distribute our capabilities in new and more efficient ways, Salesforce has integrated our dispute resolution services into its financial services cloud. This enables banks and other financial institutions to handle disputes and prevent chargebacks more effectively. And KPMG Norway has partnered with the Norwegian government to distribute our risk recount capabilities. The solution will help hundreds of local governments evaluate their cyber risk posture and that of their suppliers. Turning to open banking, we continue to make strong progress in scaling new use cases. I'll use our account opening and account linking use case as an example. Klarna in the US is now using Mastercard's open banking for this purpose. PayPal will leverage account linking, balance check and transaction history for their wallet in the US and Jack Henry will distribute these capabilities to streamline the account opening process for hundreds of issuers they support. So with that, I'll wrap it up. In summary, we delivered another strong quarter of revenue and earnings growth. We're driving growth by winning and retaining deals, we're penetrating the substantial secular opportunity, and we continue to see strong demand for our services. Now our differentiated capabilities, diversified business model and focused strategy position us well to capitalize on the significant opportunity ahead of us. Sachin, over to you.

Devin Corr:

Thank you, Sachin. Julianne, please open the call for questions now.

Harshita Rawat:

Good morning. Michael, can you talk about US merchant litigation, the settlement rejection and the ball forward from here? How should we think about the range of outcomes?

Operator:

Our next question comes from Trevor Williams from Jefferies. Please go ahead. Your line is open.

Sachin Mehra:

Sure. Thanks, Trevor. So you're right. As I mentioned in my prepared remarks, our rebates and incentives did come in slightly lower than our expectations for the second quarter. I just want to kind of take it up a level, just to kind of remind everybody, we're very active in the markets. We are constantly looking at what opportunities exist with existing customers and then with who could be potential new customers. And we have a view on what our pipeline of activities is. So the vast majority of what we had in the nature of better or, I would say, lower rebates and incentives in the second quarter were driven by some of those -- that deal activity not materializing in the second quarter. It still remains in the pipeline. It's still something we expect will occur as the year progresses. And then more specifically, as it relates to Q3, we expect that our rebates and incentives as a percentage of our payment network assessments will be higher than it was in Q2. And it's essentially based on exactly what I just said, which is it's a very rich deal pipeline that we have. And again, this is more of a timing issue than anything else.

Operator:

Our next question comes from Dan Perlin from RBC. Please go ahead. Your line is open.

Michael Miebach:

Right, Dan. So as I said earlier, the idea here is to accelerate growth. The idea is not to reposition our strategy. We've articulated our strategy. You'll hear more of that in the investor community meeting in November and how we see that play out in more detail across our core payment solutions, new flows and the services portfolio. I purposefully stated the point on markets with high cash penetration. So here is as I laid out in the context of Africa, but there's more in other emerging markets around the world, there's a tremendous opportunity here. So we want to strengthen our front line. It's also clear that the recipe to participate in the secular opportunity emerging markets isn't the same as in developed markets. So we're investing in product and so forth. It's pretty clear that on the services side, as far as the areas of focus are concerned. We continue to be guided by underlying strong secular trends, and one of that is for really any of our corporate partners and B2B partners that they want to make sense of their enterprise data and make better decisions. And how do we do that? We do that by leveraging our artificial intelligence solutions set of assistance, a set of fine-tuning how they could have more personalized suggestions to their end consumers, et cetera, et cetera. That's one part, help our customers make better decisions, not changing, but very specific solutions with a higher weightage to AI. And then on the security side and the cybersecurity side, all of this data has to be kept safe. We kept saying that for years. That's a strong secular trend in itself, and making sure that we fine-tune our solutions here. We've got to move faster because the bad guys are also moving faster, and they have the similar technology tools at their hand now. So leveraging artificial intelligence, an example I gave last quarter around Decision Intelligence Pro, that's predicting what is the next card that might be frauded. Before it actually happens, those kind of solutions provide significant lift to our customers in terms of preventing fraud obviously giving peace of mind to their consumers and overall helping our business, and it's a close link to our payments underlying payments business. So all of that -- it's largely the same strategy, but we're really focusing on very specific aspects of that, and there are other aspects of our portfolio that we're going to dial down as a result of this effort.

David Togut:

Thank you. Good morning, Michael and Sachin. Europe continues to be your largest geo by GDV and also highly differentiated growth there continues. Would appreciate your look forward on cash digitization opportunity, thoughts on the consumer. And then the outlook also for cross-border travel in and out of Europe.

Sachin Mehra:

And David, on your question around cross-border in and out of Europe, a couple of thoughts around there. Look, I mean, globally, I would say we're well positioned from a cross-border standpoint. You can see that in our metrics. And then as it relates to Europe, back to what Michael just said, as we've been winning portfolios, there's been a mix of portfolios We've been there, some of which are high cross-border and others are lowered from a cross-border standpoint. The idea is to actually be in the flow, participate and create opportunities for ourselves to actually leverage our services, our loyalty assets in order to drive cross-border, whether it's Europe or anywhere else in the world. Last point I'll make is sensitivity to foreign exchange rates, right? Strong dollar certainly helps in terms of the inbound into Europe because you tend to see a lot more travel from the US actually show up in Europe as part of that process. So again, we feel good about the cross-border opportunity, not only in out of Europe, but globally for the company.

Operator:

Next question comes from Darrin Peller from Wolfe Research. Please go ahead, your line is open.

Sachin Mehra:

Yes. Why don't I take the first part of that question, Darrin. In terms of the trends we've seen for the first four weeks of July, like I said, look, I mean, general stability and drivers across the board. And you can see that on Page 9 of our presentation. And really, I mean, to your question as to whether there was an impact from the events over with CrowdStrike or weather. I mean the reality is the weather piece has a little bit of an impact. That's what I would actually mention. But it's kind of muted in terms of the context that we've got now four weeks' worth of data in there. And so the reality is these things kind of happen, they come a particular week, if you look at it, it might look lower or higher and then there might be a catch-up factor which takes place as we tend to follow. By and large, we feel good about what we're seeing from a consumer spending standpoint, and that's reflective of what you see on the metrics right here.

Operator:

Our next question comes from Dave Koning from Baird. Please go ahead. Your line is open.

Sachin Mehra:

Yes, David. So look, I mean, it's like I said, right, it's been driven by favorable mix and a little bit of pricing in the second quarter. The reality is that the mix piece is really what's been actually causing that positive divergence you're talking about. As you are aware, our cross-border volumes are -- and we show you the metrics on this. We have intra-Europe cross-border and then we have other cross-border. Intra-Europe is lower yielding, other cross-border is high yielding for us. And so as you think about this, if the other cross-border volumes are growing at a faster pace than intra-Europe, you tend to see that positive divergence. I'll remind you, during COVID, we actually had the reverse phenomenon take place. We had intra-Europe growing faster than other cross-border and you actually had the reverse happening, which is you had cross-border assessment is growing at a slower clip than the actual underlying driver growth. So that's really what we mean by mix there. And then, of course, there's a pricing which we do back to the point Michael was making around the value we deliver, which is another contributing factor in the second quarter.

Sanjay Sakhrani:

Thanks. Good morning. I was wondering, Sachin, could you just talk about the share gain benefits in the quarter and maybe what's on the horizon. I think you mentioned it in the context of incentives. And then just specific to some of the revenue items or revenue lines. When I look at domestic assessment revenue, that kind of slowed from a trend line that we've seen that was much stronger. I know some of it was FX. But was there anything else similar for other revenues. Those were down a little bit. I know it's a smaller line, but any call-outs there?

Operator:

Our next question comes from Tien-Tsin Huang from JPMorgan. Just go ahead, your line is open.

Michael Miebach:

Right. Tien-Tsin, good to hear you. 19%, a strong growth rate for sure. The usual suspects in terms of driving for growth is the payments related part of this, particularly on the cybersecurity side. So that continues to grow and grow very well. So there's more need for more fraud solutions. That's one thing. And on the data analytics side, we continue to see great interest, as I laid out in remarks, test and learn, for example. So I'll give you a number of examples how customers are trying to figure out what kind of campaigns make sense, how can they serve their customers better and so forth. So no particular change there. I think the fundamental trend that I touched on earlier in an earlier response, more infusion of AI across the board to make these products scale better and be more effective, that's certainly a trend. Overall, the whole mix of this is largely unchanged. We continue to invest in newer aspects of our services portfolio, particularly in the open banking side. I talked through a couple of use cases here. They still have scale up in a significant way, but we feel we're well positioned in Europe, Australia and the US on the open banking side. So good to see. We said in the first quarter where we had a slightly lower growth rate. We're going to be higher quarter -- every single quarter for the rest of this year, and that is playing out as predicted. So occasionally, you have tougher comps and so forth, but this is a pretty solid trend for us.

Dan Dolev:

Oh, hey, guys. Good morning. Thank you for taking my question last quarter. I believe you gave us a cadence on rebates and incentives, growing slower in the second half versus the first half. Can you maybe give us a little bit more color on to the cadence of rebates and incentives this year. And great results again.

Operator:

Our next question comes from Andrew Jeffrey from William Blair. Please go ahead. Your line is open.

Michael Miebach:

Right. So interesting, you call that out. I just mentioned that just before. And I said it's not quite where I think most market participants would have wished open banking got to over the years. And that applies, I think, globally. Here in the United States, when I look at open banking with a focus on particular services, a set of actions around account opening or account linking or data aggregation or things like that, we see good momentum. I talked about that earlier. When it comes to payments, the payment side of open banking, it's still true that the value that the card ecosystem brings is significant, and you made a point on chargebacks. That is -- it's not comfortable if there is a problem, and then there is no established way to get your money back. On cards, we do that. The same is for fraud protection. I think we know exactly how that works in the world of card payments. It's not so clear yet in the world of counter account payments. Nevertheless, it's our role as an ecosystem custodian to understand where emerging technologies are going, whereas customer interest going that consumers want to use their data footprint to get better services, well, absolutely. First of all, that starts with data protection and data consent management, which we invest a lot of energy on. But then to say, all right, how could this kind of technology be used. So we do invest in it, which is why we called out open banking as an element of kind of future-oriented activity for us and investment. What we currently see are those use cases that I mentioned, they are the most near-term opportunity. And this is around lending. It's around account Opening, account linking, asset verification, and more recently around data aggregation. Our smart subscription solution is one example of that. That works really well for consumers. If you got 15 subscriptions and you see them in one place and it makes a real difference. So I think it's evolving. It's evolving and we're at the forefront of evolving it, but we're also trying to make sure that it's understood that the value we bring through cards is really unparalleled.

Fahed Kunwar:

Hi both. Thanks for taking the question. Just wanted to ask about profitability. Obviously, there's a lot of various moving parts with VAS growing really nicely, cross-border. How do you think about margin expansion, though versus kind of investing in all of these various product areas in distribution and the products themselves, should we expect margins to carry on expanding as they have been? Or will there be continued areas of investment that you think will kind of drive expenses higher from here?

Operator:

Our next question comes from Paul Golding from Macquarie Capital. Please go ahead. Your line is open.

Michael Miebach:

Right. So with rapid digitization around the world, we've seen a lot of new entrants into the ecosystem. A lot of small businesses have digitized post-COVID as you see in emerging markets, a lot of people for the first time using digital solutions. So digitalization is growing, vulnerabilities are growing and technology in the hands of fraudsters is also evolving. So this makes for an environment where players like ourselves who oversee an ecosystem, a franchise between banks and merchants and for the benefit of the end consumer need to really invest in safety and security. We've done that. And AI isn't actually anything new for us. So we've -- for the better part of a decade, we've been using AI. This is a discrete machine learning technology to really predict where is the next problem and analyze data of -- that we have and the data that our customers have to prevent fraud. So that's been very successful. As far as generative AI is concerned, evolving technology here, there's obviously an opportunity for us to understand more data in a quicker way. And we have used that initially to you to train our AI models, our discriminative AI models using generative AI to create artificial data set. So that was the first step. And then we went into putting out a new set of products. I mentioned Decision Intelligence. Our Decision Intelligence is that we've had for a long time, machine learning driven that was predicting fraud outcomes and now we're using more data sets to -- that are externally available, stole the card data and so forth to understand where our fraud vulnerabilities might be. The lift is tremendous, 20%, we see in terms of effectiveness out of that product. So we start to see demand for the whole reason on the vulnerabilities that I talked about. So we expect continued growth. We also expect the fraudsters to come up with new techniques themselves, we need to continue to evolve. So I believe that the penetration of generative AI and our fraud and cybersecurity product that will only expand. Now I talked a lot about transaction-related fraud. The vectors around cybersecurity, obviously much broader. It's prediction of fraud. It is what's the general cybersecurity posture of a company, risk recon capabilities and so forth. We try to cover the whole ecosystem and become a true strategic partner of our customers. So if anything, this whole space is going to grow further, and you're going to continue to see us invest in that area.

Operator:

Our last question will come from Andrew Schmidt from Citi. Please go ahead. Your line is open.

Michael Miebach:

Right. So at the outset of my prepared remarks, I talked about the puts and takes on inflation, on the prices. The bottom line there is that for now, the consumer is supported, and that's pretty much irrelevant of income cohort, is supported by a strong labor market. So that's fundamentally true, and it's fundamentally true around the world. But it's in aggregate, but it's not a uniform answer. The picture obviously plays out very differently country-by-country. We have a very global business. So we look at what is the Central Bank of Japan doing and we saw that today. They raised rates. And then Europe, you see Germany came through with actually a small recession in the past quarter. So there's a lot of back and forth. But that fundamental point that the consumer is supported by a strong labor market and some wage growth. I think that's true, and we don't expect any dramatic changes on that front, and that's why we remain positive about the outlook. You peel the onion a bit further, you look into different cohorts. And it's pretty clear that when it comes to higher income versus lower income, if you spend on an expensive trip or an experiences during the summer, whatever you're trying to do, you have more income, then you can do more of that and you have less income and you can do less of that. What we generally see though as a function of the digital economy. The higher-end consumer, but certainly the mid-income and lower-income consumer is much more empowered, empowered by having more data and the ability to look for a better deal. And that's what everybody is trying to do to make things add up and work for them that they still want to do that trip. So all of that together overall adds up to a picture that we feel pretty good, at least about our side of the business. And why do I say that? Because inflation and prices cut across carded and non-carded. But we are obviously particularly positioned. So you saw that rise. And right now, you see a lot of inflation in auto insurance and rent. That's not necessarily so much carded. So these are all the things that we think through comes back down to the fundamental point in aggregate, we see healthy consumer spending and don't see that changing in the short term.

Devin Corr:

Thank you. Now I'll hand it back to Michael for any closing comments.

Operator:

This concludes today's conference call. Thank you for your participation. You may now disconnect.

Operator:

Good morning. My name is Audra, and I will be your conference operator today. At this time, I would like to welcome everyone to the Mastercard Inc. Q1 2024 Earnings Conference Call. [Operator Instructions]

Devin Corr:

Thank you, Audra. Good morning, everyone, and thank you for joining us for our first quarter 2024 earnings call. With me today are Michael Miebach, our Chief Executive Officer; and Sachin Mehra, our Chief Financial Officer. Following comments for Michael and Sachin, the operator will announce you opportunity to get into the queue for the Q&A session. There is only then that 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.

Michael Miebach:

Thank you, Devin. Good morning, everyone. Our momentum continued this quarter as we once again delivered strong revenue and earnings growth. Quarter 1 net revenues were up 11% and adjusted net income up 16% versus a year ago on a non-GAAP currency-neutral basis. These results were powered by healthy consumer spending and strong cross-border volume growth of 18% year-over-year on a local currency basis. We had new deal wins in every region, and we're driving growth by scaling our innovative technologies. That's why people choose Mastercard, a simple, seamless and secure way to pay. With these strong results, we are reiterating our full year 2024 outlook for both net revenue and operating expense on a currency-neutral basis, excluding acquisitions and special items. On the macroeconomic front, the picture remains mixed. First, strong labor markets and solid wage growth remain in countries across the globe. This is supportive of healthy consumer spending. Second, inflation has been moderating with a path towards normalization of monetary policy in most countries. Persistent inflation in the United States could delay rate cuts here. And third, geopolitical uncertainty remains in several countries. In addition to these areas, we are closely monitoring the strength of the dollar, commodity prices and consumer balance sheet health. With tailwinds and headwinds to economic growth remain on balance, we are positive about the growth outlook. With this backdrop, we are focused on our strategic priorities

Devin Corr:

Thank you. [ Audra ], you may open up the line for Q&A now.

Sanjay Sakhrani:

Yes. Sachin, just a question on the guide. I mean, it seems like a lot of the guide lower on revenues is just FX, but I'm just confirming when we look at the volume and yield trends, those seem to be doing fairly well, if not slightly better than expectations. And you mentioned the conversion beginning, just trying to think through as we look ahead, it seems like those trends seem constructive. I just want to make sure that's the way you're looking at it.

Operator:

We'll move next to Craig Maurer at FT Partners.

Sachin Mehra:

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.

Sachin Mehra:

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.

Ramsey El-Assal:

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?

Operator:

We'll go next to Harshita Rawat at Bernstein.

Michael Miebach:

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.

Dan Dolev:

So rebates and incentives were a little bit higher than what we had expected in the first quarter. How should we think about the remainder of the year? And do we expect it to cool off a little bit?

Michael Miebach:

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.

Darrin Peller:

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.

Michael Miebach:

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.

Tien-Tsin Huang:

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?

Michael Miebach:

[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.

David Togut:

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?

Sachin Mehra:

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.

James Faucette:

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?

Operator:

We'll take our next question from Tim Chiodo at UBS.

Michael Miebach:

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.

Bryan Bergin:

I wanted to just ask about the change in the organizational structure. Any financial implications to be [ aware ] from that? Just how you're feeling about those early changes as you pursue the growth opportunities across the business.

Operator:

Next, we'll move to Bryan Keane at Deutsche Bank.

Sachin Mehra:

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.

Operator:

We'll take our next question from Dave Koning at Baird.

Sachin Mehra:

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.

Michael Miebach:

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.

Operator:

And this concludes today's conference call. Again, thank you for your participation. You may now disconnect.

Operator:

Good morning. My name is Briana, and I will be your conference operator today. At this time, I would like to welcome everyone to the Mastercard Incorporated Q4 and Full Year 2023 Earnings Conference Call. [Operator Instructions]. Mr. Devin Corr, Head of Investor Relations, you may begin your conference.

Michael Miebach:

Thank you, Devin. Good morning, everyone. Here's the headline. We closed out 2023 with another quarter of strong earnings and revenue growth. Quarter four net revenues were up 11% and operating income up 13%, both versus a year ago on a non-GAAP currency-neutral basis, excluding special items as always. These results were driven by healthy consumer spending and the ongoing execution of our strategy. Our deal momentum continued this quarter, powered by a broad range of unique diversified products and services both designed to solve our customers' needs. Let's start on the macroeconomic front, where we see both tailwinds and headwinds. First, the labor market remains strong with low unemployment and rising wages. These remain key drivers of consumer spending. Some risks we're monitoring include credit availability and delinquency rates. Second, while inflation continues to moderate, prices of many goods and services remain elevated. We're tracking the efforts of central banks who are actively managing interest rates to normalize inflation. And finally, geopolitical uncertainty remains a concern in several markets. On balance, we remain fairly positive about the growth outlook, but we are monitoring the environment closely and we'll manage the business accordingly. Looking at our switch trends this quarter, domestic volume growth remains healthy and cross-border spending remains strong, up 18% globally in the fourth quarter on a local currency basis. With that as a backdrop, we remain focused on our strategic priorities which fuel our growth algorithm across payments and services and new networks. In payments, our growth algorithm consists of five key areas. One, being in the flow to capture the natural growth of economies. Two, accelerating the secular shift to electronic payments across both spend and transactions. Three, further penetrating the addressable market in new flow. And four, growing market share, and five, optimizing our customer portfolios for performance. Economies are growing and that's not in our control. However, we are executing on the rest. Building on that, the runway for the secular shift is substantial. We are accelerating it by scaling acceptance, enhancing the user experience for digital transactions and driving adoption in new sectors and new use cases. In 2023, we added millions of new acceptance locations worldwide. This growth has been aided by scaling our tap on phone and cloud commerce capabilities. We're now live in over 18 markets. Smaller merchants can start accepting payments by simply downloading an app, and larger merchants are leveraging the technology to promote quick and seamless checkout experiences anywhere in store. We're supporting partners like Apple, who in 2023 expanded tap to pay on iPhone into Australia, the UK, France, Brazil and several other markets. We're also accelerating the secular shift away from both from cash and closed-loop transactions such as transit through our contactless capabilities. Contactless provides a fast, secure and seamless consumer experience in areas like transit, which creates an opportunity to capture incremental transactions with a tap for every single ride. And when consumers use contactless for transit, they often extend that behavior across other low dollar spend categories. We've made great progress with many major cities such as London and New York, operating broad-based open-loop systems. However, there's still significant runway for us given that only a small percentage of large cities globally are operating open-loop systems at scale. And we're leaning into advanced payment technologies like Click to Pay, tokenization and biometrics. They offer embedded, secure and password-free checkout solutions and with that bring an elevated level of security, simplicity and speed to every transaction. And that's true regardless of the device, browser, or card. These solutions not only benefit consumers, but they also create value for merchants as their customers are less likely to abandon a transaction and issuers also benefit from an increase in customer stickiness. For Click to Pay, we are now live in over 35 countries supported by over 50 channel partners. And in 2023, we drove over 60% growth in transactions. Klarna will implement Click to Pay this year and activate their merchants across all European markets where they operate. We're driving tokenization across all channels including devices, commerce platforms, card on file and guest checkout. Tokenization reduces fraud and increases approval rates by approximately 3 to 6 percentage points across regions. And we're expanding our biometric payment capabilities, which enable payments with a smile or a wave. After launching in Brazil, we have now partnered with NEC Corporation to bring our biometric checkout to the Asia-Pacific region. We're also driving growth by winning and retaining deals across consumer payments, account to account and new flows. This week, we shared that BOK Financial will flip its U.S. Debit portfolio to Mastercard, making us the exclusive partner across its debit and commercial portfolios. They selected us due to our differentiated virtual card and open banking assets fraud solutions and our shared commitment to financial inclusion. This marks the third U.S. regulated debit flip we signed in the last year building on our recent successes with Citizens and Webster Bank, both of which have now started converting their portfolios. And BPER Banca, one of the largest banks in Italy, will migrate their debit card portfolio to Mastercard as well. We renewed our partnership with Commonwealth Bank of Australia where we will retain exclusivity across their consumer credit and debit portfolios. We signed a long-term partnership with Shinhan Card, the largest issuer in Korea, to solidify our leadership in the country. This relationship spans consumer and commercial card offerings and expands into new services including data analytics. And in Canada, we executed an exclusive long-term renewal of the President's Choice Financial, consumer credit and prepaid portfolios. We're also winning in fintechs, co-brands and public sector partners. When it comes to fintechs, Mastercard is a partner of choice. In fact, Mastercard serves over 80% of the top digital payment and neobank fintechs on the CNBC Global Fintech list. This quarter, Starling Bank, one of the largest fintechs in the UK renewed their partnership with Mastercard. In the co-brand space, we're partnering with J. Crew and Synchrony in the U.S. to launch the retailer's first co-branded digital first card. And in the public sector, we have an exclusive partnership with Fiserv Money Network for all U.S. state and federal government benefit and wage disbursement debit programs. As part of our partnership, we are thrilled to launch with the California Economic Development Department in February, the largest unemployment program in the United States. As you can see, we continue our positive deal momentum powered by our differentiated products and services, while always keeping a focus on financial discipline. This also helps us to capture more of the secular tailwind and in turn further drive services growth. Looking to China, we are thrilled that our joint venture in China has released formal approval to commence domestic bankcard clearing. Believe that we will be uniquely positioned to provide Chinese consumers with an exceptional payment experience using a single card that's optimized for both domestic and cross-border spend. While we're excited about the medium to long-term opportunity, there's still work to be done as we fully build out the issuing and acceptance footprint. As we do that, we continue to grow our presence with bank and fintech partners in the market. ICBC launched the first world Mastercard product in November and Bank of Communications selected Mastercard to launch their first international debit card. Beyond cards, we also continue to make meaningful progress in the account-to-account space. This quarter, we announced a long-term strategic partnership with The Clearing House, the operator of the RTP network, which continues to secure our position in real time payments in the United States. Now shifting gears, we continue to execute against our strategy to capture the large secular opportunity in targeted new flows including commercial payments and disbursements and remittances. We continue to win in commercial. This spans commercial point of sale and B2B accounts payable which we target through our market-leading virtual card solution. This quarter alone we renewed our commercial relationships with JPMorgan and FLEETCOR, two of the largest commercial issuers in the United States. BNP Paribas Fortis will flip their business credit portfolio to Mastercard in Belgium and on the virtual card front, we announced two exciting partnerships in the online travel agency space with Booking.com and Agoda. Turning now to disbursements and remittances. In 2023, we grew transactions by over 30%. We continue to scale our use cases. For example UBS has integrated our cross-border services capability. This will enable them to execute instant cross-border payments from multiple use cases, including helping their customers pay employees abroad. In addition, we also partnered with Alipay to establish them as a cross-border payments receiving institution in China. Payments, services and new networks reinforce each other. We said it countless times. Our services and new networks provide differentiation as noted in many of the wins I mentioned. Underlying payments growth helps drive services too and payments growth brings incremental rich data. Our services turn that data into valuable insights and when implemented by our customers, those insights can drive incremental digitization of payments. In turn, this generates even more data, more transactions, more need for fraud tools and the powerful cycle continues. The services and new networks components of our growth algorithms are built on, driving increased penetration of existing customers, extending our services across new customers and customer types and continuing to build and deploy new services. Here are a few examples how we are executing against each of these. The past year Bank of America has expanded their services relationship with us to include test and learn program management and supplier enablement solutions. This is on top of many of our services they already have. Axis Bank in India has also expanded their relationship with us. They will use our consulting, marketing and analytics services to support end-to-end portfolio lifecycle management. Worldpay is utilizing our fraud alerts to streamline the dispute resolution process. And Citi has deployed consumer clarity digital receipts to provide eligible U.S. cardholders with detailed purchase information directly to their bank app. Now with increased visibility about the merchant and purchase details, consumers can easily validate transactions and reduce the number of disputes they file. Square is also integrating consumer clarity solution. Furthermore, Nexi has chose Mastercard as a strategic partner to rollout open banking for e-commerce payments across Europe and the list goes on. We're extending our services and solutions across new customer types including large marketplaces. Alibaba will use Mastercard's open banking technology to help streamline the onboarding experience for small businesses on the U.S. marketplace and reduce fraud. And Meta utilizes our digital identity technology to improve authentication for online orders. We also continue to develop new services and solutions, many of which leverage the work we are doing with Generative AI. Generative AI brings more opportunity to drive better experiences for our customers, and makes it easier to extract insights from our data. It can also help us increase internal productivity. We're working on many GenAI use cases today to do just that. For example, we recently announced Shopping Muse. Shopping Muse uses Generative AI to offer a conversational shopping tool that recreates the in-store human experience online, can translate consumers' colloquial language into tailored recommendations. Another example is Mastercard Small Business AI. The tool will draw on our existing small business resources along with the content from a newly formed global media coalition to help business owners navigate a range of business challenges. The platform, which is scheduled for pilot launch later this year, will leverage AI to provide personalized real-time assistance delivered in a conversational tone. And finally, we expanded Mastercard Access, which provides customers with a single point of connectivity to quickly and easily source our AI digital and identity services. Using access customers can deploy these services across multiple rails or networks including those outside the Mastercard network. This is an exciting development, which enhances our ability to scale our services across networks and streamlines the ability for our customers to adopt our capabilities. So with that, I will wrap it up. In summary, we delivered another strong quarter and year of revenue and earnings growth. We're successfully executing against our strategy and on our growth algorithm. Our differentiated capabilities, diversified business model and focused strategy position us well to capitalize on the significant opportunity in front of us. Sachin, over to you.

Devin Corr:

Thank you. Briana, you may open the call for questions now.

Harshita Rawat:

I want to ask about U.S. card volumes. So weather aside, the growth has decelerated a bit to mid-single-digit levels versus what we've seen in the last 5 to 10 years, especially if you compare that to PC. So how should we think about kind of a normalized card volume growth in the U.S? Or is there simply more runway, a number of transactions. So that's the metric we should be watching? And also, just as a follow-up, can you also comment on Reg II impact on U.S. bonds?

Operator:

Our next question comes from Craig Maurer with FT Partners.

Michael Miebach:

Right. Let me take the China question first and we come back to the conversion topic that you raised. So needless to say, we're thrilled about China. So this is a -- it's a massive economy, and we feel we're well positioned to serve it. As I said in my remarks at the beginning, we feel we're uniquely positioned to put into the hand of Chinese consumers a solution -- a seamless solution that works domestically as well as when they travel. That's not unique. There's another competitor that has that kind of a proposition. But we do have the much better acceptance network to provide an end-to-end solution that works well. On that basis, we're busy right now with our partners in China with the banks with acquirers, issuers and so forth, to discuss rolling out on the issuing side as well as on the acceptance side for six months, as you rightly said. Now for years, we have been very active in China on the cross-border side. And those are strong relationships with the same exact banks. And we're just -- I mentioned too, with ICBC and Bank of Communications, we're just launching new products. So the fact that we are well positioned today with the banks gives us an edge here on moving forward at speed. As I also said, going live within the first six months doesn't mean that we're live everywhere, and we have to build this out over time to get full opportunity in the medium to the long term. And on the conversion piece, just to know, for the U.S., we saw -- I mentioned this earlier for Webster and for Citizens, conversion is starting. Some of the big conversions in Europe have already completed. Sachin talked about the lapping for NatWest and so forth. So Sachin, if there's anything else?

Operator:

Our next question comes from Sanjay Sakhrani with KBW.

Sachin Mehra:

Let me just take the Brazil one first, and I'll come back to your second question. So on the Brazil piece, it increases our operating expenses because it's an increase in indirect taxes, which are there. That is a -- it's more than offset in our tax rate and in the thoughts, we've given you from a tax rate standpoint. So from an overall EPS standpoint, it actually ends up being slightly accretive because of the more than offset, which is taking place on the tax line there. On your question around payments versus value-added services and solutions expectations. Look, we're not giving specific guidance as it relates to how we see payment network revenue and value-added services and solutions revenue. But at the high level, here's what I'd say. Let me first address the value-added services and solutions piece. We continue to see good growth in our solutions around everything around our fraud and security solutions, our data analytics and insights, and we're building all of those into our thoughts for the year. We've had a good year in 2023. We continue to see a good outlook for value-services and solutions going into 2024. Likewise, for payments, right? I mean as you can imagine, in payments, it's a function of what we think will happen from a carded market volume growth rate standpoint and what the impacts will be from share wins as well as the impacts of rebates and incentives. So all of that kind of is factored in. What I would tell you broadly is that we continue to expect value-added services and solutions to grow at a faster pace than we do on the payment network side.

Tien-Tsin Huang:

Just thinking about the outlook. I think Harshita to ask it as well, just the outlook for growth between the U.S. and rest of world. Any -- anything to call out there? Do you expect the trends observed in '23 to be different in 2024 here between the two regions?

Operator:

Our next question comes from Dan Perlin with RBC Capital Markets.

Michael Miebach:

Dan, you just touched on some of the key things to watch out for. But this is no different than us monitoring fiscal monetary policy reactions by central banks and governments. So those are all things that affect consumer sentiment, potentially affect consumer spending. So we'll just have to stay close to what that is. Our discipline around these things is to do some solid scenario planning and making sure our playbook in terms of managing our financial responsibility responsibly is up to date. Certainly, the last three years have had no shortages of such challenges, and we adapted quickly. More specifically to the points that you mentioned, elections happen regularly. So there is nothing dramatically new in 2024. And geopolitical conflicts, they've been around, and they keep going. And that is something we'll watch what is the impact on energy prices and various downstream into the broader economy. Yet again, our Economics Institute is keeping a focus on that. So nothing very specific. That's why we kept it relatively high level. But these days, one has to just take a look left and right all the time.

Darrin Peller:

It's good to see the value-add services and solutions accelerate, maybe going back to 17% from 14%. Maybe you could just revisit that for a minute in terms of -- I know you sounded confident that, that should sustain strong growth relative to the business. And so maybe just revisit the drivers of that and what gives you the confidence that sustains? And really just overall, what's the -- what's -- if you sort of rank the top items in that category?

Operator:

Our next question comes from Cris Kennedy with William Blair.

Michael Miebach:

Right. So let me do that. I just gave you the headlines on that. So specifically, within that, there's a whole set of solutions from biometric to identity events where we have an ability to provide an identity confidence score to one of our customers and saying, this person has lived at the address before and here is their previous employment. So with this -- with a certain level of confidence, we can say, this is the person. All this stuff is kind of happening behind the scenes. That is the approach that we're taking. But it's not just our identity data. We are combining this with open banking. We're trying to find use cases where this really makes a difference. For example, an account opening. So we're taking our open banking technology in our Finicity footprint here in the United States, all the way up to 90% of our deposit accounts in this market. And we're taking our digital identity solution into a premium account owner verification and account opening solution. Those are the kind of examples where we see we’re truly differentiated. At the highest level, it’s before and after the transaction, we’re driving value through digital identity. We feel this is absolutely central to the digital economy. And that’s why we put it in the new network because there are people who have identity data and there are people who want to use identity data. We don’t want to hold it. We’re sitting somewhere in the middle, and we are essentially the trusted partner that can prove one way or another if a person is the person they claim to be. Minimal use of data, permission data.

Paul Golding:

I guess to touch on Finicity since you just mentioned it, Michael. Do you see this evolving more so as a value-added service and solution driver or a volume driver now that you've had it in the portfolio for some time? And then as a follow-on, I just wanted to see if we could get some more color on the acceptance location growth from a regional perspective, given the strength in international volumes in the period?

Operator:

Your next question comes from David Togut with Evercore.

Michael Miebach:

Let me start off with that question. First of all, I do want to underline what you just said. It is a source of differentiated growth for us. We've had a great run in Europe. And it's a combination of share growth, but it's also driven by the ways that we find to go after the accelerated secular shift that we saw on the back end of COVID. Countries like Germany really driving up contactless usage, just to give you one example. So overall, Europe has been firing on all cylinders for us. And I come back to the growth algorithm that we laid out for payments, which applies very much in Europe. So European economies will do what they do, but we will continue to focus on share gain, but we will also be very busy to take the share gains that we've already had and turn that into profitable volume for us. Conversions driving that. We had a question on that earlier. So that's driver number one. And then going into new flows in Europe, there is opportunity there as well. If you look at alternative payment systems, everything that's going on in Europe, clearly, through PSD3 and so forth, there's a lot of movement in Europe that we will stay on top as we look ahead into that. Differentiated assets in bill pay in the Nordics and so forth. So we have a pretty broad footprint to participate in all the drivers in Europe. In terms of Services, the services has been strong in Europe for a long time. Our advisers on our consulting business has been a winner for us in Europe for the longest time. And if you look at some of these big wins, that we've talked about, they all have a significant contribution of services. In fact, I would say, oftentimes, they are one of the reasons that we win those deals. So nothing dramatically different there. I think Europe has caught up on secular trend in digitization and we're firing on all cylinders. We have -- we're fully invested in Europe. As you know, one of the big topics in Europe is European sovereignty, and we are deeply invested in Europe with our efforts, and we're engaging with -- in Brussels in the nation states and so forth, which is very important for us to do to be a partner on their journey.

Operator:

Our next question comes from Ken Suchoski with Autonomous Research.

Sachin Mehra:

Look, I mean, I'll comment on the yield piece, because what you're seeing effectively in the fourth quarter of 2023, when you look at payment network net revenue divided by GDV is what you see every year in terms of the sequential decline in yields. And that's primarily being driven by the fact that, remember, in the third quarter of all years, we tend to have our strongest cross-border performance. And our cross-border tends to come with our best yields. And so what you've got is when you're getting more bang for the buck for $1 of GDV on the cross-border side than you are on the domestic volume side. So that's what's causing for that sequential decline. You'll see that as a pattern, which has existed in prior years as well. Broadly speaking, I would tell you that, otherwise, there's nothing unusual to call out on the payment network net revenue yield. The one reminder I'll give you is that, we run the business not only to optimize payment network, net revenue yield, but overall net revenue yield for our company. Because again, it goes back to the question David asked right before you, Ken, which is at the end of the day, we've got to be in the payment flow. We've got to allow ourselves to have the opportunity to deliver services on those payments to generate additional revenue, which causes for overall net accretion in our overall net revenue yield. So I know your question is specific to payment network net revenue, but I just wanted to make sure you know that from our mindset standpoint, we're looking at payment network net revenue yield as well as overall net revenue growth to the company.

Operator:

Your next question comes from Andrew Jeffrey with Truist Securities.

Michael Miebach:

Right. So I think both questions, your question and the previous question hit on an important point there. There is a particular point of interest for us at the intersection of open banking and payments. It enables -- the open banking connectivity enables us to go after use cases that we otherwise wouldn't be able to go after. So here's additional data that is available that you can then combine in combination with an underlying RTP rail to make a profitable proposition for a customer, which is exactly what Chase Pay-by-Bank is. Basically, you debit your customer when there's a balance, and that is what the open banking connectivity tells you. So that's a good solution. If we look broadly around the world, Pix, UPI in India, FedNow, there's a bunch of real-time payment systems. And those are the kind of rails where we have experience. We have connectivity. In some, we operate them ourselves. So that is exactly what we're looking at as one of the assets and the propositions that we will bring together for our customers. Now, more broadly speaking, when you look at Pix, when you look at UPI, one other thing to keep in mind is, here’s public sector doing a good job in pulling in more participants in the overall digital economy so we can come in with our solutions, our real-time payment solutions, our card-based solutions, but they’re basically extending the digital economy to create a tide that kind of lifts everybody’s boats, financial inclusion being the headline. So that’s something to consider. Somewhere in between, there are points that we will manage very carefully as in when these systems grow and they provide alternatives to our solutions that we compete and provide the best solution to consumers and to our customers. On the fraud side, on ease of use, a lot of these systems don’t have all of these functionalities. So those are things that we focus on. So we’re focused on providing the best choice to our customers. We don’t mind the competition, but we actually see quite a bit of opportunity for us to use these rails for the open banking type of solution that you just asked about. So interesting space, and it drives the overall economic growth, digital economic growth.

Trevor Williams:

Sachin, I was just hoping you could put a finer point on the growth algorithm within the full year revenue outlook. I know you mentioned some of the cadence dynamics with VAS and currency vault, but any help on what you're assuming for volume and transaction growth relative to the January trends, rebates and incentives, pricing? Any help on those would be great.

Michael Miebach:

We have time for just one more, Brianna.

Ashwin Shirvaikar:

I appreciate all the comments so far. My question is on real-time payments. And Michael, you did have some incremental comments there on TCH, but saw the TCH renewal. Obviously, you have a global set of capabilities here. My question is, what's the runway and what drives it? Is it the use cases rather than more countries? And then if it is use cases, what are some of the use cases that you see coming up that are exciting from a conversion perspective?

Devin Corr:

Thank you, Michael. Any last comments?

Sachin Mehra:

Thanks, everyone.

Operator:

Good morning. My name is Audra, and I will be your conference operator today. At this time, I would like to welcome everyone to the Mastercard Inc. Q2 2023 earnings conference call. [Operator instructions] Mr. Devin Corr, head of investor relations, you may begin your conference.

Michael Miebach:

Thank you, Devin. Good morning from New York, everyone. Let me start by acknowledging the recent terror attacks in Israel and the resulting war with Hamas and the growing humanitarian crisis in Gaza. We're deeply saddened by the suffering and the loss. Our focus is on the well-being of our people, those who have been directly impacted, and those in our teams around the world, who are dealing with this terrible situation. We will continue to give them support while contributing to relieve efforts. We will monitor the situation closely so we can take action as required. Turning to our results, our quarter three results demonstrate the strong fundamentals of our business, our diversified model, and the continued resilience in consumer spending. Quarter three net revenues were up 11% and operating income was up 13%, both versus a year ago on a non-GAAP, currency-neutral basis, excluding special items. On a macroeconomic front, there are a few factors we focus on. First, the labor market remains strong, which is a key driver of consumer spending. However, we continue to monitor aspects such as credit availability and savings behaviors. Second, although inflation levels have moderated, they remain elevated. As central banks continue to actively manage monetary policy, we expect the impacts to vary across countries and sectors. Also, geopolitical uncertainty remains a concern, further underscored by the recent events in the Middle East. We are monitoring these moving pieces and stand ready to manage the business accordingly. Looking at our switch trends this quarter, domestic volume growth remains healthy, with some moderation in spend in select international markets. Cross-border travel remains strong at 155% of 2019 levels in the third quarter. And cross-border card present X-travel continues to hold up well at 209% of 2019 levels in the third quarter. And this is cross-border card not present X-travel. So overall, consumer spending remains resilient and we remain focused on executing against our strategic priorities. We see substantial runway for growth through the long-term potential in person-to-merchant payments, the sizable opportunity to address new payment flows, our diverse suite of fast-growing service capabilities, and our investments in areas of future growth like open banking and digital identity. Let's explore these in more detail. Starting with person-to-merchant payments, where we see a sizable long-term growth opportunity. We're winning deals with a diverse set of partners and investing in technology to further drive the shift to electronic forms of payment and capture new ways to pay. The third quarter, our deal momentum across the globe continued. In the US, we're happy to announce that Webster Bank, a leading commercial bank in the Northeast, has chosen MasterCard as their exclusive payment network. They selected us because of our marketing assets, safety and security tools, and commitment to small business. This builds up on recent wins in the U.S. like the Citizens Debit Portfolio Flip with the transition on track for 2024. These two wins are clear examples of the value we deliver through our partnerships and the reasons banks are willing to move their debit business to MasterCard. Further, we have partnered with Citi's wealth business to launch their ultra-high net worth credit proposition, targeting their private bank clients in Singapore and Hong Kong. And in East Africa, we signed a long-term deal with Equity Bank Group that significantly increases our share across the six markets where they have presence. On the co-brand front, we joined Barclays to launch Xbox, first credit card in the United States. Building off our long-standing relationship with Microsoft, this product is an example of how we're tapping into the fast-growing gaming space. And of course, we continue to strengthen our travel-focused programs, renewing our Frontier Airlines program issued by Barclays, as well as the Turkish Airlines program with Garanti BBVA. Winning deals positions us well to capture PCE and secular growth. There's a sizable opportunity across volumes and transactions, and we benefit from both. We're bringing together innovation, technology, the experience, and trust that consumers want and expect in their daily lives. And that starts with our best-in-class digital solutions such as Contactless and tokenization. Contactless now represents 63% of our in-person switch purchase transactions, and the convenience and security of our capabilities are helping us to further penetrate verticals like transit. By converting transit to Open-Loop, we gain access to more low-ticket, high-frequency transactions, both at the station and the surrounding merchants. The last quarter alone, we launched Open-Loop programs with two of the largest transit systems in North America, Toronto, and Philadelphia. We're now live with over 25 agencies in the U.S. and Canada. This year in the Netherlands, we supported the launch of a nationwide Contactless transit payment system. And in Pakistan, we're helping to digitize daily commutes in Karachi with issuance over one million prepaid Open-Loop cards. On tokenization, it has been 10 years since we first introduced the token standard to the industry. Today, it is foundational to the network and it's performing exceptionally well. The number of tokenized transactions has more than doubled over the past two years. We just processed over three billion tokenized transactions in one month. And this functionality is extending to new places to pay. For example, Mercedes-Benz customers in Germany can now pay for fuel directly from their vehicle using only their fingerprint. And Hyundai Motor America is enabling in-vehicle payments for parking with additional features and EV use cases to be enabled in the future. Digital solutions are also key to migrating Maestro to Debit Mastercard. This conversion drives a better cardholder experience, including in many cases, the ability to shop online and across borders, which leads to incremental card spend. And prior to full transition, we offer a virtual companion card to the current Maestro cards for immediate online use. In Europe, we're in the process of sun-setting new issuance of Maestro, and we will continue to work with our issuers on the migration of well over 100 million cards over time. A lot happening in P2M for sure. Onto the second vector for growth, new payment flows. There are substantial untapped flows across commercial payments and the disbursements and remittance space. In commercial, we continue to see strong growth. We're expanding our market-leading virtual card capabilities into new use cases. In the U.S. and Canada, our mobile payment solution is now live with BMO and TechPartner Extend, bringing our virtual card capabilities to contactless business payments. We also continue to expand our reach to corporates by partnering with Oracle to embed MasterCard virtual card capabilities into their Fusion Cloud ERP to enable supplier invoice payments and corporate purchases. And we are integrating our commercial payment and open banking capabilities into SAP Firenir platforms to deliver an embedded payment and lending experience. There remains a significant opportunity to convert cash and check to commercial card products. We're signing deals across the globe to do just that. We're excited to announce that we have agreed a long-term deal with Citibank to forge a global commercial card partnership covering more than 60 markets. The deal extends our leadership position with Citibank and reinforces our efforts to modernize and grow B2B payment flows. We also signed our first ever commercial contract with Axis Bank in India and a commercial deal with the biggest investment bank in Latin America, BTG Pactual. Now, let's focus on disbursements and remittances. With access to more than 95% of the world's bank population, our reach spans more than 180 countries and more than 150 currencies. And we are seeing strong growth. In the third quarter, transactions were up more than 30% on a year-over-year basis. To continue growing in this space, we're expanding into new use cases and geographies. A great example is our partnership with Remitly, one of the fastest growing digital remittance platforms with over five million active users. Remitly will leverage our disbursement and remittance solutions to help make international payments faster, easier, and more secure. We're also expanding our collaboration with Paysend in the U.K. to enhance cross-border payments for SMEs. Now our value-add services and solutions are another important driver for our growth. Collectively, this suite of capabilities is fast-growing and provides a diversified revenue stream. We have invested thoughtfully to develop services focused on supporting our customers in areas of growing need. Cybersecurity threats are rising, a trend that will unfortunately persist. And there's an increasing demand for actionable insights and more personalized experiences. Our services, bolstered by our data-driven intelligence, can help customers reduce fraud, grow their portfolios, and better engage with their end customers. Take our cyber solutions, which protect consumers and the payments ecosystem more broadly. One example is SafetyNet, which in the past 12 months has prevented more than $20 billion in fraud. This is just one of our many fraud solutions that we're deploying to deliver more value and support continued growth. AI also continues to play a critical role powering our products and fueling our network intelligence. We're scaling our AI-powered transaction fraud monitoring solution, which delivers real-time predictive scores based on a unique blend of customer and network-level insights. This powerful solution gives our customers the ability to take preventive action before the transaction is authorized. This quarter alone, we signed agreements in Argentina, Saudi Arabia, and Nigeria with financial institutions and Fintech's, who will benefit from early fraud detection and with merchants who will experience less friction and higher approval rates. In the end, this all makes for a better consumer experience. We're also using our services, combining our data and expertise to help clients optimize and do more with their portfolios. This drives both direct services revenue and incremental payments revenue. Our consulting, marketing services, and targeting analytics help clients design and execute portfolio migrations, drive incremental card acquisition, and stimulate spend. For example, in Spain, we are working with Financiera El Corte Inglés to boost the migration of closed-loop clients to our new open-loop co-badge proposition. And we're working with Saudi National Bank to enable growth in their credit portfolio by increasing penetration from their debit base. So the headline for me is the power of our strategy to drive payment network and service revenue for MasterCard. Service improved the performance of a client's portfolio, leading to incremental payment flows which lead to more opportunities to use our services, and so on, and so on. It's a virtuous circle. We also had success in expanding our customer base and services through best-in-class personalization and our leading test and learn analytics capabilities. Don't just take our word for it. Gartner recognized the superior value proposition of dynamic yields, personalization activities, and selected it as the leader in its 2023 Gartner Magic Quadrant for the third year in a row. That's why luxury brands like Saks Fifth Avenue work with us to create hyper-personalized experiences for their e-commerce customers. This quarter, we extended our partnership with the merchant ALDI in both the U.S. and Australia to continue to leverage our test and learn platform to optimize category reviews, store hours, and marketing spend. And we're working with Duncan International to enhance their foundational data analytics capabilities to improve operational efficiencies. Our best-in-class solutions address the unique needs of a diverse set of customers, giving us ample opportunity to continue to grow across our value-add services and solutions. We have a strong foundation for growth in P2M, as discussed, new-flows and services, and we are also embracing new opportunities for future growth. As digital adoption continues to rise, open banking remains a key opportunity. We have a powerful set of assets with connectivity to over 95% of deposit accounts in the U.S. and 3,000 banks across Europe. We engage with a broad set of partners who are increasingly interested in the scale and potential of the open banking solutions we bring. This includes the account-to-account bill payments use case. Our open banking solutions enhance existing ACH flows by providing a simple and secure experience, allowing consumers to seamlessly share data with trusted parties. A previously announced partnership with JPMorgan Payments, Pay-by-Bank is now live, and Verizon plans to pilot this offering with their U.S. customers in the coming months. In addition to this, we're now collaborating with Worldpay to enable consumers to pay bills directly from their bank account. Our progress here continues. So in summary, our third quarter results reflect the strong fundamentals of our business and the continued resilience in consumer spending. There are substantial runways supported by opportunities to digitize person-to-merchant payments across both the dollar volume of flows and the number of transactions, and opportunities to address new payment flows and extend our diverse suite of services, all while we continue to invest in future areas for growth. When you put it all together, our diversified business is well-positioned for strong growth for years to come. Sachin, over to you.

Devin Corr:

Thank you, Sachin. Thank you, Michael. Audra, you can now open the call now for questions.

Sanjay Sakhrani:

Thanks. Good morning. Sachin, when we look at that fourth-quarter revenue deceleration, I think what the outlook implies, how much of it is, like, macro versus timing of incentives or something like that? I'm just curious, what factors are sort of driving that, and how we should think about that outlook, if there's still moderating trends going forward? Thanks.

Sanjay Sakhrani:

Thank you.

Tien-Tsin Huang:

Hi. Thanks. Good morning to everyone. Just on the Europe front, I noted that it's so a little bit, the four points, I think, sequentially, Euro and Euro. Is that just a NatWest comp out? Is there anything else to call out? I'm curious if you saw any change in or interesting performance country by country in Europe. Thanks.

Tien-Tsin Huang:

Thanks for clarifying. Thank you.

Harshita Rawat:

Hi. Good morning. I want to ask about regulation. There's been some unrelated activity recently with Fed proposing new debit interchange caps, REG-II implementation for China present and the credit card competition bill. So Michael, taking a step back, how are you thinking about the regulatory environment in the U.S. and abroad? Thank you.

Harshita Rawat:

Great. Thank you very much.

Unknown speaker:

Hi. Thanks for taking the question. Actually, two; one, considering what we're seeing in the U.S. with deterioration in certain, should I say, credit quality buckets and so on and so forth, I'm curious if you could discuss how your spend in the U.S. has broken down between sort of the top 1% and the rest versus historical levels. It just might help us understand how insulated spend is to the specific credit issues we might be seeing over the next six months. And secondly, we've seen some pretty strong rhetoric out of Asia regarding moving away from the global networks due to actions taken around Russia and other places. I was wondering if you could comment on how discussions with those markets might have changed in recent times. Thanks.

Michael Miebach:

And as we were saying earlier, we're monitoring credit availability. Credit availability is not an issue as far as we can see. At this point, it's beyond historic level. It's below historic level. So that's something that is part of our continuing efforts to understand where the dynamics are going. Now on Asia, you answered the question on their strong rhetoric from Asia. I would probably word this differently and say we're not seeing that. We're seeing this is an argument in a broader conversation around where value is coming from, the value of globalization and global connectivity. On the other hand, things like sanctions play into this. It's a very complex mix. And across the world, not just in Asia, there's a conversation around weighing all of that off. So it's important for you to understand that we have been partnering with countries around the world for years. Just take Europe to start with. Early on, we talked about Maestro and Debit Mastercard. We're partnering with a whole range of local payment systems for years. And there are no particular concerns around that. The same is in many other parts of the world. Where this is going and going forward, we'll have yet to see. But it is understood that as part of a globally connected economy and a world where some de-risking plays into that, trusted cross-border data flows matter. People still want to travel. And all of that makes us an important player. Also keep in mind that our capabilities across network level, trusted solutions, cyber-security solutions, gets us a seat at the table. We're seen as a technology company, a global technology company, not necessarily as a U.S. payment brand when we have those conversations because we help across. We enable local payment solutions through those services. So I'm not overly worried about this, but it's an active dialogue where we are seeing some really good things coming out of that. Think about some of the advancements in financial inclusion when local governments set up systems that reach consumers that haven't been reached before. That lifts everybody's boat. And that is good for the overall payments industry. So it is a broad topic. We've been engaging through the U.S. government, through other governments, multilateral organizations. And I personally spend quite a bit of time on that topic to ensure that we don't lose the benefit of a globally connected economy.

Operator:

We'll move next to Will Nance at Goldman Sachs.

Sachin Mehra:

Sure, Will. So a couple of thoughts first. Like we mentioned in my prepared remarks, value-added services and solutions net revenue increased 14% this quarter. I will kind of emphasize that our cyber and intelligence solutions continue to grow at a healthy pace. This obviously is driven by underlying drivers as well as demand for our various solutions which we offer. And we're seeing similar trends in terms of strong demand for our consulting, marketing, and other quality solutions. To your point about the tempering effect of other solutions, that certainly is having a tempering effect. And what we have in other solutions is the relative growth rates from real-time payments, from what's going on from a bill payment standpoint. It's things of that nature which are actually growing at a slower pace, which is, candidly, I mean, something which we should expect. The reality is we've always talked about services in the past. We haven't talked about value-added services and solutions. Now we're talking about value-added services and solutions, which is where you're seeing that tempering effect come through. I think if it's helpful, one of the things which I want to actually also share with you is that this overall growth rate can be impacted quarter to quarter by transaction growth, by comps, and by timing. And just as a reference point, when excluding other solutions which have the tempering effect, our value-added services have grown at 19% year-over-year on a year-to-date basis, excluding Russia. So I think what I'm kind of trying to share with you is there is this tempering effect on other solutions. You should expect that tempering effect to continue. All of that being said, there is the overall strength we see in our CNI and DNS side, which we're actually very positive of, we're seeing good demand in that space.

Operator:

We'll take our next question from David Togut at Evercore ISI.

Michael Miebach:

Right. So what Sachin said, he wasn't really talking about tempering in VAS. He was talking about tempering in the other solutions. So I just want to kind of get that straight out. I think there is potentially a little bit of confusion here with our revenue disaggregation and the definitions here. We've talked about services in a particular way for years, and now we have a slightly different definition, as which we shared with you. So I just want to put that out there first. To your question, so we continue to expect strong growth in value-added services and solutions, DNS and CSI, as we said. As far as expenses go, I said it at the beginning, looking at macro, looking at everything that's going on around us, and we have demonstrated this through COVID, we have demonstrated it through Russia, and we will continue to demonstrate as we have a whole range of levers in a not particularly capital-heavy business to adjust our expenses. You've seen us managing for positive bottom-line and top-line growth on a year-over-year basis. We're not managing this quarter by quarter, but that is always something that we keep in mind. So our financial discipline will continue here. We have no reason to change that. It's working well, and that is the disciplined way to do this. Thank you.

David Togut:

Yeah. Thank you.

Operator:

Next, to Bryan Keane at Deutsche Bank.

Sachin Mehra:

Sure, Brian. So on Citizens, the portfolio transition is on track for 2024. You should expect that that will take place over a period of time as opposed to a flip-the-switch kind of environment. Webster, we just announced, which we're super excited about, right? And the portfolio transition will also begin in 2024 and will take place over a period of time. Santander is done. NatWest I already spoke about. The other one, actually, which I kind of point out is Deutsche Bank, right? And there we had talked about conversion of 10 million cards. That conversion has started. It's a combination of debit and credit. It will happen over an extended period of time. Again, it's not a flip-the-switch kind of scenario. And the last one I'd mention is around Unicredit, which is something which will happen over multiple years. So this is not, and when I say multiple years, I literally mean you'll start in 2024 and this will work its way through over a few years. So that's what I can share with you in terms of at least the chunky ones. Obviously, there are a bunch of other portfolios which we went, all the time, but these are the bigger ones.

Sachin Mehra:

Sure.

Tim Chiodo:

Great. Thank you for taking the question. I just wanted to take this as an opportunity to revisit some of the mechanics around rebates and incentives. If you could just provide a recap on the portions of rebates and incentives that are volume and performance-based, some of the portions that are maybe more fixed, and then the portions that are more cumulative over the course of a contract? I think that would be appreciated by all. Thank you.

Tim Chiodo:

Greatly appreciated. Thank you.

Operator:

We'll go next to Dan Dolev at Mizuho.

Michael Miebach:

Thanks, Dan. As you can appreciate, I keep a close eye on the German market very specifically, and I think there's a lot of confusion and we're not seeing that. Consumer spending remains pretty steady in Germany and generally in Europe. Sachin talked a little bit about one U.K. might have a little bit of moderation here and there, but overall we're not seeing that. So what we see on the other hand, as is strong growth for us in Europe on all the migrations, on our debit maestro migrations and so forth. So Europe's been a bright star, continues to be for us. So we don't quite relate to what others are reporting.

Operator:

We'll go next to Darrin Peller at Wolfe Research

Michael Miebach:

Let me start off here. So I want to reiterate what Sachin said before. We are trying to win portfolios that are important for market relevance perspective for us to gain access to transactions to drive our services model and, follow through on that virtuous circle that I talked about earlier in my remarks. So that's the whole idea. We keep net revenue yield in mind as we do all of this. That is the integrated payments competitive landscape. Payments is competitive. There's a lot of players out on the landscape. we like competition and we feel we have a truly unique proposition between our payments and digital solutions on one hand and our services on the other hand. So when you think about Unicredit, so why did they come to us? Well, they were looking at our proven track record in our engagement with Unicredit for the expanded relationships and supporting their customers. They like our sustainability agenda. On Citizens, it was a similar kind of mix and on Webster, yet again, it was a similar kind of mix. There's always something across the portfolio of services that sticks out. Citizens, I recall a conversation on open banking, for example. That is clearly one that mattered and the sustainability agenda yet again. So it's a mix. There is nothing particularly new here. We always weigh off the volume growth that we can see with the incentives that we give to make this whole equation work for us in a very disciplined manner. We do not want to win. So we're very disciplined about that and I don't see anything out of the ordinary here, but I want to hand over to Sachin to give us a little more color on that.

Darrin Peller:

All right. Thanks, guys.

Ashwin Shirvaikar:

Hey. Thanks. So I want to talk about a by-Bank. It's live with JPMorgan. I mean, Verizon is piloting. Can you speak to the momentum you're seeing in the product? And given that it uses traditional ACH banking rails, could you maybe more broadly speak to the economic model for this and similar products that maybe tend to not use Mastercard rails?

Operator:

We'll go next to Jeff Cantwell at Seaport Research.

Sachin Mehra:

Hey, Jeff. So on the U.S. specifically, what you're seeing in the day 21 numbers is, like I said in my prepared remarks, it's primarily related to the timing of Social Security payments between this year and last year. So that's really what you're seeing in the nature of that 7% growth in Q3, which now shows that 5% in the first three weeks of October. So this really, from an underlying standpoint, other than that, there's not much we're seeing in the nature of a trend shift in the U.S. in the first three weeks of October. On your question about how we see Q4 shaping up, it's actually very much in line with what I shared, which is basically a scenario continues to be one of where the consumer remains resilient. I mean, the reality is, unemployment levels are at all-time record lows. When people have jobs, they hopefully are getting their paychecks, which they're hopefully using toward meeting their spending needs. You also saw GDP came out this morning and it came out pretty strong. So I kind of generally think about this as saying our base case scenario around consumer strength and resilience is what we're assuming going into Q4.

Sachin Mehra:

Sure

Ramsey El-Assal:

Hi. Thanks for taking my question. I wanted to follow up on Dan Dola's question earlier and I'm wondering about the sort of dislocation between your valuation and the marketplace and the valuation of your distribution channels, the acquirers, and banks that sort of flow transactions to you. Can you give us your updated thoughts on the overall health and TAM penetration of this core kind of value chain? When you look at the heritage distribution channels on both sides, are you seeing upheaval or are you seeing stability? In other words, are the market kind of getting the same benefits as the other?

Ramsey El-Assal:

Got it. Thank you.

Bob Napoli:

Thank you. Good morning. I wanted to follow up on commentary around the open banking, banking as a service. And MasterCard also, you've done a great job of partnering with a lot of fintechs. We were just at Money 2020, and I would say this year there were a lot more regulators than I remember in the past. And talking about open banking and how active they are in reviewing all the partners in those relationships. So just any thoughts on your outlook for your open banking investments and then how you think about the regulation, the growing regulation around open banking or banking as a service?

Operator:

And we'll take that last question from Jason Kupferberg at Bank of America.

Michael Miebach:

Yeah, Jason. So, look, we're not updating anything on the three-year outlook at this point in time. It's like you said, the first year actually turned out to be a very nice year. Again, in the second year, we've delivered quite strongly year to date, and then we've shared with you what we think will happen from an expectation standpoint in Q4. The one thing I just want to kind of orient everybody to is that we're in a very, very volatile time, and the world has actually changed quite meaningfully since then, which is what I'm alluding to here is the invasion of Ukraine by Russia and our suspension of activities in Russia. So that's something to keep in mind. We certainly keep it in mind as part of the fact that what we were assuming at that point in time in period Russia right now, obviously we don't have revenues related to Russia, which are coming through. But beyond that, I have nothing really to share in terms of updated thoughts around our three-year outlook.

Operator:

[Operator signoff]

Operator:

Good morning. My name is Audra, and I will be your conference operator today. At this time, I would like to welcome everyone to the Mastercard Inc. Q2 2023 Earnings Conference Call. [Operator Instructions]. Mr. Devin Corr, Head of Investor Relations, you may begin your conference.

Michael Miebach:

Thank you, Devin. Good morning, everyone. So starting with the big picture. Our momentum continued into the second quarter with net revenue up 15% and operating income up 16%, both versus a year ago on a non-GAAP currency-neutral basis, once again demonstrating the strong fundamentals of our business. Consumer spending has remained resilient with spend on experiences and travel remaining a focus. On the macroeconomic front, we continue to monitor a number of factors. First, the overall labor market remains strong, including wage growth, and consumers continue to be supported by credit and savings. These are key factors of consumer spending. Second, the efforts of central banks to curb inflation are showing signs of progress. Despite this, inflation remains elevated, and we are in a period of tight monetary policy across many countries. Economic growth will continue to vary country by country and sector by sector. Looking at our switched volume trends. Domestic volume growth remains healthy. We continue to see strength in T&E with some recent moderation in both inflation and spend in select international markets. Cross-border travel continues to show strength, reaching 154% of 2019 levels in the second quarter. We remain well positioned to capitalize on this trend with our travel-oriented portfolios and our initiatives in areas like loyalty and marketing. Cross-border card-not-present ex travel continues to hold up well. We're monitoring the environment closely and are ready to adjust investment levels as appropriate while maintaining focus on our key strategic priorities. As a reminder, these priorities are

Devin Corr:

Thank you, Sachin. Audra, we are now ready to begin the question-and-answer session.

Tien-Tsin Huang:

Just want to ask on the UniCredit win there. That was a nice one just outside of the top 10, it looks like, in Europe. So you mentioned a multi-market strategies what they're going after, and I heard sustainability also as a reason for the win. I'm just curious, thinking about this as a case study, is this a new trend? Why are they employing the strategy now in the wake of a lot of the macro uncertainty, open banking, and there was a lot of talk about pan-European schemes and whatnot. So I'm -- just wanted to study this a little bit and if there's any comments on timing pricing as well.

Operator:

We'll go next to Harshita Rawat at Bernstein.

Michael Miebach:

Thanks, Harshita. Yes, we're all monitoring what FedNow is doing. They are now going live. So this is clearly a milestone, a good opportunity to look at this topic again. Yes, our view on this really hasn't changed. So in the end, it comes down to what problem you are trying to solve. What are merchants looking for? Merchants are looking for reach to consumers. So scale matters. What are consumers looking for? Consumers are looking for safe ways to pay in a predictable fashion, ubiquity available. So those are all factors that haven't changed with this launch. We built that acceptance. We have a brand, the 2 interlocking circles that represent trust so that addresses a lot of what merchants and consumers are looking for. And we strengthened the position -- the proposition over years, contactless, Tap on Phone, buy now, pay later, Mastercard Installments, Click to Pay and so forth. So that's good. The Mastercard debit proposition is strong, and we keep evolving that. So it's well understood now. FedNow is launching. So as we look at that, we will obviously continue to compete and offer our services to our banking and issuing partners. At the same time, in our experience, to your question, we have stayed close to these systems in various other countries in the end, ending up partnering with most of them. So here, we'll have to see where it goes live. Going live doesn't mean that it is broadly available yet. It is early days, as you said. It doesn't have features. It doesn't have a consumer platform as such. You can't access it through your mobile banking app. All of that is what our solution today provides. So we have to see where it goes. Head-on competition by the mindset of partnership where and when it makes sense for us and where this goes. It is important to say that we do have solutions for these systems. If you look at the Chase Pay by Bank solution that we put into the market, so that's exactly leveraging these kind of flows that would run across these systems, generally B2B-focused. Some noncard penetration verticals run across these particular systems. So we see that as an opportunity. And Chase Pay by Bank app will be one of those ways to going after that. We've done similar kind of solutions in the U.K., in Europe and so forth. So more to come. We'll stay very close. At this point in time, I think we have a better solution in the market.

Sanjay Sakhrani:

I had a question on the Fed routing rules on debit. I guess the card-not-present transactions went through in July. I'm just curious sort of how you see the opportunity there. It would seem like you're in a good position to take some share.

Operator:

Next, we'll go to Lisa Ellis at MoffettNathason.

Michael Miebach:

Thanks, Lisa. So real-time payments -- when the rise of real-time payments started 2016, '17 and so forth and we invested into Vocalink, it was clear at the time that we wanted to be in the infrastructure application services. That was a bit of the logic. At the time, we needed the street cred and we needed the talent so we can participate in this trend from day 1. That was the first season of the movie, so to say, to stick with your analogy. Where we are today, we've built out an enviable and unique position in real-time payments, having a footprint in 13 of the top 50 GDP countries where we run and partially operate real-time payment infrastructure. Our strategy was we will be in the markets that matter and we don't win to be in the markets that don't matter. So we feel we've reached that point. And now it's really to drive up scale and use that infrastructure position. The business in itself of running these systems in these markets is attractive enough. As we pointed out, we're going to focus on building out a set of applications and services on top of that. If you recall from the prepared remarks where I talked about the scam -- the anti-scam solution in the U.K. with these non-U.K. banks, it's a fantastic example of how our expertise in these markets has positioned us to rally 9 banks around the table to come up with a market-wide solution. Now not everything that we will do will be market-wide solutions. There will be individual customer solutions, but we feel we have muscle in this space. It's not going to go away. All these government payment systems out there, more and more real-time payment solutions will come up, and I think we will be in demand. And because we've done it for a long time, we'll have a seat at the table.

Darrin Peller:

Could we touch on value-added services for a moment? I mean it's been a good tailwind for some time. I think it grew just about 1 point below transactions this time around. And you mentioned strength in cyber and some other categories, offset by -- that were offsetting others. So I'd be curious to get a little more detail as to what were the strengths and weaknesses of value-added services now, including the other. And then more importantly, just how much room do you think you have across those different categories to keep that growth alive and cross-sell well into your meaningful payments business?

Sachin Mehra:

Darrin, it's Sachin. A couple of additional thoughts. So Michael kind of covered off the strength we continue to see in our value-added services and solutions. And that's indeed the case. But you got to remember that growth rates move around quarter-to-quarter on this area. And so we should all focus on the longer-term trends out here. As it relates specifically to Q2, when you look at growth rates for value-added services and solutions in Q2 of 16%, I assume you're looking at the sequential trend out there. One point to keep in mind is that there was a 1 ppt drop in Q2 on account of acquisitions. So Q1 had the impact of acquisitions. Q2 doesn't have it because it kind of lapped that acquisition period. So that's one piece. And then specifically in my comments, I talked about that the strength in Cyber & Intelligence as well as in some of our Data & Services capabilities was offset by other solutions. And it's really all about what the growth rate trends are for Cyber & Intelligence and Data & Services relative to growth rates and things like real-time ACH, especially on the infrastructure level. So when we talk about other solutions, think about it in the context of things like real-time ACH, which tend to grow at a lower pace there. So historically, what we had spoken about was just services. Now we are talking about value-added services and solutions. When we think about services in the historical context, in Q2, that services growth rate was more like 18%. So just for a reference point beyond that.

Timothy Chiodo:

I want to dig in a little bit on another business that is important to your -- both your volume and your revenue growth algorithm over the medium term, which will be Mastercard Send. You touched a little bit on some of the cross-border use cases. I believe many of the initial use cases were much more domestic, but it's evolving over time. Maybe you could just dig in a little bit more to some of the cross-border use cases that are really gaining traction.

Operator:

We'll go to our next question from Rayna Kumar at UBS.

Michael Miebach:

Thank you, Rayna. I'm noticing a lot of questions coming from me means that there isn't a lot of questions in the numbers, which is fantastic. And I love to talk about B2B. Let me take the lens, Rayna, that's a little bit broader here on commercial overall. So I feel like I'm repeating myself here, but we're choosing priorities because they are growing at a healthy clip, so is the story for commercial growing at a healthy clip. So this is -- we're seeing a quarter-over-quarter, year on -- quarter 2 year-over-year growth above the consumer side. There's particular strength in our international markets business. And we've sustained elevated levels of growth when we compare this back to 2019, all the noise of COVID out of it. We have two main focuses in this area. One is commercial point of sale, and the other one is our B2B accounts payable business. Commercial point of sale, now this is a tremendous total market opportunity, massive TAM out there, and it's likely penetrated by cards today. The way we look at this is, this isn't really about building new systems. This is about penetrating with the tools that we have today, targeting SMEs and corporate T&E, purchasing fleet, all of that with our existing capabilities that we have plus our complementary solutions like smart data and easy savings and so forth. So a lot of cash and checks out there, a lot of opportunity with cards that we have today. So we leverage that. We built out a separate vertical in the company. We're focusing hard, and we're seeing the growth rewarding us for that. On the B2B side, this is accounts payable, trusted relationships, this is invoice payments and so forth. This is an even larger TAM with a lot of clear pain points. Companies are looking to automate these processes, digitize these processes, get rid of the paper. And virtual cards is a solution that works tremendously well. We -- as I called it earlier, we are the leaders in virtual cards. But the solution isn't perfect. So we invest a lot of energy through our product teams to make it better and better. What I was saying earlier on Receivables Manager, this is a way to automate the acceptance of virtual card payments, build it into the accounts receivable system, automate it to get the benefits of virtual cards without some of the manual processes that we have to go through over the past year. So this is a real breakthrough. This business is going to be hugely important for us going forward. We called it out in November 2021 at our Strategy Day. It's one of our biggest growth opportunities. We feel we're ahead in the market, and we're seeing the healthy growth. And that will be remaining a focus for us.

Ashwin Shirvaikar:

Good quarter guys. Michael, since you said Sachin's not getting enough questions, maybe I'll ask a numbers question.

Ashwin Shirvaikar:

So I wanted to figure out sort of the cadence of operating expense. 3Q versus 4Q, it sort of looks like -- it looks like you're kind of exiting the year a little bit higher than the 3Q levels in terms of growth. So what's causing that as well as -- I know your cadence of spending tends to be longer term in nature, but are there product or service call-outs in terms of the types of investments that you're making that's most pertinent now?

Michael Miebach:

Yes. So we keep top and bottom line growth in mind. But there is a tremendous opportunity ahead of us right now. So we are using this tailwind that we're currently seeing to continue to invest. You see the list of wins, the growth momentum in B2B, the growth momentum in services. So this is the time to continue to nourish that business and invest, and you will see us do that in a very prudent and disciplined fashion.

Dan Dolev:

Just a quick question on the guidance. Like obviously, results were very strong. You exceeded your second quarter guidance on revenue. Like what was the thought process of not boosting the guidance for the year?

Operator:

We'll go next to Bob Napoli at William Blair.

Michael Miebach:

All right. So open banking, as you know, we specifically called that out as 1 of 2 opportunities in new networks. The trend is here to stay. That's pretty clear. This whole notion of people got to use their data footprint to avail better financial services. There's a lot more regulation coming around that. PSD3 in Europe is coming out. So this train is -- has left the station. That's good. We're on it. The way we look at it is we have to move beyond connectivity. We had a good start. We are well connected here in the U.S. through our Finicity asset and in Europe through our Aiia assets. And we're very busy now building use cases on top of that, and this is where we think the future is going. Initial demand of Finicity was very clearly in lending-oriented use cases and asset verification use cases. That feels that is where the demand is today. To Sachin's earlier point, where do we invest, we invest where we see the demand in the near-term event. So that is where we're optimizing. But you're already starting to see as we're going beyond these lending use cases with our solutions like our Chase Pay by Bank solution here in the U.S. This is using a payment success indicator, which is using open banking data to tell a biller this is a good time when there is balance on an account, please now bill. That is what the payment success indicator does. That is powered by Mastercard's open banking technology. So near-term use case is clear. That's working. Connectivity, we're well positioned with our 2 assets, and we're very busy building out use cases. And obviously, we're excited to see Pay by Bank with Chase launch in the third quarter as we said to you.

David Togut:

Cross-border volume growth remains very strong, but on Slide 9, clearly, there's a deceleration from April growth through June, especially in cross-border travel. So my question is for the second half, what growth rate in cross-border volume is embedded in your guidance? And then if you could go a little bit under the hood, what do you see in cross-border travel volumes? Maybe a little more texture on what you're seeing by country in Europe. You gave kind of overall data and some thoughts on China.

Michael Miebach:

Maybe one thing to add here that is the current imbalance in the market between demand and supply. So there's still an unlock there as in airline capacity, airport capacity and all of that will unlock. So the combination of the underlying desire to travel, how that trend is coming through our position -- strong position in the travel industry with our portfolios, Expedia and Lufthansa, just to add, too, here, and this unlock of capacity over time will be a very good mix. This is an exciting space. People just want to be out there.

Daniel Perlin:

I just wanted to maybe dig a little deeper on the commentary around this moderation in inflation and spending, Sachin, that you called out. Particularly, what can you tell us about kind of the downdraft in average tickets during the current quarter? And then maybe more specifically, are you seeing any discernible signs or indications of trade-downs from the consumer that would be high corollaries to slightly weaker consumer spending as opposed to this resiliency that it sounds like you guys are continuing to talk about?

Devin Corr:

I think we have time for one more question.

Bryan Keane:

Sachin, just want to ask about FX volatility and how it impacts the model. I know cross-border assessment revenue growth was above volume, so it had a positive yield. I think in your peers -- one of your peers' reports, it was actually negative, and they called out the lack of FX volatility. So just trying to understand how it impacts Mastercard's model.

Devin Corr:

Thank you. Michael, any closing comments?

Sachin Mehra:

Thanks, everyone.

Operator:

Good morning. My name is Audra, and I will be your conference operator today. At this time, I would like to welcome everyone to the Mastercard Inc. Q1 2023 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions]. Mr. Warren Kneeshaw, Head of Investor Relations, you may begin your conference.

Michael Miebach:

Thank you, Warren. Good morning, everybody. Another quarter, let's jump right in. The headline is that in quarter one, consumer spending has remained remarkably resilient in that despite continued economic uncertainty. We kicked off the year with strong revenue and earnings growth. Quarter one adjusted net revenues were up 15% and adjusted operating income was up 17%, both versus a year ago, and as always on a non-GAAP currency neutral basis excluding special items. Focusing on the macro for a moment. Let's take stock of the positive and negative factors we have been monitoring. First, the labor market in aggregate remains strong by savings remain above historical levels and consumers continue to access credit, which all are key drivers of consumer spending. Second, central banks continue to combat elevated inflation levels with higher interest rates. Although we are seeing signs of inflation, putting additional stresses on the banking sector have emerged. We will continue to monitor how banks respond to these evolving conditions. And finally, economic growth around the globe continues to vary by country and sector. The reopening of China is a positive catalyst. However, the impact of monetary and fiscal tightening in many countries will likely be with us for some time. So overall, many moving pieces but even so consumer spending levels have remained resilience while the mix of spending has continued to rebalance towards experiences. Looking at our switched volume trends, domestic volume growth has remained relatively stable with some recent moderation in the U.S., in part due to lower tax refunds. Cross-border travel in quarter one reached 148% of 2019 levels with all regions above 2019 levels. This includes notable improvement in Asia cross-border card not-present ex travel continues to hold up well. We will continue to watch the environment closely. And as we have demonstrated in the past, we are prepared to adjust investment levels appropriately while maintaining focus on our key strategic priorities. And as a reminder, these three priorities are expanding and payments, extending our services and embracing new networks. Now I've been on the road for much of the quarter meeting with customers, partners, government leaders, and of course, our teams. These conversations reinforced the energy we have for our collaborative approach, and show the importance that many plays on digital payments and driving much of today's economic activity. And it's with that in mind that I'll share some examples of how we are progressing against our three strategic priorities. First, we're expanding in payments by winning deals across a diverse set of customers innovating in and growing acceptance, and expanding solutions to address new payment flows. We see our partnership deepening with a diverse set of co-brand partners, financial institutions and fast growing fintechs around the world. This quarter we had a significant win with Costco Wholesale in Taiwan, the largest co-brand portfolio in the market. The deal is a competitive flip that ensures exclusive co-brand issuance and exclusive acceptance of Mastercard, co-brand cards and stores effectives in August this year. We also announced our exclusive partnership with Wells Fargo and Choice Hotels, to launch their new credit card program in the United States. In the Middle East, we inked a renewal with National Bank of Egypt, the largest issuer in the country. And on the fintech front, we renewed our deal with N26, one of the largest new banks in Europe, for Mastercard to be the exclusive provider for issuing and processing services. And in Latin America, we've expanded our relationship with Ualá, one of the fastest growing fintechs in the region, to be the exclusive network of prepaid debit and credit. So we are continuing on our trajectory delivering another solid quarter of new and renewed wins, an important element of our growth algorithm. Beyond new wins, we are driving growth in payments through the development of innovative solutions, like our instalment offerings. In Australia, we're scaling our solutions with some of the largest banks in the market, including Commonwealth Bank of Australia, National Australia Bank and Westpac. Providing the way to pay is central to what we do, so to is making sure people and businesses can use those payment tools whenever they want. Along those lines, we are continuing to drive growth in acceptance, expanding connectivity and trust across all forms of card payments. Our acceptance footprint has now surpassed 100 million locations effectively doubling over the past five years. And that's just the start. Our innovative contactless, cloud commerce and click to pay solutions give more merchants the ability to accept electronic payments with simple technology connectivity. To us that's an opportunity to bring more physical and digital transactions onto our network. Over 100 markets have now reached at least 50% contactless penetration double the number three years ago. Contactless drives higher consumer engagement and helps to accelerate the secular shift to digital payments by accessing lower ticket size purchases that have historically been cash based. In quarter one, our tokenization capability was selected as part of a mobile payments launches in South Korea, and even a significant number of private label cards for contactless and thereby giving us the opportunity to deliver services on those transactions. We continue to see momentum in tap on phone, with programs across more than 70 markets globally. We continue to scale, including the Stripe announced in quarter 1 that they have enabled tap-to-pay on Android in multiple markets. In addition to helping our partners bring tap-on-phone to market, our cloud commerce acceptance technology is now live in Europe. Our cloud commerce capabilities make it easier and tricker for businesses of all sizes to accept payments on virtually any device. And click-to-pay is now live in nearly 30 markets globally, including key markets such as Australia, Brazil, U.K. and U.S. We are partnering with payment service providers like Mexico and Italy to further expand our presence. This is all complemented by our workers' partners to grow acceptance by integrating the payment experience where their customers are. You see that in the social commerce space with what's happened in Brazil, enabling consumers to make purchases directly from small businesses right within a chat. Further, we remain focused on expanding our set of new payment capabilities to capture a prioritized set of new payment flows. I'll highlight a couple of areas we are targeting, starting with commercial. We had a strong growth in the space with volumes across our commercial credit and debit products in quarter 1, up 21% versus the prior year on a local currency basis. We see substantial opportunity to grow in commercial, particularly with our virtual card and small business solutions. With virtual cards where we are the market leader, one of our initiatives is to integrate our solutions with leading B2B technology platforms. This quarter, we signed a partnership agreement with Coupa to enhance their Coupa Pay solution, which embeds virtual cards to address accounts payable flows. On a small business front, today, only a small fraction of payments are captured on card. We are enhancing the value propositions from programs like Easy Savings, which offers automatic merchant-funded rebates to nearly 40 million enrolled cardholders in over 80 countries. And we are growing by establishing new issuance deals through partners like Galileo in the United States, the Mastercard will be the preferred brand for small business and commercial programs. Now beyond commercial, disbursement and remittances flows represent a significant opportunity for growth through geographic expansion, new distribution partners and an expanding set of use cases. In terms of new markets, our gaming use case is now live in Canada and Peru, and we have added cross-border origination to the UAE and Uzbekistan. By connecting with MFS Africa, a leading digital payment company, we have enabled mobile payouts across 10 markets in Africa. We are working with distribution partners like checkout.com to increase reach to even more customers in Asia and the United States. And we're enabling our cross-border services solutions to small and midsized banks through cross-border services express with this simple-to-use digital-first solution, participating financial institutions can offer their customers the ability to send money or pay vendors across the globe quickly and securely. In terms of expanding use cases, we have enabled cash in U.S., in Europe and the U.K., facilitating underbanked customers to safely load cash into their accounts from a nonbank location, which can also help drive follow-on card spend. So as you can see, we continue to make broad-based progress in addressing our prioritized set of new payment flows. Turning now to services. We love services, where we are focused on growth and resiliency through scaling our existing solutions and adding new capabilities. As merchants as consumers shift to digital, our comprehensive set of cybersecurity solutions becomes even more critical. For instance, risk recon helps an enterprise identify their own cybersecurity vulnerabilities as well as for their ecosystem partners. With our acquisition Baffin Bay Networks this quarter, we now have a solution to help these customers act on this information. Specifically, Baffin Bay's AI enabled cloud based threat protection helps to stop cyber attacks related to malware, ransomware, and DDoS attacks. The acquisition also complements our other cyber offerings, including our simulation and assessment tools, as well as our cybersecurity consulting practice. You all are familiar with our comprehensive set of data analytics, marketing, and loyalty assets. These are about helping our partners make smarter decisions to drive better outcomes. For example, Agoda, one of the world's fastest growing online travel platforms in Asia, is leveraging our economic insights to inform their strategic planning. To meet among such, the largest electronics retailer in Europe, is utilizing our test and learn capabilities to support the assessment and optimization of new business initiatives. We also continue to make progress signing deals with retailers and commerce partners, like Hyundai Motors, Europe, and Puma, to utilize our recently acquired personalization platforms Dynamic Yield. We continue to look for ways to combine all these assets to deliver valuable end to end solutions. We just announced elements a suite of applications which brings insights for Mastercards data analytics to enrich dynamic yields personalization experience. Our third key priority area is embracing new networks where we are making progress in the areas of open banking and digital identity. In open banking, we continue to work with a broad set of banks and fintechs who are interested in its potential across a wide range of use cases. In addition to the Pay-by-Bank solution for JP Morgan that we announced last quarter, we are working with payment risk and identification company GIACT, member of the London Exchange to embed a secure account verification solution. Also, Saxo Bank will use our open banking technology for account opening and top ups in Europe. Further, we're developing capabilities on top of our open banking platform, we have advanced analytics partner with Fintech, innovators like [indiscernible] Nath, enigma and Gen Equity to expand access to capital, with better data for making lending decisions. This is another great example of how our technology supports small business. Moving next to digital identity. We continue to see strong adoption of our intelligent identity solutions powered by machine learning. This quarter, we secured a key partnership with Southwest to embed our intelligent identity solutions from content to reduce fraud and friction in digital interactions. Still early stages with open banking and digital identity, but we are making progress scaling our technology to new markets and use cases with notable partners. So with that, I'll wrap it up and in summary, we delivered another strong quarter of revenue and earnings growth, reflecting a resilient consumer and the continued recovery of cross border travel. We will continue to watch the environment closely and are prepared to act as circumstances dictate. We see a significant opportunity ahead having now surpassed 100 million acceptance locations worldwide. And our focus strategy, diversified and resilient business model and strong relationships around the globe position as well through economic cycles. Sachin over to you.

Warren Kneeshaw:

Thank you, Sachin. I have to say it's been a distinct pleasure. With that, let's turn it over to questions. Audra, we're ready to go.

Lisa Ellis:

Hey, good morning. Thanks for taking my question. And Warren, you will be missed, of course. I just had a question about Fed Now coming in July. Of course, VocaLink has been involved in the clearinghouses RTP network. Can you just kind of give your perspective on how you expect the rollout of Fed Now to affect Mastercard's business in the U.S. positively or potential pressures? Thank you.

Lisa Ellis:

Thank you.

Tien-Tsin Huang:

And my thanks to Warren as well. I forgot that may first crept up on this. I want to ask a macro question because Michael, I think you asked for more questions last quarter. So I'll ask you one on generative AI, if that's all right. And given that you guys have -- yes, so I know you have a data analytics and consulting business within your PAS. And so just curious, how are you thinking about generative AI and Chat GPT gets a lot of attention. So your thoughts on impact on PAS maybe on the broader business as well.

Operator:

We'll go next to Darrin Peller at Wolfe Research.

Michael Miebach:

Right. Darrin, let me start on that. We see a very encouraging activity. In fact, we -- it was tough to make choices here, what not to tell you in the 15-minute overview that I gave you. So solid activity in deal wins. And you recall some of the bigger deals that we have announced in 2021 and 2022, which are behind some of the share gains that we're seeing, particularly if you look at the Europe numbers. So that is having some impact on how the R&I plays out. But I'll defer to Sachin to say a little bit more, but overall, the activity is very healthy.

Operator:

We'll go next to Rayna Kumar at UBS.

Michael Miebach:

Rayna, I think almost partially answered your question just now. So deal activity is strong. But here -- to the second half of your question there, through the last three years, you saw some European markets, some large European markets that have been historically less digitized and more cash focused to really catch up. The stats I gave earlier on contactless penetration that includes a good number of European markets jumping ahead in the ranking. So strong secular shift. That's an opportunity. You start to see some of the payment service providers driving more acceptance into more parts of the economy. And that's also reflected in some of the acceptance growth that we talked about $100 million. A good chunk of that is coming from Europe. So it's a mix of the share wins that we have seen very specifically in the U.K. and the secular shift. So we feel very well positioned in Europe.

Bryan Keane:

Hi, good morning. Just want to ask about cross-border volume. I know it was up at 29% for the month of April -- or through April 21. Just thinking about how that might grow throughout the year. Is that the right number to think about for our models? And just thinking about the Asia recovery what’s left there. Obviously, we talked about China and just thinking about that business as we progress through the year.

Operator:

We'll move next to Sanjay Sakhrani at KBW.

Sachin Mehra:

Yes. Sanjay. Look, I mean, at the end of the day, what we see is what you see from a consumer standpoint. And we have our best estimates as to what we kind of think that looks like on a go-forward basis. Like Michael said, there are positive and negative factors. The health of the consumer remains strong, backed by record low unemployment rates, and that gives us a level of confidence. On the flip side, you've got the headwinds which come along with higher interest rates, more recently the banking crisis, which we're all going through. And we have no idea as to what the implications of the banking crisis are going to look like on a go-forward basis. So our views in terms of the strength of the consumer remains pretty much unchanged. There are puts and takes by region. And based on the fact that at this point in time, there's no real evidence to see that the consumer is not showing good strength from a spend standpoint. They're in good shape. The year-over-year growth rates, like I mentioned earlier, are going to change. You're going to see the lapping effect of that come through because of the recovery last year. That's got less to do with what spend levels this year are as compared to anything else. And it's on the base of that, that we have modestly increased our full year guide on a currency-neutral basis, excluding acquisitions, to reflect the fact that we had a stronger Q1. And we feel like overall, from a consumer health standpoint, our assumptions are relatively unchanged between what it was one quarter ago towards where we are right now.

Operator:

We'll move next to Harshita Rawat at Bernstein.

Michael Miebach:

Harshita, let me start on this. So first on the competitive landscape. As Sachin was saying earlier, our services strategy is closely tied in with our payment strategy. So we're not your average service competitor as in a cybersecurity company that competes with a bunch of other cybersecurity companies. We are somewhere in the middle between bolts and being in the flow gives us additional data points that makes us a fairly unique competitive landscape for us, which is why we like the combination of both. But it's very specifically on cybersecurity. You have a whole set of specialty players Bath & Bay was a specialty player and yet, we're dealing in threat protection. As we were ourselves with Risk Recon before, it's just a slightly different angle of that. So we are very aware of the wide competitive landscape here, but our position, I think, sets us apart. Now there's other potential comes closer to the payment space. So looking at services as well. So we're trying to keep our services set differentiated and ahead of the curve. It's the same thing for data and services. Yet again, a lot of data and SaaS companies that are building their businesses. But on the other hand, we have a captive set of customers today, and we have a captive set of transactions of these customers that these companies want to understand and where do they come to an integrated provider that helps them with both. So that's, again, a unique position for us. To look at, I think dynamic yield and how we're combining that with our data set, as I referred to my earlier remarks, I think it's an excellent example of that. So that's the competitive landscape that we're looking at. It's a fast-moving one. So we have -- we will continue to have that in focus.

Operator:

We'll go next to David Togut at Evercore ISI.

Sachin Mehra:

Sure, David. What I'd say, I'd say you hear what we hear as it relates to what the airlines plans are from a capacity release standpoint. And the reality is, I think everybody is trying to kind of find that right balance between bringing on more capacity and what the implications for the price proceed is as part of that process. And so we feel generally good about the prospects of travel. I mean the reality is there's a trend from the convert towards more spending on experiences. Experience tends to be travel and entertainment-related stuff. And so generally speaking, that trend is going in the right direction. As more capacity comes on, which we expect will happen, right, you will tend to see the benefit of that come through in our cross-border travel metrics. Again, I would remind you, strong value prop, year-over-year lapping issues which are there from a year-over rate as a standpoint. And then the third piece is we have the potential for recovery in Asia Pacific. And I wanted to kind of bring that whole thing into the picture beyond the capacity question you asked.

David Togut:

Understood. And just as a quick follow-up on Europe. Just your updated thoughts on the rollout of ACH payments in Europe under open banking would be appreciated.

Operator:

We'll go next to Ramsey El-Assal at Barclays.

Sachin Mehra:

Yes. Look, I mean, the data we look at for what we're seeing from a tax refund standpoint is what we see on the IRS website, right? And so you can take that for what it's worth because that's the insight we've kind of garnered. What we've seen is that the tax refunds tend to happen mostly in this window around, call it, March and going into April. So we view this impact of the lower tax refund to be relatively transitory. And I say that only because as the year progresses, if there were lower tax refunds, the implications of that would be minimal just because the vast majority of the refunds happen around the period we're talking about right now. So that's why we use them as being transitory. The other thing to keep in mind is on account of some of the natural which have taken place, there are some states in the U.S., which have -- where from a federal tax standpoint, they've been given more latitude in terms of what the tax filing date is. And so that's the other thing to keep in mind in terms of what the potential might be for a catch-up on some of these lower tax free funds. Again, very hard to predict, but I want to kind of bring those 2 pieces out there. On your second question on U.S. versus rest of world trends. At the highest level, I'd tell you, I feel pretty good about what we are seeing on our overall operating metrics. I mean these are pretty compelling operating metrics from a growth rate standpoint. You've got 15% credit growth taking place in the U.S., is being driven in a large part by just consumers' desire to get back to experiences. Our portfolios, our co-branded portfolios, our travel portfolio are performing very well. And again, if you kind of were to think about the go forward, the reality comes back to the broader questions we were talking about how do we feel about drivers from a domestic spend standpoint and the cross-border spend standpoint, all of that will manifest itself in terms of what U.S. volumes look like going forward. On the rest of the world side, obviously, we've got some really good metrics there as well, both across debit and credit. And you're seeing the impact of some of our market share wins in those metrics. As the year progresses, you're going to start to see the impact of that market share on some of the players start to tail off just because you'll be reaching the lapping stage on that. So you need to keep that in mind. That should help you kind of model out as to how the gap between the U.S. and the rest of the world plays out as we progress through the year.

Operator:

We'll go next to Andrew Jeffrey at Truist Securities.

Michael Miebach:

Right. So India is a hugely important market for us. We have a large number of our employees based in India, serving the Indian market as well as other markets in Asia, deep engagements with customers there. It's interesting when you look at the market from where it has gone under the lead of India's government, they've built a tremendous digital economy. So the India tech stack has really opened up the digital economy at a much, much different scale than before, and we like that. That gives you opportunities for us to engage with our customers to many more Indian citizens. So we generally see that opportunity. It's also true, though, that today, every day solution around debit and credit matter. And we have -- now we reached -- we're back to pre-embargo growth on the issuing side with our customers in India. So that is looking very, very positive. We're back in the market there. So we're playing both of that. It's a market where we'll see more innovation coming from us of the folks that are based there. So there isn't a financial inclusion opportunity. There's an everyday opportunity in credit and debit and it's not the most populous country in the world. So it's going to be the theatre of the future, and we're excited to be involved there. Where is all the engagement going with the India tech stack? What does it mean for our cards? And how will cards be linked into UPI and so forth? The details have yet to be seen, but we're active in those conversations. And in the end, when we have an opportunity to partner, then we will try to do that.

Michael Miebach:

I think we have time for one more caller.

Jason Kupferberg:

Thanks, guys. Maybe just building on that last question a little bit. You just talked about India to some extent. But which emerging geographies are you most excited about over, say, the next five years or so just in terms of the general cash-to-card opportunity?

Warren Kneeshaw:

Thanks, Michael. Any final comments?

Operator:

And that does conclude today's conference. Again, thank you for your participation. You may now disconnect.

Operator:

Good morning. My name is Audra, and I will be your conference operator today. At this time, I would like to welcome everyone to the Mastercard Inc. Q4 and Full Year 2022 Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Mr. Warren Kneeshaw, Head of Investor Relations, you may begin your conference.

Michael Miebach:

Thank you, Warren. Good morning, everyone. Let’s get right into it. So, starting with the big picture. Consumer spending has remained resilient, and we are very well positioned to capitalize on the growth opportunities ahead. We closed out the year with strong financial results and several notable wins. Quarter four net revenues were up 17% and adjusted operating income up 19%, both versus a year ago, as always, on a non-GAAP currency-neutral basis, excluding special items. While the macroeconomic and geopolitical environment remains uncertain, we are keeping a close eye on a variety of positive and negative factors. The broadly resilient labor market with low unemployment and rising wages, coupled with elevated consumer savings levels, are key drivers of consumer spending. We’re also tracking efforts by the central banks to curb inflation, along with moderating energy prices and the reopening of China. So, still lots of moving pieces. From an overall consumer spending standpoint, we expect the consumer to be relatively resilient. Spending patterns have largely normalized relative to the effects of the pandemic with the notable exception of China. In terms of switched volumes, domestic volumes in the fourth quarter remained steady relative to 2019 levels with some slight moderation in the U.S. related to lower gas prices recently. Cross-border travel continued to recover in quarter four with inbound travel either flat or up in every region sequentially relative to 2019 levels. As of the first three weeks of January, inbound cross-border travel to all regions is now above 2019 levels. We will continue to monitor the economic environment closely, and should the outlook change, we’re prepared to move quickly to adjust our spending levels as we have done in the past. In the meantime, we continue to focus on the things we can control. This starts with our three strategic priorities

Warren Kneeshaw:

Thank you, Sachin. Audra, we’re now ready for the Q&A session.

Harshita Rawat:

So Mike or Sachin, I wanted to ask about Pay-by-Bank. Over the years, you’ve developed and acquired capabilities for Pay-by-Bank in different countries. You talked about this new partnership with JPMorgan. But a skeptic could also argue that Pay-by-Bank is a risk to cards longer term, and there’s some precedence in countries. So, can you talk about the push and pull for severe? And also maybe touch upon where is Pay-by-Bank being used versus cards and how’s Mastercard able to participate in those transactions? Thank you.

Operator:

We’ll move next to Darrin Peller at Wolfe Research.

Sachin Mehra:

Sure, Darrin. Good morning. So, let me provide you a little bit of color here. Look, I mean, what we’ve generally assumed in our base assumptions that I mentioned when I was delivering my prepared remarks is resilient consumer spending through 2023. I mean, we see a resilient consumer today, and we’re seeing a generally resilient consumer spending pattern going forward in our base case. The other thing which we’ve contemplated, as we mentioned, from a cross-border standpoint, and particularly cross-border travel standpoint, the vast majority of the regions have now reached that state where they are kind of growing and growing at a healthy pace, but they’re not growing at an accelerating pace. So, they’ve reached that level of stability. So, let me give you a little bit of color here. You’ll remember as we are coming out of COVID, right, intra-Europe came back first cross-border standpoint. After that, we saw several inter markets come back from a cross-border standpoint, U.S., UK, Canada, Latin America, all of those. All of those are growing at a healthy pace, and we’re assuming they’ll continue to grow at a healthy pace but not at an accelerating pace. The one area where we are assuming an increase in terms of growth is around Asia Pacific. I mean, Asia Pacific has been a lagger in terms of recovery of cross-border travel. And we’re expecting that there will be -- with the borders recently opening in several markets in AP that there will be some level of recovery, which will come through there when you index back to 2019. So, that’s kind of generally been the base case we’ve kind of assumed. Look, I mean, to be perfectly honest with you, I think that the reality is we’ve got things which are helping us from a share win standpoint. We’ve got strong consumer spending, our services capabilities continuing to grow at a healthy pace, all of that is built into our guide as we go forward. Also remember that in 2022, we did have elevated levels of FX volatility which were there in the market, which actually supported the growth rate which we had in 2022. It’s hard to predict, but that looks like on a going-forward basis, we do our best assumptions on that from an FX volatility standpoint. But that’s kind of the building blocks as to how we’ve gone about building our business. The last point I’ll make is around rebates and incentives, you asked the question. As you can see, quarter-over-quarter, [ph] we talk about how we are delivering wins. We are winning with new customers. We are expanding our business with existing customers. So, we are building in assumptions from a rebates and incentive standpoint, which will be consistent with what you’re seeing in our track record from a winning standpoint as it relates to us.

Lisa Ellis:

Michael, I wanted to follow up in your prepared remarks related to new flows. You highlighted that that B2B POS payments as a notable opportunity area and highlighted a few new SMB co-brand wins there. Can you just talk a little bit more holistically about this opportunity? Remind us, a, how big it is; and then b, what’s different about it? What do you have to do differently as Mastercard to capture this opportunity relative to the consumer side? Thank you.

Sachin Mehra:

And Lisa, maybe I can just add a little bit out here, particularly as you think about the virtual card opportunity, which Mike just talked about. The differentiation, which is provided by technology which is what Michael talked about by virtue of the acquisition, which we had with our virtual card capabilities, but there’s also differentiation in terms of our approach from a go-to-market standpoint. And specifically, when you target flows from a go-to-market standpoint, you go on a vertical-by-vertical basis. So, as you know, we’ve been very successful in the travel vertical. Part of the reason we’ve been successful in the travel vertical is having a deep understanding of what it takes at the travel integrator level to be able to embed your technology there so that you are the payment choice, which people will exercise when they have to make those payments. Similarly, as we look at that opportunity going forward, there are several other verticals we’re making the similar kinds of advances in. So, that’s specific as it relates to the BCN piece. But you also asked about small business and the commercial point-of-sale opportunity, which is there. And the reality is we’ve been winning significant new deals in that small business opportunity. And we see, candidly, a very sizable market opportunity in commercial point of sale, a large part of that is still in cash and check. And the reality is, just like we did in B2M where we displace cash and check utilizing digital technologies and innovation, that’s kind of the advances we’re making also in commercial point of sale. So, that’s how we kind of see and frame the opportunity set across both of these areas.

Operator:

We’ll go next to Tien-Tsin Huang at JPMorgan.

Sachin Mehra:

Sure, Tien-Tsin. So, on your question around revenue, it’s like I laid out, right? I mean, at the end of the day, we put our base case together. We’ve kind of laid out what our assumptions are from a base case standpoint. And at the end of the day, we don’t have the crystal ball to actually suggest that that is the way things are going to play out. But based on everything we’re seeing in the nature of current trends as well as leading indicators, particularly as it relates to the overall strength of the labor market, we feel pretty good about what we’re seeing from a base case standpoint as it relates to the outlook for revenues. As it relates to one component of revenues, which we oftentimes think about is around -- on an as-reported basis versus what it is on a currency-neutral basis, very hard to predict where foreign exchange markets go. But again, we’ve seen recent strengthening of the euro take place, and that’s what we’ve kind of shared with you in terms of our assumptions from an FX standpoint. And then, you asked about operating leverage. Look, I mean, the reality is we’ve always operated with the philosophy of delivering positive operating leverage over the long term. We look at the top line. We look at how our expense is up also against that top line. We have, in the past, demonstrated our capability to modulate our expenses to the extent we start to see adverse impacts take place on the top line and vice versa. And the reality is what we don’t want to do is impact the long-term growth potential of our business. So, we will continue to invest in our business with our eye on the long term. We will be prudent about not going into spaces from an OpEx standpoint, which are not in demand. Obviously, I’m kind of stating the obvious here. But the reality is the philosophy remains unchanged. We will look to deliver positive operating leverage as a company. And we have the tools and the ability to actually modulate expenses if top line -- if we feel like the top line growth is going to get impacted over the long term.

Sanjay Sakhrani:

First off, I’m glad we’re getting rid of the relative to 2019 metric, for good reason. Just a question on cross-border and sort of the operating assumption this year. I know there’s a number of different trends that you guys talked about. But there’s still a decent amount of pent-up demand. I guess, how do you think cross-border travel behaves in a backdrop where macro might get worse from here? Maybe you could use some historical precedent here. Maybe just give us sort of how you’re thinking about it. Thanks.

Michael Miebach:

And just to add one point here, Sanjay, that is over the last two years, we’ve been winning portfolios in the space. We’ve really focused on the space, expecting to come back. If you recall, let me just remind everybody here, across airlines, across travel, our online travel agencies, across lodging, across other forms of transports like trains, Myriad, Virgin Atlantic, Amtrak, JetBlue, Cathay Pacific, British Airways and so forth, we have won portfolios. And we’ve bolstered that in terms of market access through these partners with additional products. So there’s Mastercard Travel Rewards out there, which is now in 80 countries. So, we believe into the macroeconomic environment that Sachin just laid out, we have the better proposition. So, it remains an exciting space. The pace in which we’ll grow, we’ll have to see that is characterized by what Sachin just said, but we certainly have a differentiated proposition in that. And one last comment I want to make, Sanjay, I’m happy you’re excited about metrics and how we’re changing the metrics. From a metrics perspective, I want to complete -- back to Lisa’s question earlier. I mentioned the $14 trillion on commercial POS, but there’s also $24 trillion on accounts payable, which makes the total opportunity in this combined space, $38 trillion. So, that conversation earlier was an important one on a very big part of our priorities.

Jason Kupferberg:

I really appreciate the China cross-border data you gave there for both inbound and outbound. I think you said that inbound is running at about 20% of 2019 levels in the fourth quarter and outbound at about 50% of 2019 levels in the fourth quarter. Can you give us a sense of how much improvement you’re expecting in those metrics in 2023 as the reopening progresses? And then separately, can you just make any high-level comments on growth for each of your three strategic pillars in ‘23? Thank you.

Jason Kupferberg:

Just the three strategic pillars, what you’re modeling for revenue growth on those in ‘23?

Michael Miebach:

Jason, I’d say the model really is one not of separate pillars. This is an integrated business proposition where services differentiates payments. And payments is oftentimes a way to build out a further -- a broader set of services and so forth. So, it kind of goes in the circle -- a virtuous circle, I have to say. When you look at it, the -- historically, we gave you a number a couple of years ago that service is a third of our quarter. It has been growing faster. I gave you an example earlier in my prepared remarks on Consumer Clarity, which is something that is transaction-related, and it’s growing faster with 50 new issuers. So, there’s just a lot of momentum in there. But, there is also the kind of services that are not related to the underlying payments business. For example, what the example I gave you on Test & Learn, where we’re working with a set of customers to work on their base core business as in Lowe’s, the example that I gave you. So, different sets of dynamics, but they go hand in hand, and that is the power of the differentiated and diversified business model that we have.

Warren Kneeshaw:

Rayna, are you on mute? Operator, let’s go to the next, and try to get Rayna back on line.

Will Nance:

Maybe I’ll squeeze one last 2019 -- versus 2019 question before the metrics go away. When we -- some of the kind of moving pieces in December, it seems like across some of the metrics, things seem to take a little bit of a step down on the 2019 stack. So, just any color on what you’re seeing on a regional basis between kind of e-commerce and travel and how those trends have kind of continued into January, maybe excluding some of the impacts of China that you’re seeing? And then just a more numerical piece of that question as I -- appreciate the color you gave on the China metrics on inbound and outbound travel. Just wondering if you have any color on just the overall contribution of China to cross-border volumes?

Michael Miebach:

And a step down compared to last year and the year before is, of course, there because you get the mathematics and the lapping effects and so forth. But to 2019, I think that’s an instructive view here. And it tells us that, yes, we’re expecting a resilient consumer will continue to spend.

Operator:

We’ll go next to David Togut at Evercore ISI.

Michael Miebach:

David, let me start off on that. So, looking at Europe really in three categories, there’s the UK on one hand and there’s emerging Europe and then there is Continental Central Europe, and slightly different picture on all of them. First of all, starting off with the continent. Here, the concern has been around for a while on rising gas prices and energy prices and the impact on the consumers’ ability to spend. A combination of fiscal measures to provide cushions to consumers, along with energy-saving measures, along with the gas storage now reaching full capacity has really alleviated some of these concerns. So, we continue to see a fairly resilient European consumer. That’s our base assumption as we look forward. UK, somewhat different economic outlook, and that might be a little more shaky there. But fundamentally, in this market, we are seeing a lot of tailwind for us from share gains over the last couple of years. So that works well for us. And emerging Europe continues to be a dramatic digitization opportunity as we’ve seen in markets like Russia, which unfortunately is not in our P&L any longer. But we have seen very high digitization rates, and we’re pushing that in these more emerging markets. Somewhere between, there’s peculiarities like Germany, where there was a significant digitization opportunity, and there still remains. But we caught up a lot in Germany over the last two years, particularly on the contactless side, which is now reaching half of the transactions there. So, healthy mix in Europe and very strong share position with opportunities to come through from portfolio wins that we have shared with you over the last couple of years as they go into effect.

Operator:

We’ll move next to Ashwin Shirvaikar at Citi.

Sachin Mehra:

I’m going to need a little bit more clarity on the second part of your question, but we’ll get to that. Let me take the first question first, which is as it relates to the growth algorithm. Just suffice it to say that the fundamentals of our business actually are very, very sound. The growth algorithm, which has actually enabled the strong growth we have delivered pre-pandemic, very much stands sound even today. So, the reality is, if you think about PCE growth, you think about the opportunity for the secular shift to electronic forms of payment, you think about the fact that we’re growing market share, you think about how we’re delivering on our services capabilities and driving growth from that, and now as we’re doing new and different things around new payment flows as well as new networks, that growth algorithm actually is very sound, very stable, very consistent with what we’ve historically had. And that’s the way we think about the business for, call it, not only the near term but near medium to long term for Mastercard. Now, Ashwin, I’m not sure I got the second part of your question. Could you repeat that, please?

Sachin Mehra:

Yes. Look, I mean, our cross-border proposition sound -- is very sound and stable. And I think at the end of the day, like I said, most of the regions are now back to what I would call, the stable growth rates that we would normally have seen in the pre-pandemic phase. The one exception is Asia, and there’s a little bit of opportunity which we have in Asia, which we’ve contemplated in our thoughts for 2023.

Ken Suchoski:

Hi. Good morning, Michael and Sachin. Thanks for taking the question. I wanted to ask about the cross-border recovery. We see the volumes for cross-border travel are well above 2019 levels. Where are you seeing the transactions versus 2019 levels on that same metric? Sachin, you made some interesting comments on price versus units. And I’m just trying to get a sense for how much the cross-border travel volumes are benefiting from inflation and spend per transaction, and how much recovery is still left from a number of transaction standpoint. Thank you.

Operator:

We’ll take that question from Dave Koning at Baird.

Sachin Mehra:

Sure, Dave. A couple of thoughts. One, in Q1, acquisitions contribute less to our Q1 growth than they did to our Q4 growth because you’re doing a sequential comparison between Q4 and Q1 in your question there. Number two, the suspension of operations in Russia has a greater impact in Q1 than it does in Q4. It’s just the way the cadence of the revenues are. And then, two other points I’d point out is Michael talked about the several wins we’ve got -- active deal activity, which has been in play. We’ve got to contemplate all of that in our Q1 kind of thoughts. And then, the last piece I’d mention is we did have elevated levels of FX volatility in Q4. I don’t know where FX volatility is going to play out. We’ve done our best assumptions around that, but those would be the contributing factors.

Michael Miebach:

Yes. So, thanks for your questions. Thanks for your trust. Rayna, we will figure out your questions offline. We couldn’t get to those, unfortunately. The day will come when there’s a call where there’s more questions for me than for Sachin. I’m still hopeful. We will get there at some point. But the story has been resilient consumer, and we still see some opportunity in cross-border for Asia. That’s the base. We’re winning. That feels good as we look ahead into 2023. And we have 28,000 excited people at Mastercard that are going to deliver on that opportunity. With that, thank you very much and speak to you next quarter.

Operator:

And this concludes today’s conference call. You may now disconnect.

Operator:

Good morning. My name is Audra and I will be your conference Operator today. At this time, I’d like to welcome everyone to the Mastercard Incorporated Q3 2022 earnings conference call. Today’s conference is being recorded. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press the star key followed by the number one on your telephone keypad. If you would like to withdraw your question, press star, one again. Please only press star, one once to queue up for a question as pressing star, one multiple times may affect your position in the queue. At this time, I’d like to turn the conference over to Warren Kneeshaw, Head of Investor Relations. Please go ahead.

Michael Miebach:

Thank you Warren. Good morning everyone. Let’s get right into it. The headline is that consumer spending remains resilient and cross-border travel continues to recover. With this backdrop, we delivered strong revenue and earnings growth through the focused execution of our strategy. Third quarter net revenues were up 23% and adjusted operating income up 27%, both versus a year ago on a non-GAAP currency-neutral basis, excluding special items. The macroeconomic and geopolitical environment remains uncertain. Inflationary pressures have remained elevated and central banks are continuing to take aggressive steps to bring inflation in line. Tensions remain high with the war in Ukraine and the supply of natural gas to Europe is a concern. Despite all of this, unemployment rates remain low, wages are rising, consumer savings levels remain elevated, and credit is readily accessible. In this setting, overall consumer spending has remained resilient, although we are seeing some shift in what consumers are buying. Looking at our switch volume trends, domestic volumes remain steady, showing growth relative to 2019 levels, relatively consistent to the second quarter 2022. The trend towards spending on experiences continues. We saw notable strength in airlines, lodging and restaurant spend with a shift away from categories like home furnishings and appliances. The current mix between retail T&E and other categories of spend is now broadly similar to pre-pandemic levels. Cross-border continues to recover as border restrictions are progressively relaxed. Cross-border travel in the third quarter has reached 124% of 2019 levels. Relative to 2019 levels, most regions are up sequentially, including a notable improvement in Asia. Cross-border card not present ex-travel continues to hold up well. Notwithstanding the continued strength in consumer spending, we will continue to watch the environment closely, including fiscal, monetary and other policy actions taken in response to events. This will inform our actions, as it always has. Should the market outlook weaken, we are prepared to act quickly to modulate our expenses. As we demonstrated during the pandemic, we have the flexibility to respond quickly across a number of levers and will do so while maintaining focus on our three key strategic priorities. The focus on these areas will create new opportunities for growth. It starts by solidifying our positions in payments complemented by our differentiated services line and our expansion into adjacent activities like open banking and digital identity. Moving onto some examples of how we are progressing against each of these, first we are expanding in payments by enabling digital transformation with our customers, [indiscernible] volume growth, expanding acceptance, and capturing new payment flows. There are now over 3 billion Mastercards in circulation supported in part by programs such as our Digital First initiative. Our Digital First solution starts with the ability for a consumer to acquire and then use a new card digitally in real time. It’s helping customers create a best-in-class digital experience leading to increased approval rates on average by two percentage points, reduce fraud on average by four basis points, and increase spend per active account on average by 10%. To date, we have launched over 200 Digital First customers around the globe. Santander in Mexico, Chase in the U.K., Citibanamex, ING in Spain, and Nubank in Brazil are amongst the latest customers to partner with Mastercard to deliver and end-to-end Digital First customer journey. Also, we’re driving growth in volume with new and renewed wins across a broad set of partners. In the U.S., we recently extended our exclusive deal with Keybanc for debit, credit, commercial and small business, as well as deepened our relationship on services. This quarter in partnership with Chase, we will launch a new co-run program with DoorDash. This deal further expands our presence in the digital food delivery space. We also went live with the Uber Pro Card, an enhanced loyalty and payments experience that will help drivers in Korea save on gas, fees and other expenses. In Europe, we have seen momentum in Italy with [indiscernible] securing an expanded deal that includes a credit and prepaid flip, as well as securing the current Mastercard portfolio. In Latin America, we have renewed our exclusivity agreement with Mercado Libre and secured incremental credit share with Banco Scotiabank Colpatria. Overall, another great quarter with notable wins. Let’s shift to one area that is sometimes underappreciated, that is how we are enabling growth in payments by giving people and businesses more places to use their Mastercard. We have added more acceptance locations in the last five years than the previous 50, and we are now accepted at more than 90 million merchant locations. The preference for contactless payments that grew over the last two years continues. More than half of the in-person switch purchase transactions are now tapped, up from approximately one-third pre-pandemic, and this trend will be bolstered by the adoption of new technologies such as tap on phone. Further, our technology and global reach enabled growth in acceptance while helping our partners drive their digital strategies. For example, we have signed with McDonald’s to use our gateway capabilities enabling them to easily offer more solutions to new markets, beginning in Middle East and Africa. Finally, we’re driving growth in payments by leaning into innovation to capture a prioritized set of new payment flows. We continue to make progress in going after flows in the disbursements and remittances space by expanding into new use cases and geographies. For example, in the U.S. gig economy, we’ve signed a new global agreement with AirBnB to facilitate host payouts using Mastercard Send in select markets. We have also expanded with gaming payouts, launching our Gaming Fast payout program. To address [indiscernible] account exported domestic payments, we have signed a deal with Pagero, a leading global B2B network and solutions provider that provides account payable automation to some of the world’s largest corporate brands. We’re also growing commercial point-of-sale transactions by targeting small business, corporate T&E, purchasing and fleet flows. In the U.S., we announced our exclusive co-brand partnership with First National Bank of Omaha to issue the [indiscernible] small business card. This product offers small business owners industry-leading access to tools, benefits and services with a focus on equitable access to credit - very important. We also continue to target B2B accounts payable flows by expanding access and reach leveraging our virtual card capabilities. We signed a deal with Marqueta to enable our next generation virtual card solution, Instant Pay. This solution intelligently and automatically sends instant payments to suppliers. We have also signed an agreement with SAP Taulia to integrate our virtual card solutions into Taulia and their SAP solutions, enabling their customers to facilitate virtual card payments. We’re also well positioned to capitalize on the return of travel with our Mastercard wholesale travel program. In Bahrain, we signed a deal with Infinios travel agency and travel management company volumes, and in Europe, we signed a deal with a fintech, Swile, while going after B2B travel flows in Europe and Latin America. As you can see, we continue to make steady progress in addressing our prioritized set of new payment flows. Now turning to services, where we delivered another quarter of strong revenue growth, our services delivered a diversified revenue stream for Mastercard beyond payments. They accomplished this by adding new service capabilities as well as extending existing service offerings into new and existing customers. There continues to be a tremendous growth opportunity in this space. First off, we’re excited about dynamic yield’s unique personalization platform which offers a great example of how we’re adding new service capabilities. Since complementing the acquisition earlier this year, we have added dozens of new retail and commerce customers. A great example is [indiscernible], a German fashion store. I always share German examples if I can. They have more than 1,400 stores in Europe. We have deployed our content personalization capabilities to additional markets. In addition, we are expanding our capabilities to financial institutions. Now, beyond adding new services, there’s an opportunity for over-extending existing offerings into new and existing customers. In the third quarter, we signed an agreement with Sky Italia, part of Sky Group, one of Europe’s leading media and entertainment companies, to enrich and commercialize a new service to support small businesses. mBurse, a technology provider to insurance companies is implementing our card link services for their micro savings program with Generali Insurance in Switzerland, and in Spain we have grown our relationship with Caxiabank with one of our largest European [indiscernible] deals. The deal enables them to provide a more efficient charge-back flow for all their card portfolios. Beyond expanding in payments and extending our services, our third key priority area is embracing new networks. As a reminder, our current focus is on two areas

Warren Kneeshaw:

Thanks Sachin. Audra, we’re now ready for the Q&A session.

Sanjay Sakhrani:

Thanks, good morning. Sachin, I was just wondering if you could just parse out a little bit of the fourth quarter net revenue expectations - it was a little bit lower than we were thinking. I’m just curious, is it incentives kind of spiking up in the fourth quarter, or is it just the gross number? Any color there would be helpful, thanks.

Sanjay Sakhrani:

Okay, thank you.

Lisa Ellis:

Terrific, good morning guys. Thanks for taking my question. A question about business resilience, I guess looking forward in the face of potential economic downturn, and just thinking about the fact that over the last several years, Mastercard increased the diversification in the business significantly with more debit, more fast ACH, more services, etc., more B2B, so how do you think about where you are now in terms of resilience of the business, if we do at some point see a slowdown in the consumer side of spending? Thank you.

Lisa Ellis:

Thank you.

Darrin Peller:

Hey guys, thanks. Your model is clearly still showing benefits of inflation, and if you could just remind us again the sensitivity in the areas you see and the basis points-driven inflation in that, but also whether or not there’s any pricing changes you guys are interested in employing on the non-basis point side, whether it’s transactions or it’s services, probably more importantly, just given what we’ve seen, or if you’ve done so already. Then maybe just on a side note on that, on the other side would be the expense management and the willingness--just how willing you are on, for example, marketing to flex there if necessary. Thanks, guys.

Michael Miebach:

Yes Darrin, I just want to add one point here, and that is looking back at the last two, two and a half years now, back to the second quarter of 2020 when revenue was severely impacted by a truly unprecedented event out there, so to the power of the levers that we have and the range of levers that we have to modulate our expenses - hiring, A&M, professional fees, T&E, market appetite and all of that, it just shows that we did not have to make any compromises when it comes to driving our strategic priorities. We pulled through on flows, we pulled through on services expansion and so forth. The model is wide and flexible - that helps us a lot, and as I look forward, there is optimism in how we’re going to navigate that.

Operator:

We’ll take our next question from Harshita Rawat at Bernstein.

Michael Miebach:

Hi Harshita, thanks for the question. There’s always something in debit routing going on, so here we have the clarification of the rule via the Fed. It takes all the way back to a decade ago, when there was this requirement to have two networks on every debit card, and basically what the Fed here clarified is that this is applying to whether it’s a debit transaction that’s made online or in stores, so pretty simple, pretty straightforward. Implementation by middle 2023, so we have some time, but we will be ready and we will be implementing. I think really what that does is we will just continue to compete with all the assets that we have in debit. I’m not really sure what this will do to the market, but we will certainly be there leveraging our technology to win more debit in the United States.

Harshita Rawat:

Thanks very much.

Tien-Tsin Huang:

Hey, thank you. Good morning. You mentioned nothing unusual on rebates and incentives, but I just wanted to ask, as I sometimes always do, with deal activity versus 90 days ago, any change there in issuer appetite to drive program growth versus maybe more disciplined growth on their side? Are there changes in timing of deals and implementation, things of that nature? Thanks.

Tien-Tsin Huang:

Great, thanks for the update.

Ashwin Shirvaikar:

Thank you. Hi Michael, hi Sachin. If I can ask about cross-border, now that we have seen some normalization in travel, if you could talk about how much more travel improvement there is yet to come in your view, and the mix of cross-border now that some normalization has happened as we look to travel versus non-travel.

Michael Miebach:

Just one thing to add, this isn’t exactly your question, but that whole space had been a focus for us pre-pandemic, during the pandemic, and now. While airlines were struggling with really no flights taking off, we were a strong partner and it showed in how the engagement with airlines and travel-oriented portfolios work now, so we stand well positioned to benefit from the trends that Sachin just talked about, on the services side as well as in the payments and co-brand side, so exciting space. I think our bets are paying off.

Operator:

We’ll go next to Rayna Kumar at UBS.

Michael Miebach:

Rayna, let me start off on that. Latin America, fascinating region for us, highly diverse from super well developed Brazil to markets at the other end of the spectrum, high travel markets with the Caribbean, Mexico, so you have all of that in the mix. It’s really interesting - when you peel the onion of it and you look at some of these markets and you compare them, two of the largest markets for example, Brazil and Mexico, if you look at the digital penetration in Mexico compared to Brazil, there is so much more potential to go, so there is upside in digitization. There is other issues that require some of our solutions. The region has experienced some fraud issues, generally in payments, so our safety and security solutions are in great demand and are a great driver for growth for us in the region while the underlying digitization continues, so you put those trends together, it’s all fairly attractive. Then I talked to you about our engagement in the crypto economy. If there is one place in the world where crypto is really in focus, it’s in that part of the world. Historic pain through high inflation and so forth, people were thinking crypto might be an answer. A lot of innovation in this space, so across all payments services and new payment flows and innovation, this is a region that has shown momentum for us.

Operator:

We’ll go next to Jason Kupferberg at Bank of America.

Sachin Mehra:

Sure, so Jason, I’ll give you--on your first one, and then I’ll get into the FX question which you’re talking about. In terms of Europe, we continue to see good Mastercard performance in Europe. Remember in terms of what you are seeing in our metrics, you’re seeing not only what the underlying economies are doing but also the impact of our share growth which has been taking place in Europe. It’s kind of the amalgamation of all of that which is coming through. In terms of regional patterns, I would tell you that we’re not necessarily seeing any meaningful change in terms of trends across the continent, in terms of how the spending patterns are taking place. The consumer generally, back to our comment earlier around consumer being resilient and strength in consumer, that’s certainly the case. Now, as you think about different markets, end markets like the U.K., we’re seeing stronger growth. A large part of that is being driven by the fact that we’ve had recent share wins in the U.K., and then there were share wins we’ve spoken about in the past in continental Europe which are still to come to effect, so for example we talked about our win with Deutsche Bank in Germany, that’s still to come to effect. Anyway, this is a mix of all of that which is kind of taking place at this point in time. On your question around FX, I shared with you in my prepared remarks what’s the annual impact on net revenue of a $0.01 change in the value of the euro would be relative to U.S. dollar, which is about $55 million on an annual basis. We wanted to put that out there so you have a sense on what the potential headwind or tailwind could be, depending on what happens with FX rates. The hard part is predicting FX rates, and so given the current mix of our business, that’s the sensitivity which I’d share with you as it relates to how you should think about what the impact could be for 2023.

Tim Chiodo:

Great, thank you for taking the question. I wanted to dig in a little bit on Mastercard Send relative to Visa Direct. I was wondering if you could call out for us and investors any of the different, maybe strategic focus areas, if there are any pricing differences, if there are any mechanical differences or maybe use cases where you seem to be getting traction relative to Visa Direct. That would be extremely helpful.

Sachin Mehra:

Just to add to what Michael said, particularly on the remittances side, we’re seeing very good traction take place in terms of cross-border remittances and the capabilities we’ve got there and the capabilities we’re building there. Our global reach out there is holding us in really good stead as it relates to how we are able to tap our partners to generate more and more volume down that path, so that’s a--it’s a bright spot in terms of the broad remittances piece as well.

Operator:

We’ll go next to Andrew Jeffrey at Truist Securities.

Michael Miebach:

Right, so Andrew, thanks for that question. You know, starting with Europe but then we could extend this conversation looking at the Middle East or at Asia, so we have processing assets in those parts of the world. Just to illustrate how this matters, there is obviously a whole new set of players that are entering the payment space whose prime raison d’être isn’t really to process, they want to have a great financial app, so they’re looking downstream for a whole set of solutions that complete what they do, make it relatively easy out of one hand, and that’s what we provide. This is really the explanation for some of our progress on the fintech side, on the neo-bank side. Those guys, where we have those partnerships, 70% win rate I’d like to add here, is really to a large extent coming down to our processing capabilities, which are state of the art, modern, fintech-oriented processing capabilities. It’s been a joy for us to watch. In some parts of the world, we are doing partnerships, for example with Network International in parts of Africa and so forth, so it’s a combination of our own assets where we feel there is scale and differentiation, and sometimes it’s through partners. Overall, there is a good play here in processing and it’s one of the services that we have in our portfolio.

Andrew Jeffrey:

Thank you very much.

Bryan Keane:

Hi, good morning. Sachin, just wanted to go through the yield improvements again. It sounds like it’s a lot of mix and some pricing in there. How do we think about the yield going forward into the fourth quarter and into next year? Do some comps get a little tougher as we get into next year for these yields? Thanks.

Michael Miebach:

Yes, and Sachin just kind of explained the strategy again, and that’s what we’re trying. We’re trying to be in the payments transaction at profitable levels, but then use our services to continue to improve the overall revenue yield, and it’s that combination that makes us look at the future very optimistically. I don’t really see anything changing here. These are the tools that we have, and we’re using them effectively.

Operator:

Next we’ll move to Ramsey El-Assal at Barclays.

Sachin Mehra:

Yes, so in terms of rebates and incentives, the mix in terms of how we are actually incentivizing to generate incremental revenue has not changed meaningfully. We’ve historically been more focused and we have actually delivered higher levels of rebates and incentives to our issuing partners, that continues to be the case as to where we are actually expending most of our rebates and incentives dollars, and that really hasn’t changed. As it relates to the mix between rebates and incentives for domestic volumes versus cross-border, I’d say that mix also hasn’t really changed. As you know, cross-border has generally been indexed lower from a rebates and incentives standpoint, and that continues very much to be the pattern right now as well, Ramsey.

Sachin Mehra:

Yes, yes. For sure.

Operator:

We’ll move next to David Togut at Evercore ISI. Sir, you may have your line on mute, we’re not hearing you.

Operator:

Yes, we’ll move next to Bob Napoli at William Blair.

Michael Miebach:

Right, yes. I’m really not into baseball analogies, so that’s why earlier I was talking about the first half of the game. But to your question very specifically, B2B, huge opportunity from a volume perspective. We called it out and we cut it down into very distinct types of flows at our investor day at the end of last year, so focus on B2B accounts payable on one hand, but there is other B2B flows which we’re very active in. For example, through all the illustrations I gave you earlier on virtual card use cases, virtual card is the current and most immediate answer to go after B2B flows. There is the commercial POS piece somewhere, which is kind of in an in-between space between B2B and small business, but that’s a huge space with a lot of cash and checks. You build it up over those into the accounts payable piece, and you know the long range vision that we have on accounts payable is really the Mastercard Track business payment service piece, where we say over time we’re building a two-sided network here. That continues to grow, but that takes time. But we have large players around the table - HSBC, JP and so forth, so that’s a good initiative for us, but for now, we are very active on virtual cards to solve the issues of buyers and suppliers in the space. We have not moved away from this by any stretch of the imagination. This is a huge opportunity and we’re going to go after it.

Warren Kneeshaw:

Audra, I think we have time for one last question.

Jamie Friedman :

Hi. Sachin, transaction processing fees increased 15%, but switched transactions increased 9%. I know you called out in your prepared remarks mix changes. I was just wondering if you can elaborate on that. Thank you.

Jamie Friedman:

Thank you.

Operator:

This concludes today’s conference call. You may now disconnect.

Operator:

Good morning and welcome to the Mastercard Inc. Q2 2022 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Warren Kneeshaw, you may begin your conference.

Michael Miebach:

Thank you, Warren. Good morning, everyone. Starting with the key highlights for the quarter, we delivered strong revenue and earnings growth with further improvement in our underlying operating metrics, notably, in cross-border travel. Quarter two adjusted net revenues were up 27% and adjusted operating income up 40% versus a year ago on a non-GAAP currency neutral basis excluding special items. On the macroeconomic front, we continue to monitor a number of factors that have both positive and negative influences on economic growth. Inflationary pressures have remained persistent and we are now seeing central banks taking even more aggressive steps to reduce inflation as we have seen in the Fed yesterday. The situation is being compounded by geopolitical tensions and supply chain constraints, which has eased from pandemic peaks but remain in many industries. Despite this, unemployment rates remain low, wages are rising and consumer savings levels remain high. With this backdrop, consumer spending and particularly travel-related spending remains strong. Looking at this from a geographic standpoint, U.S. retail spending remains healthy as consumers navigate a high inflation environment. Spending has been aided by strong job creation and the buildup of excess savings during the pandemic. According to our Mastercard spending pulse, which is based on all payment types including cash and checks, U.S. retail sales ex auto ex gas were up 6% in the second quarter versus a year ago. In Europe, spending trends are positive although the risks related to both the supply of natural gas and higher interest rates remain headwinds. Growth in Latin America continues to moderate following a strong rebound in 2021. Asia has generally lagged a recovery of other regions. While COVID-related requirements have been relaxed in several countries, strong restrictions remain in others. Asia continues to have significant upside potential. Looking more specifically at our switched volume trends. Domestic volumes continue to show strong growth with notable strength in airlines, lodging, and restaurant spend. We’ve seen some shift in spends for the gas and groceries from discretionary categories like home furnishings in the U.S. Cross-border continues its strong recovery as border restrictions continue to be relaxed. Cross-border travel in quarter two has now reached 118% of 2019 levels. Cross-border card not present ex-travel continues to hold up well. Notwithstanding the strength in consumer spending, we will continue to watch the environment closely including fiscal and monetary policy responses to high inflation and their potential impacts on spending. Within this environment, we will continue to be nimble in managing our expenses. We have the flexibility to respond quickly across a number of levers as we showed in 2020. Having said this, we will continue to invest in the business to drive top and bottom-line growth over the longer term. We have well-diversified business model and we are executing against our three key strategic priorities, expanding in payments, extending our services and embracing new networks. And here is an update on how we are progressing against each one of those. First, we are expanding in payments by continuing to grow card volume, driving acceptance growth and leaning into innovation to capture other prioritized payment flows. We are driving growth in card volume with new consumer, small business, co-brand and travel wins globally. In Canada, we are excited to announce that we secured a new partnership with CIBC that creates an opportunity for material share shift of Mastercard with the Bank. We also renewed our relationship with the Royal Bank of Canada including a range of services that will enable us to grow our proprietary and co-brand volumes with them. In the U.S., we established a new partnership agreement with the U.S. Bank, which extends our current debit, credit, co-brand and small business credit programs. It includes several new products including the first large-scale launch of a consumer credit product, a small business credit offering and the development of Buy Now Pay Later installment solutions. We are excited to announce that we have completed the conversion of Gap Inc.’s existing 10 million card members to Mastercard across the Old Navy Gap Banana Republic and Athleta brands. We renewed and expanded our co-brand with Brooks Brothers issued by Citi and we have renewed and expanded our co-brand with Barnes and Noble in partnership with Barclays. Outside of North America, we have secured several new wins and renewals including a number of deals that position us well in Asia Pacific as the region rebounds from the pandemic. In Australia, we’ve expanded our partnership with Bendigo and Adelaide Bank Limited, enabling us to maintain exclusivity with Bendigo and convert several of their regional debit portfolios. We are pleased to announce that National Australia Bank and Mastercard has signed an agreement to retain and grow the Mastercard components of Citigroup Australia’s consumer business that was acquired by NAB. This marks the first significant issuing relationship between the two companies in years and we look forward to partnering to grow these portfolios. In Hong Kong, we partner with Citibank and HKT’s loyalty program and digital ventures arm, The Club to launch the Citi The Club credit card. In India, we are happy to report that the embargo on new issues has been lifted. Issuers have restarted card issuance and they are eager to expand business with us. An example is Yes Bank where we signed a consumer credit agreement that will enable us to maintain a majority share and includes the commitment to scale our World Elite portfolio. We worked hard to expand our travel-oriented portfolios which positions us well to capitalize on the strong recovery of travel. For example, in Asia Pacific we entered into a ten year commercial card issuance deal with Trip.com, one of the world’s largest online travel agency. In the UAE, we renewed our co-brand portfolio with Marriott. In the U.S. we have renewed our longstanding co-brand relationship with Amtrak and we expanded our co-brand partnership with Virgin Atlantic in the UK, a partnership that will leverage our test and learn, innovation labs and SessionM loyalty assets. We are also driving growth in payments by continuing to expand acceptance. Mastercard is now accepted at over 90 million merchant locations worldwide and we have more than doubled the number of acceptance locations over the last five years. Mastercard has been driving tap on phone innovation enabling billions of active smartphones to become potential acceptance devices with over 130 deployments across 55 markets. This includes working with Apple to enable acceptance of Mastercard contactless cards and digital payments suited tap to pay on iPhone capability. This allows businesses to accept payments directly on their iPhones. Mastercard is further empowering the ecosystem through our card commerce capabilities, which enables our channel partners to quickly deliver cost-effective acceptance. It also provides easy access to a range of payment solutions and services including tap on phone, QR, installments, loyalty, data insights and more via the Mastercard cloud. In addition, we continue to drive adoption of our click to pay online guest checkout capability. Click to pay is now enabled in over 20 markets across all regions, attractions - transactions have been growing quarter-over-quarter. We are expanding in payments through innovations like Mastercard Installments. Our open loop Buy Now Pay Later program has been very well received. Mastercard’s Installment is now soon to be live with Saudi National Bank and several new partners adding their support to the program. Examples include, Cross River Bank, Evolve Bank & Trust, Jifiti, Live Oak, MOCA Financials, and Web Bank in the U.S., as well as HSBC, Natwest and JPMorgan’s payments division in the UK. In addition, Apple recently announced Apple Pay Later, which uses the Mastercard Installments program. Finally, we are driving growth in payments by leaning into innovation to capture a prioritized set of new payment flows including disbursements and remittances, commercial point of sale, B2B accounts payable and consumer bill pay. This is at the heart of the investments we’ve been making to develop a range of capabilities that span cards, account-to-account payments, push payments and blockchain. We’re at various stages of scaling our capabilities across these different flows and we are making steady progress. For example, we are expanding network reach through new cross-border services relationships with partners like Doha Bank and Vodafone in Qatar and UPT, a leading money transfer operator in Turkey. We are targeting specific use cases and scaling distribution through B2B partnerships with Mastercard Send. A few examples, Caesars Sportsbook will leverage Send for instant payment of online winnings and Paysafe will integrate Mastercard Send into their payments platform to enhance the payout capabilities offered to their merchant customers in the UK and the EU. Now turning to services, our services capabilities have proven to be a tremendous growth driver and differentiator for our business, build on a foundation of investments and experiences built over the years. Looking forward, we continue to see a significant opportunity for services in three primary areas. First, services will continue to enhance the value of payments. Services make payment intelligent, safe and secure. For example, our identity check payment authentication service is driving double-digit improvements in the approval rates. We are working with PostePay in Italy to support the deployment of their issuing portfolio, assist in growing their acquiring business and enhance the customer engagement approach. And our consulting team in Europe is engaging with ING to help them create a seamless payment experience for their clients. Second, we see the needs of our customers expanding beyond payments. We can leverage our full suite of differentiated services to address these needs. A recent example is Travelodge, was utilizing our Test & Learn capabilities to support optimization of new investments in their business. And third, our services can be deployed to support new networks making our open banking and digital identity propositions even stronger. With these adjacent networks it is our services that will enable us to establish a differentiated position to scale and win. For example, we recently launched a new biometric checkout program. The program outlines a set of standards from banks, merchants and tech providers helping to ensure the security and privacy of personal data when people pay with a smile or with a wave. Beyond expanding in payments and expanding in services our third key strategic priority area is embracing new networks. As a reminder, our current focus is on two areas, open banking and digital identity. We are leveraging our Finicity and IR acquisitions to expand our open banking footprint, grow our customer base and deliver new solutions. This quarter we expanded our engaged partner network to include our open banking services with new fin-tech partnerships, including Dwolla, Synctera, i2c and others. They can now use our open banking capabilities to easily build and implement solutions for their end-customers across a range of use cases. From lending to payments, to financial management. In addition, we recently launched the global Start Path open banking program. This program enables us to co-innovate with start-up fintechs like Dapi, Finantier, mmob, Mono, and Paywallet as we support their path to scale. We have expanded our open banking product offering as well. We announced pay by link in Europe to allows business to send payment request through invoice, email, SMS, or social media chat. This can expedite the payment of invoices in a cost-efficient way and aiding both parties to better manage cash flows. Online accounting provider Visma Dinero is using pay by link to simplify invoice payments for over 75,000 small and medium-sized businesses. And in the digital identity space, Ekata continues its strong performance signing over 200 new deals and expansion since we acquired the company just over one year ago. This includes many of the leading Buy Now Pay Later and crypto companies. It also includes real-time payment software providers like ECI Worldwide who is leveraging encompassed capabilities to help their global merchant network more accurately to identify fraudulent transactions. Both in banking and digital identity are attractive and growing opportunities and Mastercard is uniquely positioned to be successful in both. So in summary, our business fundamentals remain strong. We delivered robust revenue and earnings growth again. We are executing against our strategic priorities in payments, services and new networks. We have fortified our strong position with travel-oriented portfolios to capitalize on the continued recovery in travel. On the macroeconomic fronts, we continue to monitor on a number of factors influencing economic and spending growth. And with all of that, we will continue to manage our expenses carefully. That said, we will also continue to invest in the business to drive top and bottom-line growth over the longer term. Sachin, over to you.

Warren Kneeshaw :

Thank you, Sachin. Julie, we are now ready for the question-and-answer session.

Harshita Rawat:

Hi, good morning. So, Mike or Sachin, can you comment on the media reports yesterday that a potential bill for introducing routing choice for credit cards? I know the Durbin amendment for debit has market share, how could a credit routing choice, how could be implemented given many alternative networks don't have those capabilities? And then finally, just taking a step back, can you talk about routing decisions for merchants that why they choose Mastercard or might choose Mastercard where they have a choice of alternatives? Thank you.

Harshita Rawat:

Thank you.

Operator:

Your next question comes from Sanjay Sakhrani from KBW. Please go ahead.

Sachin Mehra :

Sure, Sanjay. So, what I shared was that we are thinking ahead in terms of cross-border travel seeing a modest improvement relative to 2019. And as you can see in our metrics, cross-border travel in Q2 was at a 118%. And in the first three weeks of July is at 126%. Without getting too specific as to what exactly we are kind of building in that, but that the point we've got is the following

Warren Kneeshaw:

Next question please?

Rayna Kumar :

Good morning. Thanks for taking my question. During the 2008, 2009 recession, Mastercard generated solid revenue and earnings growth and I'm curious to know what you think has changed the most about Mastercard since then, that could help you generate positive results through another potential economic downturn, even if you're not seeing it right now. Thank you.

Operator:

Your next question comes from Darrin Peller from Wolfe Research. Please go ahead.

Sachin Mehra :

Yes. Darrin, happy to take the second question first. I must say you were breaking up on the first part of your question, so we might ask you to just – kind of state that again. But on your second part of the question, what you are seeing in transaction processing growth rates relative to the growth in switch transactions is exactly like I said, the thee things kind of going on there, right? The favorable mix piece, which I talked about, the higher FX-related revenues and then there is some elements of pricing. Look, I mean, the reality is we're operating in an environment in which you've seen a few things happen. One is the mix has shifted towards a more cross-border and you know we make cross-border fees both in the cross-border volume fees line, as well as in switch transactions. So, sometimes that's kind of an overlooked element, but that's an important piece to keep in mind that we do make cross-border fees on the transaction processing line. And as the shift has gone towards more cross-border, that's helped us. Number two is, there is high levels of volatility in the foreign exchange markets. We delivered some very important services when we do switching of transactions and when we do the settlement of those transactions. In a highly volatile FX environment, it's actually worked in our favor. And on pricing, the baseline is the following, which is at the end of the day, we continue to deliver value to the ecosystem. And as we put value out into the ecosystem, we price for that value. And what you're seeing there is exactly that come through, which is, we are reflecting that in the nature of pricing. You'll see puts and takes in different quarters in terms of what we may or may not do in terms of pricing, depending on what we believe is the value we're delivering, as well as what the market's appetite to accept that is, and that's what you're seeing through there.

Michael Miebach :

Could you repeat your first question?

Darrin Peller :

Yeah, thanks. I was just trying to figure out the value-added services, the new flows, all the areas that are driving other revenues, obviously, are continuing to trend very well. And I mean, if you could just revisit what do you think are the top two or three drivers there? And what kind of sustainability in different macro scenarios you'd expect for that? Just it looks like the investments you made there are clearly paying off. Think we're just wondering on the cyclicality of this. Thanks again guys.

Sachin Mehra :

And Darrin, I'll just add as it relates to how we see the other revenue line item and services, in particular to what Michael was talking about, look, we see really good demand from the customers, and we see good growth potential there. The reality is we are doing deeper penetration of those services with our existing customer base. We're expanding the set of services we've got across our customer base and the third element, we're actually taking those same services and moving across to the new network side of things as well. And Michael alluded to one part of that when he was talking about what we do in the CipherTrace, but more broadly, even in open banking, for example. So the potential is there and we do expect that given the suite of services we've got, there is good growth potential going forward.

Lisa Ellis :

Alright. Good morning. Thanks guys. Good stuff here. I wanted to ask a question about some of the news related recently to the CFPB, the Consumer Financial Protection Bureau looking into stand-alone service providers, both in the P2P space. So, meaning the fraud issues we've seen in Zelle and other private P2P services and then also on the BNPL side, looking at the stand-alone providers there with the marketing and kind of risk management that they are doing. Can you just comment on how Mastercard is kind of positioned relative to the areas they are looking into? Is this an opportunity for Mastercard to perhaps play a larger role with Mastercard Send in P2P and with MasterCard Installments in the NPL? Thank you.

Operator:

Your next question comes from Tien-Tsin Huang from JPMorgan. Please go ahead.

Michael Miebach :

Tien-Tsin, let me start off with the deal activity. The momentum that we have seen over the last two years throughout the pandemic, where we lean with our customers and say, hey, what do you need and these are tough times? I think we set ourselves up as a trusted partner and help to shape that deal pipeline that we currently see, which is very strong. Deal pipeline is strong across all regions and we gave you a few examples today from – we haven't talked much about Canada lately. So these are strong wins. This is excellent. Some of the very significant wins we talked about over a year ago in Europe when you think about NatWest, Deutsche Bank, the multi-regional deal that we have with Santander, they are progressing according to plan. The conversions are going on. I mentioned very specifically back to United States. The GAP conversion is actually done on those 10 million cards. So overall, we talked to you at the Investor Day in November last year that we see share growth across all of our carded products and we continue to feel very good about that. So momentum, it's competitive out there, of course. But I think the mix of what we have in various payment solutions, as well as services sets us apart. We've also relooked at how we deploy our sales resources across the company with all the acquisitions that we have so that we can do the best possible work for our customers. So overall, strong momentum that I think will continue.

Operator:

Your next question comes from David Togut from Evercore. Please go ahead.

Michael Miebach :

Alright, let me start, and then Sachin can chime in. So David, as a matter of fact is Europe is not homogenous. That's the first thing I would say. When you look at where we are on the arc of the secular shift, it's very different. So there is lots of opportunity across the board from further digitization. The opportunity to go beyond P2M and sets of flows is wide open in Europe. The push of the European authorities to digitize beyond just in-store payments and online payments is significantly there. We are well-positioned with our tools in Europe, which is pushing on open banking, which is pushing on open on account-to-account, which is pushing bill pay solutions. So we have all of that in a hop. So we feel that there is significant opportunity. And as I said before, there is uncertainty on the European macroeconomic front. But on the other hand, macroeconomic GDP overall economy and our baskets are two different things, and we'll have to kind of see how that will play out. I can't really predict that. I am from there, so I have a sense, but I am not in the business of predictions.

Ramsey El-Assal :

Hi, thanks so much for taking my question. I had wanted to ask about some of the longer term drivers of rebates and incentives. It seems like today or not it seems like today, rebates and incentives as a percentage of gross revenues are several hundred basis points higher than they were in 2019. I guess the question is, is the mix and the mix-related drivers of that increase are very clear. But as we move forward over the next couple of years and your mix normalizes, should we see downward pressure on the rebates and incentives as a percentage of gross revenues? Or is this something where this new baseline is sort of here to stay? And if that's the case, maybe give us some reasons why?

Ramsey El-Assal :

Got it. Thank you so much. Appreciated.

Unidentified Analyst:

Hi guys. Good morning. I just wanted to ask a clarification, Sachin, on the OpEx, the non-GAAP growth, currency-neutral ex acquisitions that went up from high-single-digits originally. I think it was last quarter that you guided to that for the year to low end of low-double-digits. So, I guess, why the increase in OpEx? And is it just taking the opportunity to invest more due to the strength of the topline but any color maybe on where some of those investments might be going with the additional expense? Thanks.

Unidentified Analyst:

Thank you.

David Koning :

Yeah. Hey guys. Thanks so much. And I guess my question is on cross-border yields. One thing that was interesting this quarter, intra-Europe cross-border grew faster than non-intra-Europe for the first time in a long time and yield was up regardless. So it seems like the last few quarters, mix helped a lot, but now there it seems like another driver on top. I guess is that right? Maybe what's that other driver? And should we get faster growth in non-intra-Europe kind of in coming quarters?

David Koning :

Yeah. Great. Thank you.

Jason Kupferberg :

Good morning, guys. Wanted to get your perspective on just the relative health of the lower-income consumer versus higher income? And then, if you can just make some remarks about how we should think about rebates and incentives for Q3 and Q4? Thank you.

Jason Kupferberg :

Thank you.

Operator:

Your next question comes from Bob Napoli from William Blair. Please go ahead.

Michael Miebach :

Right. So open banking, let me start off more generally speaking. So clearly, a global trend, one that's to stay. It's happening in Brazil. It's happening in Australia, certainly was there in the United States and Europe. The way we approach it is, first of all, we have a relevant position in connectivity and then building out a bunch of use cases. And the use cases that would get really to the heart of your question, you see very different types of kind of revenue models, value exchange models. First of all, on connectivity itself, you have per API call kind of logic. If you go into financial management solutions and it depends on who's our customer here, let's say it's a fintech that could again be by API. But you could start to see as we go into lending, mortgage verification, asset verification, kind of use cases. Those are kind of – that's the broad range of currently what we're seeing no established model at this point in time. I mean, we are investing heavily Aiia, Finicity because we feel there is a tremendous opportunity. This is – it's going to help to pull so many new customers into – consumers into the ecosystem, on the financial inclusion side, on the SME side and so forth. So, hard to answer very specifically right now where we are, but those are those kind of different kind of models and it's going to be multi-geography and it's going to be here around to stay.

Bob Napoli :

Thank you.

Operator:

This concludes today's conference call. You may now disconnect.

Operator:

Good day and thank you for standing by. Welcome to the First Quarter 2022 Mastercard Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today Mr. Warren Kneeshaw, Head of Investor Relations. Please, go ahead.

Michael Miebach:

Thank you, Warren. Good morning, everyone. Russia's invasion of Ukraine marked a somber start to 2022, as war returned to Europe for the first time in decades. Given these extraordinary circumstances, we decided to suspend our business operations in Russia. We did not take this decision lightly, given that Mastercard has operated in Russia for more than 25 years. We are now focused on the orderly suspension of business operations in Russia and supporting the well-being of our employees and their families across the whole region. Even in the context of this challenging geopolitical environment, we're off to a strong start in 2022. We delivered robust revenue and earnings growth with further improvement in our underlying operating metrics, notably in cross-border travel. Quarter one adjusted net revenues were up 27% and adjusted operating income up 40% versus a year ago on a non-GAAP currency neutral basis. On the macroeconomic front, consumer spending remains strong, particularly as economies across the globe continue to reopen and pandemic-related restrictions are lifted. Labor markets are firm, with low unemployment rates and rising wages. Weighing against this healthy backdrop are a number of factors that they are monitoring, including inflationary pressures, supply chain constraints geopolitical uncertainties and COVID with infection rates. We're monitoring these developments including the fiscal, monitory, public health care and other policy responses. Let's look at this from a geographic standpoint. US retail spending remains healthy, aided in part by the buildup of excess savings during the pandemic. According to our quarter one spending pulse report, which is based on all payment types, including cash and check, US retail sales ex-auto, ex-gas were up 4.7% versus a year ago. In Europe, spending trends are positive, although the invasion of Ukraine has introduced risks to economic growth looking ahead. Growth in Latin America continues to moderate, following a strong rebound in 2021. Asia has generally lagged the recovery of other regions. We're seeing several countries relaxing COVID-related restrictions, like others are facing stronger measures. Asia continues to have significant upside potential. Looking at Mastercard spending trends, we continue to see strong growth. Domestic switched volumes or strength across a broad range of sectors including retail, utilities and professional spend. We also saw strong growth in travel and entertainment including spending with airlines, travel agencies, lodging and restaurants. In terms of cross-border where the growth was particularly strong the recovery continued this quarter led by travel. Cross-border travel reached 2019 levels as of March for the first time since the pandemic began. Geographically, the cross-border recovery has been broad-based with improvement across all regions. Cross-border card not present ex-travel continues to be strong. Our strategy is designed to enable and capitalize on these trends and executing against our three key strategic priorities

Warren Kneeshaw:

Thank you, Sachin. Jamaria [ph] we are now ready for the question-and-answer session.

Sanjay Sakhrani:

Thanks. Good morning. I've had a question on inflation. I know the data suggests the consumer remains in good shape as we look across trends in the vertical as such. Are you seeing anything that sort of is seeing some kind of negative impact on consumer spending patterns as a result of inflation? I know we heard some comments on e-commerce. Maybe you could talk about that? Thank you.

Sanjay Sakhrani:

Thank you.

Harshita Rawat:

Hi. Good morning. Michael, Sachin, I want to ask about cross-border travel very strong recovery here. Is there a scenario where, even if let's say China and other parts of Asia don't come back meaningfully, you can still kind of get back to this like normalized 30% to 40% kind of levels above 2019 which is depend with the run rate pre-pandemic? Because there's so much pent-up demand, or does Asia and China need to come back for the next like cross-border recovery? And Sachin, just a follow-up for you. Can you just talk about the sensitivity of your revenue guidance should macro consumer spend deteriorate from here? Thanks.

Michael Miebach:

Yes. If I can just build on that, we love cross-border. But while we love the trends, it's a lot of hard work. And over the last two years, I mean, the travel industry was hard hit from the outset of the pandemic. We have leaned in. And as I recall over the last two years JetBlue, Cathay Pacific, British Airways, LatAm, Aeroplan, AirCanada you name it it's a long list of where we have either expanded renewed one additional volume. So we're participating in the trend in a very significant way. And we've always said, it's going to happen this year and we're ready for that.

Rayna Kumar:

Good morning. Thanks for taking my question. It was really good to see the strong operating margin expansion in the quarter 460 basis points. Can you discuss some of the underlying drivers outside of the return of cross-border and how sustainable you believe in upper 50% operating margin is going forward?

A – Warren Kneeshaw:

Next question, please.

Darrin Peller:

Hi. Thanks, guys. When we look at the types of opportunities on cross-border that you're seeing right now you clearly are positioned as you said before to take advantage of the upswing in travel. And historically it's been very high pass-through without rebates incentives, I think as I have a correlation. So first of all, just to be clear, I mean should we still expect that to be the case, or is there anything around the new business the relationships that Michael you mentioned earlier, that would cause that growth yield, I guess we can say our net yield to be a little bit different going forward on this type of big pickup in resumption and spending on travel. And then Michael just more strategically, when we think about that that industry in terms of cross-border payments. There's been so much change. And even you guys are trying to work through opportunities for more A to A [ph] and open banking opportunities across globally. And so does that change the ecosystem at all, or is card-based really, how you expect to see cross-border players stay really dominant for payments cross-border over time?

Michael Miebach:

Right. And strategically, so Darrin here's what I'd say is similar lens that we took at Investor Day where we looked at different universes and different use cases. You got the P2M world where card is well established domestically but also certainly cross-border. The industry and we very specifically with our services propositions have found a way to ensure that the risks associated with these cross-border transactions for merchants and for consumers are addressed. So the conversion rates and the approval rates have continuously increased. And there's a lot of value brought. So there isn't much of a problem to be resolved to payment for payments for goods on a cross-border basis. Now where we're actively looking in our -- it tends to participate in all relevant payment flows. We're saying what other payment volumes happening cross-border that we can contribute to with our technology through our franchise and so forth. And here the whole space of import-export, cross-border and accounts payable. That's a space where a counter-account solutions make sense for us to hold. We have specifically called out for you at the Investor Day the focus on remittances. Again, that's a significant opportunity for us. That's all additive and expensive from a target market perspective from an opportunity perspective. Attractive growing opportunities. We have the technology on the cross-border remittances side our Transfast acquisition, our buyout on the HomeSend side all of that is coming together. It's a 100 country reach. So I think what we're bringing here is the multilateral network idea into this space that has been historically inefficient. So, I look at it as a growth opportunity while we're going to continue to power the cost side of the house.

Operator:

Your next question will come from the line of Lisa Ellis with MoffettNathanson. Please proceed with your question.

Michael Miebach:

All right. So let me take that. So first of all, Brazil has been a market in focused strategically important market for us for years. We're very well established on with the large banks out there Itau and others to mention. So, I'm actually seeing the Brazilian country manager right after this call. So, it's very much in focus. We're very happy with what's going on there. Overall, it's a market that drives a lot of innovation. Buy Now, Pay Later has been a thing in Brazil forever. Open banking is on the rise, real-time payments is on the rise. So, a lot of movement there. And the P2P network that's been introduced by the Central Bank in the Brazil market is another push to further digitization in that market. So, the whole digitization in Brazil is really seeing great momentum and we're leaning right into that. Now the kind of flow that PIX is going after, you see a lot of P2P flows and some B2B flows, so that's not necessarily anything that we're particularly worried about but it's also the kind of flows as part of our multi-rail strategy that we like to support ourselves and we have a whole set of technologies for that. What's have paid just to point one out which is the first live in Brazil itself is set a market with innovation and a lot of momentum there. So, here's our technology powering a social network as an alternative which is an easy user experience great adoption 4.7 million users already on that platform. So, I look at it as a market that's a lot to learn from, a market that we invest in and where we chart passed for the new additional flows beyond card flows very with specific local solutions considering the size of the market.

Operator:

Your next question will come from the line of Tien-Tsin Huang with JPMorgan. Please proceed with your question.

Sachin Mehra:

Thanks, Tien-Tsin. So everything we kind of talked about and Michael talked about earlier on in this conversation was about our expanding relationships with these issuers. And so with these issuers, we are gaining share. That's kind of the reality of the situation. Again, there are puts and takes in the market, right? So as I think about the new relationship well I should say new relationship, the expanded relationship we have with Wells, right, that's an increasing share position with Wells which is taking place for example there. So the bottom line is the following which is whether it's Wells, Capital One, what we're doing with Santander and NatWest, Deutsche -- you name it the GAAP portfolio all of these incrementally are helping us drive our volumes. From a holistic market standpoint, again, like I said, there are puts and takes, right? But we're very, very optimistic about how we are seeing business translate for us. And as we mentioned at the Investor Community Day, we are growing market share across all regions and the market share growth which we've seen in 16 of our top 20 markets which is something we shared with you at the Investor Community Day is really the data points we put out so far.

Operator:

Next question will come from the line of David Togut with Evercore ISI. Please proceed with your question.

Sachin Mehra:

Sure David. So I think you're touching upon a couple of things which are there on that card-not-present ex travel. The reality is, as cross-border travel comes back, you do see some give back in terms of cross-border card not travel -- card-not-present ex travel. That's a mouthful. So the point is at the end of the day right, there are a few factors you got to take into consideration, when you're thinking about future growth rates for cross-border card-not-present ex-travel. Number one, what's the pace of recovery on cross-border travel is going to be. Number two, what the prior year comps were on cross-border card-not-present ex-travel? Because remember, these growth rates are all influenced by prior comps as well. And what was happening in the COVID environment last year, which might have caused for elevated levels of cross-border card-not-present ex-travel. And number three, you do see fluctuations come in that number through, as a result of crypto and crypto volumes, right? And so, these three factors are kind of things you've got to take into consideration. The point at an up level is the following, which is, the consumer continues to spend in an omnichannel manner. When they can get out and spend in a physical environment, they do that, when they can't spend in a card-not-present environment, they do that. We are ready to support them in both manners, whether it's through our omnichannel capabilities that we're offering our merchants and the strength which we're seeing in card-not-present ex-travel from a cross-border standpoint, is something we expect that strength to actually stay going forward as well. There might be puts and takes for all the reasons I just mentioned, but largely, I think, consumer behavior has changed in a manner where they've gone more digital and you're going to see some strength come through out there.

Operator:

Your next question will come from the line of Bryan Keane with Deutsche Bank. Please proceed with question.

Sachin Mehra:

Sure, Bryan. So, first, I'll take your question on Russia and what we're assuming. So we have suspended operations in Russia, as a result of which we're not earning any revenues related to Russian issued cards. So as it relates to revenue for the rest of the year, we had mentioned that we had put out an 8-K about how Russia represented roughly 4% of our revenues in 2021. And so, we've assumed that that 4% doesn't exist in any of the quarters going forward, from a net revenue standpoint, right? Point number two. And again, like I said in my prepared remarks, there's some level of headwind which we're assuming in Ukraine as well. But the reality is, that's a little bit of an uncertainty, just because we're not entirely sure as to how the war in Ukraine evolves and what the implications of that are. So we built in some assumptions and that's what we've kind of given you in our overall thoughts. From an expense standpoint, the Russia-related expenses represented roughly 2% of our operating expenses. And, again, from an OpEx growth standpoint, kind of, that's the way we think about it. As I mentioned, we have taken down, when we've shared with you our thoughts for full year 2022, we have taken down our OpEx growth rate on an ex-acquisition currency-neutral basis to reflect that very impact from a Russia standpoint.

Ramsey El-Assal:

Hi. Thank you for taking my questions. Good morning. I was wondering if you could give us your latest view on what the kind of longer-term post-pandemic payment [Indiscernible]. I mean, do you see a different longer-term mix of debit versus credit or any associated impacts to P&Ls or yields or anything that we consider as we model out in the long-term.

Operator:

Your next question will come from the line of Dan Dolev for Mizuho. Please proceed with your question.

Sachin Mehra:

Yes. So Dan, there's nothing fundamentally which is really changing as it relates to our debit business. I'll put that out there in the first place. Growth rates obviously are impacted by comps. I think you get that piece. I think you've got to take into consideration that there is a one portfolio, which is a debit portfolio, which is rolling off in the U.S., which was previously announced, which is probably impacting that comparative analysis that you're seeing, because obviously, we're seeing the detriment of that comes through in our debit metrics and that primarily started in the recent past and will go on through the course of this year. And the competitor is likely actually getting the benefit of that. So, that's probably the reason you're seeing some of the divergence.

Andrew Jeffrey :

Hi. Good morning. I appreciate taking the question. Michael, I actually have a question on other revenues value-added services in particular. Ex-acquisition seems that it's deselling a little bit. Would have perhaps expect to see that growing faster and certainly approaching the growth in the card business. Can you just comment on kind of puts and takes there and what the long-term growth trajectory is for value-added services?

Sachin Mehra:

And I'll just add some – a little bit more color on that just because I think it's important for you as you're thinking about your models going forward to actually factor this in. When we talk about Russia revenues, there are a few things from a Russia revenue standpoint which you might want to take into consideration one of which relates to the fact that Services was well penetrated in the Russia and Ukraine markets and had strong growth. And so as you think about the model and the impacts across the different line items you're going to see impact related to lost services revenue come through in other revenues in the ensuing quarters. That's kind of point number one. Few other salient pieces on Russia-related revenues as you think about the different line items. Yes we will lose the volumes and transactions. Russia was a fast-growing market. It has no average ticket size which I kind of mentioned earlier. There's a high degree of contactless penetration. Again I think these are important things where you want to kind of keep in mind as you think about comps on a going-forward basis. And the cross-border issuing out of Russia was mostly higher yielding into regional cross-border issuing. Also strong remittances and disbursements market. Why am I sharing all of this with you? Because as you think about the various metrics we've shared across all of these aspects, those will get impacted as Russia starts coming into play in future quarters.

George Mihalos:

Great. Good morning and thanks for taking my question guys. Sachin I wanted to ask you called out currency volatility is obviously being a benefit to our first quarter results. Can you isolate what that benefit was in 1Q? Just – I know it's still a volatile time which is sort of three weeks into the next quarter. But how are you thinking about that looking into 2Q?

Warren Kneeshaw:

Jameria, I think we have time for one more question.

Jason Kupferberg:

Thanks guys. Just a quick one, so just in terms of your expectation for cross-border travel relative to 2019 levels, last quarter you were expecting to be at 100% by the end of this year. You're already at 110% in April. So what's your updated assumption on that?

Jason Kupferberg:

Can we get a directional rebates and incentives just for the rest of the year?

Jason Kupferberg:

Thank you.

Michael Miebach:

All right. So thanks for your questions, insightful questions as always. Thank you for support for the company. Just a thought for me, here we're thinking that we're going to get out of Omicron and then a few days later we have an invasion in Europe. So for our teams, it's around the world it continues to be a never-ending marathon. And I just want to extend the thanks to everybody in the Mastercard team. And with that, we'll see you next quarter. Thank you so much. Bye-bye.

Operator:

Good day, and thank you for standing by. Welcome to the Fourth Quarter 2021 and Full Year Mastercard Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded [Operator Instructions]. I would now like to hand the conference over to your speaker today, Mr. Warren Kneeshaw, Head of Investor Relations. Please go ahead.

Michael Miebach:

Thank you, Warren. Good morning, everyone from New York. And starting off with the key highlight for the quarter. We delivered strong revenue and earnings growth as we saw further improvement in our underlying operating metrics. Quarter 4 net revenues were up 28% and EPS up 46% versus a year ago on a non-GAAP currency neutral basis. On the same basis, quarter 4 net revenues are 19% above pre-COVID levels in 2019. So with that, let's take a look at the macroeconomic front. The outlook remains positive despite the recent supply chain constraints, geopolitical uncertainties and inflationary pressures. Although there has been a recent surge in COVID cases, there are signs that these may be peaking. By each of these areas' merit monitoring, underlying spending trends remain strong as consumers, businesses and governments have become more adaptable to a changing environment. In the U.S., economic growth remains solid with low unemployment and healthy consumer confidence. According to our quarter four SpendingPulse report, which is always based on all payment types, including cash and check, U.S. retail sales, ex-auto, ex-gas were up 6.4% versus a year ago, and up 10.9% versus 2019. In Europe, GDP growth has been strong, although recently impacted by mobility restrictions. The impact of the Omicron variant reduces, expect the economic growth to pick up in the coming quarters, in large part, thanks to considerable pent up demand from the past year. SpendingPulse shows that overall European retail sales in quarter 4 were up 3.3% versus a year ago and up, 1.3% versus 2019. In Asia-Pacific vaccination rates continue to improve and we expect the economic recovery to pick up pace as both governments and businesses ramp up investment. The travel recovery in Asia-Pacific has lagged that of the rest of the world and has significant growth potential. Growth in Latin America is expected to moderate a bit following the rebound in 2021. As it relates to COVID specifically, there are early signs that the Omicron spurt will be relatively short lived. The reality is that the tools we have to deal with the pandemic are more advanced than ever. 60% of the world's population is now at least partially vaccinated. Effective therapeutics are becoming available. And governments are using more targeted measures to limit the spread. More borders have opened and have stayed open despite the recent variant. Although we've always said the path forward will not be linear there are signs we're moving towards the endemic phase of the disease. Looking at Mastercard spending trends, switched volume growth continued to improve quarter-over-quarter. Both consumer credit and debit continued to grow well. Turning to cross-border, the recovery has continued with overall quarter 4 cross-border levels now higher than those in 2019. Cross-border travel continued to show improvement relative to quarter 3 levels, aided by border openings in the U.S., UK and Canada. While Omicron has had some recent impact on cross-border travel, we continue to believe that cross-border travel will return to 2019 levels by the end of this year. Cross-border-card-not-present spending ex-travel continue to hold up well in the quarter. So overall, the spending trends are moving in the right direction with some near term travel related headwinds as a result of the variant. Now turning to our business highlights. I outlined in our Investment Committee Meet in November, we remained focused on our grow-diversify-build strategy, and our three strategic priorities which are, expanding in payments; expanding our services; and embracing new networks. Here's an update on how we’re progressing against each of those priorities. First, we're expanding in payments by growing person to merchant payments, scaling across other payment flows and leaning into innovation in new payment technologies. In aggregate, these targeted flows represent $115 trillion in opportunity. First up, we're driving growth in person to merchant payments through new wins across the globe. In the U.S., I'm excited to announce that we're partnering with Chase and Instacart, leading online grocery platform in North America on a new Instacart Mastercard co-brand program. This partnership marks an additional co-brand win with Chase, quickly following the recent launch of the Chase Aeroplan World Elite Mastercard. In addition, with First Interstate Bank's planned acquisition of Great Western Bank, we will flip Great Western’s consumer debit, credit and commercial portfolios to Mastercard. And I'm happy to note that the consumer credit portfolio of MERIX Bank, over 3 million customers will transition to Mastercard beginning in the second quarter. MERIX Bank plans to leverage several Mastercard solutions, including our fraud prevention, consulting, open banking and loyalty services. Over in the Netherlands, we've renewed our partnership with Rabobank, which includes the migration of 8 million Maestro cards to Debit Mastercard. We signed an exclusive deal with Westpac in Australia for the new Banking-as-a-Service platform. This platform will allow new players to leverage Westpac's banking capabilities. Afterpay, the first partner on the platform will connect Debit Mastercards to their Money by Afterpay app. And in the UK, the NatWest Debit migration is progressing to plan as in the early stages of consumer rollout. We're also expanding in payments by capturing new payment flows including commercial, B2B accounts payable, bill pay and cross-border remittances. For example, in the consumer space, we've expanded our relationship with Bank of America, where we'll be the lead brand for new commercial card issuance. We've also renewed and expanded our relationship with WEX, including be chosen as their strategic partner and adding open-loop functionality to their millions of closed-loop fleet cards. Turning to accounts payable, we continue to scale Mastercard Track, WEX, BMO, BOK Financial, Melio and Delux will connect to the platform. We also launched the launch -- we also announced the launch of Mastercard Track Instant Pay, which uses machine learning to analyze and initiate automatic virtual card payments, streamlining processes for buyers and improving cash flow for suppliers. And we're driving new B2B acceptance through a global partnership with Boost Payment Solutions with an initial focus on expanding the use of commercial card in seven key markets. We're addressing new payment flows in consumer bill payments as well. We recently announced the acquisition of Arcus to help deliver bill pay solutions and other real time payment applications in Latin America. Arcus enables digital payments for the majority of households built in Mexico and its connections with banks, fintechs and digital wall providers across the region. And finally, we continue to capture new flows in cross-border remittances. This quarter, we established a partnership with Travelex in Brazil, who will use Mastercard's cross-border services to send P2P transfers to the U.S. and Europe. For domestic disbursements in the U.S., we partnered with fintech processor TabaPay to make Mastercard Send easily available to fintechs and merchants across multiple use cases. Now shifting gear, we're also expanding in payments by leaning into payment innovation in areas like installments, contactless acceptance and cryptocurrencies. Here are a few examples. Our open-loop Mastercard Installments program that we announced last quarter has been very well received. The U.S. launch is on schedule for quarter one. We're actively bringing new partners into the program as we announced in Middle East, Africa earlier this week, watch this space. Now we're making great progress in expanding contactless acceptance by turning the world's billions of active smartphones into potential acceptance devices, enabling people to buy and sell whenever wherever they want. We now have 100 deployments of Tap on Phone in over 50 markets with leading partners globally. Contactless penetration increased to one in two of our in-person switch transactions globally this quarter. This is up from approximately one in three prior to the pandemic. And with that, the potential for accelerated acceptance growth, financial inclusion and consumer convenience is substantial. We're also bringing capabilities, experience and reach to help enable the crypto ecosystem. Our new collaboration with Coinbase will allow consumers to use their Mastercard to purchase NFTs, tried that myself. Our work with ConsenSys will make it easier for software developers to increase the scale, efficiency and speed of transactions on Ethereum and permissioned blockchains. And our CBDC [ph] Sandbox Test Platform, which we launched in 2020 continues to gain traction. We're helping central banks, financial institutions and fintechs simulate the issuance and distribution of CBDC along with the integration of CBDDs with our card network, our real-time payment modules and native blockchain wallets. Now shifting to services, our services support can differentiate our core products and have played a critical role in aiding many of the ones I just mentioned. The group services revenue at 25% in 2021 on a currency neutral basis. We will continue to extend our service capabilities to enhance the value of payments. We even further accelerating our growth by expanding into new areas and new use cases, particularly through our Data & Services and Cyber Intelligence propositions. Again a few examples for you. In December, we announced an agreement to acquire Dynamic Yield from McDonald's. Dynamic Yield uses enhanced AI to deliver customized product recommendations, offers and content to consumers. Their customer set includes over 400 global brands ranging from financial services companies like Synchrony to retailers like Lens End. When combined with SessionM's loyalty platform and our Test & Learn experimentation software, we will be able to offer a unified consumer engagement and loyalty hub to our customers. McDonald's is a great example of a company who is using all three of these platforms today with plans to further scale and integrate Dynamic Yield's capabilities globally. In addition, our Ethoca platform continues to experience strong traction in preventing unnecessary chargebacks, a real pinpoint. We added new customers in every region in 2021 for Ethoca. Recently, we launched Ethoca Consumer Clarity, which gives consumers detailed information about purchases on their mobile banking app. Submission is live with issuers across the U.S., UK and several European markets, including OTP Bank, Central Cooperative Bank and Paybox Bank. Now beyond expanding in payments and expanding in services, our third strategic priority area is embracing new networks. Specifically, we are leveraging our expertise in payments to build out new networks, with current focus on open banking and digital identity. On the open banking front, we have closed the acquisition of Aiia in November, which brings strong API connectivity to over 2,700 banks across Europe. And combined with Finicity's North American connection, which covered more than 95% of deposit accounts in the U.S. market, Mastercard has an unparalleled footprint in the key open banking regions upon which we are building solutions to solve a wide range of use cases. One example is in the mortgage verification space, where Finicity has signed deals with several new partners, including LoanPro [ph]. And in the digital identity space, we're helping our customers with fast, frictionless identity verification services. Ekata has performed strongly over the last quarter, expanding through strategic partnerships with companies such as ZIP and Equifax as well as growing its global footprint with leading fraud [ph] providers Tongdon and AirClick [ph] in Asia-Pacific. Combined, open banking and digital identity extend our value before and after the payment transaction. These are large, attractive and growing opportunities, and we are uniquely positioned to be a leader in both. So in summary, we delivered strong revenue and earnings growth this quarter. The macroeconomic outlook remains positive with a few areas that we're monitoring. And we're executing against our three strategic priorities, expanding in payments, expanding our services and embracing new networks, and all that with substantial progress on the product and deal front this quarter. Now Sachin, over to you and the numbers.

Warren Kneeshaw :

Thank you, Sachin. Jumaria, we’re now ready for the question-and-answer session.

Rayna Kumar :

Good morning. Thanks for taking my questions. So with cross-border spending now above pre-pandemic levels, are you anticipating any pent-up demand in travel spend in your financial guidance, particularly as we get through the travel months in the summer?

Sachin Mehra :

Yes. I think Michael, you pretty much covered it. The only thing I'd just add is we just need to go back to 2021 where we saw that when people have the ability to travel, they express their intent to travel. And we do believe that the impact of Omicron is going to be short-lived. And as borders start to relax a little bit more and people get a little bit more comfortable around this, people will get out there and express the demand for travel, back to what Michael was just saying.

Rayna Kumar :

Great. Thank you.

Harshita Rawat :

Good morning. Thank you for taking my question. Michael, I want to ask about FedNow. It looks like it will be live in the U.S. in 2023. Domestic RTP system in many countries is used for payments other than consumer to business. But then you have examples like the ones in India with UPI, which is used for retail payments. How do you see that playing out with FedNow? And how can you participate in terms of services enablement for that? Thank you.

Harshita Rawat :

Thank you.

Darrin Peller :

Thanks, guys. Michael, when we think about the parts of your business that are outperforming partly because of the panic but partly given where we are within the acceleration on spending on electronic payments, can you just walk through that in terms of what kind of sustainability you see to the parts of the business that have sustainable upside now? In other words, debit volume is now probably bigger than you would have otherwise thought it would be. Services is another piece that's probably higher than it otherwise could have been. Are those sustainable? And then maybe remind us of the parts of the business besides just cross-border that can catch up as we see the recovery again? Thanks, guys.

Darrin Peller :

Helpful. Thanks, guys.