The operator, Audra, welcomes everyone to the Mastercard Inc. Q2 2023 Earnings Conference Call and introduces the speakers, Devin Corr, Head of Investor Relations, Michael Miebach, CEO, and Sachin Mehra, CFO. The operator reminds participants to access the earnings release and accompanying materials on the company's website and mentions that the call will include forward-looking statements. Michael Miebach acknowledges the recent terror attacks in Israel and expresses concern for the humanitarian crisis in Gaza.

The company expresses their condolences for those affected by recent events and states their focus on supporting their employees and contributing to relief efforts. They also report strong financial results for the third quarter, with a focus on the labor market and inflation levels. They mention geopolitical uncertainty and their readiness to manage the business accordingly. Domestic volume growth remains healthy, but there has been some moderation in international markets. Cross-border travel and card spending continue to hold up well. Overall, consumer spending remains resilient and the company is focused on their strategic priorities.

MasterCard sees significant potential for growth in person-to-merchant payments, new payment flows, service capabilities, and investments in areas like open banking and digital identity. They have recently won deals with partners such as Webster Bank, Citi's wealth business, and Equity Bank Group, and have launched co-brand programs with Barclays and Microsoft. They also continue to strengthen their travel-focused programs.

Mastercard's success in winning deals positions the company to take advantage of the growing demand for payment solutions, especially in the areas of contactless and tokenization. These digital solutions, along with the company's reputation for innovation and trust, are helping to drive growth in transactions and volumes. Mastercard's partnerships with transit systems around the world, as well as its expansion into new areas such as in-vehicle payments, demonstrate the widespread adoption of its digital solutions. Additionally, the company's efforts to migrate Maestro to Debit Mastercard will further enhance its position in the market.

MasterCard is experiencing growth in their payment flows through the conversion of Maestro cards to their new system, as well as expanding their virtual card capabilities into new use cases. They are also partnering with major banks and companies to convert cash and check payments to commercial card products. This includes a long-term deal with Citibank and their first commercial contract in India. MasterCard is also focusing on expanding their disbursements and remittances capabilities.

The company has a wide reach, operating in over 180 countries and 150 currencies. They are experiencing strong growth and are expanding into new partnerships and markets. Their value-add services, including cybersecurity and data-driven intelligence, are also contributing to their growth. They have invested in solutions to address the increasing demand for fraud prevention and personalized experiences. AI is also a key component in their products and network intelligence.

MasterCard's powerful solution for early fraud detection has resulted in agreements with financial institutions and merchants in Argentina, Saudi Arabia, and Nigeria. This has led to a better consumer experience and increased revenue through consulting, marketing, and targeting analytics services. MasterCard's strategy of driving payment network and service revenue has also expanded their customer base through personalization and test and learn analytics capabilities, with Gartner recognizing their superior value proposition. Luxury brands like Saks Fifth Avenue and merchant ALDI in the U.S. have also extended their partnerships with MasterCard for hyper-personalized experiences.

The company is focused on leveraging their test and learn platform to optimize various aspects of their business, including category reviews, store hours, and marketing spend. They are also working with Duncan International to improve their data analytics capabilities and are well-positioned for growth in the person-to-merchant payments space. As digital adoption and open banking opportunities continue to rise, the company has a strong set of assets and partnerships to capitalize on. They have also made progress in enabling consumers to pay bills directly from their bank accounts. Overall, the company's third quarter results reflect the strength of their business and the potential for future growth in various areas.

In summary, our diversified business is well-positioned for strong growth in the future. Sachin Mehra then goes on to discuss the financial performance for the quarter, including an 11% increase in net revenue and a 13% increase in operating income. Operational metrics for the quarter show a 11% increase in worldwide Gross Dollar Volume, with strong growth in both domestic and international markets. Cross-border volume also saw a 21% increase, although this was lower than the previous quarter due to tougher comparisons.

In Q3, cross-border travel remained strong at 155% of 2019 levels and cross-border card-not-present transactions continued to hold up well. Switch transactions grew 15% year-over-year, with both card-present and card-not-present growth rates remaining strong. MasterCard has also been increasing the percentage of transactions it switches, presenting a revenue growth opportunity. In Q3, they switched over 65% of total transactions worldwide, compared to approximately 55% in 2018. Card growth was 7%, with 3.3 billion MasterCard and Maestro-branded cards issued globally. Payment network net revenue increased 10%, driven by domestic and cross-border transaction and volume growth. Value-added services and solutions net revenue increased 14%, with strong demand for cyber and intelligence solutions, consulting and marketing services, and loyalty solutions. Domestic assessments were up 10%, while worldwide GDV grew 11%. Cross-border assessments and volumes also saw significant increases.

In the third quarter, Visa experienced a five ppt difference in growth due to mix, with transaction processing assessments increasing by 11% and switch transactions growing by 15%. The four ppt difference was primarily due to lower revenues related to FX volatility. Operating expenses increased by 9% on a non-GAAP currency-neutral basis, with the NatWest migration and Japan switch impacting sequential declines in Q3 and October. Cross-border travel growth was impacted by tougher comps, but remained strong compared to 2019 levels. In the fourth quarter, Visa expects continued execution of strategic initiatives and factors such as timing of Social Security payments to impact performance.

The company's consumer spending remains strong and their diversified business model is well-positioned for future opportunities. They are closely monitoring macro and geopolitical concerns and are prepared to adjust expenses if necessary. Consumer spending is slowly recovering post-pandemic, with potential for further growth in cross-border travel. The company expects low double-digit growth in net revenue for the fourth quarter, with minimal impact from acquisitions. Foreign exchange is now expected to have a small positive impact on revenue, compared to previous expectations. Operating expenses are expected to increase at a high single-digit rate, with acquisitions adding one ppt to this growth. Foreign exchange is expected to have a small negative impact on operating expenses. The company forecasts an expense of $85 million for other income and expenses in the fourth quarter.

Sachin Mehra, Chief Financial Officer, discusses the fourth quarter revenue deceleration and factors that are driving it. He mentions that the decrease is partially due to lower levels of FX volatility compared to the previous year. He also notes that rebates and incentives are expected to increase as a percentage of assessment revenue in the fourth quarter, as is typical for the company. Overall, the company is confident in their strong pipeline and ability to compete in the market.

The company's base case assumes a strong consumer market going forward, with some fluctuations depending on the country. The recent decline in Europe is mainly due to lapping the NatWest win from last year. The company is also facing regulatory changes in the US and abroad, such as new debit interchange caps and implementation of the China present and credit card competition bill. The company will address these changes individually.

The speaker discusses two topics, CCCA and REG-II. They mention that there is a lot of momentum in the industry to address CCCA legislation, which has been proposed by Senators Durbin and Marshall but was not successful. The speaker also mentions that they are in compliance with REG-II and will compete in the market. They highlight the importance of security in this debate and mention that the Fed debit pricing piece is currently in a consulting period.

The American Bankers Association and Electronic Payments Council, along with seven other trades, have sent a letter to the Fed arguing that price caps are causing market distortions and are not beneficial for consumers or merchants. However, it is important to note that interchange, which is a balancing mechanism for the industry, does not directly affect the company's profits. The company sees itself as a custodian for the industry and is focused on promoting safety, security, and consumer choice. In regards to spending trends in the U.S., the company's portfolio is largely insulated from credit issues and continues to perform well. There has been strong rhetoric in Asia about moving away from global networks, but the company is still in discussions with these markets.

The company has a well-diversified portfolio across all consumer bases, with a better mix of credit and debit products. Diversification has always been a key strategy for the company, both in terms of products and geographical markets. The company has a decent amount of co-brand portfolios catering to affluent consumers, which should hold up well in down markets. They have also recently invested in winning debit portfolios, which tend to perform well in down cycles. The company is monitoring credit availability, which is currently below historic levels. In terms of Asia, the company does not see strong rhetoric and instead views it as a part of a broader conversation about the value of globalization and global connectivity.

The speaker discusses the complexity of international partnerships and the importance of trusted cross-border data flows in a globally connected economy. They also mention their engagement with governments and organizations to ensure the benefits of a global economy are not lost. The topic of value-added services is also briefly mentioned.

The commentary this quarter was similar to last quarter, with strong growth in services and a drag from solutions. The drag is due to slower growth in real-time payments and bill payment services. The company is seeing strong demand for their cyber and intelligence solutions and expects the drag to continue for the near future. The overall growth rate can be impacted by transaction growth, comps, and timing, and excluding other solutions, value-added services have grown at 19% year-over-year.

The speaker clarifies that the tempering effect mentioned earlier applies to other solutions, not VAS. They expect strong growth in VAS, DNS, and CSI. In terms of expenses, they have various levers to adjust and will continue their financial discipline.

Sachin Mehra, speaking on behalf of the company, reiterates the company's philosophy of delivering positive operating leverage over the long term in a disciplined manner. He mentions that the portfolio transitions for NatWest, Citizens, Webster, Santander, Deutsche Bank, and Unicredit will take place over a period of time, starting in 2024 and continuing for multiple years. This will not be a sudden change, but a gradual process.

In this paragraph, the speaker discusses the rebates and incentives offered by the company, which are primarily used to drive volume and win preference. These incentives are a combination of fixed and variable and are typically more indexed towards domestic volumes. The speaker also mentions that the company does not offer as many incentives for cross-border transactions. The paragraph ends with a compliment to the speaker for acknowledging a recent terror attack in Israel.

The speaker, Darrin Peller, compliments the company on their politically correct response to a competitor's comment and asks for clarification on the negative trend in Germany reported by a European merchant acquirer. CEO Michael Miebach responds by stating that they are not seeing this trend and that consumer spending in Europe remains steady. He also mentions strong growth in Europe and dismisses the reports of others. Peller then asks about the company's incentives and rebates, and Miebach discusses their competitive landscape and faster growth in gross revenues.

The speaker is asked about any changes in rebates or incentives that may affect their business. They respond by saying that they are focused on winning important portfolios and maintaining net revenue yield. They also mention that the payments industry is competitive and they have a unique proposition. They give examples of recent partnerships and state that they are disciplined in balancing volume growth and incentives. They hand over to another speaker for more details.

The speaker, Darren, addresses a question about the impact of incentives on net revenue growth. He explains that there is a lag between when incentives are recognized and when volumes come on, but overall the company is focused on being in the payment flow to drive higher net revenue yield. The next question is about By-Bank, which is live with JP Morgan and being piloted by Verizon. The speaker is asked about the momentum of the product.

In paragraph 26, Michael Miebach discusses the economic model for a product that uses traditional ACH banking rails. He explains that the product, which combines bill pay and open banking, adds value to ACH flows by checking for sufficient funds in an account before a payment is made. The model involves a per-click fee for the API call. Miebach also mentions that this is a TAM expansion and that the company's unique combination of services, including real-time payments, digital identity, and open banking, is needed for the solution to work. He mentions that JP Morgan and Verizon are piloting the solution and that it is now live. In response to a question about the business update in October, Miebach mentions that the U.S. switched volume growth is 5%.

The speaker is responding to a question about the slower growth rate in the current quarter compared to the previous one. They explain that this is primarily due to the timing of Social Security payments, and there has not been a significant trend shift in the US market. They also mention that the consumer remains resilient and the economy is strong, which is their base case scenario for the upcoming holiday season. Another question is raised about the difference in valuation between the speaker's company and their distribution channels, and the speaker does not directly address this question.

Michael Miebach, CEO of MasterCard, discussed the company's distribution channels and how they have evolved over the years. He highlighted their work on acceptance, diversification across products and segments, and partnerships with companies like Stripe. Miebach emphasized that their model is highly diversified and regionally diversified, so any blips in specific sectors do not necessarily affect their numbers. He also mentioned their focus on driving the overall digital ecosystem through partnerships. A question was asked about open banking and banking as a service, and MasterCard's success in partnering with fintechs.

The speaker discusses the growing presence of regulators at the recent Money 2020 event and their focus on open banking and banking as a service. They express their belief in the concept of open banking and the importance of trusted parties in ensuring the safety of data exchange. The company supports the regulatory efforts, as it aligns with their data responsibility principles and their role in keeping consumer data safe. They are actively engaged in the dialogue surrounding data privacy and open banking in Europe.

The operator introduces the last question from an analyst at Bank of America, who asks about the company's three-year revenue forecast. The CEO responds by saying they are on track for the first two years, but the current situation with Russia has changed their outlook. He thanks the company's employees and ends the call.

The paragraph is thanking the reader for their participation and informing them that they may now disconnect.

This summary was generated with AI and may contain some inaccuracies.