Good morning, welcome everyone to the Bernstein's 39th Annual Strategic Decisions Conference. I am delighted to be joined today by Sachin Mehra, the CFO of Mastercard. We have about 50 minutes for a fireside chat. audience members can submit their questions via the Pigeonhole link provided, and I will read those questions during our conversation. With that, let's begin. Sachin, thank you so much for joining us today.
Thanks, Harshita. Thank you for having me here. Good morning to all of you.
Let's start with the question, Sachin, that's on everyone's mind, the macroeconomic environment. With everything that's going on, what are you seeing in terms of consumer spending on Mastercard cards?
The headline, as we shared with you as part of our Q1 earnings call, was, we continue to see a consumer which is just remarkably resilient, and consumer spending continues to be remarkably resilient. Obviously, we are all tracking exactly what you're tracking from a macroeconomic environment standpoint. And as I look at our drivers, as in the performance drivers which drive our top line, what we're seeing effectively is that through the first four weeks of the month of May, that our drivers are generally in line with our expectations. It's what we shared with you at the time of our earnings call. They're actually tracking generally in line with that. Now, obviously, we're totally aware about what the macro environment is.
We're keeping a close eye on various factors, some of which are positive, some of which are potential headwinds. On the positive side, I would highlight the fact that unemployment levels remain at record lows. So strong on from an employment standpoint, as you all can appreciate. When people are employed, they get paychecks. When they get paychecks, they tend to spend, so that typically tends to be a tailwind. We also see inflation as generally moderating and coming under control, so that you're starting to see a little bit of that come through as well. It's one to certainly keep an eye on, 'cause, again, the impact of rising interest rates will play out over a period of time. It's something to be actually, you know, somewhat cautious about.
From a regional color standpoint, I'll share with you know, the U.S. continues to perform well. There's a. You know, we talked about this in our first quarter earnings call. You saw a little bit of impact on drivers come through on account of lower tax refunds, in this year relative to the prior few years, so you're seeing that come through. You're seeing the impact of lower gas prices come through as well. When I start going around the world and I see what's going on in Europe continues to be very resilient from a spend standpoint. NSE is wide open, business continues, people are spending, things are looking good there, and likewise for Asia, Pacific, and EMEA.
When I take the other lens around this, which is around what's happening from a cross-border standpoint, we continue to see, you know, potential from a cross-border standpoint. We mentioned this as part of our first quarter earnings call. There is still opportunity for a recovery in cross-border travel to occur, coming out of Asia, and the other parts of the globe hold up pretty well as well.
The one thing which I will share is what we have seen is, and you've all seen this, is that the US dollar has strengthened over the last month. Based on what we're seeing now on account of the US dollar strengthening, we now expect that in Q2, the strengthening of the US dollar will have approximately a zero-one PPT impact as a headwind to our net revenue in Q2. This compares to what we had shared with you at the time of the earnings call, where we said that the FX impact would be minimal. There's a little bit more of a headwind on account of the US dollar strengthening.
The last point I'd make is, since you asked about the macro environment, is one thing which we closely track is what's going on from a tax legislation standpoint. Just recently in Brazil, and Brazil is a decent-sized market for Mastercard. In Brazil, the legislature in Brazil enacted. Well, they haven't enacted it. What they did do is they passed a new tax, a package of tax measures, which basically align with OECD tax initiatives. The passage of this is a function of the president signing these tax measures into effect. They will be in effect January 1, 2024.
The reason I bring this up is because it's our assumption that the president will sign these tax measures into law in the second quarter, and if that were to happen, our effective, our non-GAAP effective tax rate for Q2 will be in the 24 to 24.5 percentage point, 24% to 24.5% range, compared to what we had earlier guided as being about 18.5% to 19%. The resultant impact on a full year basis from a tax standpoint will be a non-GAAP effective tax rate of between 20% and 20.5%. Again, we had guided for a full year basis at 18.5% to 19%.
The reason is we're going to take a one-time discrete, tax expense associated with the valuation allowance, which we're going to put against our deferred tax asset. Look, I mean, I've kind of given you the macro, I've given you what's going on from changing tax legislation, but that's kind of the overall picture as we see it.
Sachin, let's talk now more about the competitive environment, right?
Mm-hmm.
As I kind of think about the last couple of years, you've had several wins. I'm thinking about Europe, especially the U.K., the most recent Citizens win. Can you just take a step back, talk about the competitive environment, and highlight why Mastercard is winning?
Sure. Look, I mean, we operate in a fairly competitive kind of environment. That's been the case in the past, and that continues to be the case right now. Our approach to the market has always been one of, you know, let's get out there and solve what are the real-world problems for our customers and for consumers at the end of the day. This has kind of led us down the path of going through with what we call a solution selling approach, as opposed to showing up there and saying, "Oh, guess what? You should switch to a Mastercard branded kind of network proposition." That's certainly part of the discussion, but the discussion goes well beyond that.
The way we go about doing that is by assembling the suite of products and services that we've got, which allows us to go and solve for those real-world problems that our customers have. This includes all the services which we've got from a cyber intelligence standpoint, our data analytics insights, our loyalty and reward propositions. There are several, you know, assets which we've got, which we bring to bear. Not all of them are applicable to every customer, so it's about understanding what the customer needs, and then actually making sure we're coming up with the right solutions to solve for that. In several instances, it's about our digital enablement tools which we've got. It's our tokenization capabilities. It's what we're doing from going digital-first standpoint, which really resonates with our customers.
I will tell you, beyond just products and solutions, what also matters very much for the customers who we've been winning with, has been just a meeting of the minds from a philosophical standpoint. This could be everything from our approach towards financial inclusion and how that matches with what our customers want to do, or our prospective customers want to do, our approach towards ESG, and how that matches with what our customers want to do. All of those factors come into play as part of the discussion. I'll give you examples. You, you mentioned, you know, the wins with... In the U.K. with NatWest and Santander. You know, take someone like NatWest.
In the instance of NatWest, the combination of what we were able to bring in the nature of digital-first solutions and our services capabilities, was a key enabler in terms of getting us there. You take someone like Citizens. Citizens, too, cares about, deeply about our services, they also had a meeting of the minds in terms of what they're trying to achieve from a financial inclusion standpoint and from an ESG standpoint, which matched with what we are trying to do out there. Most recently, on Friday of last week, we announced that we have been awarded the business with UniCredit, this is that they will be our exclusive partner across all of their products. Which, you know, they've been a partner of ours for some time now. They used to have a dual network strategy.
They have chosen to go down the path of making it a single network strategy, it's gonna be Mastercard. It's across all of their products in Europe. It's across 13 banks in 12 markets. We're very thrilled about that. We think it's a great opportunity. Again, it's the power of all the solutions we're bringing to bear, which has helped us get to be their partner on a going-forward basis, which we're super thrilled about. Their total portfolio is about 20 million cards, and it's a pretty exciting place to be.
Sachin, how should we think about the financial impact of these banks, right? If I think about your net revenue growth rate, that's been very healthy, but client incentives, which is kind of a contra revenue item, has also kind of grown steadily. How should we think about incentives...
Yeah.
As a potential growth strategy?
You know, look, it's a really good question. I get asked this question all the time. The reality is, what we're trying to do is we're trying to optimize our net revenue yield as a company. We're trying to drive accretion in net revenue yield. Net revenue is a combination of the revenue we make from our payment network and the revenues we make from our value-added services and solutions. It is really important that we, in a very disciplined manner, compete on the payment network side, which is where you see the vast majority of the rebates and incentives, right? In order to position us well to benefit from a few things. If you're in the flow for the payment transaction, you get to benefit from PCE growth, you get to benefit from secular shift.
If you're not in the flow, you don't get the benefit of the digitization effect, you've got to take those into consideration, right? You get then to deliver the various suites of services that we've created. Which is why net revenue yield has been where we have been very focused on trying to drive our accretion. That doesn't mean, just to be clear, that does not mean that we will be giving away our switching capabilities for free. That is not what I'm suggesting. What we will do is we will be disciplined in terms of how we compete. We will not win all transactions, and all markets, and all portfolios, but we will definitely compete, because we're looking at the bigger prize at the end of the day.
We do believe we've got a very competitive set of value-added services and solutions, which will help us achieve that broader mandate of driving net revenue.
Sachin, let's switch gears and talk about innovation at Mastercard. It feels like Mastercard has kind of led with innovation over these last couple of years. I'm just kind of thinking about your investments in AI, cybersecurity, data analytics, fraud, et cetera. Tell us about some of your recent innovations that you are most excited about, and also those which may be less well understood.
Look, I mean, I think you mentioned a few already, right? You kind of talked about AI, you talked about what we're doing from leveraging AI to drive our data analytics solutions, our cyber intelligence capabilities. They are clearly, you know, paying off, and they're paying off healthily in terms of what you're seeing, in terms of the revenue profile which we're generating. I don't think we should lose sight of the innovation which is going on in the core payment side, because there's a lot of innovation going on in the core payment side, right? You might say, "Okay, well, what is that?" Let's talk a little bit about that. Let's take something like our digital-first initiatives.
Our digital-first initiative is about trying to get our issuing community and consumers enabled to get digital card propositions enabled on a real-time basis, not only in terms of having the credential available on a real-time basis, but being able to use it on a real-time basis. In a world which is increasingly digital, that's become more and more important, right? This is part of the reason we're winning some of our portfolios. That would be one area from an innovation standpoint, which is super interesting for us. The other area is around the work we're doing from a tokenization standpoint. We had mentioned a couple of quarters ago about how more than 2 billion tokenized transactions run over our network every month now. It's important, and the reason it's important is because when more data transactions are tokenized.
It's driving higher approval rates. Higher approval rates means more volumes coming across our system. It's driving safer and secure transactions, which is, again, something which is helpful for the old ecosystem as a whole. That would be the other area, I would say, which is really helpful for us. The other two areas I'd mention are around acceptance, which ties very closely to what we're doing from a contactless standpoint. On acceptance, there's a fair amount of innovation going on there. We have grown our acceptance footprint to north of 100 million merchant locations, which has effectively doubled over the last five years, and that's been done on the back of innovation. There's a lot of work going on in terms of leveraging the technologies which we've been investing in to drive that.
One, in particular, I'll talk about, is the Tap on Phone capability, which we created, and which we've been rolling out in various markets across the globe. Which is effectively saying, NFC-enabled devices can now become acceptance devices. Which is helpful because the more the acceptance locations, the more the volume that can run across your system. When you bring that, along with everything we're doing from a contactless standpoint, that's what I. You know, we oftentimes kind of immediately delve into innovation going on B2B and in cybersecurity. I think those are really important. The brass tacks of what we do on core payments and the opportunity are there from an innovation standpoint, is something we continue to focus very heavily on.
Sachin, you mentioned B2B, and I want to double-click on that.
All right.
It's a key investor focus area in my conversations, which is kind of Mastercard's opportunity in new flows. This is an area which I know you've invested a lot over the years. You're a market leader in virtual cards, you have capability in B2B, remittances, disbursements. I know this topic is very close to you since you used to lead the commercial business at Mastercard. Tell us about the new flows opportunity at Mastercard.
Sure. We've defined new flows across four areas. We've defined them across remittances and disbursements. It's what we call commercial point of sale is the second area. The third is B2B accounts payable, and the fourth is bill payments. I'm going to start off first with what we talk about commercial broadly, and that's commercial point of sale and virtual cards, right? Virtual cards caters to the accounts payable opportunity, commercial point of sale caters to the small business proposition, the T&E proposition, the fleet card proposition. I'm going to start there, and then I'll go into remittances and disbursements, and, you know, we can take the discussion wherever you want to take it. We continue to see tremendous potential on commercial, and we are executing on that potential. This is not about creating new solutions and creating new ecosystems and new models.
This is about utilizing the full party model. It's about utilizing our card rails to tap into what is a largely untapped SME universe, which still remains highly under-penetrated from a secular opportunity standpoint. This is true on a global basis. The way you go about doing it is slightly different than you do it on the consumer side. Do you still have to provide digital propositions which are world-class? Absolutely. Do you still have to provide a debit and credit proposition? Absolutely. SMEs have unique needs, and those unique needs come around in with what we are delivering in the nature of platforms which help us garner the loyalty of these SMEs. The platforms are things like our expense reporting solutions, things like our Easy Savings platform. What is Easy Savings?
Easy Savings is a merchant-funded platform, rewards platform, which basically has got 40 million small business cardholders enrolled on it across 80 countries. What that effectively does is, if I'm a Mastercard small business cardholder, and I go on a business trip somewhere, and I wish to do a car rental, we've got a merchant-funded car rental proposition which provides an always-on offer to the small business owner to get a discount or a rebate on what they're looking to do. That's just one example. You could get that at a hotel. You could get that in terms of everywhere where small business owners spend. That's how we win loyalty from our customers in terms of how we go about doing that. The small business spends proposition is, in of itself, a largely untapped proposition, which we're really going after. Let's go to T&E.
T&E is something which we've been in for some time in the U.S. and in several markets in Europe. When you go to Asia Pacific, the corporate card proposition is slightly unique. There, because there are trust issues, people don't hand corporate card solutions to their employees. The reason they don't is they're concerned that people will utilize their corporate card for fraudulent transactions and then not make whole on the payments which are there. The way to address that is what we're doing through our mobile virtual card capabilities. That's, again, the innovation we're bringing there, where we're bringing in mobile virtual card capabilities to go after that universe. The last piece I'll talk about is virtual cards per se, which is going after the accounts payable flow. We are the market leaders in that space.
We continue to see tremendous growth. We are going after that opportunity on a vertical-by-vertical basis, and the verticals we've gone after have been in travel, have been in commercial real estate, have been in media, where we see tremendous opportunity to displace both check and ACH-based payments. The result of all of this is the growth you're seeing in our commercial volume. For example, in Q1, our commercial volumes grew 21%. We continue to see tremendous promise on this area on a going-forward basis. That's kind of the commercial sphere. That addresses two parts of the new payment flows. There's remittances and disbursements, and there's bill payments, and if you wish, I can go into the remittances and disbursements piece.
Yeah, yeah. No, I remember, I think, at the 2021 Investor Day, I think you disclosed that's 2% of your revenue, the remittances and disbursements fees, and I remember it was growing 45% year-over-year. Let's talk more about that opportunity.
Sure.
There's so many pain points to solve.
Yeah. Look, I mean, the remittances and disbursements opportunity, we tackle that through what we call Mastercard Send and Cross-Border Services. Really, what you're going after, Those, they're push payments effectively. That's what it is. Everything we do otherwise on card rails happens to be a pull payment. These are push payments. The use cases which we're actually going after this are, and we're developing new use cases, you know, every day as part of this process, is finding areas where you can enable P2P payments with the likes of Mastercard Send, which is what we do, on disbursements in the insurance industry, for example. When an insurance claim has got to be paid on a real-time basis, we leverage Mastercard Send to go after that, right? Let's talk about payouts.
For example, we have struck a partnership with Airbnb, and when Airbnb has to pay its hosts, they leverage Mastercard Send, right? Same for in the gaming industry. When there are payments to be made for winnings that people have when they are in the gaming industry, they leverage Mastercard Send as part of that process. The growth in the space is going to be a function of identifying use cases which have got applicability across the globe, and then going and penetrating those areas, and then identifying new use cases as they come around, which wouldn't typically be dealt with through traditional card payments. Everything I just mentioned is in the context of domestic flows.
In addition to domestic flows, there are cross-border push payments which take place, which is where our Cross-Border Services come into play. We continue to see good growth in that area as well. At the end of the day, across both our Mastercard Send and Cross-Border Services, we have about 10 billion endpoints where we can terminate payments, and that's really important, because the more the places you can terminate payments, the greater the utility for the services we've got. We continue to see a lot of promise on this area of payments and disbursements as well.
Sachin, I want to switch gears and talk about your recent revenue disclosure.
Uh-huh.
which is, which now kind of show payment network and then value-added services as different segment. What triggered this change?
Look, I mean, you know, we interact a lot with our investors. We hear what our investors have to say, we believe that the new revenue disclosures are... Our objectives around that were around providing greater transparency to you, the investors, around what is our revenue, which comes from payment network, what's our revenue, which comes from value-added services and solutions. It aligns with our strategic, you know, priorities, it's actually very closely aligned to recent interpretive guidance, which has been put out also on revenue disclosure.
It's a combination of these three factors which got us to that space of saying, "The time has come for us to actually show revenues and broken down by payment networks and value-added services and solutions." I would be remiss if I didn't say nothing changes in the nature and the way in which we do our business just because we've changed our revenue disclosures. Payments are very aligned on services are very aligned on payments. New networks work very closely with payments and services. That's the way we've run the business historically. That's the way we'll run the business on a going-forward basis. That's really the motivation behind showing you that level of disclosure around what's going on across those two areas.
We found those disclosures very helpful. Thank you. Let's talk more about services.
Yeah.
which is now approaching 40% of your revenues. For, for those in the audience who are less familiar, can you remind us of the key drivers of your services, revenue? Also, let's talk about some examples on what is driving that services penetration up, in terms of sales, product, and growing that revenue stream faster than the core.
Sure. Look, I mean, so I'm going to actually go back to what we just talked about as payment networks and value-added services and solutions. Services are a component of value-added services and solutions. The vast majority of our value-added services and solutions are what we call services. There's a additional piece which we've got in there, which relates to things we do from a digital identity standpoint, open banking or real-time ACH-related revenues, which sit in that value-added services and solutions number. I think it's important to get those definitions right, because historically, we used to talk about just services, now we talk about value-added services and solutions. Suffice it to say, services comprise the vast majority of that bucket.
In services, you've got everything from our cyber and intelligence capabilities, to our data analytical capabilities, to our loyalty and rewards, to our consulting capabilities, to processing. All right? We see these as fast-growing parts of what we bring from a business standpoint. They're key enablers of what helps us win share at the end of the day in terms of our business. The reason we got down to, as a company, to really pursuing a services strategy was it was around basically multiple areas. One, they grow faster than the core. Number two, they help us differentiate our core. Number three, they help us diversify our revenue streams. Number four, they're a great source of talent. A lot of the talent we acquire through our services capabilities, right?
Not only through acquisitions, but who we hire as well organically, is talent which rotates through the company to bring tremendous value to us. The engines of growth around this are across primarily two big areas, which are cyber and intelligence and what we call data and services. Look, I mean, it's really about what we can bring in the nature of, you know, the power of the data which we've got, how we organize that data, how we apply technology, particularly our artificial intelligence technology, to that data, the fourth leg of the stool on that one is how we deliver that solution to our customers. Being successful in this space requires all of those four things to happen. You've got to have the right data. You've got to have the data organized in the right manner.
You've got to be able to bring the technology to bear, to be able to mine that data, to provide high-confidence scores and high confidence analytics to our customers, and then be able to deliver it in a seamless manner to your customer, all of which we're able to do as a network, which helps us drive growth in this space. You ask kind of how we compete and how we differentiate, that's what we do. Again, the services portfolio is very much a product-led portfolio. When I say product-led portfolio, there are unique products which solve unique pain points, and I'm happy to talk about, you know, what those different things might be. For example, we've got a company which we acquired called RiskRecon. RiskRecon, what do they do?
They leverage the data we've got and the AI capabilities we've got to do an outside-in scan of the digital footprint of any company. Literally, what they do is they go through your IP address to identify where are the cyber vulnerabilities that you have as a company. You could be a small business owner, you could be a bank, you could be an acquirer, where are your vulnerabilities, and they tell them, "This is where you are most vulnerable." That's something our customers really value. You've got something else we've got, which is called Decision Intelligence, which provides a transaction-level fraud score to our customers. They're very unique services, mostly related to what we're doing from a payment standpoint, which is driving that growth.
Sachin, I think a key part of your services, strategy over the last several years has been kind of acquiring specific capabilities through acquisitions. Can you tell us about your recent acquisition of Baffin Bay, and how that fits into this overall suite of services that you talked about?
Sure. It's actually interesting that you ask that question, because Baffin Bay is very closely tied. Our acquisition of Baffin Bay is something which we advanced and brought to bear because of our experience with RiskRecon, the company I was just talking to you about. RiskRecon helps identify where the problem is from a cyber vulnerability standpoint. When we were talking to our customers, they were like: You tell me where the problem is, but you're not telling me what the solution to the problem is. Which is where we was like, "This is a great opportunity." This is an opportunity for us to talk to our customer, and not only tell them where the problem is, but have them provide the solution. What does Baffin Bay do?
They're basically AI-enabled, they're cloud-based, and what they do is they provide the solution to where the vulnerability sits. Really, what they're tackling is the likes of malware, ransomware, DDoS attacks at our customers. You might say, "Well, what does this got to do with payments?" Well, what it's got to do with payments is, we've got a distribution channel through our payment partners where we can really bring this to bear. Not only do our issuers need to use it for their own infrastructure, our acquirers need to use it for their own capabilities, but merchants need it.
When you think about, you know, the depth at which we can actually go with this kind of capability, whether it's Baffin Bay or RiskRecon, is you use it for your own capabilities, but you also then can market it through to other corporates. Our customers can market it through other corporates. We see a tremendous opportunity down that path as well.
Sachin, you mentioned AI. This is also a question that came from the audience as well, very topical. How will generative AI impact Mastercard's business? What opportunities do you see where AI could drive productivity or structurally reduce cost in the business?
First, I'm gonna start up... Yes, I know the question's about generative AI. Just, you know, for the benefit of the audience, we've been engaged with artificial intelligence-related technologies for quite a few years now. It is actually foundational in what we use for a lot of the services that we deliver. I just talked about Decision Intelligence, whether it's Safety Net, it could be RiskRecon, it could be Baffin Bay, they all leverage AI. It's something we utilize extensively for the products and solutions we develop to get them out into the market. I think the question is more around generative AI and how we at Mastercard are leveraging that. It's early days, is what I would say, but it's been something we've been engaged with as a company.
We've set rules of engagement for our own employee base to be able to experiment with generative AI in a controlled environment. At the same time, the use cases that we see around this are in areas like our customer interaction. For example, our call center interactions. There are services we provide to our customers from a call center capability standpoint, where we could see huge applicability for something like generative AI. The other area, which is very near and dear to my heart, is as leading the finance function at Mastercard, I've implored my team extensively to drive efficiency across the company, but certainly in the finance organization, leveraging artificial intelligence.
How we do it is by effectively taking the technology to help us improve our processes, drive efficiency in terms of reducing the amount of man-hours required to run our processes, but also to help improve our forecasting capabilities, right? There are lots of use cases, and again, we haven't been exhaustive about this. This is still a work in process, but we keep kind of working down this path. We run AI challenges in the company, where effectively, we're challenging our own employee base to say: Leverage what we've got in the nature of capabilities to come up with new use cases which can help us drive those efficiencies.
Sachin, we talked about a number of growth opportunities for Mastercard. I want to switch gears and talk about the other side of the equation, which is kind of some of the perceived risk.
Yep.
There is some concern around disruption as it relates to payments. There's always been concern, you know, about disruption as it relates to payments. For example, from growth of account-to-account payments, real-time payments, Big Tech, regulation, et cetera. I want to zoom in specifically on account-to-account and real-time. Areas, I think, get a lot of investor attention. I think one can argue that this proliferation of real time can accelerate the growth of account-to-account. You know, there's some interesting things happening in India and Brazil, but on the other hand, the overall usage of account-to-account remains muted. How are you thinking about account to account as it relates to Mastercard?
Yeah, look, I mean, you know, this is not new for us, just because we got into the real-time payment space through the acquisition of Vocalink quite a few years ago. Vocalink is a U.K.-based company which we acquired, which has real-time ACH payment technology. Our view of the world is you've got to ask the question: What is the problem which is looking to be solved out here? First, when we talk about real-time payments, and we talk about account-to-account payments, what we're talking about is, are they a fair competitor to what is a debit card proposition which exists today?
You've got to do a side-by-side comparison of those two, cause a debit card proposition brings with it not only the ability to provide, you know, the payment functionality that it provides, but it also brings along with it, for the consumer, zero liability, the ability for the consumer to return goods, fraud tools which help keep it a safe and secure experience. What we have observed so far in terms of the account-to-account capabilities, which have been largely driven based on real-time, you know, ACH movements in the likes of Pix and UPI, is they do not come along with the equivalence of the zero liability. They do not come along with the equivalence of the ability to return goods and services, and fraud is certainly a big problem there as well.
I think it's a little bit of a what is the problem which is looking to be solved, and is it a fair comparison point? Our view is, to the extent there's a debit card proposition in the market, our consumers have actually demonstrated that they're not really looking to move away from debit card propositions to move towards giving somebody access to their bank account in order to make a payment. If you're going to entice me as a consumer to allow me or to have me give you my bank account credentials as a payment mechanism, you're gonna have to pay handsomely for that to actually happen. Really, I mean, the pro...
If the problem being solved out here is to reduce the cost of payments for the merchant community, in quite a few markets across the globe, debit is already a regulated interchange model. The cost of payments for debit has already come down fairly significantly, right? The point really for us is, where you have seen this really take off has been primarily to facilitate P2P payments, right? In the likes of what you're seeing in Pix or let's keep with Pix for a second, it's replacing Boleto and wire transfer payments out there. We haven't seen large proliferation take place in P2M payments there. India is a slightly different story with UPI, where it started up again with P2P. It started up with, you know, B2B payments. It's started to encroach into that P2M space.
The economic model in that is questionable, in our view. Is it long-term sustainable or not? The reason I say that is because there is no charge being levied to the merchant. The banks who actually enable those payments tend to lose money on those transactions. It's a proposition which we are asking the question: Is it long-term sustainable or not? You know, who knows? We'll see where it goes. In the meantime, debit continues to flourish in that market, as does credit. Yes, these are things we keep a close eye on, but you've got to take a step back and ask the question: Is there a real problem being solved which is not being met?
In markets where debit has not properly proliferated, right, I would say there's white space where there's the potential for them, for account-to-account payments to be, you know, a first mover there. It's not lost on us. We, too, are actually pursuing our own approach around that, which is pushing our debit propositions down that path.
Sachin, a somewhat related question, FedNow-
Yeah.
here in the U.S., so will be live this summer. I know live doesn't mean being ubiquitous. It's far from being ubiquitous. How are you thinking about that?
Yeah, look, our experience or our view on FedNow is... I go back to the Vocalink piece, which I just mentioned to you, where we acquired Vocalink, I think it was in 2017. We launched something which is on the back of Vocalink called Pay by Bank. Really what that was intended to do was to allow for a P2M use case, leveraging account-to-account payments, to allow consumers to pay directly from their bank account. The uptake on that has been very limited. Again, it goes back to the point, there is a debit card which works really well, so there's no real need for the consumer to shift and change behavior there.
I bring that logic and that experience over to the U.S., and I say, "All right, well, if you're thinking about FedNow, do we perceive that to be a huge threat to P2M payments?" You know, we'll... I mean, never say never, but our view on that is you have a debit card proposition which works really well in the U.S., and the use case of FedNow to make payments for P2M seems a little bit kind of questionable in our view. That being said, I do see the potential to use the likes of FedNow for B2B payments, for bill payments and things of that sort, something we're absolutely gonna look to leverage as well. We see potential down that path.
Sachin, I want to talk about a somewhat related adjacency, so open banking.
Yeah.
It's an interesting new area, and you've made a number of investments here, both organic and inorganic, over the last few years. How are you approaching this opportunity? Also just in that, can you also give us an update on Chase Pay by Bank?
Sure. Absolutely. Our advent into open banking was through the acquisition of a company here in the US called Finicity. Then we acquired another company called Aiia in Europe, which is also in the open banking space. Our view on... Let's talk first Finicity, and then I'll come back to what we're doing with Aiia. Finicity has got connectivity to the large part, a very significant portion of the banking infrastructure here in the US, and it's got access in the, what we call the right way, which is API-enabled. The reason that's important is because at the end of the day, what is open banking? Open banking is effectively an open data network. It is with the right permissions from the consumer, right?
Being able to access the consumer information to help application providers provide services to the consumer base. The use cases which we are focused on are. I'll give you a few examples. What we call mortgage verification services. In the U.S., when you do a mortgage application, you've got to provide proof of income, proof of employment, proof of assets. It has been archaic historically. It's been very people-based historically. Finicity and our open banking capabilities are solving that, to provide that on a more real-time basis.
With consumer permission, by giving access to their bank account, they're allowing the mortgage provider to provide a mortgage to that consumer by saying, "You can look at what the assets are, you can look at what the income is, you can look at what the employment status is of the individual in question." Our revenue model on that is a per API-based revenue model, which we really like. Think about it like a per transaction model. That's one use case, which is this mortgage verification service. Extend that same logic with the right consumer permissions to small business lending, to automotive lending. Those would be areas which we're actually going after. The other areas we're going after on open banking are, again, leveraging the power of that data for account opening.
There's more and more digital account openings which are taking place, which is what we're leveraging this for. For account validation. Remember, when P2P payments take place, every so often there's got to be a reauthentication taking place that the account which is attached for that P2P payment is still a valid account. You leverage open banking for that, right? There's several use cases we're going after. We see a lot of promise. We're leveraging open banking, by the way, for our Mastercard Installments product. This is not just about generating new revenue streams through new use cases. This is about integrating those capabilities into Mastercard's core product capabilities, such as Mastercard Installments, to allow for the lenders who want to lend on Mastercard Installments to be able to get good insight into what's going on with the consumer from a creditworthiness standpoint.
We see a lot of potential. It will take time to actually grow and develop, but we see potential not only in the U.S., but in several markets in Europe as well.
Sachin, I want to ask about Big Tech, and this is also a question that came in from the audience as well. Some of these companies are very large merchants for you. They're also very interesting in the sense that they have deep, highly engaged user bases. They have, in some instances, control of critical infrastructure, like the NFC chip, on the iPhones, for example, and the desire to be successful in payments and financial services. I know Big Tech is a close partner of yours.
Mm-hmm.
Apple, you know, for example, is in fact a very close partner of yours. How should we think about the opportunity and risk posed by Big Tech for Mastercard?
Look, I mean, what started up as a perceived risk has turned out to be an opportunity for Mastercard over the last decade. Look, we work and engage very closely with Big Tech and Small Tech and Fintech. You know, the reality is, if there are people who need solutions and they're trying to solve the problems, if we can help them, we're going to be there. I think the most important thing for us to all recognize is, what are the strengths and virtues that Mastercard brings, how we can enable what the objectives of, for example, Big Tech is, as part of that process. If they're looking for consumer engagement, payments happens to be a way in which payment, consumer engagement can happen, well, you know what? We bring the full body model.
We bring interoperability, we bring the open loop network to bear to allow them to get there, right? We continue to see this as a partnership opportunity. It's not lost on us that they might have aspirations which might actually veer into potentially getting into what we do. So long as we create relevance for ourselves by continuing to expand our acceptance footprint, by continuing to get new technologies out there. For example, we've got the tokenization capabilities, which we spoke about. That's something we at Mastercard developed, I think it was back in 2012, 2013, and we engaged actively in terms of getting that out there as part of what goes on with Apple Pay today, right?
I kind of view this as an important element of how the evolution of the industry takes place. Technology companies will play a part. We have our part to play, and I think it's symbiotic, and it's something we should be, continue to keep focused on, and it will continue to evolve on an ongoing forward basis.
Sachin, we talked about a number of different growth opportunities for Mastercard. How are you just more broadly thinking about investments in the business to keep growing in the future, and specifically, how you're approaching M&A?
Sure. Look, our capital allocation priorities have not changed. They've always been around. We want to maintain a strong balance sheet and a strong credit rating. We want to invest in the growth of our business. We believe that there are significant growth opportunities that are in front of us, where we have to continue to invest, and we will do that both organically and inorganically. You know, whatever excess cash is there, we will return it back to our shareholders across both share buybacks and dividends, with a bias toward share buybacks. This has been our philosophy for the last decade. We've been executing on it. It's served us well, and that will be kind of the path going forward. There's a.
Let's double-click on one of the elements which I talked about, which was around the investments piece and how we are investing, right? We are investing organically, we're investing inorganically. The inorganic investment, the M&A question which you're asking, is an important part of our approach in terms of how we're executing on our strategy. When we think about M&A, we think about first, what is the strategy which we're trying to accomplish? We've laid that strategy out. It's well understood. All right. Let me say, what are the assets we've already got in order to help us accomplish that strategy? What are the gaps in our portfolio? The gaps in our portfolio could be met either through building organically and/or buying a company and/or partnering with another company.
If we decide building is not the right way to go, that buying or partnering is the right way to go, is where M&A comes into play. That's what we do, and we've done it, and we've been acquisitive. We've typically done it in new and emerging areas, such as cyber intelligence, data analytics and insights, in real-time payments. Part of the reason we go down that path is there isn't any technology which theoretically cannot be built. The question really is: Can you build it fast enough? Can it come to market fast enough?
What we typically tend to see is, if we can get a hold of companies who've got either, very interesting technologies and/or reach and/or footprints in markets which are new, which provide us synergy potential, we go after those, we do those acquisitions, and we execute on that, which is what we've been doing.
Sachin, one very interesting acquisition you made a couple of years ago was Ekata and digital identity.
Right.
Can you just update us on where you are in digital identity, which I know is also an important adjacent situation?
Yeah, look, we think digital identity is a huge opportunity. The world is going more digital. You guys all know that. As the world's going more digital, there's greater need for authentication of people in that digital environment, where you don't have face-to-face interactions. What does Ekata do? For the longest time, Mastercard has been helping with authentication when a payment transaction takes place. What Ekata does is it helps us allow for establishing the ID, the digital ID of an individual before a payments transaction and after a payments transaction. The revenue model is a per API call revenue model, so think about, again, as a per transaction revenue model. I can give you a real-life example.
If you're looking to open a bank account through a digital bank partner, where you no longer walk into a bank branch to go and open the bank account, but you get into an app, you download the app, you enter your name, you enter your email address, you enter your home address, just as a starting point to open up your bank account. Every time you're entering those credentials into the app, there's an API call, which is hitting up against our database to validate whether this individual is indeed who they say they are. There's a score which is being provided to the bank, who's opening the digital bank, to tell them, "This is not a bot.
This is somebody where you can trust that they are actually indeed who they say they are." That's the before the payment transaction, the account opening use case. Let's talk about after a payment transaction or, you know, the pre-shipment of goods. In an online marketplace, when you're looking to buy goods and services, we all go and put in a whole bunch of stuff in the basket. What's happening unbeknownst to the consumer is that there are API calls going on to say, "These goods which are being put into the basket, which have been shipped to a shipping address, which is not typical of the account owner of that account, that confidence score doesn't look that great. Maybe you want to do a step-up authentication on that transaction." That's, again, a service Ekata provides. We see... Again, it's a network.
It's a two-sided market. There's a network effect. The revenue model is a per transaction model, which we really like, and we see tremendous potential. As the world's going more digital, there will be more and more use cases down this path.
It's very exciting. Sachin, we are almost running out of time. My last question for you: what do you see as the key focus areas for Mastercard over the next six-12 months time?
Yeah, look, I mean, I think very often we get caught up in what's the new, cool, you know, funky stuff going on in the technology universe, and that's super important. For us, it's really important for us to continue to execute on our three strategic priorities, and those are around expanding in payments, extending our services, and embracing these new networks around digital ID and open banking. On payments in particular, it's process, keep growing your acceptance footprint, keep growing your issuing footprint, advance the new payment flows area, particularly on commercial and remittances and disbursements. Super important. We think there's tremendous potential for growth as you keep going down that path in payments, while we continue to grow our suite of services and our penetration there.
On new networks, early days, but we're seeing good traction, and we'll keep focused on that as well.
Fantastic. Thank you so much, Sachin.
Thank you, Harshita. Thanks a lot.
Thanks, everyone.
Appreciate it. Thank you