Welcome to the Mastercard third quarter 2013 earnings conference call. My name is Christine, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded. I will now turn the call over to Barbara Gasper, Head of Investor Relations. You may begin.
Thank you, Christine. Good morning, everyone, and thank you for joining us for a discussion about our third quarter 2013 financial results. With me on the call this morning are Ajay Banga, our President and Chief Executive Officer, and Martina Hund-Mejean, our Chief Financial Officer. Following comments from Ajay and Martina, the operator will announce your opportunity to get into the queue for the Q&A session. Up until then, no one is actually registered to ask a question. This morning's earnings release and the slide deck that will be referenced on this call can be found in the investor relations section of our website at mastercard.com. The earnings release includes reconciliations of non-GAAP measures to their GAAP equivalents. The release and the slide deck have also been attached to an 8-K that we filed with the SEC earlier this morning.
A replay of this call will be posted on our website for one week through November the 7th. Finally, as set forth in more detail in today's earnings release, I need to remind everyone that today's call may include some forward-looking statements about Mastercard's future performance. Actual performance could differ materially from what is suggested by our comments today. Information about the factors that could affect future performance are summarized at the end of our press release, as well as contained in our recent SEC filings. With that, I'd now like to turn the call over to our Chief Executive Officer, Ajay Banga. Ajay?
Thank you, Barbara, and good morning, everybody. We're very pleased with our results this quarter. We've had a net revenue growth of 16%, or 15% when adjusted for currency. That's been driven by solid volume and transaction growth in every region around the world. I think that revenue growth allowed us to invest more back into the business in areas such as digital products and the safety and security around them. We were able to make these additional investments while still delivering a net income growth of 14%, or 13% adjusted for currency, and an EPS growth of 18%, or 17% on an FX adjusted basis. Let's start in our normal way by looking at the underlying economic trends. If you start with the United States, consumer spending was relatively flat from the second quarter's better-than-expected growth.
Our SpendingPulse data for the third quarter shows that U.S. retail sales growth, ex automobiles, is about 3.8%. That's down just slightly from the 4% of the second quarter. Over the last three or four months, we've seen a slow, steady decline in the confidence numbers, and that's probably the reason behind the slight deceleration of our SpendingPulse data. The recent circumstances in Washington have contributed, I think, to a sharp decline in October's consumer confidence. What that means for consumer spending for the remainder of the year kind of remains to be seen as yet. The fact is that for us as a company, despite the relatively flat growth in overall consumer spending in the U.S., we saw an increase in our U.S. business in the third quarter, where volume grew 9% up from last quarter, driven by improvements in consumer credit.
In Europe, overall economic growth was subdued in the third quarter. I think we expect it to remain that way through the end of the year. European consumer confidence continued the recovery that it started in the second quarter, and it's now back up to the 2010 levels. Business sentiment has also improved over the quarter across major European markets like Germany, France, the U.K., and even Italy. The combination of an improved environment in some markets, along with the continued secular shift, and most importantly, our business wins, have driven third-quarter volume growth of 17%, up from 14% last quarter, with Poland, Russia, Sweden as some of the key contributors to those numbers. Looking elsewhere in the world, in Asia, consumer spending in the third quarter increased in key markets. Consumer confidence levels have remained by and large steady across the region.
However, business sentiment continues to be mixed because of lingering concerns about the global economy. Our business in this region continues to do well, we had strong volume growth of 22%, up from the 21% that we showed last quarter. In Latin America, consumer confidence in Brazil improved, but Mexico edged down slightly in September. Across the region, forecasts for the rest of the year seem to indicate that GDP growth will probably remain sluggish. Our business in the region continues at a healthy pace. We had a 17% growth this quarter, similar to our growth rate of the last quarter. Overall, you step back from all this and it feels like the underlying global economy is showing the right trends to get back onto a more solid footing.
What we kind of need to see is a more balanced and practical approach on the part of the political leadership to allow those underlying improving economic trends to take hold and bear fruit. Before moving on to business highlights, I'd like to say a few words on where things currently stand on the legal and regulatory front. First, on the U.S. merchant litigation, nothing new to report. Judge Gleeson held the final settlement approval hearing, as you know, on September the 12th. We are all awaiting his ruling, which is expected sometime late this year. On the debit front, as you know, the Federal Reserve appealed the district court's July decision. The judge issued a stay of the existing rules pending the outcome of an expedited appeal, and the Fed recently filed a brief presenting their arguments in response to the judge's decision.
The appeals court probably will issue their ruling sometime in 2014. The European Commission's proposed legislation is the third one. Both the European Parliament and the Council of Ministers need to review, potentially amend, and finally vote on the commissioner's proposal. The Parliament has begun the process, and though it's still early days, they have now appointed what they call a rapporteur, who has the responsibility for both drafting and then shepherding the legislation through their parliamentary process. He has announced a draft timeline that includes a session on the 5th of November to officially kick it off. He will also be meeting with us next week. The commission has indicated they would like the proposal to be adopted before Parliament goes into recess in the spring.
As we said before, that timeline appears ambitious in light of what needs to be accomplished before a vote can actually be taken in the European Parliament. Now let's move on to some of our recent business activity. You've heard enough from us on Investor Day. Relatively recently in September, you had an opportunity to see firsthand a number of the product innovations we were rolling out from our simplified commerce acceptance solution to social benefit programs to shop this with a 3D avatar. I'm not going to go into all that, but I'm going to talk about a couple of different items. The first one is that last quarter, there were several new partnerships established in the U.S. with merchants.
In addition to the agreement with Virgin Atlantic that Chris McWilton probably mentioned, I think on Investor Day, we have now signed three more new credit co-brand relationships and partnerships with Hawaiian Airlines being the largest of those three. The second big area of focus for us, and frankly, it's true of everybody in the payments industry, as you heard on the Visa call yesterday, is safety and security, the importance of which is second to none as our physical and digital worlds converge. Historically, how this has worked is that when you developed industry standards and specs, we did it with traditional payments partners, banks, other networks. Today, we are working with those also, but with a broader group as well that includes technology companies and merchants.
The idea is that by expanding this participation, we'll get to create better consumer, better merchant experiences, and at the same time ensure safer and more secure transactions. The drive to continually upgrade to newer technology is going to mean that all of us have to ensure that payment security standards adapt more quickly to changing consumer and merchant needs than they have in the past. One interesting new development in that area is tokenization. As you know, earlier this month, we along with Visa and American Express, proposed global standards to replace these traditional account numbers with digital tokens for online and mobile transactions. What that ensures is that the cardholder's bank has access to their card information and only the cardholder's bank has that access. It eases the merchant's requirement of having to keep that specific card information secure.
What the merchant sees is a token. We can connect that token back to that specific information with the bank. Work is being done in collaboration with issuers as well as other industry stakeholders. The idea generally is all of us is to improve cardholder security, reduce the impact of fraud, and yet provide a good consumer and merchant experience. In addition to that, we've joined the board of FIDO Alliance, an industry consortium. Members there include Google and PayPal. The consortium promotes standards in support of authentication technologies such as biometrics.
You've heard us talk about biometrics a number of times, but along with existing solutions like chip cards and NFC, I think doing this will help us to ensure that the development of standards that happens, which everybody can innovate in, is in an environment that is safer and more secure for online commerce. Supporting safer and more secure transactions is more than just creating new standards. You can also do it with platforms, such as what we are doing through our DataCash business to provide a more secure environment for e-commerce merchants. For example, in Brazil is one of the largest and fastest-growing e-commerce markets in the world. We announced a new partnership last year with DataCash and Rede, one of Brazil's largest acquirers. As a result of the partnership, Rede recently launched an e-commerce gateway with fraud and risk management services.
They are the only ones, by the way, in the Brazilian market to offer payment processing and fraud tools together in one place, making it much simpler for merchants to accept cards without the need to sign up with multiple vendors for these different needs of theirs. Finally, on this topic, security can also be about using our technology, our data, and the expertise around it to provide services that help reduce the cost for our customers in ways they sometimes cannot do themselves. Let me give you an example. We used our global network and data analytics and leveraged it, and we're helping our customers right now by monitoring inter-regional activity on all of our cards in over 150 countries and at more than a million ATMs around the world.
What that allows us to do is gives us a chance to provide better insight to our issuers about potential fraud threats that go well beyond what they can see themselves just through their own card activity. We introduced what's called Fraud Rule Manager at ATMs in April, and this resulted in significant reductions in inter-regional ATM fraud on Maestro cards, and that reduction is up to 70% in some regions. In the context of overall ATM volume, fraud is small. That's not the point I'm trying to make. I'm trying to make the point that the level of improvement, up to 70%, represents a powerful example of what we can do with data and technology. With that, let me turn the call over to Martina for a conversation on our financial results and operational metrics. Martina?
Thanks, Ajay, good morning, everyone. Let me begin on page three of our slide deck, where you see that this quarter, the difference between as-reported and FX-adjusted growth rates is one percentage point for each line item. All of my comments today will pertain to the FX-adjusted growth rates. To reiterate what Ajay said, we continue to be pleased with our performance. Even with a relatively difficult economic environment, we're able to make progress on the conversion from cash to electronic forms of payments and win business around the world. Net revenue grew 15%, which combined with operating expense growth of 13%, resulted in net income growth of 13%. EPS growth was 17%, benefiting from our share repurchase program. During the third quarter, we purchased almost 575,000 shares of Class A common stock at a cost of approximately $345 million, with $912 million remaining under our current authorization.
We did not repurchase any additional shares in October, given the parameters of the 10b5-1 plan that we set a couple of months ago. Our strategy remains unchanged. We will continue to look to repurchase shares on an opportunistic basis. Cash flow from operations was $1.3 billion, we ended the quarter with cash equivalents, and other liquid investments of about $6 billion. Let me now turn to page four, where you can see the operational metrics for the third quarter. Our worldwide gross dollar volume, or GDV, was up 15% on a local currency basis to over $1 trillion. U.S. GDV grew 9%, with credit volumes growing 7%. U.S. commercial credit growth was in the mid-teens, higher than last quarter. U.S. consumer credit growth was positive and a continued improvement over prior quarters.
Our U.S. debit growth was 11%, driven by growth from consumer, commercial debit and prepaid programs. Outside of the U.S., volume growth was 18% on a local currency basis, and this continues to be driven by APMEA, with a 22% growth rate and solid 17% growth in both Europe and Latin America. Cross-border volume grew 19% on a local currency basis, including more than 25% in Latin America and APMEA, and growth in the high teens in Europe. Turning to page five, here you see processed transactions grew 16% globally to more than 10 billion for the first time. In the U.S., we saw good growth due to increases in debit and credit card transactions. Outside the U.S., processed transactions grew 23%.
We saw increased growth from the second quarter in all regions, with particular strength in Europe, driven by our business wins in Sweden and continued good growth in Russia and Poland. Globally, the number of cards grew 8% to almost 2 billion Mastercard and Maestro-branded cards. Now let's turn to page six for some insights on our revenue. Within our net revenue growth of 15%, gross revenue grew 13%, in line with volume and transaction drivers, along with some contribution from pricing. Rebates and incentives increased by 8%. As I said last quarter, the rebates and incentives line can move around on a quarter-to-quarter basis. Similar to what we saw last quarter, there were a couple of factors impacting the growth rate in the quarter.
First, while we signed a significant number of contracts during the quarter, there were a few that we now expect to sign in the fourth quarter instead of the third quarter. Second, we have a couple of contracts that paid out at a lower level of incentives than in the past, very similar to last quarter. Similar to the prior quarters, growth in domestic assessment was again driven by strong growth outside of the U.S. This growth is coming from the work we're doing in places like Russia and South Africa around financial inclusion. These countries will initially produce lower-yielding transactions as people first use the cards at ATMs before beginning to use them at merchants. Just one last note on revenue. Excluding pricing, cross-border revenue growth was 9%.
The resulting gap between the cross-border volume and revenue growth numbers is mainly due to the higher mix of intra-Europe activity. Let me move to page seven, where you can see that total operating expenses were up 13% in the quarter, growing significantly higher than in recent quarters. First, given the revenue growth that we saw in the third quarter, we took the opportunity to increase our advertising and marketing. As a result, you can see that this line item is up by 16%, mainly due to higher media spend. Second, the 13% increase in G&A expenses continue to be primarily driven by investments related to all aspects of our growth strategy. Turning to Slide 8, let's discuss what we've seen in October through this past Monday.
Each of our business drivers is slightly lower in this period compared to the third quarter, but when we adjust for the extra processing day that we had in the third quarter of this year versus last year, the growth rates are actually very similar. For our processed volume and transaction metrics only, that extra processing day provided a tailwind of about one to two percentage points to our growth in Q3. Here are the numbers through October 28th. Globally, our cross-border volumes grew about 18%. In the U.S., our processed volume grew 9%. Processed volume growth outside of the U.S. grew 16%. In particular, since I know you are all very interested in that, our European processed volume growth continued in the teens, the range that we have seen throughout 2013. Globally, processed transaction growth was 14%.
Looking forward, let's start with our long-term performance objectives for the 2013 to 2015 period, which have not changed. We remain confident that our business can deliver an 11%-14% net revenue CAGR, which still includes a modest contribution from pricing over the three-year period, and at least a 20% EPS CAGR. These growth rates are on a constant currency basis and exclude any new acquisitions. We also remain committed to our annual operating margin target of at least 50%. Now I'd like to share with you some thoughts about the rest of 2013, which is slightly improved versus what we said at our September Investor Day.
Given our continued stronger than expected net revenue growth and the level of rebates and incentives we expect for the balance of the year, we now believe that second half net revenue growth will be slightly better than the 12% growth rate that we produced in the first half. This includes an assumption of a significantly higher growth rate in rebates and incentives in the fourth quarter versus what we have seen to date this year, at least in the mid to high teens range. We now anticipate total 2013 operating expenses to grow a bit more than the 8% currency-adjusted growth rate we had in 2012, as we are able to put a little more into A&M than we planned, and our G&A growth is proven to be more back-end loaded than we originally expected.
Even with this higher expense level, we still expect to deliver some operating margin expansion in 2013. For your modeling purposes, we continue to expect a full-year tax rate of about 31%. With respect to FX, if rates remain similar to where we are today, that is the euro trading at the EUR 1.37 level and the Brazilian real at the BRL 2.19 level for the rest of the year, the net impact of the euro and the real would be a slight tailwind for the full year of 2013. Let me turn the call back to Barbara to begin the Q&A session. Barbara?
Thank you, Martina. We're ready to begin the question and answer period. In order to get to as many people as possible, we ask that you limit yourself to a single question and then queue back in for additional questions. Christine?
Thank you. We will begin the question and answer session. If you have a question, please press star, then one on your touch-tone phone. If you wish to be removed from the queue, please press the pound sign or the hash key. If you are using a speakerphone, you may need to pick up the handset first before pressing the numbers. Once again, if you have a question, please press star, then one on your touch-tone phone. Our first question is from Chris Brendler of Stifel. Please go ahead.
Hi. Thanks. Good morning. Can you maybe repeat, I wasn't quite sure what you said about cross-border. I think you said that revenue growth without pricing was only 9% compared to almost 20% transaction growth. Is that correct, Martina?
That is absolutely correct. This is exactly the trend that we have seen in prior quarters. This quarter was a bit more pronounced because actually our intra-European cross-border activity grew fairly large versus the rest of the cross-border activity, as well as when you have the appreciation of the euro factored in, you see that the gap is widening.
Got you. My other question on the same topic was, can you give us any more color around the cross-border volume trends, almost 20% growth, it's phenomenal. Is most of that sequential increase Europe?
You mean on domestic assessment?
No, still on cross-border transactions.
No. All regions contributed in a very significant way to the cross-border volumes. When you just look at the intra-European volume, just from a pure dollar point of view, it is larger than what you have in general across the world.
Okay, got it. On a separate topic.
Chris, we're going to try to limit it to one question just to get through people, so please queue back in.
Okay, no problem.
Next question.
Thank you. Our next question is from Jason Kupferberg of Jefferies. Please go ahead.
Thanks, guys. Just a question on a couple of metrics. Can you just go into a little more detail on the U.S. credit side of the story? It was obviously great to see the acceleration there. I know you mentioned both commercial and consumer accelerated, but maybe you can parse that a little further. Which accelerated more or kind of where are you running more precisely on U.S. consumer? Can you just clarify if the process transaction growth actually accelerated in the month of September? It looked like the full quarter number was quite a bit better than the July-August mid-quarter update. Thanks.
Jason, Ajay. On the first part, the part about U.S. credit, the commercial credit, of course, did pick up well, but the good news is that even in consumer credit, we saw continued positive improvement. In fact, last quarter, we told you that our U.S. consumer credit was actually a very small growth rate. This quarter, it's better than that. I'm actually not going to give you the exact number, but it's headed in the right direction. It's not where I'd like it to be, but it's headed in the right direction. On Investor Day, we told you we'd won more than 60% of the co-brands that have been up for bid in the U.S. over the past 12 months. We haven't lost any where we were the incumbent. That remains the case. In fact, we got a few extras I just announced as well.
We're kind of working on that. This is going to be, as I said, a bunch of doubles and singles and stolen bases, quite appropriate for yesterday's World Series game. Although Chris McWilton is probably a happy boy given that his team won. It's a bunch of doubles and singles and stolen bases to get our share back to where it should be for a company of our type. We have in the past lost share in that space, and I've said so, we're making progress, and that's what's giving us our numbers here. Commercial credit just continues to do well, and that's just the steady growth in what we are doing in driving our acceptance advantage, our capabilities with Smart Data .
We've put people on the street that actually go sell this product with our issuers to different corporate clients as well as small businesses, and it's beginning to show the result of the effort.
Jason, with respect to your second question, actually, when you look at the July, August, and September data, process transactions grew fairly similar. There was a little bit of an up one, down one point, it was very similar through the whole quarter, and it's very similar to what we're actually seeing in October. It's in both in the U.S. as well as outside of the U.S. We're seeing these kind of improvements over last quarter.
Okay, thank you.
Thank you. Our next question is from Sanjay Sakhrani of KBW. Please go ahead.
Thank you. Good morning. Just a question for Martina. I guess when I look at the domestic assessment yield, that's been coming down quite a bit over the last couple of years, and I was just wondering at what point it might stabilize, given the fact that you are seeing credit kind of pick up and I guess the mix shift's kind of played out a little bit. Thank you.
Yeah, it's a good question, but we are doing this significant work around the globe, in particular in countries that have a lot of work to be happening on the financial inclusion side. When you look at these countries, South Africa, Nigeria, or even when you go back into Russia, you know how this starts first, right? If you want to put the cards out to people first, they are going to get used first how to use these cards, which will be at ATMs. That's where you're seeing a little bit of a lower yield coming in for ATM transactions. Then we're working on the infrastructure for those consumers to be able to use the cards at merchants, which at that point in time, you're starting to see some different pricing for those kind of transactions. It's an evolution.
By the way, Sanjay, if we are doing our job correctly, that means expanding in those countries in a significant way, we should continue to be seeing some of these factors coming through over time and not stopping.
Okay, great. Thank you.
Thank you. Our next question is from Bill Carcache of Nomura Securities. Please go ahead.
Thanks. Good morning. Can you talk about how much of the strength that you saw in your U.S. consumer, in your U.S. credit volume growth was driven by the success that you're having in the co-brand space specifically? How does the pipeline look for potential new co-brand wins? Has that been given all the wins you've had recently, or do you still see room for growth specifically in co-brand?
The room for growth, definitely. The co-brand business is a relatively large business in the U.S., there's a constant cycle of brands that come up for renewal, we're in strong and continuous dialogue, as are all our competitors in the space with a very large number of merchants as well as airlines, hotels, and banks. I think there's a long runway here for growth and possibility. I'm not going to give you specific numbers on what came out of the growth specifically from the wins we had versus what came out of a general improvement in some of the underlying mix of our portfolios versus that of our consumers versus what came out from consumers going back to credit. Those three are the big factors in there, and I'm not really going to give you specifics on that, but all three played a role.
Our mix, some of our stronger issuers have had better sales volume growth recovering over a period of time. We have seen the consumer using credit a little more than they used to, although debit is still clearly growing very handsomely, as is prepaid. We've also seen the results of our first efforts around co-brands as those cards are getting replaced and changed, that their volumes are coming through. I would tell you that those volumes are smaller than the impact of the first two topics, just because it takes time after you win a deal to convert the cards onto our brand.
Thank you.
Yes.
Thank you. Our next question is from Glenn Fodor of Autonomous Research. Please go ahead.
Hi, good morning. Martina, just a quick question. Would you say a greater portion of the investments you made this quarter are related to initiatives that you expect to drive revenue growth by 2015 within your financial goals period, or were they more heavily weighted to longer term type return projects that are more in their infancy right now?
Glenn, it's really a mixture. As you know, we always look at investments that are in the short-term bucket, which means that they're really returning over the next 12 to 18 months of return, the medium-term bucket, which is more like a three to four-year timeframe, and the longer-term bucket, which is kind of the five-plus return. There are a number of things in there as we did, but of course, when you see all of the comments that we made about digital convergence and all the investments that have to go in there from a security and a safety point of view, from a consumer, how you put the product together from a consumer and merchant experience point of view, we do have, of course, some investments going in there. We'll see how that's going to play out for the future. It's a mixture.
I mean, things like tokenization will probably only pay back in terms of better consumer experience and better fraud control out there in some period. Whereas things like Simplify Commerce, if it gets picked up well in the marketplace, which we are very hopeful of, then you would find that to be a more interesting item closer in this period. It's actually a mixed bag of stuff, but that's not just this quarter. What's going on in our G&A line is the result of continued and sustained investments organically and then some inorganically, which then become organic in our base, as we say, after a period of time. Access Prepaid is now in our base. The money we put into expanding the capabilities of Access Prepaid show up in our G&A line.
Whereas a new product, if you were to buy, once you conclude the acquisition of Provus, that's going to show up for a while as separate from being in our base. It's actually a very complicated question to answer, but the way we manage this inside the company is we look at our strategy, which we lay out for you on Investor Day. We make sure we've got adequate resources going towards the basic elements in that strategy of new merchants, new consumers, digital physical convergence, and all the spaces of safety and security. Then we put a certain amount of energy into more short-term kind of growth and revenue. It's a mixed bag.
Thank you.
Thank you. Our next question is from David Togut of Evercore Partners. Please go ahead.
Thank you. Ajay, could you size for us-
David, we can hardly hear you. Could you speak up, please?
Is that better?
Oh, yeah, much better.
Great. Could you size for us your European debit processing pipeline, and in particular, are there any large transactions that we might see on the horizon?
Yes, you're talking about the whole stuff in SEPA, right, and what goes on there. The fact is that we're now seeing domestic volumes in virtually every one of the SEPA countries. As you know, a few years back, we only saw cross-border. In this third quarter, the processing of domestic Maestro transactions increased by 19% in the SEPA region. We've grown in the Netherlands. We've had very attractive percentages growth in Austria and Belgium, but off a lower base. The Netherlands is actually the much higher base, as you remember, from all the work we did. We are kind of moving along in that range, and we're going to keep, I think, getting breakthroughs in a number of countries in this space.
Acquisitions of things like Provus actually could be helpful in driving this number, as is all the work that we've done with a similar company that we built up in Poland over the last four or five years. Those are the kind of things we're trying to do to get to a better play in those domestic transactions.
One other region that you're really seeing or sub-region that you're really going to see in our numbers, as we already said, is really the Nordics and in particular Sweden, and that is on the debit portfolio too.
Thank you.
Thank you. Our next question is from Craig Maurer of CLSA. Please go ahead.
Hi. Thanks for taking my question. Regarding the cross-border volume growth that really is separating itself from your largest competitor. The 13 consecutive wins you've had in China and the fact that that's only cross-border, is that a major contributor to that separation? I obviously understand the intra-Europe discussion. Is the recent revelation regarding the NSA impacting any of your discussions with issuers around the globe? Thanks.
Craig. There's no doubt that China, as you know, is a pretty attractive cross-border spending market. I mean, every country around the world is targeting Chinese tourists, that's a pretty obvious one. We have benefited certainly from that. In the context of our overall numbers, I don't want to overstate the importance of China to our total numbers. We've got very good cross-border volume growth in every region, China contributes to the Asian growth in terms of cross-border, there's a lot of other countries in Asia that are driving very attractive cross-border. Countries like Australia and New Zealand are outstanding across border volume growth. Countries across ASEAN are giving us good benefits. When you come to Latin America, you've got growth. You go to Europe. It's a mixed bag. I'd be careful to overstate the importance of one country.
I love the position we are in China, in terms of winning those co-brands, and we're still winning some, despite all the changes that are going on with the WTO ruling in China, which as you know, is still not completely clear where that's going. We're still winning some brands there. The NSA discussion is a much deeper discussion way beyond just us. Right now, we are not having a direct situation with any issuers in countries overseas that impact this. I think the longer, bigger term issue for a lot of global companies is that if the fears about privacy go to a point where people would attempt to find ways to have more localization, then that certainly impacts the way that you construct your business model over time.
We are a little more fortunate than some of our competitors in that when Robert Selander built the technology system in our company, he built it in a distributed way. More than 80% of our transactions in any country are approved at local servers in that country, installed by us, called MIPS, and I have no idea what the damn thing stands for. It's Mastercard something. They're black boxes lying in different banks and retailers. I've been told the name, what it stands for regularly. I keep forgetting it. It's basically a black box with blinking lights that helps you to clear transactions locally.
We download an intelligent logic into that regularly over the course of a day that enables us to say, "Card number so and so tends to behave like this." Therefore, transaction that comes in of that type gets approved locally on soil, on the ground in that country. Very few transactions actually come back to St. Louis, in our case, for being diagnosed and approved. During the time that we had, for example, an undersea cable break between Taiwan and the U.S., we were able to dial that 80% to 100%. We're using all those discussions as we are out there overseas, but you know that nationalistic tendencies are a tendency not just in our industry, but in a number of industries.
The NSA is just one small pimple on a dimple on the aunt's left cheek on that issue.
Thank you. Our next question is from Dan Perlin of RBC Capital Markets. Please go ahead.
How do I follow that comment? I was still laughing. I had to control myself. I do just have a broad-based question. Both yourselves and Visa have put forth on, in prepared remarks on the calls the safety and security and the integrity of the network. I'm just wondering, is this just a push for your tokenization agenda, or is there something else that's happened over the course of the past year even, where other technology players have come in, they've seen how difficult it is, you guys act as the grown-up in the room, they're kind of gravitating back towards the security of the network? If you could just elaborate on that, I'd appreciate it.
The timing of the fact that Visa had this in yesterday's call and the fact that we're talking about it today is just crazy coincidence. I don't even know how to. I think I should give Charlie a call after this and say, "Was he prescient or what." I have no idea right about this. The fact is that tokenization happened in this quarter. To us, tokenization is a material change and move forward in the way that we believe as an industry, not just Visa, us, and Amex who put this out together, but even the issuing community with whom we've been in very good dialogue with, who frankly are very interested in this themselves.
The idea is to find a way, as you can clearly guess, to find a way to protect the weakest link in the security chain, which is the smaller merchant who you cannot afford or you cannot expect them to spending the same kind of money as we would on data encryption, both at storage and in motion on the managing of that data and so on. We're trying to, as an industry, find a responsible way to help control that, while at the same time allow for what I believe in the digital world will be the Holy Grail, which is the least friction from a consumer's point of view in how to execute a transaction. Millennials these days don't like friction in hunting and shopping. It's just a very important part of what we're trying to go at.
We talked about safety and security because of the tokenization event this quarter. I would otherwise have chosen a different topic. I'm trying to pick one topic of interest every quarter to you guys and talk about that in some depth, till I run out of topics, then I'll start again. That's kind of what I'm trying to do. Safety and security happened to be the one for this quarter. The aspect of our networks have great barriers of safety and security in terms of what we've built and invested over a long period of time, and there are a lot of others who said they could just do this business realized that being in the payments business is more than having a network of some type that exchanges data. Yes, absolutely.
For three, four years now, we've been talking to mobile network operators, we've been talking to banks, we've talked to merchants, we've talked to others and said what we bring to the table are our assets, one of which is the safety, security, and reliability of our network. We've got other assets too, like the one I just described about how 80% of our transactions are approved locally. Some of our assets are common across the industry. Some of our assets are differentiated for us compared to others, and we're certainly using all of them in our conversations.
Thank you.
Thank you. Our next question is from Glenn Greene of Oppenheimer. Please go ahead.
Thank you. Good morning. Just a couple real quick. I guess from your comments, Martina, sort of talking about the extra processing day in the quarter, I just want to be real clear because obviously it was a topic of conversation last night on Visa's call. Did you see any slowdown in volume trends toward the end of the quarter and through October? It doesn't sound like it, but want to be clear on that. Maybe you could just help us parse the acceleration in the European volume trends with some particulars on the Eastern Europe part of the business. How fast are they growing? What's the proportion of the European pie from Eastern Central Europe at this point?
First of all, for the first question, yes, there was, as I said, an extra processing day in the third quarter. When I look at July, August, and September, other than what we saw from an oil price impact in the United States, we really haven't seen any significant impact from a change in the growth rates. It was relatively even. You could see, September just being just a tad lower, but then you see it quite coming up in October again. Truly, even when you adjust for the processing day, there wasn't really any impact on that. When you compare the third quarter versus October, just to get a sense of how the fourth quarter is starting, again, very similar growth rates if you compare like for like. Okay?
On your second question on the detail of growth in Eastern Europe. Eastern Europe for us, this is part of our European region, includes a lot of very high-growth markets such as Russia, Poland, a number of other countries that are sitting in Eastern Europe. A lot of things that are driving there is that you have a lot of usage of cash, quite frankly, and we are putting all of those cards out in the market, and people are getting more used to be using cards rather than cash from a security point of view, from a convenience point of view, from an ease point of view, et cetera. That is really what's driving our growth, and we really have not seen any letting up in those kind of countries from a growth perspective.
As long as we continue to do our work there, you should see quite a bit of contribution from that secular trend coming. The economic environment is depending how it is. You know that we have 3 influences of growth. 1 is the economic environment, the second is the secular trend, and the third is obviously market share. We control the last 2 things, and that's what you're seeing in particular in that region.
We're really trying very hard to influence the second one, which is the secular trend, compared to just waiting for it to happen due to population changes or urban demographics or middle-class demographics and so on. That's why the financial inclusion angle is such an important part of what we're doing and why we're spending so much time, effort, and energy on it. That's what we're trying to influence there. The share, yes, that's what we're fighting for, and fortunately, we're doing okay there. It's the economic trend that we don't control, yes, Eastern European countries are growing for all those reasons.
Okay, thank you.
Somebody just emailed me with exactly what MIPS stands for. Mastercard Integrated Processing Solutions. Let it be known that I now know what it is.
Next question, please.
Thank you. Our next question comes from Bryan Keane of Deutsche Bank. Please go ahead.
Hi, guys. I was just thinking about rebates and incentives in the industry. I know Visa yesterday highlighted a pickup for their fiscal year 2014 in rebates and incentives. You talk about a little bit of a pickup in the fourth quarter, but I guess the overriding question is, are you seeing a pickup in rebate and incentives in the industry? Because one of your comments was that you thought rebates and incentives were lower in some contracts than in the past. Just trying to reconcile all these comments. Thanks.
First of all, I don't expect a significant change from a rebates and incentive line point of view when I look over the last three years and when I look in the future. By the way, all my comments on rebates and incentives are always included when I talk about our net revenues. We don't really talk about growth and rebates and incentives. We talk about net revenues. I don't see any major change. We just had an interesting development here for the last couple of quarters in this year, which is that we had a couple of contracts where customers did not perform to what the performance hurdles were in the contract, and therefore, we didn't pay out the level of incentives that were agreed as part of the contract. Okay. That was really what it was driving.
When you pull that apart, our rebates and incentive line is really going back to the kind of growth rates that we have produced over the last three years. That's what I said now about the fourth quarter. We're going right back to the kind of growth rates on rebates and incentives as what you have seen in the past. No difference.
Really, it's an in-and-out issue. Those couple of clients that we've had this conversation with about performance versus contracts have made adequate difference to the total numbers that you're seeing this change. You shouldn't expect that that should be something which will persist in the future because the fact of what Martina is saying is the underlying conversations, the underlying deals being signed, the kind of rebates that go into them, the construct of them may change from client to client. Some may be constructed one way, some the other way. Basically, they're there and going on. Then the other big aspect of rebates and incentives, the damn thing is lumpy. You go sign a couple of big new deals, and they're lumpy. You will get things come in that quarter, which may not be quite what we expected.
It is a challenge with that line in our P&L.
Okay, thanks very much.
Thank you. Our next question is from Andrew Jeffrey of SunTrust. Please go ahead.
Hi, good morning. Ajay, just a follow-up or maybe a point of clarification on tokenization. I understand the rationale, and it makes perfect sense to me, and funding friction is an increasingly important topic in payments in P2P and other areas. I can't help but think a little bit in the back of my mind that tokenization also offers kind of a very convenient Trojan horse by which the established networks can perhaps smooth the path for payments and increase security on traditional card-based payments, and simultaneously potentially throw up a roadblock to some of the disruptors who might not be able to accommodate the tokenization technology that's being advanced by the established participants. Am I way off in left field somewhere?
Well, you have a more devious mind than I do.
Perhaps that's too much time.
Yeah. No. Honestly, it's not coming at it that way. I'll tell you, it's a very simple issue. If you go back to the days of introducing standards and mandates around requiring a certain level of payment system integrity in the industry, which we put out, the idea was to enable issuers and merchants, not only enable, but ask them to raise their thinking, their quality, and their capability in that space so we could help provide protection for consumer data. That's where this is coming from. It's worked in some ways because a number of people have raised their bar. Frankly, it hasn't worked in others because smaller merchants, smaller banks, smaller acquirers are always going to find it more difficult to keep pace with what is a very well-funded industry, which is aiming at fraud.
The digital world, the onset of a digital, physical converging world, creates a whole new challenge in that space in terms of the number of different players and the way data moves around among those players. All we are trying to do is to find a way to use our capacity and our capability as banks and networks to provide a protection filter in this process. If you think back, Orbiscom, which we bought years ago and had the ability to create virtual card numbers or the virtual card number facility that Citibank used to offer when I was still working there, for you to be able to purchase things online by using a different card number. These are all elements of tokenization, the early elements.
What you're seeing us do now is a systemic, methodological, process-driven method of getting at tokenization, where not only will you get your current payment instrument, be it a card or your account or a fingerprint that's connected to your card or whatever the heck it is, some account number in the sky will remain in the sky protected, and the data that will flow out will flow out differently to different mobile devices that you choose to interact with. Not only will your number never reach the last point in the chain, it will also reach differently for each device you work with. Therefore, it gives me yet another methodology of preventing people from using numbers on the wrong device, which you haven't registered your original account with, and so on and so forth.
It's actually planning for tomorrow's world of digitization rather than the current world of digitization. What we're trying to do is to create these industry standards. There's going to be a ton of open APIs and the like that we're working with. You look at Masterpass, it's full of open APIs. The idea is to allow players in the industry to get our standard as a fundamental system and then innovate on top of it. No differently, by the way, from what a lot of people do in Silicon Valley. You create a standard, you allow people to innovate on it. That's what we're trying to do. It's quite the opposite of what you're thinking.
Okay, thanks.
Thank you. Our next question is from Darrin Peller of Barclays. Please go ahead.
Thanks, guys. Listen, I just want to touch on the other revenue line. It increased by a little more than we expected, and I think last quarter, there were certain fees in there, the Staged wallet fee, and I think the acquirer fee, one of the acquirer fees also that anniversaried. I might have expected that growth rate to be a little bit lower this quarter. Can you just give us a sense of what's driving that segment or that line?
Yes. First of all, Dan, on the other income and expense line, actually, what we said at the beginning of the year is that you should be seeing a decrease actually going into negative on this simply because we had Oh, I'm sorry.
Other revenues.
Yeah, we had other revenues. I'm sorry, I just missed your question. From an other revenue point of view. Sorry.
You can answer both.
We'll answer both.
I thought I'd get two questions in one. There you go.
Exactly. From an other revenue point of view, you should continue to see some of the things that are not really related to our volume-based business and our transaction-based business going into here. For instance, some of the acquisitions that we made from an Access Prepaid point of view, from a DataCash point of view, et cetera, you would be seeing increases there. Pricing actually had a very little impact on this. Over time, you should be seeing this number going up from a growth perspective.
The Advisors revenue also comes in there.
Yes. We have advisor's revenue in there. We have a number of information services we have in there. We have a number of other things in there.
Okay. Overall, that line could be growing at a faster than corporate pace?
It depends, right? It depends how these businesses are basically developing and the care, the feet that we put into these businesses. They're more of our newer businesses. All of that is pretty much included in our Net Revenue Performance Objective Target for the next three years.
For sure, if we can build our data and analytics business the right way, that's one of the items in other revenue.
Sure.
That should get a better % growth rate than the traditional Transaction-based business.
Sure.
In the beginning at least, until it becomes of a certain size and scale. It's getting to a decent number these days, and it's all there. This is all behind that other revenue line.
Great. All right, thank you.
Well, given that I went off the track on this question. I think you all get a free one here.
Other income.
Other income and expenses. We have been saying for a number of quarters now that you should really expect that line to be trending into negative territory because really we have some of our joint venture activity and the investments that we make in those joint ventures, one of which is, for instance, the Telefónica JV that we have in Latin America, the two of them that we have. You should be seeing that line trending down over time into negative territory until we obviously get the return of the investment. However, that trend has been masked this quarter. We had a couple of items in there that basically increased this line item, and you saw it in positive territory. There were really two things. One, we had some gains on some bonds that we sold, so on the investment side.
Two, we actually had some reversal of interest related to our FIN 48, so these are our tax reserve accruals that we do from time to time. Other than that, when you pull those items out, you really should again see that line item trending down.
This reminds me of being in college when no matter what people ask me, I answered what I wanted to answer.
Thanks, guys.
That's what we used to say.
Okay.
All right.
Next question.
Thank you. Our next question is from David Hochstim of Buckingham Research. Please go ahead.
Yeah, hi. Thanks. Could you give us a little more color on what you're spending incrementally in advertising and marketing? Where are you finding opportunities, what you're doing differently?
Yeah, sure. Actually, in addition to the core business, we're doing a lot of things in A&M around changing the way our money was spent. A fair amount of money has gone into activation-oriented spending. That's why the Priceless Cities campaign started, and it's being built out. We're now in 26-plus cities and headed for more. That costs us some money to create both the asset base in those cities, but also the actual marketing locally in those cities. We keep building the asset base. As I get an opportunity, I spend some money and put another city onto the map on the Priceless City area. That's one kind of thing. Another one is, we're changing the way we spend our money with sponsorships. Earlier we would pay a lot of that money to the organization that facilitated the sponsorship.
We've kind of changed that to say, let's spend the money on activation in that location. If you were watching the Red Sox game over the last few days with the Cardinals, you would've seen Stand Up to Cancer coming up with us a couple of times in there. That's the kind of thing we're trying to do. We're trying to get exposure and benefits of that exposure through partnering with the right kind of elements and partners. We're doing some money on traditional media advertising. You probably saw some advertising on our Acceptance Matters campaign because we believed we have a competitive advantage there over other players in the commercial and T&E card space. These are very targeted. They're all under the Priceless umbrella, but executed based on opportunities we see at that time.
Okay, thanks.
Okay, operator, I think we have time for one last question.
Okay. Our last question is from Tien-tsin Huang from JP Morgan. Please go ahead.
Hi, good morning. I'll try and keep it quick. Just one clarification, one follow-up. Just on G&A was up a little bit. How much of that was driven by headcount, Martina? Just trying to gauge how sustainable that level is. Then just as a follow-up, just thinking about M&A. I know you talked about that a little bit at the Investor Day. Looking at PayPal buying Braintree. Does Mastercard need to own a gateway in the U.S.? I've been thinking about that topic a lot. Thought I'd ask it on the call. Thanks.
Okay.
I'll take the first question on G&A. When you actually look, you know that most of our G&A numbers really are related to investments in people. When you look at the trajectory that we are in terms of our hiring rates in the U.S. since December 31st of 2012, we hired about 500 people at this point in time. You are seeing that coming into, and you should expect to see that coming into the fourth quarter too.
We're hiring, Tien-tsin, across the world. It's not just in the U.S. We're hiring in different parts of the world. We're hiring in London and Singapore and so on and so forth to get our footprint improved, but also our technical and technological capacities. One little number that'll give you a hint on that front is, four years ago, the millennials in our population were 4%. They're now 30% of our population in our employment population. Not all caused by hiring. Part of it is caused by the acquisitions. DataCash and Access had a different age profile, Truaxis had a different age profile, but also by the hiring. All the founders in hiring isn't incremental. Some of it is to replace the people who leave for various reasons. It's kind of a mixed bag. There's a lot of money that's going into the people.
There's a lot of money going into technology. Tokenization requires investment. It's a real technological platform that's been invested in sustained and will require investment for a little period of time to come. There's a lot of that going on. As far as the gateway question is concerned, you're absolutely right that I'd love to get into a bigger gateway position in the U.S. The fact is, now that we've feel comfortable with where we are with DataCash and MiGS. We had MiGS earlier, as you remember. We bought DataCash, put them together. We've got that management team pretty well organized. They are doing a very good job of executing. They've entered into Latin America, and they've entered into a few global merchants, including some in the U.S. There are lots of ways to get into that space.
One of those could be not just through buying gateways, but buying adjacent businesses that allow our gateway capability to connect well with that adjacent business to get a footprint into the U.S. We're working on a ton of those ideas. It's just one of them hasn't fructified yet and haven't come in at the value that I'd be happy to pay for some of the things that have got acquired by other people.
Okay. Ajay, you have some closing-
You want me to keep going?
Sure.
After that brilliant comment on MIPS? Okay. Let me give you the few closing thoughts that go beyond MIPS. We are pleased with our solid third quarter results. As Martina said, we've used the opportunity to put some money back into A&M, but we're also continuing to invest in the most sustained way in the longer-term aspects of our business. She and I talked about this in some detail, she in particular, at the Investor Day when she laid out the manner of which our investments were going. Those investments can be organic in areas such as the convergence of physical and digital or in areas like technology that support safety and security. They can also be through acquisitions like Truaxis and Access Prepaid. We've recently announced Provus, which hasn't got, as you know, approved yet.
Hopefully it'll get all sorted out in the fourth quarter, and we can talk about it after that. These are only a few examples of many initiatives that we're into that hope we should drive long-term growth. It connects back to the kind of question Tien-tsin just asked for how we're trying to grow. Our business continues to have strong momentum. We're focused on delivering another good year. I just want to thank you for your support through this entire period, and thank you for joining us on today's call.
Thank you. Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.