Okay, welcome everyone. My name is Tim Chiodo. I'm the lead payments processors and fintech analyst here at UBS. We're very glad to have with us this morning the head of investor relations at Mastercard. This is Devin Corr. We want to thank Devin for making the trip out here to Arizona. Devin, thanks a lot for being here.
Thanks for having us. Happy to be here.
All right, great. We've got a great list of topics that we're going to try and get through here in the 30-minute session. We're going to start out with a little bit of a, as we've done with many of the companies at the conference, starting out with a little bit of a state of the economy, health of the U.S. consumer, and some of the trends that you're seeing here through the fourth quarter.
Perfect. Yes, let's start with what we talked about in our Q3 earnings, right? The macro backdrop is and has remained stable, and it's supportive of the consumer. Think about things like inflation that's subsided, albeit at varying degrees across categories, across countries, et cetera. The job market itself remains strong, albeit a bit lower than historical tight levels we saw earlier this year, but that is supportive of consumer spending. So when you think about what we talked about in Q3, we saw relatively stable and strong drivers from Q2 to Q3 into the first four weeks of October. If we then look into November, we continue to see healthy consumer spending. So spending remains strong or healthy. At the end of the day, there's positives and negatives across the macro, but as I said, there are supportive and stable backdrops for the consumer itself.
I should also mention, you know, we have seen the USD strengthen, the US dollar strengthen as of late. If you also think back to our Q3 earnings, when we talked about Q4 2024 guidance, we talked about a 0- 1 percentage point headwind from a net revenue perspective and minimal impact on expenses. Given that strength of the US dollar, we actually see the headwind now about 1- 2 percentage points for Q4 2024. On the expense side, it's about a 0- 1 percentage point tailwind. So a little bit of a put and take there from FX. Fundamentals remain strong. Consumer spending remains very healthy. Generally, we're positive on the outlook.
All right, Devin, thank you for that update. We really appreciate that. Let's move on to the next topic as we walk through some of the growth algorithm. We'll start with consumer payments. So you talked about this, of course, at the recent investment community meeting, but can you talk a little bit about the remaining opportunity? Oftentimes investors ask about, well, what's left in the U.S. and Europe and other developed economies? So maybe we can start there.
Sure. So we see a long runway for the consumer secular trends, right? We talk about cash. There's obviously a lot of cash left in volume. We'll get to that. But it's beyond that. It's cash in transactions. It's account- to- account or ACH payments that we can move to cards. It's opening up closed loop systems to open loop systems. It's about new business models or going after domestic schemes. So if we think about some of those pieces, let's deep dive a little bit. At the Investor Day, which you mentioned, Jorn Lambert talked about $11 trillion globally in cash and check. At the same time, there's 1.5 trillion transactions in cash and check. That's huge. And that's not just in emerging markets. That's across developed and emerging markets. We are geographically diverse, so we're going after putting ourselves into areas where we see a lot of opportunity.
We talked about Africa, Latin America, et cetera. But I know you want to talk more about U.S., Europe, et cetera, so I'll focus a little bit there. One, you haven't talked about U.S. alone. There's over $1 trillion of cash, right? That doesn't even include checks, which makes the number bigger. 27% of transactions in the U.S. are also done in cash. There's a huge amount of opportunity there. In Europe, you have the likes of Germany, Italy, Eastern Europe, which are huge cash markets, but there's still, you know, obviously cash elsewhere. So how do we go about attacking this secular trend? There's a lot of areas we do this, right? One, it's just growing acceptance. Right now, we have around 150 million acceptance locations worldwide. But there's plenty of room to go there.
There are a lot of countries that is not scaled, that is not there, and we need to get out there, particularly when you think about Eastern Europe, to your point on Europe. It's about changing consumer behavior. The likes of Germany, Italy, et cetera, you know, contactless can help with this. As we roll out transit systems, people get used to tapping. There's a halo effect, and they use a card for everything over and over again as they continue to build out that behavior, new behavior, et cetera. Tap on Phone, Cloud Commerce type solutions can also help with this because it's a low-cost way to get an acceptable device out there to merchants. You know, there is a little bit less cash than there was years ago because we're doing our job, but there's a lot left there for us to go after.
And I mentioned these other verticals. You think about ACH, right? Moving ACH to card, it's about solving for pain points. It's about a better user experience. You know, we're going after certain verticals like rent. We've launched programs with Bilt and Yardi in the U.S., going after utilities, going after healthcare. And if you think about, we actually just launched a solution called Bill Pay Qkr, which uses AI to make a very simple, easy consumer experience to pay invoice payments with a card on file. So we're finding strategic ways to go after even what's there in developed countries beyond cash itself. So we see plenty of opportunity ahead. And this is before we get into things like commercial, et cetera, where there's obviously vast opportunity.
That's a great segue, Devin. I think you covered consumer payments quite well. I think we should move on to exactly that, so commercial. When we think about the new flows opportunity, we generally think about it in two big categories, one being commercial or B2B, and the other one being the Mastercard Send-related volumes. There's some degree of overlap between the two, but specific to commercial or B2B, the market's been large for some time. Maybe just talk about what's different now that makes it maybe more attainable in the view of Mastercard.
Yeah. No, it's a great question. I'm getting that a lot recently as well. I think there's a couple of things. If we take it to the highest level, right? You think about, we're all used to a really exceptional digital payment experience in our consumer lives. You're starting to see that pull move into the business side of things. This is small business owners. These are people in treasury departments, AP departments wondering, you know, why can't I have that same experience from a business card perspective? There's a bit of a pull as people want better digital payments on the business side of things, as well as you're seeing much more automation in the procure to payment cycle, right? With that, the next logical step is to make payments themselves more automated, et cetera. So you're starting to see a bit of a need for better solutions.
So you mentioned, you know, within commercial, there's a couple of buckets, right? So let's take them separately, and we'll get a bit more to your point of why now. One, there's a Commercial Point of Sale. This is T&E cards, fleet cards, purchase cards. This is just like what we've been doing on the consumer side for a long time. So it's a little bit of blocking and tackling. It's getting the right sales teams. It's going direct to corporate. It's having banks focus on it. And if you think within that, there's a huge chunk of small business. For that, it's about reaching small businesses, one with banks focusing on it, but also having the right solutions. So we've rolled out expense management solutions for small business.
We rolled out something called Easy Savings, which, as simple as it sounds, is merchant discounts if that small business is using their card, be it a rental car or virus software, that type of thing. So having benefits for those small business owners is big, and so there's our traditional go-to-market through issuers, et cetera, but we're also finding new ways to go to market. I think a really cool example is something we did in LAC with CBC, the distributor of Pepsi products. So they accessed two million different small businesses, so you know, show up with a truck, drop off Pepsi, and those small businesses purchase the soda.
Partnering with them and a couple of other partners, we now can reach all two million of those small business owners to, one, open up acceptance, but to, more importantly, put a card in the hands of them, of those small businesses, so they can purchase that inventory. So being able to quickly purchase inventory with card is better for working capital. It changes their behavior and allows them to turn and they can use those cards not just at Pepsi, but on anything else they're purchasing. So it's finding different ways to go to market, particularly to go after those small businesses. And that piece of the business, you know, when you think about our total commercial opportunity at our ICM, we talked about $100 trillion serviceable, addressable market. Commercial point of sale, which I just talked about, is 17 trillion, and one trillion is carded.
On the invoice payment side, it's $63 trillion opportunity. So it's multiples bigger. Only $2 trillion of that is carded. In this instance, you know, we've really focused our strategy, and we're trying to go at verticals that have sizable opportunity and where we see solutions or card solutions solving pain points. So what do I mean by that? So we've seen a lot of success in online travel. So how do we take what we've done there and bring it out to other verticals like healthcare, ERP systems? I'll come back to ERP systems in a second. But where we see cards working here is where we solve pain points, right? What's different about cards versus account- to- account? And people said historically these types of solutions are account- to- account based. And account- to- account can be cheaper, right? But what do cards do that's different?
Cards flow with information. So if you're paying invoice one, invoice two, half of invoice three, that information flows with the card transaction. And we've now launched, you know, just this year, maybe the end of last year, services that can help reconcile that information. So there's something called Mastercard Receivables Manager, and that can use AI to take the information that flows with the cards, reconcile it all, and populate that into the expense management tools of the businesses. So you're not having the AR, AP teams pick up the phone and call each other, right? There's more convenient ways to do this. So it's a bit of an education and unlocking that, but there is a benefit to using cards. And we talked a bit about price, and you and I have talked about this offline as well, right? That's something we can solve for too.
So we have something called a Variable Interchange Program. It's live in the U.S. It's live globally only with certain verticals. Into 2025, we look to roll that out globally and more broadly. So there's further opportunity there. This type of solution is a little bit more issuer-led. What I mean by that is if an issuer is looking to grow acceptance or help its large buyers, et cetera, it can decide to very simply change the interchange table. It's not about long paperwork and filling it out. It's an easy implementation. Or it could be pull if a big buyer or supplier reaches out to the issuer and says, "Hey, I want to kind of try and negotiate this down because the parties know each other," et cetera.
We're trying to find— to solve pain points in this world, as well as find ways to compete on price where it's necessary. I talked about verticals before. I'll just hit on that really quickly. One big one we're really excited about is embedding our solutions into the ERP providers. We've signed deals with the likes of Coupa, SAP, Oracle, the top four ERP providers we've signed deals with. It doesn't mean you'll see the volume, you know, monetarily hockey stick up, right? One, we have to initiate the solutions, but it makes cards available for any buyer who wants to use them. Then we can work with the buyers, with the ERP solutions to open up acceptance. That's what takes time, is getting the suppliers to understand the benefits of cards and really open up that acceptance.
So I think for us, it's about, you know, what is the pull now? And then it's about solving pain points and having the right solutions to go to market. But huge addressable market, only [$]3 trillion of it's carded. You know, within that [$]3 trillion carded, we've increased market share by 4 points in the past five years. So we do have the right solutions to win. We see a lot of opportunity here.
Excellent. Thank you, Devin. Yeah, the point around the ERP integrations that was on display at the Investor Day in the booth area. There was a discussion point. I'm glad you brought that up. Okay, great. Let's move on to value-added services or VAS & S in terms of the revenue segmentation. The growth there has been very strong over the past few years, and the guidance was for high teens over the next three years and the recent Investor Day. When we think about that, we can break it into the 60% or so that is transaction-based and the 40% or so that is not transaction-based. Let's start with the transaction-based component and talk through maybe some of the components of growth around growing with transactions, further attach rate, new products, and of course pricing.
Yeah. And you're right. So we talked about 60% being network-linked. And what do we mean by network-linked? Is it not necessarily all on the transaction, but you can use transactions as a proxy. So technically it helps with modeling, right? But it could be directly on a transaction. It could be on a type of transaction like a card not present transaction, or it could be related when you think about things like dispute, et cetera. But at the end of the day, the 60% is overall, you know, network-linked. I might just take a second to step back and then go into the growth algorithm of services because, you know, when at Investor Day, we introduced a couple of new categorizations, let's call it, same services and solutions, new categorizations. But also we think where we play is differentiating.
We've been investing very strategically in certain areas to ensure areas we see large market growth, but just a lot of opportunity and demand from our customers. If you think about our services, our biggest bucket is security solutions. This is cyber solutions. This is fraud insights, fraud scores. After that is consumer acquisition and engagement. This is marketing. This is loyalty, personalization. Then we have business and market insights. This is our data insights. This is a big chunk of consulting. And then it's digital authentication processing gateway. And to your point, the & S is other solutions. And other solutions is account- to- account infrastructure, cross-border send, as well as open banking and non-carded bill pay. And, you know, we've been very strategic in seeing growth across all these facets.
In fact, there's a slide in our ICM deck that shows the relative size of these in some degree if you want to take a look there. But, you know, we think we've been investing a bit differently from our largest competitor, but also, you know, some of the niche competitors. And so I think it's worth just highlighting what's in there. So if you think back to the growth algorithm you talked about or how services grow or why we think they'll grow, you know, one, to the point of being in these different areas, a lot of these have their own market tailwinds. So the likes of cyber is growing fast as B2B modernization increases to the point of our last question. There's underlying market trends, and our services are not all in the transaction.
There's many brand agnostic services, so they can just grow with the market itself. Two, exactly your point, 60% is network-linked. If you believe in your second question that a consumer secular tailwind or the commercial secular tailwind is there, there's a natural growth you'll see of these services, right? And then we can grow beyond that, to your point, by penetrating customers. Now there's penetrating the transaction itself. We talked about it at our Investor Day. Over the past couple of years, we've gone from, on average, three services per transaction to, on average, five services per transaction. And with many customers well beyond that, so there's further opportunity. But that's just the ones on the transaction itself. There's plenty we can sell outside the transaction that are even network-linked.
But I think an interesting point to talk about is, you know, we can also, one, sell to new customers. So you think about merchants and governments. But I think more importantly, we can sell to new wallets at our network customers. We have the extreme benefit of having a network of thousands and thousands of banks, 150 acceptance locations, et cetera. You know, we can sell on the transactions. We can sell to the payments teams at banks, for example. We can sell transaction-based. We can sell consulting. We can sell marketing. But with the solutions we have that are brand agnostic, we can sell cyber intelligence to the chief security officer of a bank. We can sell personalization to a marketing officer at a bank that can use it in other facets of their business.
We can sell open banking to help grow the deposit side of the bank. So this opens up new wallets. This allows us also to become much more stickier on the payment side. So services for us help us win deals and make us stickier on the payment side. So at the end of the day, the deeper we can go into the bank, it opens more wallets, but also creates a stickier payments or network side of things for us. So super excited about that piece. Then there is just building and buying new solutions, right? Once you build and buy new solutions, you can go out and, as I mentioned, go to other facets of the bank. You can scale across the network. But it takes what is we talked about, a $500 billion total addressable market for services.
With the services we have today, it's about $165 billion. As we build and buy new solutions, that $500 billion, more of that comes into the service addressable and grows to $165 billion. So for us, you know, we see a lot of advantages in how we compete as well. If you think about all that growth algorithm, there are our advantages we see: one, data. We have a lot of data. It comes from our payments side of the business. It comes from permission data on the services side of the business. Two, synergies with our payments or synergies with services themselves. Being able to show up to a customer and talk about a suite of solutions versus one solution is an advantage. I talked about the network already.
But one piece of the network worth mentioning is once you're tied up from a payments network perspective, we're plugged in. So once you're plugged in, it's much easier to send some of those services through. It's not like you're sitting at the back of the tech stack. You already have the API, and it's just pushing some of those services through those solutions. So you think about our competition. It's big networks. It's niche players. We can see competitive advantages and a lot of opportunity to grow in services. My old job was in services. I'm pretty excited about that. I think that answered. Oh, I didn't answer your— I think you talked about the 40% that's not network-linked. I'll hit on that real quick. Within that 40%, you know, one, there is some of the other solutions we talked about.
It could be transaction-linked, but it's more of an account-to-account type transaction. You know, those are slower growing than cyber solutions, et cetera, but they're still growing. There's also SaaS platform businesses. You think about our Test & Learn solution, our personalization, some of our loyalty. Those are multi-year platform-based go-to-market. And then there's bespoke stuff, consulting, marketing, where we continue to sell in. Across all of that, 85% of our services are recurring. What I mean by recurring is by a certain product, you know, revenue for over two years. So, you know, very recurring, a lot of opportunity, pretty excited about the growth ahead.
All right. Excellent. That was a great rundown on VAS & S. And also, there was a, you alluded to something in there, which is around winning deals and related to some of the services. So on that note, you've had a solid streak of deal wins over the past few years. Maybe you could talk a little bit about the reasons behind that. Clearly, the Citizens Bank had a value-added services aspect to it with Finicity. But also maybe you could talk about rebates and incentives and the role that that plays in winning new deals.
Yeah, we've had a great drumbeat of new wins. We're very excited about it. Something from years ago, building out the debit book in the U.K., recent regulated debit wins in the U.S., UniCredit, Bradesco in Brazil, and so on. But, you know, there's a couple of reasons. And I'll start, you started with R&I, so I guess I'll start there. You know, one, there's table stakes. Table stakes is best-in-class technology, and it's competing on price. R&I is price. We won't win every deal because some won't financially make sense. But what R&I is for us is a tool. It's a tool to win deals to bring more flow onto the network. The more flow we have on the network, the more services we can sell in, the more data we see, the more you benefit from the secular tailwind.
It is about you do have to compete on price to be in the deal itself. But it's not necessarily why we're winning. You're not going to always see an issuer flip or migrate a portfolio for a couple of basis points. It's about partnership and showing up locally and understanding what it is that they need. And that comes back to our services. And we, as I mentioned, I think we're differentiated. If you look at a number of our wins, it's because of some of the services we can deliver to help, you know, with the conversion, to help other aspects of our issuers' businesses and understanding what it is. Each one is different. So it's not about showing up with the same services. It's understanding what their needs are and helping them grow the top line.
So that's using marketing to stimulate inactive cards, using personalization to bring people to the deposit side of the business, you know, saving money on the bottom line, using, you know, cyber fraud insights to allow them to save costs on the fraud perspective. So being able to partner, truly partner, is what makes a big difference.
All right. Excellent. Thank you, Devin. I think related to the topic of some of these wins, maybe we could just provide just a brief kind of recap of how we should think about some of the lapping dynamics. Clearly, there was the European pricing in July. There was a U.S. pricing in April. There's the U.S. Citizens. There's the U.S. Wells. We try to think through these impacts for 2024 and for 2025. If you could just give a few brief thoughts on how investors should be thinking about that cadence.
Sure. No, it's a good question. You know, and also in our Q3 earnings, Sachin did talk about the lapping. But when you think about any of these wins or any pricing benefits we have, right, it's you get four quarters of that, and then it becomes part of your base. And so there can be lapping effects. And Sachin mentioned in Q3, we're positive over long-term growth outlook, but cadences can shift depending on lapping and when things come in and out. You know, so hitting on, trying to hit on, if I remember all the ones you mentioned, you know, if you think about Wells Fargo, for example, Wells Fargo converted ending in Q2 of this year. So you'll benefit for that from four quarters, and then you lap. Citizens, and Citizens is a great example of partnership. I'm going to steal this for a second.
You know, so Citizens, we won Citizens because we had shared goals from a, you know, an overall financial inclusion perspective. They liked our open banking capabilities because it could actually help them with easier onboarding on the deposit side of the business. And they liked our marketing capabilities because we had skin in the game and aligned objectives to stimulate what were active cards and make— inactive cards and make them active. Just an example of how we use that partnership approach. But so Citizens, the biggest conversion or migration happened in Q2 this year, but it really completed in Q3. So once again, you'll see, you know, the benefit of that four quarters then a bit of lapping. You know, and we've seen some benefits from pricing into the second half of this year.
You know, in Q2, we talked about, in Q2 and Q3, we talked about cross-border pricing outside of the U.S. In Q3, we talked about some transaction processing and VAS pricing as well. You know, we'll benefit from that four quarters, and then you do lap it. So it's a bit about cadence, and just we were trying to get across that there is a cadence associated when these things come in. Now, that doesn't mean there won't be further pricing. We always look for opportunities. It doesn't mean there'll be other wins because there's always a pipeline, but this is what we know right now. That being said, there's other stuff we've talked about, UniCredit, Deutsche Bank. These are all wins that are multi-year. So you'll see those coming through, you know, throughout the balance of next year.
So it's just a bit about, you know, ensuring everyone knows when things come in and out in the cadence. But, you know, generally, and you heard Sachin talk, gave three-year guidance. We are positive and about the overall kind of growth outlook just when things come in and out.
Perfect, Devin. And just briefly, Deutsche Bank and the UniCredit, those are multi-year migrations.
Correct. Those are multi-year. They're in process. They've started. They're in our numbers now, but those will go on for a period of time.
Very nice. All right, great. Well, with the time we have remaining, let's see if we can get in these two topics. I think we can. So the first one is around tokenization. So a discussion at the Investor Day around finding means to monetize tokens. And maybe we could just talk about that topic and maybe more specifically, where does that monetization show up? We understand the answer is more within value-added services versus a core network fee. Maybe you could expand upon that.
Sure. So I guess just, you know, for the audience to start with, tokens are— they replace the card PAN when a transaction happens. This can be when you tap your phone. This can be online. But if a token is stolen, it's worthless. Whereas if a PAN is stolen, it's an issue, right? So this is a huge value add to the ecosystem. It reduces fraud. It increases approval rates by 3-6 percentage points, which is huge for a merchant, right? So there's a lot of value the tokens themselves bring to the ecosystem. As of Q3, about 30% of our transactions were tokenized. So we're seeing this really scale overall. Now, as a token scales, we also have services that sit on the token. Think about authentication. Think about lifecycle management, cryptogram validation. There's a number of services that are attached to this token.
Those services also add value. So you think about the value from the token, the value of these services. These are benefits we've invested in that we can bring to the market, and we can charge for that. So we've seen some of that pricing come in this year. And you ask where it would come through from a P&L perspective. Well, the benefit of approval rates and all that type of stuff will come through in the payment network because just more transactions. This is how the services help the core. But the pricing is really on the services around the token itself. So that's going to come through in value-added services. So the benefits from this pricing are going to be seen in the VAS[& S].
All right. Perfect. Thank you, Devin. Let's move on to another topic that's been coming up with investors. And you mentioned on the earnings call, which is tax rate. So you added about 400 basis points or so to the tax rate. Essentially, the full impact associated with Singapore adopting Pillar Two. Maybe you could just talk around the mechanics there and what are some potential mitigating factors that could help to reduce some of this tax impact over time.
Yeah. Topic of the day. Yes, from a tax rate perspective, let's first start with we've had a fantastic partnership with Singapore, and the tax team at Mastercard gets kudos for having the incentive we do to date. The issue is, as Singapore implements the Pillar Two tax rules, it offsets that incentive. It's a minimum tax. So any incentives you receive on the tax rate can't go below that minimum. So it offsets that, which, to your point, as you know, we've got it to about 21% tax rate in our three-year objectives. And Singapore is a material one for us. You know, when you think about offsets or incentives, given there's minimum tax, it's harder to do. But it doesn't mean we aren't trying.
So, you know, one, and generally, our tax team is always working to optimize our overall tax structure, you know, find ways to optimize it, find discrete, whatever it might be. That's something they constantly do. We also work with governments around incentives, right? And we had a tax rate win in Singapore, but we can find other ways to find incentives. It could be through refundable credits. This could be investment in our products, our services. This could be co-investing in the market. Think about opening up transit. You know, and this can come across in different ways. It may not be in a tax rate. It could be above the line. It could be in our payments because together we found ways to truly grow overall acceptance, excuse me, overall acceptance or overall payments network itself. So this is something we're constantly doing.
We're working with a number of governments around, you know, how do we think through incentives and benefits that will benefit our P&L, but also benefit the ecosystem, you know, as we invest in those markets themselves? So, you know, further opportunity there.
All right. Excellent. Thank you, Devin. I think we probably have a minute just to squeeze in a brief update. You talked about this a little bit recently, but in the couple of minutes we have left, maybe just touch on the traction that you're, well, the progress you're making in China with the first transaction going live earlier this year.
Yeah. First transaction in May, and we're excited. If you want to see true excitement around this, watch the video of our Investor Day with Ling Hai. Actually, I think he does a little dance on stage, but no, I mean, listen, China is a fantastic opportunity. It positions us to be the most accepted network brand in the world. That being said, we're opening up an ecosystem, and it takes time. So first transaction started in this May, and we've seen, you know, incremental transactions, but it's going to take time to really see kind of the big increase there. We are working with our issuers to issue cards. And the interesting thing here is we can now issue one card, one card that works if you buy groceries as well as if you're, you know, traveling overseas for a Chinese consumer.
This is something some of our competitors can't do. Our goal is to, you know, work to take domestic volume, but also cross-border volume from competitors. We're working with issuers to issue cards in the market. Once they're in the market, we also have to build that acceptance, right? Those cards can be used in the wallets today, but we still want to build our own acceptance that we can make sure we can see the data, we can bring services on top, et cetera. That takes time. We have the relationships, luckily, with issuers and acquirers already because we had a cross-border business. Now it's just spending the time to really scale both sides of that ecosystem. Then it's about having the right card value prop. How do we compete with China UnionPay? We have tech, new tech.
We have the right JV partner there, which is, you know, I think helped us kind of be able to launch the market. So it's building the ecosystem, having competitive value prop, and then it's blocking and tackling. It's proving the value prop is better and trying to kind of work against share. There's not really cash. The secular in China is different. It's about, you know, trying to, you know, chip away at its share gain. But for us, super excited, in market, building the ecosystem, but it'll take time. You know, it's a medium-term story to really see that kind of take off.
Excellent. On behalf of our full team and everyone at UBS, Devin, we really want to thank you for being here with us in Arizona. It was really a pleasure speaking with you this morning. I hope you have a great rest of the conference. Thanks a lot.
Thank you.