Good morning. My name is Denise, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Mastercard Q3 2018 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you'd like to ask a question during this time, simply press star, then the number 1 on your telephone keypad. If you'd like to withdraw your question, press the pound key. Thank you. Warren Kneeshaw, Head of Investor Relations, you may begin your conference.
Thank you, Denise. Good morning, everyone, and thank you for joining us for our third quarter 2018 earnings call. With me today 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. It is only then that the queue will open for questions. You can access our earnings release, supplemental performance data, and the slide deck that accompany this call in the investor relations section of our website, mastercard.com. Additionally, the release was furnished with the SEC earlier this morning. Our comments today regarding our financial results will be on a currency-neutral basis and exclude special items unless otherwise noted. Both the release and the slide deck include reconciliations of non-GAAP measures to their GAAP equivalents.
Please note that due to our decision to deconsolidate our Venezuelan entity starting this year, we are providing additional information regarding our switched transaction and card growth rates. The adjusted growth rates eliminate Venezuelan switched transactions and card counts from prior periods so that you can better understand the underlying growth rates of our business. Our comments on the call today will be on the basis of these adjusted growth rates. These are the only supplemental operational metrics which are significantly impacted by the deconsolidation. Finally, as set forth in more detail in our earnings release, I would like to remind everyone that today's call will include forward-looking statements regarding Mastercard's future performance. Actual performance could differ materially from these forward-looking statements. Information about the factors that could affect future performance are summarized at the end of our earnings release and in our recent SEC filings.
A replay of this call will be posted on our website for 30 days. With that, I'll now turn the call over to our President and Chief Executive Officer, Ajay Banga.
Thanks, Warren, and good morning, everybody. Our strong performance continued this quarter. We had revenue growth of 17% and an EPS growth of 36% versus a year ago on a currency-neutral basis and excluding special items. If you further exclude the impact of the accounting changes that affect year-over-year comparisons, our underlying net revenue growth was 14% and our operating income increased by 19%. I think these results reflect our operational focus, our market share growth, and I think strong underlying business fundamentals while we continue to invest in the business for the longer term. Let's start with the macroeconomic environment. We continue to see solid overall growth, although just like others, we're keeping an eye out for potential impacts related to fiscal stimulus reductions, rising interest rates, and possibly increased trade barriers, which could slow global economic growth.
In addition, we are monitoring the impact of a stronger U.S. dollar on cross-border flows and the economic weakness in some emerging market countries. In the U.S., economic growth remains positive. Low unemployment, healthy consumer confidence help. Our SpendingPulse estimate for Q3 show retail sales remain strong and were actually up 5.2% ex-auto, ex-gas versus a year ago. Businesses are investing and the provisional agreement on a new trade deal in North America is good news, both in terms of the stability it'll provide to companies as they plan their supply chains and due to some of the specific terms that it includes that we believe will be beneficial to our industry. Overall conditions in Europe remain stable. Unemployment continues to decline.
Consumer confidence remains strong in areas such as the Nordics, while I think political concerns weigh on countries, some of them, including the U.K., Italy, and Turkey. In Latin America, the elections in Brazil and Mexico are now behind us, and the real and peso have recovered somewhat, although yesterday was not a great day for the peso. At this stage, we are waiting to see how the economic and fiscal policy agendas develop as these new administrations take office. We're also monitoring a few potential headwinds in Asia. Although consumer sentiment remains relatively positive, trade tensions are weighing on business sentiment, most notably in China and Japan and Korea. Against that backdrop, we are driving healthy double-digit volume and transaction growth for Mastercard across most of our markets with momentum across our core products and services. Let me, as usual, give you a few examples.
First, we have expanded our existing relationship with HSBC, including winning new business in the U.K., Hong Kong, and Mexico. Like many of our customers, HSBC will now also leverage Mastercard Labs' rapid prototyping capabilities along with Mastercard Advisors and our data and analytics services to help optimize their portfolios. In North America, we continue to build momentum in the co-brand space and this quarter we announced that we will be the exclusive network for the new Air France-KLM co-brand portfolio with Bank of America, which includes a suite of enhanced travel benefits. We also expanded our partnership with Kroger, which includes joint efforts to improve the customer experience to create a safer, more efficient checkout experience. Kroger will leverage a broad array of Mastercard's products and solutions, including data analytics, fraud tools, and digital services.
We're also going to migrate their commercial card business to Mastercard, this partnership basically builds on the co-brand portfolio flip that we won last year. In Europe, we expanded our relationship with Bankia, one of the larger banks in Spain, to flip the vast majority of their debit and credit portfolios to Mastercard. Bankia will also leverage our Mastercard Advisors and Mastercard Labs services as we partner to build their business going forward. In Belgium, Mastercard is selected as IKEA's credit co-brand partner. We've also extended our relationship with PayPal. As you know, we are PayPal's partner for almost all their credit and debit co-branded programs around the world. We've also been selected as PayPal's partner as they embark on direct card issuance in Germany and in the U.K.
In Germany, for example, we will work with PayPal to support digital cards issued in Google Pay wallets, which will enable German PayPal users to have access to contactless payments at the point of sale. In Asia Pacific, we continue to benefit from strong deal momentum. We are prioritizing two key areas. First, partnering with digital players to harness new payment flows, and secondly, increasing our participation in domestic transactions. Let's start with the digital players and harnessing new payment flows. Last week, we announced a deal with Grab, which is a leading fintech platform, digital wallet provider, and ride-sharing service in Southeast Asia. The Grab app has been downloaded onto more than 110 million mobile devices in the region.
Through this relationship, Grab will offer its customers both a prepaid Mastercard within the GrabPay wallet, as well as a physical prepaid Mastercard to enable online and offline payments across a wide range of spend categories. The partnership also opens up the GrabPay wallet for acceptance across the Mastercard merchant base using existing point-of-sale systems or QR codes. This Grab effort will initially launch in Singapore and the Philippines in 2019. The plan is to quickly expand across six additional countries in Southeast Asia. In China, we have strengthened our cross-border and mobile presence through an exclusive cross-border credit co-brand program with the Ctrip Group and the Bank of East Asia. Ctrip is the largest online travel agency in China. 70% of their bookings, for example, are executed via mobile phones. The second part of the conversation in Asia was around increasing our participation in domestic efforts.
Let me give you a couple of examples in domestic transactions. In Thailand, in response to on-soil regulatory changes, we built a co-badged partnership with ITMX, which is the leading domestic switch in the Thai market. That partnership enables us to deploy a range of safety and security and gateway services. It will also allow us to significantly grow our co-badged debit share via flips and new issuance with four additional issuers in Thailand. Another example is Indonesia, where we recently launched on-soil debit switching, enabling us to comply with local regs, but also work with domestic networks to integrate a set of value-added services. These local capabilities and the global acceptance footprint gave us the entry point to flip the closed-loop debit business of BCA, which is one of Indonesia's largest banks, to debit Mastercard.
Those are some of the regional updates. I'm going to highlight progress in addressing new payment flows. On the B2B front, we are really excited about the launch of Mastercard Track, which is a global trade platform which we have developed in collaboration with Microsoft. Track basically solves key challenges in the procure-to-pay process, including managing supply chain risk and creating more transparency in the B2B payments process. We're going to deploy the platform through a phased rollout. The first phase is focused on helping corporations with the cumbersome process of compliance screening of new and existing suppliers. Now, how we address that challenge is we provide a comprehensive trade directory, which is currently at more than 150 million businesses in over 75 countries. The trade directory includes corporate registry details, business credit scores, and compliance data, including sanction notifications and other regulatory information.
The directory will be regularly updated to support a business' know your customer and know your supplier processes and includes automated change notifications to ensure that corporations understand the evolving risk across their supplier base. We're also going to build out additional capabilities on that platform, including the integration of our account-based payment rails. Eventually, we envision that Track will enable B2B networks, banks, insurance companies, and technology providers to extend value-added services to business customers, including data analytics and supply chain finance.
In Singapore, Track has already been integrated with the Networked Trade Platform, which is a trade and logistics platform developed by the Singaporean government. It's got card payment facilities incorporated inside to facilitate secure and efficient electronic payments between buyers and suppliers. In the faster payment space, we have talked about the opportunity to leverage our assets to provide a combination of infrastructure, applications, and services to help solve customer needs across an entirely different set of rails. A recent example of this is the announcement of the Mastercard Bill Pay Exchange. Now, that's a digital application that will enable U.S. consumers to view, manage, and pay their bills instantly from their bank accounts. The solution basically attempts to address consumer pain points like managing multiple billing sites and passwords, and most importantly, remembering when bills are due.
Consumers will be able to use their mobile banking app to set up a broad set of their billers, receive notifications when a bill is due, see the bill details, and specify when and how much they want to pay from their bank accounts. The Bill Pay Exchange will support payments over the clearing house's real-time payments infrastructure, which as you probably recall, is based on technology from Vocalink. It'll also support traditional ACH payments, and card integration is planned for the future. The exchange includes a large community of over 100,000 U.S. billers, which is built on our existing bill pay network. Similar to how we distribute most products, this solution is designed to be offered through banks and credit unions, and the idea is to enable the bank or the credit union to become a one-stop-shop for bill payments for their consumers.
On the services layer of our faster payment strategy, we've now launched AML Insights, which is our network-level anti-money laundering solution currently in the U.K. AML Insights runs advanced analytics to identify potential money laundering across the faster payments network there, and it helps our bank customers comply with their obligations. The solution has already been adopted by 10 banks, representing over 90% of the U.K. market. We're in active discussions with prospective customers in several markets around the world. Finally, a quick update on our efforts to improve the online checkout experience for consumers, merchants, and issuers. Last week, we announced that we're targeting to have token services on all cards by 2020, allowing consumers to store credentials with merchants without exposing their actual card details. That's the first part.
The second part is we're improving the consumer authentication experience to move quickly and accurately and allow them to verify that a consumer is who they say they actually are. Our solution is called Mastercard Identity Check, which uses the data-rich EMV 3-D Secure authentication standard and applies our AI and behavioral biometric capabilities to verify the consumer with a single touch or click. We've worked with issuers and merchants in the U.S. and Europe to enable this technology. It begins to roll out globally in early 2019. Finally, you've heard us talk about the importance of a safe, streamlined, and standardized online checkout experience for all key stakeholders. The Secure Remote Commerce framework, or SRC, will create a standard for a simplified and secure digital point-of-sale process. EMVCo's draft technical specs for SRC have now been finalized. We're working to complete the branding guidelines and other go-to-market considerations.
We expect to begin the roll-out of SRC in the second half of 2019. With that, let me turn the call over to Martina for an update on our financial results and operational metrics. Martina?
Thanks, Ajay, and good morning, everyone. Turning to page three, despite the expected foreign exchange headwinds, we delivered another very strong quarter. Here are a few highlights on a currency-neutral basis, excluding special items related to litigation provisions and the adjusted tax effects of previously recorded special items. Net revenue grew 17%, driven by strong underlying performance and includes a three PPT benefit from the new revenue recognition rules. Excluding this, underlying revenue growth was 14%. Operating income grew by 22%, or 19% if you exclude the revenue recognition rules impact. Net income was up 33%, reflecting strong operating results and the impact of the U.S. tax reform, which contributed approximately nine PPT to net income growth. EPS was at $1.78, up by 36% year-over-year, with share repurchases contributing $0.04 per share.
During the quarter, we repurchased about $1.2 billion worth of stock and an additional $385 million through October 25. Let's turn to page four, and here you can see the operational metrics for the third quarter. Worldwide gross dollar volume or GDV growth was 13% on a local currency basis, down one PPT from last quarter. We saw solid double-digit growth across most regions. U.S. GDV grew 9%, similar to last quarter, with credit and debit growth of 8% and 10%, respectively. Outside of the U.S., volume growth was 15%, down one PPT from last quarter. Cross-border volume grew at 17% on a local currency basis, in line with expectations and driven by double-digit growth in all regions. This was down 2 PPT from the second quarter, primarily due to one less switching day in Q3 versus a year ago. Let me turn to page five.
Switching transactions continue to show strong growth at 16% globally, normalized to exclude Venezuelan transactions as we no longer consolidate that entity. Again, there was one less switching day versus a year ago, which impacted growth by one PPT. We saw healthy growth in switch transactions across all regions, led by Europe and the U.S. In addition, global card growth was 6%, again normalized to Venezuela. Globally, there are 2.5 billion Mastercard and Maestro branded cards issued. Now let's turn to page six for highlights on a few of the revenue line items, again described on a currency-neutral basis unless otherwise noted. The 17% net revenue increase was in line with expectations and was primarily driven by strong volume and transaction growth, as well as growth in our services offerings. As I mentioned already, the new revenue recognition rules contributed three PPT to the growth rate.
Excluding these impacts, underlying net revenue growth was 14%. Looking quickly at the individual revenue line items. Domestic assessments grew 24%, while worldwide GDV grew 13%. The difference is mainly due to pricing and the impact of the new revenue recognition rules. Cross-border volume fees grew 18%, while cross-border volume grew 17%. Transaction processing fees grew 17%, primarily driven by the 16% normalized growth in switch transactions, as well as revenues from our various service offerings. Finally, other revenues grew 11%, driven by increases in our advisors and safety and security services. Moving to page seven, you can see that total operating expenses increased 10%, excluding special items, on a currency-neutral basis. Within our expense growth, we had a two PPT increase related to the new revenue recognition rules, offset by a two PPT benefit associated with foreign exchange hedging losses in the year-ago period.
I'm going to now turn to slide eight, let's discuss what we have seen through the first three weeks of October. Our drivers are generally similar to or slightly better than what we saw in the third quarter on a normalized basis. Just remember, Q3 had one less switching day, which reduced each of the switched metrics by approximately one PPT. The numbers through October 21st are as follows. Starting with switched volume, we saw global growth of 16%, an increase of two PPT compared to the third quarter. In the U.S., our switched volume grew 13%, a sequential increase of three PPT, aided in part by the timing of certain Social Security payments this quarter. Switched volume outside the U.S. grew 19%, up one PPT from the third quarter.
Globally, switched transaction growth was 17%, up one percentage point from the third quarter, with healthy growth in each region. With respect to cross-border, our volumes grew 18% globally, up one percentage point sequentially. As a reminder, we will face a more difficult comp as this quarter progresses due to the timing of cryptocurrency-related activity last year. Turning to our thoughts for the full year 2018, which I will describe on a currency-neutral basis excluding special items. Overall, not much has changed. The economic environment remains healthy, and we continue to expect year-over-year revenue growth to be in the high teens and operating expense growth to be in the mid-teens. As a reminder, these growth rates include the impacts of the new revenue recognition rules that we adopted in 2018 and the full year effect of acquisitions. A few other items of note.
FX is now expected to have no real impact to revenue for the full year, and we expect Q4 to have a higher foreign exchange headwind to revenue than in Q3. We expect a sequential increase of operating expenses in Q4 due primarily to the timing of some of our marketing programs. We estimate the tax rate will be approximately 9% for the year. The tax rate approximately 19% for the year. With that, let me turn the call back to Warren to begin the Q&A session.
Thanks, Martina. Denise, we're now ready for the question and answer session.
Ladies and gentlemen, to ask a question, please press star then the number one on your telephone keypad. To withdraw your question, press the pound key. Your first question comes from Jason Kupferberg from Bank of America Merrill Lynch. Your line is open.
Hey, good morning, guys. Just two quick ones here. I guess first, one for you, Ajay. Just wanted to take your temperature macro-wise. Not sure if your tone is maybe softening a little bit, some caution points out there. Obviously, U.S. equity market's dropping a lot this month. Not sure what your historical data would show in terms of potential impacts on consumer spending going forward. Just Martina, any comments on rebates? We were expecting the number to be a little higher in Q3. I know timing is always an issue here. Any changes in how you're thinking about full-year rebates? Is this just a timing issue between Q3 and Q4? Thanks, guys.
I think on the macro, Jason Kupferberg, honestly, in our numbers, nothing is showing up that should give me reason to be cautious. If you look at even our three weeks of data that we've shown you till October 21st, you'll find that consumer spending remains kind of robust or even a little better in some cases. It's nothing showing up directly. It's just that at the end of the day, any of our time we spend in industry and business, you do feel that if you've got trade barriers, or if you've got discussions going on rising interest rates and removal of liquidity in the system, at some point of time, that should have an impact overall on the economy. If nothing else, to slow down the growth rate a little, to keep the heat down, if anything else.
It's from that point of view that you're hearing me speak about this. I don't have any indicator in the system that I could point to that should give you either exuberance or caution where we are today. We're kind of going along the way we see our data, which is good spending, even in the three weeks of October that we shared with you.
On rebates and incentives, as you know, Jason Kupferberg, our first quarter was actually the low quarter from a rebates and incentives growth point of view. Second and third quarter are very similar, and we continue to expect strong deal activity into the fourth quarter.
Your next question comes from James Schneider with Goldman Sachs. Your line is open.
Good morning. Thanks for taking my question. I want to ask a question on cross-border. Obviously, that was still strong, and it looks like it improved a little bit in October. Can you maybe give us a little bit of color on some of the regional composition of that? Anything in that kind of have implications in terms of are you taking a more cautious view on spreads or cross-border pricing? Just in the general macro sense in any particular region?
I mean, cross-border has continued to be very strong. In fact, when you look at the Q3 numbers, they're very similar to the Q2 numbers when you adjust for the switching day. You can see that when we look at the October 21 stats, it continues to be very strong. Though we put out a bit of a cautionary note on that because when you remember the fourth quarter of last year, in particular at the end of November into December, we saw all that cryptocurrency-related activity that we don't expect to repeat. In fact, that activity has gone down in a very significant way. The areas that we're looking at very carefully is, of course, one, what is happening from a strengthening U.S. dollar point of view.
We can already see that cross-border inbound into the U.S., the growth rate has been declining versus what we saw in Q2. In addition to that, we're looking at some of the emerging market phenomena in terms of people being able to travel. Our watch-outs are countries like Brazil, Indonesia, a number of other countries on this. Also we watch very carefully on Canada as well as Australia because how these currencies behave versus the U.S. dollar very much impact what our cross-border volume growth does.
Thank you.
Your next question comes from Don Fandetti with Wells Fargo. Your line is open.
Hi, good morning. Ajay, as you look out, the market seems to be convinced that there's potential recession coming into the U.S. If you look back at your company, you had very good revenue growth through the downturn. Can you talk a little bit about what the playbook would be in this scenario? Do you still sort of feel like pricing could be a buffer and take cost out? Do you feel like you have a similar type of buffer?
I don't know about the conclusion that the market is pricing in a recession or the market is pricing in a correction caused by the reality of increasing Fed rates and reducing liquidity. I don't know that yet. I think I'd be cautious on concluding that as of now. Having said that, I guess your question really is, what's our flex in our P&L to manage our way through cycles of different types? Our revenue is built out of multiple legs of the stool, first of all. One part of it is clearly impacted by personal consumption expenditure. It tends to be the quickest impact on our revenue. If PCE in the U.S. tomorrow slows in its growth rate from the 5.2% that I referred to for Q3 in the SpendingPulse, ex auto, ex gas, to let's say 4.5%, that impacts our revenue immediately.
What's happened in past cycles on that has been that while some countries slow down, others pick up, and over a period of two to three years, you tend to find that global PCE, supported in addition by the secular shift from cash to electronic, gives us a reasonable multiple legs of the stool to keep some form of revenue growth growing through that period. Pricing is a function of what you think the market can bear, both on acquiring pricing and issuing pricing. Remember, we now have another leg of the stool, which is our services, and there's pricing there as well. It's safety and security tools, it's data analytics and consulting, all of which tend to get used a great deal more when people feel the pressure to grow their own company's revenue or manage their own expenses or be more efficient.
I think our multiple legs of the revenue stool, if anything, will help us through the next challenging set of circumstances in an even better way than it was 10 years ago. On the expense side, we've got two forms of expenses that can be dialed up or down. Remember, we are putting a lot of money consciously into strategic growth initiatives. Some of that is people, and that's a cost that you incur to get the right quality of skills and talent. Some of it is technology and the rollout of new products and new platforms. Clearly, if there's a pullback, you will find lower appetite for rolling out some of those new products and platforms. We can expect some of that to show up in our expenses. A&M is an obvious one.
Marketing can be another one that can be played with and dialed with during times of crisis. As we've shown some years back, we know how to manage our expenses tightly and down when there's a crisis as well. I'd say you're going to get more of this from Martina. On the revenue side of the stool, more legs and therefore some degree of balance. On the expense side, a couple of good levers to play with. Martina?
Just to add, every time that we put our budget together, our yearly budget together, we put obviously a base plan together based on our base assumptions on what we think revenues will be and what we can afford from an investment point of view, both in the core as well as additional investments that we are making into our strategic initiatives. At the same time, we actually always put a couple of downside scenarios together so that the entire organization actually premeditates if a downturn were to come down the road, what we actually have to do so that we don't have to scramble at that point in time. We have a roadmap. The roadmap is very defined. Obviously, when anything happens, you refresh your roadmap, the company is able to course-correct if it needs to be course-correct.
Let me just add a couple of things to that. First of all, if it's a mild downturn, generally, we would not be cutting our strategic initiatives. We would try to find our way through it because from a long-term perspective, we are obviously looking at long-term growth and garnering that. If we were to shortchange some of the strategic initiatives, we will not be able to do that and really create the kind of value that you want to have for our shareholders. If it's a more severe downturn, then it's some of the things that Ajay said are jumping in, where we would evaluate very carefully which initiatives we would continue and which ones we would maybe mothball for a while.
Okay. Thank you.
Your next question comes from Tien-tsin Huang from J.P. Morgan. Your line is open.
Hey, good morning. Just wanted to ask on the pipeline for new deals and renewals and how you'd characterize that and your win share so far. It looks like, obviously with KLM, that was a nice one. Just curious what the go-forward looks like.
Tsin, across the board, we are still continuing to win share. Just remember that this is not just against one competitor. This is obviously against domestic competitors, too. Secondly, from a pipeline point of view, we look pretty strong. You can see that in the rebates and incentives number. I do expect that that will continue to grow. The agreements that we have announced, most of them will be rolling out between the first and the fourth quarter of 2019.
Next question, please.
Okay. Your next question comes from Darrin Peller with Wolfe Research. Your line is open.
Hey, thanks, guys. When looking at the strong trends, even into calendar fourth quarter, just how much of that is really market share? I know the switching day helps, obviously, but market share versus macro strength. Then just as a follow-on to that, can you just touch on the contribution or the potential benefits from the Maestro conversion you're seeing? How much is that impacting numbers now? It seems like it's got a long road ahead of it, but really good benefits. Thanks.
Darrin, it's tough for us to parse this apart. The macroeconomic environment is obviously good in many countries around the world, and it is, as Ajay was saying, driving quite a bit of our revenue growth. Every quarter, we're winning from a market share point of view, given the kind of announcements that you have. That is an added benefit. Don't forget, the secular trend is also an added benefit. We are not seeing any changes in terms of the three drivers of our core business, besides what we're actually doing on the services side, which is another growth driver for us. From a Maestro conversion point of view, I think you're seeing probably in this data about 9 million cards or so have gone away from the Maestro cards. Pretty much all of them got flipped to a debit Mastercard.
As we told you before, the Maestro product, given that it cannot be used in a number of different ways, like on e-commerce, but the debit Mastercard product can be used, that we see much more significant volume on it as well as the pricing is different. It's a nice contribution to what we're seeing on the debit side.
Your next question comes from Sanjay Sakhrani with KBW. Your line is open.
Thanks. Ajay, you talked about the SRC initiative in your prepared remarks. I am curious how confident you feel the industry players will come together with a strong solution that competes with the other players out there. Perhaps you could just talk about the value proposition to the various constituencies. Secondly, Martina, you guys have had obviously very strong growth in revenues on the back of all the various things you talked about. You haven't provided formal guidance yet, but is there any reason outside of a macro situation that you can continue or sustain these trends? Thanks.
On SRC, Sanjay, I think it's always early days, but I'm pretty confident that the issuing and acquiring and merchant community will see a fair amount of value out of SRC. Look, I have a very simple logic for the response we get when we talk about SRC to any of those communities. The first one is there is clutter on a checkout page if there's going to be multiple checkout buttons. The second one is it's just harder for a merchant or an issuing bank or an acquiring bank to have to handle multiple checkout options for the purposes of digital and online purchases. Both of those are appealing to the entire community, and that appeal is what we're hearing back from them.
Getting the standards right, which is why it took us the time, that EMVCo, which is a body that comprises, as you know, the networks, the issuing banks, but also some merchants are now part of the advisory group there. They're all involved with this together with us in an effort to create the right standards that not only provide for simplicity of integration and checkout, but also for higher standards of security for the merchant and the consumer and the issuer and acquirer. I think we're actually building this infrastructure the right way for all the different stakeholders in the system. Obviously, the one group of stakeholders we haven't yet tested it on is the consumer because it hasn't reached them yet. That one we'll see.
The proof of the pudding will be in the eating, but at the end of the day, there's no reason why they wouldn't find it the right thing to use. My general view of this thus far from all the interactions is very optimistic. Now, it's going to be a run. It's not going to be something that's going to end in 100-yard dash. We've got to get the standards frozen, get all the work done to get it launched out there, get the issuing, acquiring, and merchant systems to accept these new standards, work with them, and then allow us to roll that out over three, four years. This is not a one-year or six-month effort. It starts in the second part of next year.
You should see this having a lot of energy and momentum from us at least for the next three, four years, then you'll see where we get to with it. I'm reasonably optimistic about it. The value prop is embedded in what I just told you. The reason for my optimism is the value prop.
On the longer-term guidance, Sanjay, first of all, we said earlier this year that you have to let us finish out 2018 predominantly because of the adoption of the new revenue recognition standard because there are lots of moving parts. Having said that, we will on the fourth quarter call, which is in early 2019, you will hear our thoughts about 2019 as well as you will hear our thoughts from a long-term performance objective.
The one thing that I usually point people back to is when you look at our investor day back in September of 2017, you actually see the one chart that we put out for a 5-10-year period where it shows our drivers and what we are doing from a services point of view and kind of puts it together what we think from a very long-term point of view for revenues, and it says low to mid-teens. We haven't changed our opinion in all of this, but you are going to have to wait for the 2019 thoughts as well as for a longer-term guidance at the Q4 earnings call. I think that is end of January or so.
Thank you.
Your next question comes from Bryan Keane with Deutsche Bank. Your line is open.
Hi. Good morning. Just want to ask about the adjusted operating margins that came in, I think, significantly above last year and above street estimates. How much of this, Martina, is just leverage in the model versus timing of expenses? I think you called out some increased marketing in 4Q, but just trying to figure out how much of that was kind of a surprise in showing leverage versus is just a timing issue.
Look, Bryan, first of all, we're going to continue to stick to our guidance since we said when we look at the business overall, we think the business can produce 50%+ operating margins at any point in time, right? We're not going to change that. Every year when we put our numbers together, we basically decide what we think revenue growth will be and how much we can afford from an operating expense point of view. Obviously, you are seeing that we've been doing really well from a revenue growth point of view this year, we have been able to produce more profits and it doesn't go that quickly that we can just turn on the dime and suddenly invest in some other strategic investment. You're going to have to have a long-term view.
We're not going to change our long-term view, from time to time, as we said in the past, depending on revenue growth, you might have a little bit of an extra contribution to operating margin.
The way we run our system is that we took the idea of a 50% minimum operating margin to explain to our investors that we are committed to running the company with a fair degree of efficiency and profitability. We're also committed in a growth industry, because that's what our industry is, with the amount of PCE that's still in cash, with the amount of B2B payments that are still inefficiently done through check and strange ways of paying, that there's an enormous amount of opportunity to enable our company to grow. In that circumstance, our long-term sights now, I've been here nine years, Martina has been here 10. I've been saying this from the day I came. Our long-term sights are set on investing to get at that cash and to get at those inefficient ways of doing B2B payments.
The second thing we've built out over these years is the investment in services. I'm hoping you guys are beginning to see a lot of those services embedded in our relationships with merchants, issuing banks, governments, and acquiring systems. The embedding of those services in those relationships enables us to not only have a better, more holistic relationship with that partner, but also enables us to be seen as a value-added partner, not just a price play. Price is important. Don't get me wrong, I've said this every time. It also allows you to have more than that, in addition to the service being a good revenue and good margin generator on its own. Our approach to this whole thing has been play that game for the longer term, play it in a way that our investments make sense for where we're going, including inorganic investments.
Manage if there's a couple of years of a slowdown in growth, manage your way through it, but don't take your eyes off where we're going. That's kind of what we're trying to do. Your question about operating margin in a quarter, to be perfectly honest, I don't even look at it until Martina comes and bops me over the head and informs me that this is our operating margin. I actually don't. I don't operate through operating margin. I operate through revenue growth, that too net revenue growth. I operate through basic franchise indicating trends, and I operate through investing in the strategic portfolio initiatives that we've laid out for you. Those three things, making sure we've got great people, good technology, good brand, is how we run our company.
Everything else, quarter by quarter, it comes and it goes, and I'll faithfully report it to you.
Okay. Thanks for the help.
Your next question comes from Lisa Ellis with MoffettNathanson. Your line is open.
Hi, good morning, guys. Hey, t his one's for Ajay. At Money20/20 last week, we got a peek into the future of commerce with things like voice commerce, which is like buying through a personal assistant, and social commerce, which is like buying through a photo on Instagram, or doing things like seamless omni-channel, where you're checking out with your phone while you're in the store. Just on the theme of investing for the future, what are some of the unique technologies and investments you're making at Mastercard against those kind of futuristic trends that are looking more like five, 10 years out?
Go in the backward order. The last one you talked about was about seamless multi-channel kind of omni-channel thinking. We've been talking about that for some time with you as well, with others as well, about the things we're doing in that space because consumers do exactly what you said. They actually research online, buy in store. They buy online, return in store. They research while in the store. For example, at our labs or our tech hub, you'll find things like these mirrors where you can both test out things but also ask the attendant to bring you stuff from the inventory in a different color and purchase right there and have shipped to you later delivered. All that is part of the idea of the fact that consumers don't think online separate from physical. They just look at their experience.
A ton of things are going into that seamless back and forth. In fact, your entire approach to managing chargebacks and disputes also has to evolve to the idea of buying in one channel, returning in the other. That entire work has been going on for quite a while. Your in-between one, the one about social commerce. You remember some time back, we launched an effort with Vogue where if you were on Vogue and you were flipping through and you found a pair of shoes, which Martina has plenty of, but you found a pair of shoes that she liked even more than the 2,000 pairs she already has. She would just click on it. She's making faces at me.
She would click on it and go right there and buy that pair seamlessly through a one click. By the way, come right back to the same page in Vogue as compared to going out to a website to buy and then have to navigate back to the Vogue site. It's not just social commerce. The oral commerce part is actually just beginning to move. I think you'll find us over the period of time being very focused on evolving our brand and our signature and our capability in all these channels of oral, social, and omni-channel commerce. There's investments going on in technology. There's investments going on in chargebacks and dispute management. There's investments going on in the consumer experience from front to back.
There's investments going on in the brand and its evolution. It's kind of across the whole lot. Of course, there's investments in data and analytics that help you work into that process and that connect to the safety and security of transactions in that space. One of the things that you will find us using artificial intelligence on, you take a look at NuData. NuData was all about trying to figure out whether the person using the phone is the person whom the phone belongs to or not, or somebody's been able to get into their phone.
Using AI, you can send back a risk-weighted score to the merchant or the bank to say, "This may not be Martina buying that 2,001 pair of shoe that she saw in the magazine, and instead it might be Ajay who stole her phone and her password." That gives the bank or merchant a chance to make a conscious decision based on the value of the customer, whether to let that decision go through or not. I mean, we could keep going on this topic, but it's a whole series of efforts across all forms of commerce, across all the legs of our revenue stool that we're working on.
Terrific. Thank you.
Martina is running out to buy a pair of shoes right now. This is how it works. Right on.
Your next question comes from Craig Maurer with Autonomous Research. Your line is open.
Yeah, good morning. Thanks. Two questions. I wanted to follow up on Tien-tsin's question from much earlier. Visa called out 20% of their volume being renewed in fiscal 2019. Is there an increased opportunity to win share over the next, call it, 12 months? Secondly, how much of the current OpEx is being spent on complying with data localization rules? If you could just frame that for us. Thanks.
Yeah. Let me start with both of those, I'll let Martina get into some of that as well. The data localization rules, you got to remember, we're managing and meeting the needs of what, for example, India has announced about what it wants from data localization. Essentially, data localization comes in many flavors. It's a bit like white bread to whole wheat bread. Which part of it do you want? If you look at data localization, the way the Indian government has put out its original guidelines were, managing that data localization is a question of attempting to put a bunch of servers on the ground that enable that data to be kept locally. The fact is, if you go further onto on-soil processing and on-soil switching, as we've had to do in some countries, that's a different cost base.
What we are referring to when we talk about our lack of support for data localization is not caused so much by expenses. It's caused by the inefficiency of what that does to the ability to provide safety, security, and analytics to India's banks and merchants. Honestly, if we are to be able to look at transactions and recognize them, the example of NuData I just gave, to recognize patterns and to look at them across systems, it's common sense that more transactions give you better predictability and lower false positives. Less transactions give you lower predictability and more false positives. Secondly, if you localize, you're unable to learn from the learnings of one country and apply them with global platforms like ours to every country, and therefore you leverage the cost of learning by 1/200, meaning you learn in one country and it's available to 200.
I have tons of examples of when this has paid off. What India is doing is actually enabling both those benefits to India to be turned off. At the end of the day, it's not a cost issue, is what I'm trying to tell you. It's more of the manner in which we run the business to be able to benefit those stakeholders on the ground in India that I think we're losing out on. I'm picking on India only because that's a live issue over the last few months. There are others like that. It's not a cost issue as much as it is a manner of operating issue.
On the agreements, Craig. First of all, on average, agreements are between three and seven years, so you can actually say five years. It's no surprise that typically in any given year, 20% plus minus a few percentage points come up for renewal. We will continue to do what we did in the past many years. It means we are going to go after every agreement and hopefully we can convince clients to continue to do business with us or new clients to come over to do business with us. It's kind of business as usual.
Okay. Thank you.
Your next question comes from Robert Napoli with William Blair. Your line is open.
Thank you, and good morning. I was wondering if you could give a little more color on the growth of your B2B business and the investments that you're making there, and just maybe general thoughts to the % of your business that could come from B2B payments over the very long term.
Yeah. Bob, let me start on this one. First of all, when you just look at B2B payments, we said in the past that it's about 11% of our total volume at this point in time, and that it's growing kind of in the low, mid, high teens, depending on which quarter you're looking at. If I can just recall for you, we think that the opportunity worldwide is actually $120 trillion. That doesn't mean that we're going to go after every $120 trillion, but we're going after the slices where we can actually bring a lot of a good value proposition to bear. You saw how we expanded into virtual cards, that is actually in these kind of numbers, and how we're basically adopting virtual cards for ecosystems such as the travel industry, et cetera.
We took that learning further and expanded basically in the U.S., how to figure out for smaller companies and mid-size companies to be outsourcing their accounts payable process. That is going beyond virtual cards. This is the Mastercard B2B Hub. It's not just virtual cards, it's the whole suite of payment means, be it check or ACH, how vendors can basically make payments to suppliers. That is one expansion which is closer probably to our core business. This morning you heard Ajay talk about Mastercard Track. I mean, that is really to address pain points between trading partners across the whole world. Just like know your supplier. That solution, which as Ajay said, will be rolled out in phases. At some point in time, we hope that we're also going to integrate a payment solution.
That is addressing a different pain point in cross-border account to account. We had told you before that we have been working on a permission-based blockchain solution that we have already connected to our settlement capability, and we're currently in a pilot with several banks. In addition to that, you know that Mastercard Send is actually also enabled for cross-border B2B payments. You shouldn't forget Vocalink, which is enabling B2B payments too. There is a number of things that we're doing and innovating on, all of which that we are hoping obviously to come to fruition over time.
Has the growth rate of the B2B business accelerated? We've seen signs that maybe it has in other places, but
Well, as we are adding to it, you kind of have to look at. That's why I said, depending which quarter you're looking at, it's anywhere between the low teens and the high teens growth rates, which is pretty fantastic.
So the-
Great.
Think of the B2B business as, I was a little speechless with Martina's speech because she obviously has imbibed the B2B business deeply. Here's the thing, there's
Former treasurer
Former, yeah. Now that Sachin works for her, who used to run our commercial, I think this education process has only ratcheted up. Here's the deal. There's the card-based original business that we always were in. Small corporates, large corporates, T&E, B2B, SME, fleet cards, P-cards. That business continues to grow in a good rate. Frankly, you should view that as a steady, stable business that we understand the most about because it's been in our portfolio for a fair amount of time. The virtual card business came in after that, and that has continuously improved, not only in the form of the industries it targets, as Martina was explaining, but also in the form in which we deliver the product more and more through open APIs and through simple ways for people to integrate with the virtual card.
That business is also beginning to, I would say, come to the point where it's in the first category of something we've known for a lot of years. The hub business, which connects to the ERP systems and the Mastercard Track business, which we have just about launched. These are new. I think you will see the results of these two over the next two to five years, not the next six months to one year. I think you've got to look at our B2B business as being laid out as the foundation of the way we built the services business. It took us four or five years to build it to some size, and then we began to really plug it hard. You should watch us doing the same with those parts of the B2B business, the hub and the Mastercard Track part.
There's more to come on Mastercard Track, and there's more to come on the hub, as we go along. Vocalink and the fast ACH capability that Vocalink gave us, along with the incremental amount of data that flows in a Vocalink message back and forth, which gives us better reconciliation capability and better capability for these vendors who are buying and selling from each other. That is just another plus in the system. We're kind of building a repertoire of assets like we built in safety and security to package together and bundle together at the front end for meeting that $120 trillion market that Martina's talking about. That's kind of how I view the B2B business as those two distinct parts. Older, more mature type, a newer, more interesting, probably more future growth variety. Mastercard Send kind of transcends both of those.
Thank you very much, Martina and Ajay.
We have time for one final question.
Your last question comes from Andrew Jeffrey with SunTrust. Your line is open.
Hi. Good morning. Appreciate you squeezing me here at the end. Ajay, I heard you mention your prepared remarks, at least one flip from a proprietary or closed network. I wonder if you can expound sort of globally on the share that you think those networks have and how much opportunity Mastercard has to open them up, and in fact, what your win rates might look like as you go after that volume.
Closed loop networks have evolved over the years. They were very strong, for example, in Europe over the last so many years. Then, when SEPA and the first Payment Services Directive came around, it began to open up the opportunity for companies like ours to gain vis-a-vis the closed loop networks in a number of those countries. The Netherlands was the first big breakthrough. You'll find every quarter, every country, we begin to see some progress. In fact, if you dial back to the big picture. Nine years ago, we used to see about 40%, 42%. Martina will remember the number correctly. 42% of our transactions went through us?
It was less, actually.
Less?
I think it was more like in the mid-30s.
Okay. Mid-30s was what we saw. We're now at 50 something percent.
55% at this point.
55% of our transactions are. We could see a large part of that is because we've been able to take on these closed-loop systems over the years and convert them into open loop and be able to see them ourselves. Closed loop has many implications. There are bank-owned ones, there are government-owned ones, and then there are smaller closed-loop systems like transit systems. The London transport was a closed-loop system, where if you took a subway in London, you paid on an Oyster card, which was their own little closed loop. That's been converted to an open loop as well. The closed-loop, open-loop conversation has many dimensions to it across smaller ones for government-run systems to all the way big ones that run nationally and infrastructure.
I actually don't want to give you a percentage of what comes from those versus the others, only because it'll start becoming a quarterly question, and this is not a change that happens quarterly. I would tell you this, in our secular growth story, while there is a great deal of focus on the 80% odd of transactions that are still in cash, in that other 15%, 20% that are electronic, there is a chunk of closed loop. Europe is a big example of that. Canada has that, Australia has that, Latin America has it. It's not a developed market, emerging market thing. It's across the world. Yeah, we are focused on that, and we work with those closed loops very often to show them why they're inefficient. Remember the conversation I was giving about India and not having access to global technology, global data analytics?
All closed-loop systems suffer from that problem. They can't even keep pace with innovation and new technology forms. It's those arguments that enable us to go after that volume. It's a regular, steady drumbeat of growth.
Thorough as usual,
Ajay. Thank you.
Great. Ajay, any final comments?
Thanks. You're welcome. Yes. Thank you for all your questions. I just want to tell you to wrap up with a few thoughts. We have once again delivered strong financial performance this quarter, record revenue, record earnings growth. We are very focused on executing against our strategy. We're investing in our core products as well as in differentiated service offerings, and the idea is to embed ourselves but also to provide choice to our customers. We continue to drive solid deal momentum across products, across geographies. We've built that momentum on our solution-selling approach, and we are focused on delivering the best digital experience possible over the next few years across all channels and all devices for merchants, consumers, and issuers. With that, thank you very much for your continued support of the company. Thank you for joining us today.
This concludes today's conference call. You may now disconnect.