Good morning. My name is Kim. I'll be your conference operator today. At this time, I would like to welcome everyone to the Mastercard Q4 Full Year 2017 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. Warren Kneeshaw, head of investor relations, please go ahead, sir.
Thank you, Kim. Good morning, everyone. Thank you for joining us for our fourth quarter 2017 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 to accept registrations. 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.
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.
Thank you, Warren. Good morning, everybody. Our business continues to perform well. We are very pleased to have delivered strong results again this quarter. I think they're driven by our continued focus on the execution of our strategies that we laid out for you, in fact, as recently as the Investor Day in September. For the quarter, we delivered net revenue growth of 18% and an EPS growth of 30%, excluding special items, which are primarily related to the U.S. Tax Reform and our Venezuela operations. On that same basis, net revenue growth for the year was 15% and EPS growth of 21%. Major economies around the world generally improved in 2017, and we expect to see a relatively steady environment again this year, although with some pockets of instability.
In the U.S., consumer confidence has been healthy, unemployment remains low, and our holiday retail sales were solid, although year-over-year quarterly growth was slightly lower in Q4 than in the previous quarter, according to our SpendingPulse estimates. In Europe, the economy has been relatively stable. Germany and France are driving some mild growth. Retail sales growth in the U.K., however, slowed in the fourth quarter, again according to SpendingPulse. About the U.K., we remain concerned about the potential impacts of Brexit over the medium and longer term. Latin America. There, the region has been recovering from its economic recession. While Brazil and Mexico both have presidential elections coming up, and of course, Mexico has the added uncertainty of NAFTA renegotiation, we are cautiously optimistic that economic growth in that region in 2018 will be similar to 2017.
The political and economic crisis in Venezuela continues to worsen, Martina is going to discuss that in some detail when she comes onto her section. In Asia, we've seen improvement in consumer and business sentiment in Australia and the ASEAN countries continue to be bright spots. Overall, although we know that the world is not without geopolitical and trade-related risks, absent any major impacts from these, we expect 2018 to be similar to 2017 from an economic standpoint. With that backdrop, we're focused on continuing to execute our strategy that's allowing us to grow share across all of our product lines in 2017. Let me give you a few examples of how we are doing this. The U.S., you read this morning probably that we have just announced that we have now got the combined Bass Pro Shops and Cabela's co-brand.
They've chosen Mastercard for their consumer credit co-brand book. It's one of the largest retail co-brands in the market. You probably know that we have been the network for the Bass Pro Shops co-brand, and we're going to convert the Cabela's club portfolio to Mastercard later this year. We also renewed our exclusive agreement with KeyBank for their consumer and commercial credit and debit portfolios this quarter. KeyBank actually is a great example of a customer who uses various Mastercard services. They use our Decision Intelligence authentication tools, our loyalty platform processing services. That's a nice wide spread of services. Another example is Bank of America, as we told you in September, we had won their [Mastercard cash 1|2|3] consumer credit cards. We're going to be launching those exclusively by the end of the first quarter.
They leverage many of our capabilities, including fraud products, advisors, and are also one of our largest Labs as a Service customers. That's where we innovate together with our customers using design thinking to rapidly co-create targeted solutions for their business opportunities. In Europe, we're just pleased to announce that later this year, we will be launching the new Virgin Atlantic consumer credit card, and that's issued by Virgin Money in the U.K. We're continuing to make progress with European banks. We signed a number of new deals with large issuers in France this quarter, including moving market share with a flip of Crédit Mutuel's debit business. In addition, we're shifting share to us in credit and debit from local competitors with ING Bank in Italy as one example.
ING is also launching new prepaid issuance with Mastercard. They're leveraging added benefits such as Mastercard Installments, which gives consumers financial flexibility to split their payments over monthly installments. The interesting aspect beyond this is that ING's implementation is entirely managed by our APIs. Of course it gives their customers an easy way to convert purchases to installments through their mobile banking app. We're also winning debit in other regions, such as in Latin America, where we signed a new deal with Davivienda in Colombia, emphasizing cross-border and digital capabilities. We launched a new co-brand debit program with Amazon in Mexico. In the Middle East, the flip of Doha Bank's debit portfolio is giving us portfolio exclusivity in one of the most affluent markets globally. In China and India, we're making progress.
We've signed new deals in China this quarter with customers such as ICBC, China Industrial Bank, the Agricultural Bank of China. In India, the government has finally published new merchant discount rates. We think that's going to spur merchant acceptance and continued transaction growth over the next few years. We're making progress with VocaLink. Since the acquisition in May, we have launched real-time payments to The Clearing House in the U.S. We have further scaled the person-to-merchant Pay by Bank app. We went live with an image-based clearing system for the Cheque and Credit Clearing Company in the U.K. In the fourth quarter, we expanded our analytics capabilities at VocaLink. We've successfully launched a corporate fraud alert product with RBS as our first customer. They're using analysis of corporate payment history and machine learning to help protect companies or their clients against various types of corporate fraud.
Invoice redirection being an example. On the infrastructure side, we're participating in a number of RFPs around the globe. We believe these will position us well in the real-time payment space over time. In parallel, we're developing apps and value-added services that can be deployed across this infrastructure. A few comments in the digital space. We've expanded the rollout of Tokenization, which as you know, is the foundational technology for secure digital payments. We've added 500 new issuers and 21 markets over the course of 2017. We're now a total of 1,200 issuers in 46 markets. For the year, we saw tokenized transaction growth of over 500%. That's from a small base, but it reflects this momentum that I'm speaking to.
Last year, we continued to see how important the seamless digital purchasing experience is to our merchant partners as we grew Masterpass acceptance with Dunkin' Donuts, Walgreens, Verizon Wireless, many others. This quarter, we're pleased to add several more partners, including in the grocery category, such as BJ's and Giant Eagle in the U.S. With McDonald's, we're going beyond a simple implementation and helping them develop a food delivery app with exclusive Masterpass acceptance in multiple markets across Latin America. Let me wrap up by saying a few things about U.S. Tax Reform. We see this as a very positive development for the country, particularly in the near term, as businesses will have an increased capacity to invest and many consumers will have more disposable income.
What we are taking the opportunity is to make several focused investments that build on our longstanding commitment to strengthen our business, support our people, and make a positive contribution to the communities where we operate, while of course, continuing to provide strong capital returns to our shareholders. I'm going to lay out a couple of steps we're going to take. The first one is we will make additional investments in our Center for Inclusive Growth, which we launched back in 2014 as a way to focus our data, expertise, technology, and philanthropic investments to support inclusive growth. You know that we believe that enables more people to become financially empowered, it's therefore good for our business as well. Over the next several years, we plan to invest an additional half a billion dollars to fuel their philanthropic contributions into the community.
Among our initial efforts will be training programs for U.S. workers to help create the workforce for tomorrow. Now, these additional investments in this center go beyond the impact we already delivered through other existing initiatives across the company, as well as the Mastercard Foundation, which you will recall is one of the world's largest private philanthropic funds. Of course, our public-private partnerships with governments, which today are in over 60 countries. We've got 1,300 programs, and that's taken us more than two-thirds of the way to our goal of bringing 500 million more people into the financial system. Our second area of focus with this opportunity around the U.S. Tax Reform is our employees and their retirement planning.
While we've always been an active and generous contributor to our employee benefits, we're going to take this opportunity to enhance our employer match to 10% for defined contribution retirement plans. Now, this will be an opportunity for the majority of our employees, including those across the United States, to benefit from this change. Finally, we will absolutely accelerate investments both on an organic and inorganic basis in areas that are aligned with our business strategy, digital infrastructure, Fast ACH, data analytics, those places. Now, just to put this in context, yes, we will be making all these additional investments, the majority of the tax savings will be used to invest in the growth of our business and also to return excess capital to our shareholders.
Now, with that, let me turn the call over to Martina for an update on our financial results and our operational metrics. Martina?
Thanks, Ajay, and good morning, everyone. As you can see in the highlights on page three, we have delivered another strong quarter. Foreign exchange was a tailwind of about 2.5 PPT to net revenue and three PPT to net income, primarily due to the strengthening of the euro. I will now highlight the numbers on a currency-neutral basis, excluding the impact of special items, which I will explain in more detail on the next slide. Net revenue grew 18%, driven by solid momentum in our core business and includes a three PPT benefit from acquisitions. Operating expenses increased by 15% and includes an eight PPT impact from acquisitions primarily for VocaLink. Operating income grew by 20%, while net income was up 25%, resulting from our strong underlying performance and a lower tax rate. EPS was $1.14, up by 30% year-over-year, with share repurchases contributing $0.03 per share.
During the quarter, we repurchased about $1 billion worth of stock and an additional $287 million through January 30, 2018. Let me turn to page four, and here, I'm going to touch on the special items we have taken this quarter. The U.S. Tax Reform resulted in three impacts to the tax line in our P&L in the fourth quarter. This is our best estimate based on our current interpretation of the new tax laws and could still change during 2018. The first item is a $629 million charge related to deemed repatriation on accumulated foreign earnings and is payable over eight years. The second item is related to the revaluation of our deferred tax assets and liabilities at the new corporate tax rate of 21%. Since we are in a net deferred tax asset position, we have recorded a $157 million charge this quarter.
Finally, we had an $87 million impact due to the loss of certain foreign tax credits and a change in policy regarding foreign earnings. The total of all tax impacts related to the U.S. Tax Reform Bill was $873 million, or $0.82 per share. In addition, the economic and political conditions in Venezuela continue to deteriorate and therefore, similar to what other companies have already done, we have decided to exclude the financial results of those operations from our consolidated financial statements for future periods. This has resulted in a pre-tax charge of $167 million, or $108 million after tax. However, we will continue to provide switching and other services in the country. As a result of these special items, we had combined after-tax impacts of $981 million or $0.92 per share this quarter. Let me now continue to explain our underlying business performance for the quarter.
Here on page five, you can see the operational metrics for the fourth quarter. Worldwide gross dollar volume or GDV growth was 13% on a local currency basis, and that's up two PPT from last quarter. We saw a solid double-digit growth in all regions outside of the U.S. U.S. GDV grew 9%, up three PPT from last quarter and was made up of credit and debit growth of 10% and 8% respectively. Outside of the U.S., volume growth was 15%, that's up two PPT from last quarter, led by Europe and Asia. Cross-border volume grew at a healthy 17% on a local currency basis, with strong double-digit growth across all regions, again led by the U.S. and Europe. Turning to page six, here you see switch transactions continue to show strong growth at 17% globally with U.S. growth up sequentially.
Similar for the last few quarters, we saw healthy double-digit growth in all regions outside of the U.S. Globally, there are 2.4 billion Mastercard and Maestro branded cards issued. Now let's turn to page seven for highlights on a few of the revenue line items, again described on a currency-neutral basis unless otherwise noted. As I already mentioned, net revenue increased by 18%, including approximately a three PPT benefit from acquisitions, and was driven by strong transaction and volume growth, as well as growth in services. Rebates and incentives grew 23%, reflecting higher volumes and incentives for new and renewed deals. Let me quickly go through the individual revenue line items. As we've commented on throughout the year, the difference between fees charged and volumes in the domestic assessment and cross-border categories were mainly due to pricing, which was essentially offset in rebates and incentives, as well as some mix.
This continues to be the case this quarter. The domestic assessments grew 19%, while worldwide GDV grew 13%. Cross-border volume fees grew 19%, while cross-border volume was up 17%. Transaction processing fees grew 22%, primarily driven by the 17% growth in switched transactions, as well as revenues from our various services offerings. Finally, other revenues grew 15%. As a reminder, most of the VocaLink revenues show up in this line. Advisors and safety and security revenues were also up. These items more than offset the four PPT impact from the changes we made to our loyalty business in Asia that I've called out previously. Moving on to page eight. Here you can see that total operating expenses increased 15%, excluding special items on a currency-neutral basis, and that was higher than our expectations due to foreign exchange hedging losses.
Similar to last quarter, this includes an eight PPT impact from acquisitions primarily from VocaLink, including the impact of purchase accounting and integration-related cost. The remainder was due to our continued investment in geographic expansion and digital capabilities. I'm going to move on to slide nine, and here we're going to discuss what we have seen so far on the drivers for January, and the numbers are through the 28th of January. Starting with switched volume. Global growth is at 14%, up two PPT from what we saw in the fourth quarter with healthy growth in all regions. In the U.S., our switched volume grew 10%, up two PPT, with higher growth in both credit and debit programs.
In switched volume outside the U.S. grew 18%, up two PPT, driven by higher growth in Europe with slower growth in APMEA as we lap difficult year-ago comps related to the demonetization effort in India. Globally, switched transaction growth was 16%, down one PPT from what we saw in the fourth quarter. This decrease is the result of the exclusion of Venezuelan transactions, as we will no longer be recognizing the related revenue in 2018. Ex Venezuela, our growth was similar to the fourth quarter. With respect to cross-border volumes, our volumes grew 22%, up five PPT, with double-digit growth in all regions. Let me explain this a little bit more. About three PPT of this was driven by higher growth in Europe, resulting from both increased intra- and inter-Europe travel, as well as holidays extending further into January this year in certain markets.
APMEA also contributed about one PPT to this growth. The remaining one PPT was driven by cardholders funding accounts at cryptocurrency exchanges, which were then used to purchase these digital currencies. You should note that these accounts can be funded from a number of sources such as bank accounts, wire transfers, et cetera. With the recent interest in and the price volatility of cryptocurrencies, we have seen an increase in this activity. Just to be clear, we do not switch or settle cryptocurrency transactions over our network. Our plans do not assume this type of activity will continue, as we have no line of sight as to how cardholders will view cryptocurrencies in the future, and given that we've already seen some declines in our recent weekly trends. Now I'm going to turn to our thoughts about 2018 on slide 10.
Let me start by talking about the numbers on the same basis as we always have. That is, before the impact of the new revenue recognition rules on a currency-neutral basis and excluding acquisitions and special items. On this basis, our business fundamentals remain strong, and we continue to grow through the combination of new and renewed agreements in our expanded set of service offerings. We expect the global economic environment to be similar to what we saw last year, with a few areas to monitor, as Ajay mentioned. With this backdrop, we expect to deliver strong organic growth again this year, with net revenue growing towards the high end of the low double-digit range. This is in line with our recent trajectory, though we will be absorbing a slight headwind as a result of the deconsolidation of our Venezuelan entity.
On the expense front, we continue to invest in key long-term growth areas such as digital security solutions and geographic expansion, in addition to the incremental employee and technology investments Ajay just highlighted. Overall, we expect operating expenses will grow at a mid-single-digit rate year-over-year, reflecting our ongoing cost management efforts. As you can see, we are well positioned to deliver strong operating performance again in 2018, slightly ahead of where we had previously expected. Turning to slide 11. Now let me add to those growth numbers the impact of acquisitions, the new revenue recognition rules, and the investment in the Center for Inclusive Growth that Ajay talked about. All of these items are very important when you try to model our results for 2018. Please bear with me as we're going through this. Let me walk down the chart.
First, with respect to acquisitions, we estimate that having the acquisitions for a full year in 2018, rather than just a partial year in 2017, will contribute about a half PPT to revenue growth and approximately two PPT to OPEX growth for the year. Second, the new revenue recognition rules will contribute approximately two and a half PPT, or $300 million, to revenue growth and four PPT, or $200 million, to expense growth based on our current estimates. These amounts are driven by two factors. First, we have recently determined that certain market development programs will now flow through the P&L on a gross basis, resulting in about a $200 million in increased revenues and offsetting expenses. The remaining $100 million relates to a change in the timing of when particular deal incentives are recognized.
These amounts, which are also detailed in the appendix, are estimated based on our current and assumed commitments and are thus subject to change. We will be disclosing the impact of the new revenue recognition rules on a quarterly basis throughout 2018. You will be able to follow the effects each quarter. Can have fun with that one. Just as a reminder, the new rules have no impact on the underlying economics of the business. Finally, we will be expanding our Center for Inclusive Growth. The initial contribution will be $100 million to a new not-for-profit entity to enable a variety of workforce training, financial inclusion, and digital infrastructure initiatives, which will add another two PPT to operating expense growth for the year. We expect to take this charge in the first quarter.
Overall, with these adjustments, we estimate 2018 year-over-year growth net revenue will grow at a mid-teens rate, and operating expenses will grow low double digits, both on a currency-neutral basis and excluding special items. I have a few other items for you to consider for 2018. We expect operating expense growth in the first quarter to be $250 million higher than what our annual growth rate of low double digits would imply due to the timing of the market development programs, which I just referred to as part of the new revenue recognition rules, the impact of the acquisitions, which occurred after Q1 last year, and the charge for the Center for Inclusive Growth.
When modeling as-reported numbers, foreign exchange is expected to be a one to two PPT benefit to the top line and about a two PPT benefit to net income for the year based on our planned exchange rates. Finally, we expect a tax rate of approximately 20% in 2018, primarily due to the impact of the U.S. Tax Reform here in the U.S. Turning to slide 12, I would like to move to our long-term performance objectives for the 2016 to 2018 period. As a reminder, these objectives are on a currency-neutral basis. They do exclude acquisitions and special items and are normalized for tax. They do, however, incorporate the impact of the U.S. Tax Reform in 2018.
For revenue, given our expectations for 2018 that I just discussed, including the new revenue recognition rules, we now believe that net revenue will grow in the low teens on a three-year CAGR basis. We remain committed to a minimum annual operating margin of at least 50%, and we now expect EPS CAGR over the three-year period to be in the mid-20s, up from the approximately 20% we last commented on. This reflects our continued strong business performance and expense management initiatives, as well as a four PPT benefit from lower taxes in 2018. The new revenue recognition rules to be implemented in 2018 are expected to have a minimal impact on the three-year EPS CAGR. With that, let me turn the call back to Warren to begin the Q&A session.
Thanks, Martina. Kim, we're now ready to start the question and answer session.
Thank you. Ladies and gentlemen, if you would like to ask a question, please press star, then the number one on your telephone keypad. Your first question comes from the line of James Schneider with Goldman Sachs. Your line is open.
Good morning. Thanks for taking my question. I was wondering if you could maybe start out on the healthy trends you've seen across the globe, but particularly in international debit, which I think accelerated, as you mentioned, quite a bit. There's particular pickup in Europe. Can you maybe talk about How much of that is market share? How much of that is improving economy? Maybe you can talk about the impact going forward on your yields, given it seems like there was a substantial decrease again in the number of Maestro cards as you convert those to standard debit.
James, good morning. Let me just take this for a minute. In Europe, where we're seeing really good drivers are in Italy and Germany and France, a number of these kind of countries. Those are good economic environments. I called out that the holidays in January lasted a little longer in some of these countries. In terms of where we added the market share was really in the Nordics. We actually have flipped a deal in Sweden. That is coming in over this year, and that will actually benefit these kind of numbers. From a Maestro point of view, yes, you're absolutely right. We have been talking about that in a number of countries. We're actually flipping our Maestro portfolios into Debit Mastercard portfolios. We are very well on our way in many of those countries.
What we are actually seeing is when we do these kind of flips, that on the new Debit Mastercards, we see about 2x the volume that we used to see on the Maestro cards. We are not just seeing cross-border volume, but we are also seeing local volume. That will continue to benefit, and it will improve our yield over time. You have actually been seeing that our yields have been improving over the last many years, both on the core business where you're seeing it predominantly because of the additional processing that we're coming in. By the way, we are now at processing about 54% of the transactions that are done on Mastercard versus when you just look two years ago, it was just shy of 50%. Secondly, of course, the healthy cross-border trends.
When you look at our total yields, that is where obviously our growing services offerings are really benefiting us, and that's why you're seeing very healthy yields across the whole company.
Thank you.
Your next question comes from the line of Donald Fandetti with Wells Fargo. Your line is open.
Hi, good morning. The cross-border number, even if you sort of strip out cryptocurrency, was notably better. I know the dollar has been generally weakening. Do you expect, as you think about guidance for 2018 and just look out, have we sort of stepped up into a structurally higher cross-border rate? Lastly, can you talk about volume into the U.S. cross-border?
Don, I'm so glad you're asking this question because, of course, when you see for the first four weeks in the year a 22% cross-border number, you're asking exactly the right question, in my opinion. What we always say is four quarters do not make a year. In fact, the guidance that we're giving-
Four weeks. Four weeks for me.
Four weeks, Don, don't make a year.
Four quarters do.
Yeah, four quarters do.
At least last I heard.
You're absolutely right, Ajay, as usual. Four weeks don't make a year. In particular, all of the guidance that we're giving you for the top line of 2018, we are not planning on those kind of cross-border numbers, growth numbers. We are planning much more to what we have been seeing over the last couple of years. Even with the weaker dollar, I don't think that trend will change much. I don't think it's prudent to be planning on this kind of number. I would like to point you back to the guidance that we had from a new revenue point of view.
Okay, then the volume into the U.S.?
Volume into the U.S., we actually do see it's kind of mid-single digits volume into the U.S. What we do see is a volume outbound of the U.S. is picking up.
Okay, thank you.
Thank you. Your next question comes from the line of Darrin Peller with Barclays. Your line is open.
Thanks, guys. Nice job. Just want to touch on when you look at your guidance for 13% revenue growth at the low or 15%, including the accounting change, just versus the 18% run rate, just make sure we have the right variables that would cause the deceleration being, I guess, Venezuela, M&A grew over lower pricing. Anything else we're missing there? I mean, just lower pricing benefits. Just quickly, Martina, when you look at the tax investments, I just wanted to squeeze in, what will be the steady state of investment beyond 2018? Some of this just feels that it could be one time or should we expect that to continue? Thanks, guys.
Yeah. Okay, on the first question, first of all, you need to take into account the half PPT on Venezuela. That's the impact on revenue. In particular, you also need to take into account the acquisitions that you called out. We had eight months of acquisitions built into 2017 numbers. You only get the lapping effect from the four months. When you actually look at the total results for 2017, we are basically saying that 2018 is just going to be slightly better, in part because, of course, what we're expecting in the U.S., even though we are very watchful on a number of more potential risk countries around the world, right? Middle East Africa is a risk country. We are watching very carefully Brazil. We're watching very carefully Mexico as well as the potential impact from a Brexit point of view.
Overall, while the U.S. is a little better, we are actually believing that the economic environment in 2018 will be very similar to 2017. All of this is baked in just slightly better than 2017 on the net revenue side. That's where we are.
Okay. On the tax savings? Yeah.
On the tax-
Yeah, a question on the-
Yeah, on the tax impact, just your second question. What we're doing in terms of the Center for Inclusive Growth, as Ajay said, we're planning over several years to put a half a billion dollars into that center. The first chunk is going to go in in Q1 with $100 million, we're going to see how we're going to lay it out for the next several of years. You are going to have to expect that we are going to continue to do some contributions in that. Not in 2018, but likely 2019, 2020, et cetera. The employee benefits, that is a permanent adjustment. Of course, that's not just a one-time thing. We really want to make sure that our employees are focused on making sure that they are well situated from a pension benefit point of view.
This is going to go in this year, sometime this year. We haven't given a date yet, that's going to continue. The other investments are also in our baseline, I would suggest to you that both organically as well as inorganically, we're going to continue to look at that and make more investments.
Okay.
Literally in those areas that we're talking about, from digital and technology and data and Fast ACH, the kind of things we talked about in September. Very focused on the strategy.
That makes sense. Thanks, guys.
Thank you. Your next question comes from the line of David Togut with Evercore. Your line is open.
Thank you. Good morning. Europe continues to accelerate nicely. Clearly a lot of that's due to some solid market share gains. I'm wondering, Ajay, if you could comment on the merchant acceptance footprint in Europe for electronic payments, especially post interchange caps a couple of years ago. My follow-up is on PSD2, and any update you could give us on bringing VocaLink's capability to the European continent in advance of PSD2.
The first part, the merchant acceptance. There is growth across the European region on merchant acceptance from large outlets that earlier used to prefer to take either local payment systems only or cash. That change is there, all the way to small ones. What you do see really changing also is the reduction in suppression. Even if the outlet said, "We accept," in actual fact, when you showed up for a small ticket charge or a low-value payment, they would encourage you to lay off the idea of producing electronic payment. I think all that has changed quite dramatically. It's helpful. It's part of the secular change in the way cash is used in the European economy.
I wouldn't declare victory on that right now because I think a year or two in Europe is a relatively small time in a set of complicated countries with lots of local dynamics vis-a-vis local schemes, local players, and the like. I would tell you, keep your eye on that space and we keep working with the acquiring community. We are talking about a four, five-year transition in a continent like Europe. It's good signs. It's helpful. It's a nice tailwind. I'm not running with it to the bank yet. That's the first part. Your second question was about, do you mind me what the second question was?
PSD2.
PSD2. Oh, favorite topic. We're coming up to the timeframe of when all this starts to go live in so many ways in different aspects of implementation in Europe. We have been working both internally as well as with the help of our largest clients, as well as in conversations with regulators about the implications of PSD2 and the things we can do around PSD2 with these European merchants and European banks and the new European entities that will get created as a part of PSD2, the PSPs and the various acronyms that are being created in PSD2. Your question was around VocaLink and PSD2.
To get VocaLink onto the ground in different European countries beyond the software status, which is what it is today in the Nordics and some other markets around the world, will require us to actually participate in the RFP process of different ACH systems being opened up in Europe. We are participating. You heard me in my opening comments. We are participating in those RFPs. These take a year or two to get resolved and settled. After they get settled, it'll take a while to get invested in and implemented.
We are very active in all of those, and one of the reasons why I think you will see us using some of the Tax Reform money in a sensible way in our business is to keep on focusing on the opportunity with Fast ACH, thanks to VocaLink's capabilities in Europe but also outside of Europe, even in the United States and other markets. Not just in infrastructure, but it could be in the applications, it could be in the scheme rules, and it could, of course, be in different aspects of the range of things we could do with Fast ACH.
Thank you very much.
Thank you. Your next question comes from the line of Andrew Jeffrey with SunTrust. Your line is open.
Thanks for taking the question. Ajay, a big picture strategic question for you, especially in the wake, last night, of a pretty meaningful shift in the PayPal-eBay relationship. One of the things that PayPal has asserted is its value prop to large marketplaces, especially next gen marketplaces. I see Mastercard building a pretty comprehensive value proposition of its own. I just wonder how you think about the so-called commodity nature of Visa, Mastercard versus sort of the value add of a provider like PayPal, and whether or not the lines perhaps are beginning to blur a bit in terms of go-to-market value proposition.
I think in the whole E&M commerce space, there's so much going on, Andrew, in that whole space. I think if you go back in time when essentially Visa and Mastercard in those spaces and other brands like ours, the other card, what were called card network brands. We got into a position where we became part of a dropdown on a merchant's checkout site. In a dropdown, you got one brand or the other. You entered a lot of details. You entered a lot of addresses, and that created its own friction and its own lack of branding at the checkout point, even though the consumer was aware of the brand because they were looking at their card and entering the data. I think that's moving. PayPal is one way of that movement.
Our own efforts with branded checkout points is moving. We will continue to do that. I think PayPal itself, its relationship with eBay, I mean, look, at the IPO time, it's something for Dan to answer, but I'm pretty certain that all of you thought about one day that relationship will come up for reassessment. It's come up for reassessment. eBay has chosen what it wants to do. I think Dan's done some interesting work of building out his partnerships in the meanwhile. He's kind of consolidated his own position with a second and third leg of the stool.
I think we are a key beneficiary of that because, as you know, we've got a great partnership with PayPal, which includes all their co-branded cards and their corporate cards and all the understanding around how their wallet is used, including the visibility of the brand and the non-steering towards ACH and the data flow and basically the pass-through angle compared to the staged angle, blah. My general net take of all this is, this is still a wide open field. It's going to be years before you can figure out who's playing what game here. All I'm trying to do with our company, all of us are doing is, we want to be very much a part of that game. We're going to keep investing in Tokenization and secure checkout. We're going to keep investing in an enhanced consumer experience in digital.
You'll find us doing all kinds of things with banks, with merchants in that space. We're going to keep investing in allowing the developer community to access our capabilities in digital and core payments through the simplest form of APIs and SDKs so we can get embedded in more and more locations. We're going to keep investing in creating good R&D with our labs and making sure that they're capable of working with our clients with Labs as a Service. You heard me talk about that with specific reference to Bank of America, but frankly, it applies to many other clients as well. We've got a whole series of strategies in digital to make us not be anywhere other than at the forefront of what's going on here. With simple, transparent standards are important because they enable merchants and banks to connect one time, not multiple times.
You'll see us over this period of years to come. That's the focus. Simple experience, simple standards focused on security, secure every transaction, make sure we do good stuff with labs, make sure the open APIs and SDKs are available and well-used, make sure that we focus on all forms of payment, not just card rails. ACH, Fast ACH, all those so that you enable banks and merchants to do the best thing for their consumer. That's our digital strategy. Not changed. PayPal, eBay, other issues will come and go. We're doing what we need to do.
Thank you.
Thank you. Your next question comes from the line of Jason Kupferberg with Bank of America. Your line is open.
Hey, thanks, guys. Just two quick ones. First on your rebate and incentive expectations for 2018. Can you just give us the latest update on what you're thinking in terms of what might happen in Europe with the European Commission looking at some of the inter-European cross-border interchange fees, some of the potential fines? I know you've disclosed this in your 10-Qs. Any way you could kind of frame up what % of your cross-border business is actually inbound into Europe, just so we have some sense of reference in case we get some headlines on this soon.
Okay, Jason. First of all, on your first question, I'm not going to give you any guidance on rebates and incentives for 2018. It is because of the new revenue recognition rules coming in. There are so many moving parts between growth revenue and contra revenue that I just feel, given all of the work that we were able internally to do, I just feel that the net revenue number is just the best guidance that I can give you. I do want to take the opportunity to deep dive into that just a little bit more. As you know, I called out $300 million of benefit on the net revenue line due to the new revenue recognition rule. $100 million of that is really in relation to customer business agreements and through incentives.
There are a number of effects that we had to be estimating in this. First of all as you know, we had amortization of incentives on previous deals that have been previously expensed. In prior years, we expensed those. They will be now expensed over the life of the deal. That will be a negative, right? We estimate actually that roughly about a half a billion dollars of incentives will need to be re-recognized as contra revenue under the new rules starting 2018. The average life of this recognition is a pproximately seven years. It's a headwind. It's not really material in the context of our size.
In addition to that, we would have had some incentives in 2018 or later that will now have to be carried back to prior years to the original deal inception or carried forward. That will actually reduce the amount of incentives recognized in 2018. You can see these two things are toggling with each other. The last, the third thing is that obviously we will be having new deals coming in, and that could impact this calculation too, depending on the terms and conditions in these kind of deals. When you put all of this together, we do estimate the net benefit of that $100 million that I just referenced. Obviously that could change over time.
Beyond 2019, we will continue to amortize the remainder of that half a billion, of that roughly $500 million that we have to re-recognize as contra revenues under the new rules. You can see this is a relatively complex area, and that's why we're staying with net revenue guidance, and we're not going to split it up in gross and into contra. With respect to your second question, there's really not much more that we can say to you. Quite frankly, what our cross-border business, inbound business in Europe is, has actually no relationship in terms of how the European Commission would be looking at fining us if they fine us. We have, at this point in time, really no new news, so I'm still going to point you back to the last 10-Q that we filed. That is a pretty accurate statement in there.
Unless something happens between now and when we file the 10-K on what, February 14 or 15? If we have an update, obviously the 10-K will be updated by that time.
Martina is in accounting heaven for the last few weeks and months.
Yep.
Between rev rec and tax, I'm sure it's been a party.
You also got Venezuela, which she's done an outstanding job of in trying to put our arms around how to manage that through the next period of time. In Venezuela, we're still very much on the ground doing all the right things. We've got a great team. We're supporting a lot of our clients there. We're not pulling out of the business on the ground. That would be a very unfortunate thing to do, and I think it'll spark all kinds of humanitarian issues given the role we play in that economy. In fact, we're trying to work with other players, including multilateral institutions, to try and find a way to make this a sensible outcome because there will be an outcome one day in Venezuela.
You got to think out long term what we're doing with all of these things, whether it's European cross-border or Venezuela or these rules. At the end of the day, we're trying to give you guys some thought of what we're thinking in terms of what the impact could be. Martina's laid out a pretty good estimate of where we think our 2018 revenues and expenses and EPS and our combined 2016 to 2018 goals will go at. Say to you, over 2016 to 2018, we've had a good run. We gave you an update in September when we raised our guidance. What we're doing basically is making sure the accounting flows through. There's a small improvement in 2018 that she pointed out. Some of it gets eaten up by Venezuela, some of it gets eaten up by the lapping of the acquisitions.
That's kind of where we are. We're running our business to win, share, and keep taking advantage of the secular trend in the business. That's what we're trying to do, and not getting ourselves tied up between rebates and incentives and gross revenue and net revenue at a time when there are so many moving parts that asking someone to estimate accurately would be asking for the moon.
It all makes sense. Thank you.
Thank you. Your next question comes from the line of Bryan Keane with Deutsche Bank. Your line is open.
Hey, Bryan.
Thanks. Just wanted to talk or ask about two things. One, just the strength in U.S. credit and debit. Is that just some lapping at some of the headwinds, obviously USAA, but the numbers are obviously picking up there?
It is, Bryan.
Maybe strengthened.
It is.
Okay. There's nothing else to call out there?
No.
No. Most of it is just that, and then all the other things you heard about us winning, they're all coming on board. You'll see some benefit from Bank of America when it starts issuing. It'll take time. You'll see some benefit from the Coca-Cola brand, the Cabela's co-brand, but these things take time. Meanwhile, there's the natural spending pattern, that SpendingPulse shows up, and there, as I said, fourth quarter growth was actually lower year-over-year than third quarter, just to be clear.
Yeah. It doesn't seem there's no flips going the other way, like, that created the headwind like USAA.
Don't go there. You'll give me nightmares. Don't go there.
Yeah. My follow-up is just on Tax Reform. I just was trying to quantify total Tax Reform investments. I got the $100 million for the inclusive growth, and then just thinking about employee retirement and then some of the accelerated investments that you talked about, Ajay. Just in all, it seems like maybe we're getting to 20%-25%. I just trying to get to a number of what we're reinvesting total of the tax benefit. Thanks.
Okay. Just to let you know, the total cash tax benefit as a result of the Tax Reform on an annual basis is in the zip code of $450 million. Right? We're doing then two things. One, we're taking the $100 million in order to invest it into the Center for Inclusive Growth. The other part that Ajay was mentioning in terms of the employee benefits as well as the additional investments we're doing, we have that embedded in the baseline of the operating expenses. Okay? That is all embedded in the low double digits guidance that I have been giving to you for 2018 based on the new revenue recognition rules.
I don't want to run a business in which I'm paying employees for their retirement long term, because this is not a one-year, $1,000 contribution kind of thing. We're adding to our already good 401(k) and defined contribution plans around the world. Secondly, we're investing in data and digital and Fast ACH. We don't want to run a business where that stuff is kept as a separate item. Martina has got those embedded in the way we look at the future of our business.
The only thing that's not embedded in that is these lumpy contributions that are going to the Center for Inclusive Growth. Honestly, $100 million going into that center, being directed for workforce training and financial inclusion in the U.S. and elsewhere, that kind of lumpy contribution is the one that we've not got embedded in our guidance to you. We're telling you about it, but it's embedded in the total, not in the net that we're looking at. Right, Martina?
It's in the low double-digit operating expense.
Correct. In the total.
guidance. We put two PPT for that particular contribution.
In the total.
In the total.
Not in the organic growth.
No.
Okay, great. Thanks. Very helpful. Yeah, I got it. Thanks.
Thank you. Your next question comes from the line of Craig Maurer with Autonomous Research. Your line is open.
I wanted to ask you on Brazil, considering recent IPO drawing attention there, plus you're seeing the recovery finally seeming to be on firmer ground. You've gained a fairly enormous market share against Visa there over the last few years, and I believe last summer, you're now the biggest new issuance brand in Brazil. I was wondering if you expect to see, A, Visa be able to rebound against you there, and B, how you look at that market going forward, considering the big gains you've had recently.
First of all, I will always expect my competitors to make every effort possible. They're a good and strong company. They've got good people on the ground. They're going to make efforts to win back share, and that's just the reality, and it's the I believe that we survive by being comparatively paranoid about all our competitors. That's, to me, just a I take it as a given that they'll attempt. There's a lot of competition on the ground. It's not just Visa. It's Elo. It's the local methods of doing a lot of work. There's a lot of competition on the ground locally. There's also a lot of regulatory change that is going on in Brazil, including with the Bankers Association attempting to look at the idea of the way installments are paid and the whole installment method is managed, including the settlement time.
There's a ton of things going on in a market in which we are today, a very large market share player there. The political environment in Brazil, yes, this year 2017 showed an improvement, you got to remember, you're comparing 2017 to 2016, which was not a particularly, let's say, delightful year in Brazil. It was a hard year. They got some political stability. 2017 turned out to be better. Good economic policies were getting put in place. Remember that 2018 has an election, and that election has currently identified two players to come there, none of whom is in the current government. It's a little unclear to me what instability that could cause in the economic environment.
That's why Martina pointed out, and I pointed out, that there are pockets of instability across the world that we are careful of, and Brazil is one of those for this reason of the political circumstance and the longevity of their economic reforms. I've been around a long time with working with Latin America, and I've learned that you cannot take for granted what happens for a couple of years because it does find its way through change on where politics goes. That's where we are. I'm relatively constructive about Brazil. We're investing on the ground. The number of people we have in our office has increased. Our capabilities on the ground have increased. Our technological investments on the ground have increased. We're going to keep seeing growth there is what I'm hopeful for. 2018 is a year to watch out for.
Jim, I think we have time for just one last question.
Thank you. Your last question comes from Tien-tsin Huang with JP Morgan. Your line is open.
All right. Thanks for including me here. I won't ask an accounting question. I just want to ask a bit about deal activity, maybe because based on Craig and Bryan's questions. How would you characterize, guys, the pipeline for new deals and renewals this year in 2018 versus 2017? It seems like you've got a good backlog going, so I'm curious what the pipeline might look like for this year, especially in things like B2B, if you can comment on that.
Yeah. Tien-tsin, obviously with the numbers in Q4 that you saw on the rebates and incentives, and we had given you a little bit of a heads up on our November call that that number might be coming in a little bit higher than what we had forecasted before. That should show you that we have actually terrific deal activity in Q4, and those deals will be rolling in over the next 6 to 18 months. It depends which deal you're looking at. I, quite frankly, with everything that I'm seeing from the pipeline from our regions around the world, I think that we are going to have a similarly robust deal activity in 2018. I don't think there's any letting up.
I think there is a lot of players in the market that are looking to do things with us as a network, and it will be similarly robust.
On B2B, Tien-tsin, the global travel deals that we did over the last couple of years, they're actually helping us in our cross-border as an example. Back to somebody's question I forget on cross-border. There's all this work we're trying to do with the B2B Hub. We've announced that one partner has signed up. There's a bunch of partners in the pipeline. Hopefully, a few of them will come into locking on. There's all the work we're trying to do with Fast ACH and Mastercard Send in different parts of the world. B2B is pretty active for us right now. We consider ourselves to have good assets in the place, so we're working our pipeline hard. I'm sorry I got to cut you off, Tien-tsin. We can chat another time, but thank you all for your questions. I'd like to wrap up with some closing thoughts.
We're pleased with 2017 financial results. We think it's all driven by strong operating performance and execution of our strategy. Overall economic trends are positive, and as we've said a couple of times on this call, we're going to monitor some risks and uncertainties that Martina and I have spoken to. Overall, we expect 2018 growth to be similar to 2017. Meanwhile, we expect tax reform will benefit the U.S. economy and have a positive impact on our company. We see this as an opportune time to further invest in our employees and communities and continue to strengthen our business with strategic investments in those key growth areas while continuing to return excess capital back to our shareholders. Thank you for your continued support of all of us and our company, and thank you very much for joining us on the call today.
Thank you. Ladies and gentlemen, this concludes today's conference call. You may now disconnect.