Good day. My name is Jack. I'll be your conference operator today. At this time, I would like to welcome everyone to the Mastercard Third Quarter 2016 earnings 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'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. I would now like to turn the call over to Barbara Gasper, head of investor relations. You may begin.
Thank you, Jack. Good morning, everyone. Thanks for joining us for a discussion about our third quarter 2016 financial results. With me on the call today are Ajay Banga, our President and Chief Executive Officer, and Martina Hund-Mejean, our Chief Financial Officer. I'd also like to welcome Warren Kneeshaw, my successor, to his first Mastercard earnings call. Following comments from Ajay and Martina, the operator will announce your opportunity to get into the queue for the Q&A session. Up until then, no one is actually registered to ask a question. Even if you think you have already dialed into the queue for Q&A, you will need to register again following our prepared comments. This morning's earnings call and the slide deck that will be referenced on the call can be found in the investor relations section of our website, mastercard.com.
Additionally, the release was attached to an 8-K that we filed with the SEC earlier this morning. A replay of this call will be posted on our website for 30 days. Both the release and the slide deck include reconciliations of non-GAAP measures to their GAAP equivalents. We've also added a table at the end of both documents, which provides additional information about the impact of Article 8 of the EU's recent payments regulation on our GDV and purchase volume growth rates. Since we are no longer charging de minimis fees on co-badged domestic volume that doesn't use our network in markets such as France, this volume is no longer included in our reported volume statistics. We saw the partial impact of this in the second quarter and now have a full quarter of impact in Q3.
The table adjusts growth rates for the impact by eliminating the related co-badged volume in prior periods so that you can see the underlying run rate of our business. Our comments on the call today will be on the basis of these adjusted rates. Finally, as set forth in more detail in today's earnings release, I need to remind everyone that today's call may include some forward-looking statements about Mastercard's future performance. Actual performance could differ materially from what is suggested by our comments today. Information about the factors that could affect future performance are summarized at the end of our press release, as well as contained in our recent SEC filings. With that, I'll turn the call over to Ajay.
Thank you, Barbara. Barbara, thank you once again for your outstanding decade of work for us. Warm welcome to the company. Good morning, everybody. Our business continues to perform well. We are very pleased with our strong results this quarter. As you've seen, we delivered net revenue growth of 14% and an EPS growth of 19% after excluding last year's special item, which was related to the termination of our U.S. employee pension plan. Our perspective of the global economy remains largely unchanged since last quarter. You've all seen the U.S. GDP growth report this morning. We continue to believe, as we said in the previous quarters, that the U.S. is on a steady growth path with consumer confidence, unemployment, and wages holding firm. Of course, unless something unforeseen occurs coming out of the upcoming elections. Basically, the U.S. is on a steady growth path.
Many markets across Europe are showing a gradual recovery led by Germany as economic sentiment holds steady. Unemployment rates are continuing to decline. Although uncertainty from Brexit and its impact on Europe remain a concern, I think it's going to take a few years to understand the full implications. Again, you saw the British GDP report, which kind of sees it holding steady. Interestingly, underlying U.K. consumer demand remains stable. In fact, as a result of the weaker pound, inbound travel to the U.K. is picking up over this last quarter. In Asia, the picture is still mixed. In China, both exports and imports were down sharply, and you all know the concerns over inflated asset values. In Australia, however, business confidence is up, and India continues its relatively strong growth trajectory.
In Latin America, Brazil, even though it's expected to remain in a recession for the near future, seems to be bottoming out, and the political environment seems to be stabilizing, which should hopefully improve economic conditions over the next six to 12 months. In Venezuela, the political and fiscal crisis is deepening. In Mexico, the economy continues to expand, but with increasing dependence on consumer spending growth. In sum, the outlook from the economic side remains mixed. Even so, we're continuing to grow. We're seeing double-digit volume and transaction growth across most of our markets. We're continuing to win deals as we execute against our long-term strategy. Now let me provide you with a brief update about our planned acquisition of VocaLink. The first step is now complete. The European Commission has referred the transaction back to the U.K. regulator to perform the antitrust review.
The second step, which will be led by the U.K. regulator, generally has 2 phases. We're hopeful to complete the review in the first preliminary phase, but it's always possible that this could go into a more detailed second phase. We continue to believe that we can complete this acquisition by about the middle of 2017. Before going on to our business highlights, let me just touch on a few regulatory and litigation items that you all ask us about from time to time. Starting with the United States, as you know, the merchant litigation is now back in the Brooklyn Court. In the status conference held last week, the court heard arguments on the appointment of class counsel for merchants. Now once the court appoints that counsel, we expect the litigation to proceed, and we intend to resume the settlement negotiations.
Given its complexity, we think this process will take some years to resolve. In the U.K., as many of you know, a proposed class action was filed in September on behalf of U.K. consumers seeking damages related to interchange fees. The court will set out the timeline for the case soon. We've had good experience addressing similar claims in the U.S., and we believe strongly that in fact, far from being harmed by interchange, U.K. consumers have in fact benefited significantly. Finally, following legal submissions and an oral hearing this past summer, we continue to be in conversations with the European Commission to find a resolution to the 2015 case around our interchange rates on inter-regional cross-border transactions and the central acquiring rules. Now moving on to some of our recent business activity.
You heard a great deal of all of this from us at the recent Investor Day. You had an opportunity to see firsthand a number of the product and service innovations we are rolling out. I'm going to stick to very few items this time. We continue to make solid progress in our U.S. consumer business, building on our recent momentum in debit. We're actually excited to highlight two new deals that deepen and strengthen our existing relationships with both U.S. Bank and Regions Bank, which have now been expanded to include preferred Mastercard routing for their PIN debit businesses. Outside of the U.S., we're actually pleased to have flipped a number of portfolios by continuing to leverage services as a key strategic differentiator. I'm going to give you a couple of examples in Europe.
We're building on the long-term debit deal we announced last year in Italy with Poste Italiane. We are now expanding our partnership by converting a significant portion of their prepaid portfolio. This deal also includes a number of our services, such as Advisors, to help drive their financial inclusion and innovation agendas. Another example with DenizBank, which is one of the market leaders in Turkey, to flip their credit business, which also leverages Advisors. The domestic opportunity in China. We are awaiting a more detailed interpretation of the final PBOC regulations, particularly around the newly introduced security provisions and how these would impact our implementation of on-soil switching while protecting our systems and our data. We hope these will be available over the next couple of months. We're continuing to speak with regulators to clarify our options on how best to enter the market.
Meanwhile, we continue to make progress in China by winning a number of new deals with banks including HSBC, China Construction Bank, ICBC, and Postal Savings Bank. As part of these deals, they will be issuing new single-branded cards targeted at the country's growing affluent customer segment and to drive cross-border spend. We've highlighted several key renewals in our commercial business, including FleetCor and WEX, both of whom are driving B2B and cross-border spend in unique and innovative ways by leveraging virtual cards. We just added two new deals in Europe, one with Credit Suisse, which is focused on the small and medium enterprise segment where Mastercard is the exclusive card provider. The other with UBS, where we're looking forward to deepening our relationship within their corporate banking business. Now on to digital strategy.
Over the last several quarters, including at the recent Investor Day, we've given you a number of updates on the significant progress we are making with Masterpass. Just to recall, we are taking two parallel paths. The first is our digital by default strategy, which enables issuers to auto-enroll cardholders through their online banking app and helps to drive scale for us while keeping issuers at the center of their consumer relationships. We're quite pleased that more than 80 million accounts will be automatically enabled over the next few months. The second is to deliver a digital payment service that works across all devices, all channels, whether that's in-app, online, or in-store, the idea there is to keep growing acceptance by being ubiquitous.
Today, I'll discuss a couple of use cases to give you an idea about some of the unique ways we're using Masterpass with our partners around the world. In South Africa, we're working with MTN and Vodacom, two telecom providers, who by the way put together have a market share of about 70%, to allow their customers to securely pay for airtime minutes from their mobile device using Masterpass. Prior to this, subscribers would either have to stand in long lines at a third-party service location or go to an ATM to transfer funds to the telecom provider and then wait for their accounts to be updated. Since its launch, more than four and a half million users have registered for the service, and airtime distribution costs for the mobile network operators have been reduced by as much as 15%.
Another example in Europe, we partnered with Czech Railways, the largest rail operator in that country, to integrate Masterpass into their booking app to better compete with new entrants in the transit space and to modernize mobile ticketing. Again, prior to this, users would have had to enter their card details for each purchase. Since its launch in early 2015, usage has grown significantly, and Masterpass now accounts for nearly 8% of all Czech Railways transactions. Both of these examples, I hope, demonstrate to you that through Masterpass, we're not just enabling digital payments; we are actually trying to create a better consumer experience. From an acceptance standpoint, Masterpass continues to grow. It's now available at more than 300,000 merchants online and in-app, as well as more than six million locations in 77 countries that allow contactless payments. We're continuing to add new merchants.
For example, United Airlines in the U.S., Domino's Pizza and Trenitalia in Europe, KFC in Asia. In addition, last week, we signed a memorandum of understanding with the Ecobank group to roll out Masterpass QR, a mobile person-to-merchant service across 33 African countries. This solution will be integrated with their mobile banking platform, will enable users to safely pay for purchases directly from their bank account using a QR code. Again, millions of micro, small, and medium enterprises across Africa will now be able to accept secure digital payments quickly and without the expense of a traditional POS terminal. Our Masterpass partner-centric approach that you heard Garry Lyons talk about at Investor Day, which is aimed at delivering a seamless consumer experience, benefits issuers, digital players, and merchants.
Earlier this week, we highlighted that issuers like Capital One, who are already leveraging our digital-by-default approach, are further integrating Masterpass into their wallet offering. Users of the Capital One wallet can now shop online and in-app and check out using their same MDES tokenized login credentials at the hundreds of thousands of merchants around the world where Masterpass is accepted. Similarly, at Money20/20, we highlighted an important expansion of our digital partnerships and starting sometime early next year, Samsung Pay, Android Pay, and Microsoft Wallet will also enable the same online and in-app consumer experience that I just mentioned. Finally, clearly, merchants also benefit from this. Since they've already integrated with Masterpass, there's no additional development work required. It gives them access to the millions of consumers who already use these other wallet services or will in the future.
Meanwhile, we continue to support our partners to extend their reach globally. We actually recently helped Android Pay move into Poland. In fact, helped Apple Pay expand into Japan and Russia, both currently exclusive with Mastercard. Finally, we highlighted our recent partnership with Green Dot and Uber, as well as Stripe and Lyft at Investor Day, and how they're leveraging the Mastercard Send platform to make convenient and secure payments to drivers, delivery people, and others. We just added Allstate, who will leverage Mastercard Send to make claims payments to their customers via a debit card, providing nearly instant access to their funds. 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. Starting with page three, you see there are minimal differences this quarter between non-GAAP reported and currency-neutral growth rates. The figures exclude the impact of a special item related to the termination of the U.S.-defined pension plan taken last year. As you can see from our numbers, we have delivered another strong quarter. Here are a few highlights. Net revenue growth was 14%. Operating expenses grew 12% as we continue to invest in our strategic initiatives. EPS was at $1.08, up 19% year-over-year, driven primarily by our strong operating performance and a slightly lower tax rate. Also, share repurchases contributed $0.03 per share. As of October 25, we have $1.8 billion remaining under our current authorization. Lastly, cash flow from operations was $1.4 billion. We ended the quarter with cash equivalents and other liquid investments of about $7 billion.
Let's turn to page four, where you can see the operational metrics for the third quarter. Just a reminder, as Barbara mentioned, the growth rates I'm quoting are adjusted for the impact of the new EU regulations. Our worldwide gross dollar volume or GDV growth was 11% on a local currency basis, down two PPT from the prior quarter. Overall, our U.S. GDV grew 5%, made up of credit and debit growth of 4% and 6%, respectively. As expected, this includes the impact of the USAA roll-off. Total U.S. GDV had less than one PPT headwind from lower gas prices. Outside of the U.S., volume growth was 14% on a local currency basis. This is down one PPT versus last quarter due to slightly lower growth in each region.
Cross-border volume grew 12% on a local currency basis, about two PPT higher than the 10% we saw in the second quarter, driven primarily by commercial travel programs in Europe. Let me turn here to page five. Here you see processed transactions grew 18% globally to 14.5 billion, which is a four PPT increase from last quarter, driven primarily by increased PIN routing in the U.S. Globally, the number of cards grew 6%, with 2.3 billion Mastercard and Maestro branded cards issued. Let's turn to page six for highlights on a few of the revenue line items. Unless otherwise stated, the growth numbers I call out both here and on the next slide are on a currency-neutral basis. The net revenue growth was 14%. We saw strong volume and transaction growth, plus a higher contribution from some of our services businesses.
Rebates and incentives grew 21% due to higher volume and new and renewed deals. Looking quickly at the individual revenue line items on a currency-neutral basis. Domestic assessments grew 10%, essentially in line with worldwide GDP growth. Cross-border volume fees grew 15%, while cross-border volume grew 12%. The three PPT gap is due to some pricing actions, partially offset by a higher mix of intra-Europe activity. Transaction processing fees grew 19%, in line with processed transaction growth. Other revenue grew 23%, predominantly driven by Advisors, safety and security, and loyalty. Moving to page seven, you can see that excluding last year's special item, total operating expenses increased 12% in the quarter, of which more than two PPT is due to the impact of foreign exchange activity and balance sheet remeasurement.
The remainder of the increase was primarily due to higher personnel costs as we continue to invest in digital services and geographic expansion, as well as higher data processing costs in line with our transaction growth and Russian domestic processing costs to NSPK. Turning to slide eight, let's discuss what we've seen in October through the 21st. Most of our drivers are similar to Q3, except for the U.S. The numbers through October 21st are as follows. Starting with processed volume, we saw a global growth of 10%, that's equivalent to what we saw in the third quarter, with double-digit growth in each region outside of the U.S. In the U.S., our processed volume grew 3%, down more than three PPT from the third quarter, with the same growth in credit programs but lower growth in debit programs, primarily due to the deconversion I mentioned earlier.
Excluding that, our October growth was similar to the third quarter. GAS did not have an impact on our October growth rate. Processed volume outside the U.S. grew 16%, that's actually up one PPT from the third quarter, with higher growth in each region. Globally, processed transaction growth was 17%, down one PPT from what we saw in the third quarter. Processed transaction growth outside the U.S. was similar to Q3, while the U.S. growth was down three PPT. With respect to cross-border, our volumes grew 13% globally, up almost one PPT from the third quarter, with faster growth in Europe, driven by a combination of consumer and commercial usage. Looking at the full year 2016, there's really no change in our business outlook from what I have discussed at Investor Day back in September.
We continue to expect revenue growth in the low double digits on a currency-neutral basis. When you model on an as-reported basis, adjusting for the impact of all currencies, we now estimate that there would be about a one PPT headwind to net revenue growth and to the bottom line. This is less of a headwind than what we said in September given the continued moderation of exchange rates. Let me call out a few other items that you should consider when modeling 2016. On expenses, we now expect total operating expense growth in the low double-digit range for our as-reported results, excluding special items. On a currency-neutral basis, we continue to expect low double-digit growth. As discussed at Investor Day, we expect to see positive operating leverage for the year.
You should now assume a 2016 tax rate towards the lower end of the 28%-29% range that I talked about in September. As is our normal practice, we will defer any comments about our 2017 outlook until our year-end call in January. Let me turn the call back to Barbara to begin the Q&A session. Barbara?
Thanks, Martina. We're now ready to begin the question-and-answer period, in order to get to as many people as possible, we ask that you limit yourself to a single question and then queue back in for additional questions. Jack?
At this time, I would like to remind everyone, in order to ask a question, please press star then the number one on your telephone keypad. We'll pause for a moment to compile the Q&A roster. Your first question comes from the line of Jim Schneider with Goldman Sachs. Your line is open.
Good morning. Thanks for taking my question. I was wondering if you could maybe give us an update on the B2B payment space and the opportunity you see there. Specifically, can you talk about how Zelle and Mastercard Send fit into the strategy for you?
Sure. I think this whole commercial business continues to be an area of pretty good growth. You just heard me talk a little bit about prepaid card and WEX and virtual cards, and I gave you the examples of UBS and Credit Suisse. What we're basically seeing in addition to the transaction side of this is we're seeing an adoption of some of our products, Smart Data, which is our reporting and reconciliation tool, as well as In Control, which is the virtual card system for commercial payments, is kind of getting well embedded. I'm also starting to see some increasing interest beyond the typical bank card users. Technology providers who embed commercial payment solutions into their software and their platforms and payment aggregators and verticals such as construction, insurance. You see these guys coming into play as well.
There's a series of things we are doing in the B2B space, in the T&E space, in the SME space, that are all connected to this effort to drive our commercial efforts. The Mastercard Send product that you just heard us talk about again, what this is a payment service that facilitates the delivery of funds very quickly and very securely to consumers, both domestically and internationally. If you take a single connection into this platform, you could be a business, you could be a merchant, you could be a government, a nonprofit, an issuer, some other sender, and you can send money to consumers, whether they're banked or unbanked, most importantly, whether they're domestic or overseas as well. That's kind of what we are trying to do here.
In the overseas markets, we combine with a JV that we had launched some time ago called HomeSend, not to be confused with Mastercard Send. That's just internal Mastercard confusion. I don't want you to get confused. HomeSend is a unique asset for cross-border payments. It kind of expands our reach to billions of bank accounts across more than 70 markets through their phone numbers and systems. The combination of this ability to move money to any bank account in the U.S. through Mastercard Send, whether it's got a Visa debit card or a Mastercard debit card at the front end of the account, combined with HomeSend, which can connect to these billions of bank accounts across 70 markets using phone systems, that's what we're up to.
Next question, please.
Your next question comes from the line of Tien-tsin Huang with JP Morgan. Your line is open.
Great, thanks. Good morning. Great growth here. I was wondering if you can maybe give us your perspective on why your growth rate on a reported or constant currency basis has been growing at such a big premium to Visa. Any color there? Because obviously they've been boarding a lot of new clients, been surprised by the magnitude of the premium.
Well, look, Tien-tsin, you know that we are extremely disciplined when we go to market and when we actually work with clients and the kind of agreements that we're striking. As we have discussed on Investor Day, we are not just doing a core product kind of deal where we look at a credit product or a debit product or a prepaid product or a commercial product, but we are also adding quite a lot of our services to that kind of agreement. When you look at the growth rate in the other revenue line items, where most of these services are actually residing, that's where you are seeing the extra juice coming out from these kind of agreements.
I would say between the discipline that we have and the services, the differentiated services that we can deliver to our clients, you can actually see that coming through.
I think you should, Tien-tsin, think about the fact that both our companies are winning clients around the world from each other, but also the growth of geographic expansion, new issuers, new types of issuers coming into the system. It's not my impression that a great deal of growth comes for either of us from just winning a client from each other. I would rather focus on the opportunity that exists in this industry to grow versus so much more there is to do. Remember, 85% of the world's retail transactions are still in cash and check. That's, I think our focus is giving us the benefit of thinking that through in a way that's allowing us to build assets and capabilities to aim for the bigger pie and keep at it over a period of quarters. There'll be quarters when we do better.
I'm sure there'll be quarters when somebody else does better, I'm fine with that. I am more focused on where we're executing for the next few years.
Appreciate that. Thanks.
Your next question comes from the line of Jason Kupferberg with Jefferies. Your line is open.
Hey, guys. Just wanted to build on Tien-tsin's question. Obviously, you've got 14% constant currency growth year to date, if I'm not mistaken, still guiding to low double digits. Just doing the math on Q4 would imply a lot of decel. Is there some rebate timing to consider, or what other factors should we be building into the Q4 model? Does this put you kind of at high end of low double digits at the risk of putting too fine a point on it?
Jason, nice try. No, it's still at the low double digits. What you have to consider for the fourth quarter, and you're absolutely right, year-to-date it's 14%. Actually this is the third quarter this year that we're producing a 14% net revenue growth rate, and we are obviously extremely pleased with that. Yeah, you will see a slowdown in the fourth quarter, and you have to consider two factors. One, we have the USAA roll-off, and that will be pretty much complete by the end of the year from what we understand. Of course, that's a bit more of an acceleration than what we had thought before earlier this year. Secondly, on the rebates and incentives side, it is normal for us in the fourth quarter, just before year-end, to sign a whole bunch of new agreements and renewing agreements.
It's actually nothing different than what we've seen in prior years, you should expect that there will be more rebates and incentives coming in the fourth quarter. Both of these factors will weigh down on net revenues.
Your next question comes from the line of Don Fandetti with Citigroup. Your line is open.
Hi, Ajay. It looks like cross-border is continuing to tick up here. Could you talk a little bit about the comment on the commercial improvement in Europe? Is that just sort of organic, or are you seeing market share gains? Then also, what are you seeing in terms of outbound China? I know some of your competitors have talked about some stabilization or improvement.
The second part, which is that transactional piece of information on outbound China. I think you'll find growth to certain parts of the world, but not to others. It's not coming into the U.S. and Europe as it used to. It's actually going much more to the Asian markets, to Australia, to Japan, to those parts of the world. That's actually similar to what I may have said at Investor Day, but I don't fully recall if that question came up. That's kind of what we have seen on the China part of it. The cross-border growth in Europe, remember when we pointed out commercial in Europe because that's the one thing that's different from prior quarters. It's not as though that's the largest reason for our growth. You've got to take it in context. It's the one thing that's different.
In that, yes, we are seeing the activation of a bunch of programs in commercial in Europe that we had signed some deals earlier. They've come on board. There's a series of activations going on. Our cross-border growth is built off really blocking and tackling on a series of portfolios around the world where our account teams engage with the issuers and the merchant community to look at how to work on cross-border opportunities. This is not a new thing. I think I can recall this for years now. It probably was being done before I even showed up seven years ago. I think it's just a series of focus items in Mastercard around cross-border.
Thank you.
Your next question comes from the line of Darrin Peller with Barclays. Your line is open.
Thanks, guys. Great results. I just wanted a question on the thought process around incentive growth. We've had now, I think, two years of around 20% incentives and rebates growth and obviously outpacing gross revenues. Obviously, there's been a lot of deals. Now I think, Martina, you just mentioned Q4 probably has a step-up also. Just can you give us a little thought process around what's happening in the industry around is it competitive dynamics? Then really with SunTrust and others, should we expect another type of year like that going forward? Thanks.
Sure, Darrin. I don't think for the last couple of years, we are not seeing anything different than what we've seen in the last couple of years. Just to remind everybody, in 2015, we had a step-up in rebates and incentives, given that we signed some fairly mega agreements, right? One agreement with one customer for 10 years, another agreement with another customer for 20 years. So we did talk in 2015 that we had to step up the incentives. The accounting was a little bit different. So in the early part of the years, we are actually amortizing more of those incentives. You see that second year. So the 2016 number is going to be with us in 2017, et cetera. You see the same kind of step-up.
In addition to that, when you look at our results this year, you do see some better revenue rates coming in on the growth side. You will see some more contra being dragged with that. What is happening in the fourth quarter from a renewal as well as from new agreements, in terms of what I am seeing from our business people, we are seeing nothing different in terms of how we are actually signing the agreements. It is just the normal activity and the normal terms and conditions, by the way, that we are seeing in the fourth quarter.
Remember, we actually incent issuers to give us a share of their wallet, and that is built into this thinking. If they grow well in absolute numbers and they also grow well in giving us some share, they actually get a higher percentage discount. This is actually good for us from. It is built in many ways to help with that.
All right. Thanks, guys.
Your next question comes from the line of Sanjay Sakhrani with KBW. Your line is open.
Thanks. Good morning. Martina, when I look at the revenue yields for domestic assessments and cross-borders, those accelerated some. Then transaction processing fees kind of decelerated some. I know you mentioned last call that there was some anniversarying of fee increases. How should we think about the trajectory of those yields going forward?
On the domestic assessment yields, we typically say that they will be trending down over time simply because of what we've been saying that when you sign larger agreements and you're incenting customers to be actually giving more volumes to you, that should be happening. You would have to factor the counter into account. If you just look at the domestic assessments for this quarter and for the prior quarters. You have a little bit of a change in mix coming in. Remember, we've been talking a number of times that when you go and do work in a number of Asian countries, African countries, Russia, Venezuela, et cetera, that those come typically with lower yields. It depends which quarter, which part of the GDP is growing in which country in terms of how the mix is coming in.
In this quarter, we had a little bit better mix coming in. That's all on domestic yields. What was your second question?
No, I guess even the cross-border number on an adjusted basis was up a little bit. Does that just continue? Then the USAA impact, the numbers you quoted, does that include all of it rolling off, or is there an additional drag that we should expect?
Yeah, on the cross-border side, we did have a little bit of pricing action in that. That will be anniversarying very soon. On the USAA side, we believe that our comments are comprehensively assuming that USAA is rolling off by the end of the year. You're going to have to take into account that because this happened all this year, that you're going to have a knock-on impact to the growth rates in 2017.
Thank you.
Your next question comes from the line of Chris Brendler with Stifel Nicolaus. Your line is open.
Hi. Thanks. Good morning. I wanted to ask a question about Europe. Thanks for the disclosure on the co-badge transactions. Does that mean if we exclude these transactions that had very low revenue yields, that your prior commentary on European revenue yield being in the high teens would actually be in the 20s if you exclude these transactions? If you could just summarize for PSD2 and all the changes that are taking place in Europe, can you just summarize the fundamental impact on your business? It seems to be positive at this point, and if it is, just give us a little color on why. Thanks.
On the European revenue yield, first of all, just to make sure that everybody understands where our European revenue yield is. Chris, can you please put us on mute? Chris, can you put us on mute, please?
Sorry, yes.
Thank you.
Well, it sounds pretty exciting wherever you are.
What we have said in the past, our global yield is around 21 basis points. We talked about our competitors' yields because the information was out there be kind of in the 10, nine basis points, and we are somewhere in between. That revenue yields will not change whatsoever by this particular change in terms of not charging de minimis fees on these co-badge transactions. There will be absolutely no impact to that. You should not be assuming that our yield on GDP in Europe is changing. It is not.
The second question?
PSD2.
PSD2. PSD2, the first thing it did or the most important thing it did was to enable access to the consumer bank accounts through a series of what they call PSPs, Payment Service Providers. I think that's going to lead to a series of some more competition, more innovation, and it's something we should expect to happen over the next few years. One thing is for sure, ACH will become even more relevant in the PSD2 environment. You know that we've talked about that when we spoke to you about the reason that we were keen on getting into the ACH space, particularly into the fast ACH space. There are other elements of PSD2.
There's elements to do with strong customer authentication, particularly for online transactions, that depending on how it actually gets rolled out, it could actually create either a hindrance to the simplicity of an e-commerce checkout, or if it's done very smartly, it could actually make it smooth and safer. Obviously, we'd want the latter, but there's many conversations to be had between here and the actual implementation of the stronger consumer authentication philosophy that PSD2 raises.
Great. Thanks so much.
Next question, please.
Your next question comes from the line of Andrew Jeffrey with SunTrust. Your line is open.
Hi. Good morning, everybody. I think it's notable, Ajay, that you're calling out services, not the first time, obviously, as a differentiating point when you bid for business and win business. Given the success you've had over an increasingly extended period of time now, do you see competition, whether from traditional competitors or perhaps new entrants? I don't know off the top of my head who those might be, but do you see folks trying to replicate the services success you've had, and can you comment a little bit on the competitive barriers you think you've erected that can continue to share gains?
Actually, I do see people coming into the system, but our services are not services generically. They are services that very tightly connect back to the idea of an authentication, clearing, and settlement system that gives us the insight into a payment transaction. All our services, be it loyalty and rewards, be it safety and security, be it the data analytics business or our managed services that we do with Advisors, all of these connect back to that idea of being connected to the payment transaction and the moment of truth when that happens. I think we do a relatively good job of tying the two things together when we speak in terms of the logic of why a service we provide would be incremental value add to the clearing authorization and settlement stream.
In a number of these, competitive barriers are only as good as the investment you keep putting into them to keep staying ahead in terms of both technology and innovation. Take safety and security. Anybody who will tell you that they've figured it out on safety and security is probably somebody you should run a mile from, because there is no such right answer. There is a continuous effort of people trying to break into everyone's systems. You read that all the time. You're only as good in safety and security as the effort you keep putting into it to keep your clients having products and capabilities that keep them keeping their promise to their consumers. We recently launched a series of products that use artificial intelligence and machine learning in the safety and security space. We got to keep doing that.
I would tell you we're in the first innings of a baseball game on that kind of space. We're a little better when it comes to tokenization. We are well into the middle of a game. We are better when it comes to EMV. We are well into the latter part of the game. Different aspects of safety and security have got different levels of maturity in terms of what they're solving for, and therefore require different levels of investment to keep them growing and competitive. I think our competitive edge is that we have been allocating capital to these areas and expenses for the last seven years.
It's one of the reasons why I kept telling you I'd like to make sure that you take the expansion of margin off the table as a permanent effort of this company, and instead give you a really healthy margin, but use the revenue growth of the company to invest back in creating competitive and frankly, great differentiators for future revenue for where we're going.
Great color. Thank you.
Your next question comes from the line of James Friedman with Susquehanna. Your line is open.
Hi. Thank you. Martina, at the Investor Community Day in September, you had discussed the same topic of services and you had said that the services division did a 40% combined margin, if I'm remembering right. The thing I wanted to get at is you said that the services margins would scale over time. I was wondering if you could help dimensionalize that, like what's going on with service margins. Did they just scale because this was a really good quarter? Or how should we be thinking about services margins over time?
Here we are just a few weeks after ICM, and you think there will be something different than I would be saying on services. First of all, there is no such thing as a services division, okay? There are many different services that we are actually providing, and here I called out three, but we have a ton other ones. I don't want you to just bundle this together. We bundle it together because it's an easier way of contrasting it to our core business. In terms of what I said on the margin is that when you add all the services, with their many different margin profiles, right back to what Ajay has been actually explaining on the safety and security side together. If you were to add that together, the margin as a whole at this point in time is 40%.
What I also said is that, and by the way, this is not on a fully loaded basis. Things like corporate costs, et cetera, are not in there. What I also said that over time, as we are scaling these services, that we would believe that the margin would increase. Okay? Just to remind you, there was this one chart in ICM where I actually showed which services are at a higher margin level versus which services are lower margin level. The safety and security side was actually really at the higher level. Then we kind of worked our way down. Advisors was the next one down, the loyalty was the next one down, and processing was actually on the lowest side. All of those services we are working to scale and with scale, you will be getting some better margin on these businesses.
Interestingly, I don't look at these as one unit. That's a really important issue. I don't look at a P&L that way. I don't look at the business that way. It's broken up among a bunch of different people. They come in and they talk to me on our monthly and quarterly business reviews. Each of them has a different conversation about what they're doing with their independent units and their businesses, and that's how it's constructed all the way. The real implication actually is that our sales force at the front end is learning how to sell something that's way beyond our traditional credit, debit, prepaid, and frankly, even commercial is not as traditional. These are completely non-traditional in a selling process, and some things they can do themselves. Some of them, they need experts to come help them sell.
We have that kind of sales structure built, and it's constantly changing as well to keep pace with where this space is going. It's a mix of many things that are going into services. I just feel that so long as we can keep it tightly connected to our authorizing, clearing, and settlement business, we are actually building yet another leg of the stool for our company for the next couple of decades to come.
Thank you.
Next question, please.
Your next question comes from the line of David Koning with Baird. Your line is open.
Yeah. Hey, guys. Thanks. I guess mainly my question is just around the PIN share gains that you mentioned that's helped process transaction growth accelerate. I guess first of all, is that share gain sustaining into Q3? Isn't that lower yielding? Because your transaction yield is actually up 1% sequentially, but I would have thought this was lower yielding.
Yeah. You're absolutely right. In the U.S., PIN debit is lower yielding. Absolutely. There's no question about it. How this actually came in, we already talked about this at the last earnings call, is that we did win a couple of PIN agreements. Okay? We showed up on the back of the card. You have to remember, in the PIN debit market, the merchants are actually then aligning the routing. They're choosing the routing over which network to route. There is a second thing that you have to think about in terms of, yes, you can go on the back of the card, but then do you actually get to see the transaction?
We have a very analytical methodology in terms of trying to see how many transactions we want to see, and that actually influences the pricing that we put out in the market every day. You will see our PIN share going up and down. You saw it in the third quarter going up. This is the new agreements coming in. You saw in our three weeks in October, it coming a little bit down. That's why you're seeing a little bit less purchase transactions. You should expect it goes up and down.
By the way, on a previous earnings call or somewhere, I once explained that we go to some of the larger merchants. Their level of sophistication that goes into the decision-making of the routing of a PIN debit transaction is way beyond the price. The price is interesting, and it's kind of table stakes, but they do enormously sophisticated thinking on the time taken for approval, on the number of turndowns, on all kinds of aspects. You can move up and down the routing tables five times a day in some of these merchants, depending on what's going on. It's a little difficult to predict where that goes, but it's lower yield business, so the overall impact on the revenue stream of the company tends to be buffered or, let's say, shock absorbed, but it's an interesting learning for all of us.
Great. Thank you.
Your next question comes from the line of Tim Willi with Wells Fargo. Your line is open.
Thank you, and good morning. I just wanted to touch on the comments around loyalty and just in general, when you talk with merchants, with banks about that topic. I guess, is there any sort of new dynamic or way that they are thinking about approaching it, particularly with the continued evolution of mobile payments, shopping in store? Just anything you might be able to add there and how you think about the momentum around that business line.
There's actually a series of things going on in loyalty and rewards. One of those, you've actually picked the correct topic, which is e-commerce, digital mobility, that whole space. If you think about this, it's almost like simple things like cashback become even more attractive. Even voucher management and the management of keeping track of your loyalty rewards card number and how it all accumulates into that, all those become very important, even more so than in the physical world. The loyalty business has got many elements to it. It's got the accumulation of rewards. It's got the offers every day that go into the system. It's got the aspect of what's funded by banks and what's funded by merchants.
It's got the aspect of are you a complete program manager in some markets, or are you only providing a portion of the service and only a portion of the value chain. As you know, we bought Pinpoint in Asia and Australia. Pinpoint is a complete program manager. Truaxis, on the other hand, is a merchant reward-generating engine, which is not a complete program manager, and it's something we bought a couple of years before Pinpoint. We've got a series of different capabilities now in the company, and in some ways, we are probably one of the more interesting global players on loyalty and rewards. You've got to package it very tightly with, as I said, the clearing, authorizing, and settlement business, whether in digital or in the physical space.
Great. Thank you very much.
Your next question comes from the line of Tom McCrohan with CLSA. Your line is open.
Hi, thanks. I'm just trying to get a sense of trajectory of operating expense growth going forward and just looking at history was averaging high single digits, a little higher than that this year. I know you don't want to give forward guidance at all, but maybe you can just speak to maybe the intensity of investment spending. Has it gotten more intense recently given all the geographic expansion, all the digital changes, everything that's going on in this space? Thanks.
Look, clearly, Tom, over the last couple of years, I would say over the last three years, the intensity of the investments has really taken off. Just imagine what have all happened in the digital space. A significant amount of spend went into the digital space. In addition for us to be developing all of the services. What we did from an Advisors point of view, from a data analytics point of view, from a loyalty and from a safety and security investment point of view, some of the investments that Ajay was talking earlier about was very important for us to do. Some of the numbers are masked in terms of when you look at the foreign exchange hedging activity that came in in 2015, which actually was a benefit there for us. In 2016 it was a drag.
When you actually take that out, our operating expense growth is relatively similar. We would continue to expect that we will have to invest. Yes, I am not going to go into 2017, but as you can see, for 2016, we really have not changed our forecast at all in terms of how we think we are rounding out this year, which is the low double-digit growth number that we gave on a currency-neutral basis.
I'll add one element to that conversation. The discipline that Martina has in our company around acquisition is that at the end of 2 years, the acquisition becomes part of our base. When we talk to you, we're talking about our base expenses as well. The acquisitions we are doing, because it's the kind of industry we're in, don't exactly come fully loaded with revenue and unloaded with expense. They tend to come with capabilities that bring expenses and revenues that we need to build over a period of years by putting them together with what we sell. Typically, the timing lag of that creates a higher growth rate on expenses than on revenues for the first few years of owning that property. That's part of what we're talking about when we talk about putting investment capital and expense dollars to work.
The acquisitions are all in areas of strategic growth opportunity for us. A number of them are in the services space that Martina was loosely talking about a little while ago, that's kind of what we're putting our capital to work at. A lot of our expenses, aside from the acquisitions, tend to go into the digital space because that's where a lot of opportunity will get laid out over the next decade. Revenue is not as much as staking out capabilities right now.
Next question, please.
Your next question comes from the line of Chris Donat with Sandler O'Neill. Your line is open.
Good morning. Thanks for taking my question. Ajay, I wanted to go back to something you said in your prepared remarks about inbound cross-border volume into the U.K. being strong. I'm just trying to understand how sustainable this might be, and I'm wondering if you can comment on anything from historical examples of devaluations or sort of the opposite case where the Swiss franc appreciated in January 2015, and how that affected outbound volumes with Switzerland. Just trying to understand if U.K. is going to see a lot of inbound volume for months or years here.
First of all, I'm glad you called them prepared remarks. Barbara is always nervous when I'm speaking because she's tracking all that I've said, and it doesn't always follow the script. I will use your comment as proof of my being relatively thoughtful. The second part is the U.K., which is your real question. I'm just cracking up on you. I'm taking it out on Barbara for 10 years of this. The U.K. Be careful about assuming that a lower currency will necessarily lead to inbound travel, either tourist related or business related. It works in a place like the U.K. because it is one of the world's most attractive tourism destinations. If you drop the currency value in Venezuela, it doesn't lead to anything. It does in the U.K. because of the nature of the U.K. being what it is as an attractive location.
In addition, what we are seeing really in the third quarter, I don't know whether I can tell you right now off the top of my head. I actually don't know whether the breakup is commercial traffic or tourist traffic. Unless Martina knows that, I don't know it today. I do know that you can't assume that tourist traffic or even business traffic will necessarily follow the pattern of a currency moving around. Right now, there's no doubt that in the U.K., tourism's up, one. Two, there is a great deal of re-interest in acquiring assets of the United Kingdom. If you are sitting outside of the U.K., the values of assets from the U.K. have not only gone down by the change in the currency, but they've also gone down by the extreme reaction that the market had to the fears around Brexit.
That has also created a level of interest in people traveling in to look at assets in the U.K. Again, I don't know if that'll persist because the latest U.K. GDP report actually shows the Brexit response to be kind of what I'm saying, which will take time to come. It won't happen this quarter in terms of real GDP change. This may change the valuation of market assets in the U.K. I wouldn't draw too many conclusions either from the past, or even the U.K. specifically, for where this is going.
Just one thing to add. For the main travel destinations, we are seeing some of this over the last 10 years. When you look, for instance, where the U.S. dollar is trading versus where the GBP is trading versus where the EUR is trading, tourists are actually relatively sophisticated who go to these kind of locations. We have seen that the tourism travel is getting adjusted. If people are coming to New York or if people coming to London or people going to Paris, that people are adjusting their travel plans because of some of the facets of the currency. We've seen that over the last 10 years. As Ajay said, that does not expand to many other countries. It's really for the top tourist destinations.
Shopping destinations. The U.S. right now, inward tourist traffic is down with the U.S. dollar being strong, whereas outward travel by Americans is quite strong. Those are all just natural things that we all do as well.
Operator, I think we have time for one last question.
Your last question comes from the line of Lisa Ellis with Bernstein. Your line is open.
Hi. Good morning, guys. Thanks for squeezing me in. One quick Martina question. It did look like underneath the covers, Asia volumes were a little bit unusually low this quarter. Was curious what was driving that. Then for Ajay, it looks with this flurry of announcements around wallet interoperability and convergence, it kind of gets a little bit complicated in terms of what's going to be accepted where. How do you just envision how Masterpass will play into the overall wallet landscape and how you see it evolving? Thanks.
Yeah, Lisa, first on the volumes, you're absolutely right on Asia-Pacific. The volumes year-over-year are a little bit lower. China plays into that. We are now at low single digits from a China growth point of view. That was higher last year. Australia, India, Indonesia also had a little bit of lower growth.
Masterpass. Masterpass, my view is that on a small mobile screen, it's unlikely that merchants on their checkout page for browser, I'm talking browser right now, which is still the largest portion of digital commerce and probably will be a very large portion for the next four or five years. It's very unlikely that you're going to find them putting many different wallets up in the checkout page because the total space available on a mobile phone is relatively restricted. Therefore, there's going to be some kind of trend towards creating the right infrastructure of wallet acceptance over time. I think you'll find with the kind of things we're trying to do, we're trying to ensure that one of the brands on the checkout page is Masterpass.
Because if you could put your digital wallets as well as your user wallets to all using Masterpass as an acceptance brand, then that's a good thing. In our view, I've said this many times, Masterpass is not a B2C effort. It's a B2B effort. What I'm doing is not just building wallets because a bank could have their own wallet, a merchant could have their own wallet, or they could take a wallet from us private label to open APIs. That doesn't matter. It all can come through in a safe, secure way using tokens, come through a Masterpass acceptance mark. The idea is to build all our services capabilities onto open APIs. We've already done that in a substantial way. If you go to mastercard.developer.com or developer.mastercard.com, I think I'm mixing up what came first and what came later. That is developer.mastercard.com.
You will find that it's relatively easy if you do strike a deal with us to get the cryptogram to unlock the API, to then connect it up to your capabilities, either as a merchant or an issuer. I'm seeing Masterpass not as a wallet. I've said this for a long time. I see Masterpass as a digital strategy and as a future brand for our company. I see the Masterpass system as an acceptance system that enables safe, secure payments, that enables open APIs to be connected to that for services. That's the offering which is very partner-centric. It enables issuers to own their consumer experience by making it digital by default and connecting it to their online banking app. It enables digital giants to create a seamless acceptance system, and it enables merchants to not have to repeat their acceptance capabilities time after time.
Once they're on Masterpass, they can accept the others. That's what we're trying to do.
Terrific. Thank you.
Okay. Ajay, you have some closing comments?
Oh, yeah. Sure. Okay. A couple of closing thoughts, just to sum up, I think our business continues to perform well. I think you see that reflected in our strong revenue and earnings growth, and that despite the usual uneven global economy that everyone talks about. I think we are executing well against our strategy. We have our ups and downs, we are executing consistently, growing our share, continuing to leverage services as a strategic differentiator to further drive our core business around the world. We're in a very dynamic industry, just as I was just talking to Lisa, we are working very hard to deliver a secure digital payment experience for consumers using Masterpass across all devices, all channels.
Of course, I continue to believe in the long runway driven by strong secular growth opportunities that we have, we continue to hopefully position ourselves well for that future. Thank you for your continued support of the company. Thank you for joining us today.
This concludes today's conference call. All participants may now disconnect.