Good morning. My name is Chris, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Mastercard third quarter 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 would like to ask a question during this time, simply press star followed by the number 1 on your telephone keypad. To withdraw your question, please press the pound key. Thank you. Barbara Gasper, Head of Investor Relations, you may begin your conference.
Thank you, Chris. Good morning, everyone, and thank you for joining us for a discussion about our third quarter 2015 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. 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, you will need to register again following our prepared comments. This morning's earnings release and the slide deck that will be referenced on this call can be found in the investor relations section of our website, mastercard.com.
These documents include a reconciliation of non-GAAP measures to their GAAP equivalents and have also been attached to an 8-K that we filed with the SEC earlier this morning. A replay of this call will be posted on our website for one month. 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 will now turn the call over to Ajay.
Thank you, Barbara. Good morning, everybody. With the backdrop of this continuing uncertainty in the global economy, we're actually quite pleased with our results this quarter. After adjusting for currency, we reported net revenue growth of 8%, in line with what we thought we would get, and an EPS growth of 11%. This excludes the impact of a special item. Martina will touch on that later. Now let's take a quick look at what's going on in the global economy. You know it's been challenged in recent months. While the U.S. recovery remains among the most solid, job gains have steadily lowered the unemployment rate to just over 5%. Job and wage growth are starting to slow. Consumer confidence is only moderately up. As we know, given yesterday's announcement, uncertainty about rising interest rates remain.
When moving beyond the U.S., the economic picture is more mixed. Global growth is clearly slowing, particularly in smaller emerging markets, and a sharper-than-expected slowdown in China is affecting many other economies. Exporters to China and those with close trade links, Russia, Brazil, for example, would probably be the most impacted, adding to the downward pressure on oil and commodity prices. In Asia, India is less dependent on global demand and should continue to grow. In Australia, consumer and business sentiment has weakened again as their economic growth has slowed for what is now the fifth consecutive quarter. Growth in Europe, on the other hand, is improving, but not as fast as previously expected, and the unemployment rate continues a gradual decline. The U.K. remains steady.
Economic growth is expected to continue through the rest of this year and into next year, Germany is also showing some signs of strengthening. In Latin America, Brazil continues to be in a recession. Economic conditions continue to worsen in Venezuela. The lone bright spot there appears to be Mexico, where the economic recovery continues, led by relatively strong consumer spending and the lowest levels of inflation in almost 50 years. When you put all this together, what we're really talking is some period of economic uncertainty fueled by the slowdown in China, combined with continued lower oil and commodity prices, as well as this continuing uncertainty about rising interest rates in the U.S. Overall, we remain cautious about the outlook for the global economy. Having said all of this, our business continues to grow. Our fundamentals remain strong.
We are seeing double-digit volume and transaction growth across most of our markets as a result of our efforts to drive the shift from cash to electronic payments, but also as well as our continued business growth. Before we go to our business highlights, I want to say a few words about the opening of the Chinese domestic market. Since the final Chinese regulations have not yet been released, we have no new insights to add beyond what we all told you at our recent Investor Day last month. We continue to execute against our plans to be technically ready to process domestic Chinese transactions by the end of 2016, and we're working on expanding issuance and acceptance in that market while we wait for clarity on the regulations. Now onto some of our recent business activity. You've already heard a great deal from us at Investor Day.
You've had an opportunity to see firsthand a number of the product and service innovations we are rolling out. Let me just mention a couple of items very briefly. First, we continue to grow in the co-brand space. In the United States, we are pleased to be able to confirm our agreement with JetBlue to launch a new co-brand credit card and convert their existing credit card portfolio. Barclaycard will be the issuing bank. We also won several other co-brand deals around the world, including CITS. That's the largest travel company in China. Coles, the largest supermarket chain in Australia, and of course, one of the co-brands for Aeroflot. Aeroflot has a number of co-brands. We've won one of those. They're the largest Russian airline, as you probably know.
We've also signed a strategic partnership with Citi for an affluent co-brand with a large global airline based in the Middle East. Moving beyond specific customer agreements, I'd like to talk a few minutes to you about some other developments going on in our space, in the payment space in particular. Let's start with EMV in the United States. As you know, the liability shift went into effect October 1st. We're kind of pleased with the progress we are seeing thus far. We now expect 60% of cards and approximately 40% of terminals in the United States to be chip-capable by the end of this year. By the way, this is true for us, but it's true for the industry as a whole.
We expect almost all cards in the market to be upgraded to chip by the end of 2017, and we've already seen tens of millions of chip transactions. By the way, another little side benefit of EMV is that it'll likely give a boost to the adoption of contactless or NFC payments because the latest generation of EMV-enabled terminals also contain contactless capabilities. That kind of leads me to the next topic I'd like to talk about, which is to give you a quick update on the progress we have made in the digital space. Over the past year or so, you've heard us make several announcements related to Masterpass. Just to put it together for you, we're now live in 24 markets. We are accepted at over 250,000 merchants, a list which recently added Burger King and Firehouse Subs.
In addition, we recently announced Masterpass will be fully tokenized using our MDES platform. That's M-D-E-S, starting with the United States in 2016. That'll give consumers EMV-level security and the ability to shop more securely online or in-app from any device across all card types. Let me give you one example of a breakthrough which can really drive the growth of Masterpass. Despite the challenges going on recently in the Russian market, we are working hard to extend our capabilities there. In fact, recently, we just had a partnership announced with Yandex Money, one of the largest payment service providers in Russia, that extends the use of Masterpass to their 22 million customers.
Talking about scale, the State Bank of India, which is the largest bank in that country, it's got more than 15,000-plus branches, have also launched their mobile wallet solution with the help of Mastercard. That solution enables consumers to load money, perform a P2P transfer, pay bills, things that the average consumer in India is really keen to get with. The State Bank of India is the right partner for that. Now, as you know, we've been putting a lot of emphasis on tokenizing transactions using MDES. Most recently, you've heard about Android Pay and Samsung Pay, who've been added to the list of providers leveraging that service. As we said before, we were the first network to extend support for private label cards. In fact, Kohl's and JCPenney have now gone live with that service.
In addition to small business cards, we were also the first network to announce tokenization for all commercial cards. All that means is that all of our card products and channels can soon be tokenized, so it becomes ubiquitous for us. We also announced the launch of our Digital Enablement Express program, which basically expedites the process of digitizing and tokenizing accounts using MDES. Any financial institution can gain immediate access to all our latest digital payment services, while our partners, that's digital wallet providers, device manufacturers, other digital payment providers, they can all have a simple onboarding process to engage with all these participating banks. Google, Samsung, Capital One, Fifth Third Bank, KeyBank are among the first companies to announce their participation in the Express program.
The Internet of Things, something everybody's been talking about, continues the convergence of the physical and digital worlds that began with mobile devices. That new generation of connected devices, smartwatches, wearables, this will collect and transmit vast amounts of data, and the idea is to be able to use that to provide new insights, new services. To give you an example, data from a smartphone indicating that a consumer is in a retailer's store location could trigger a discount offer for using their credit card. Now, that could sound futuristic, but to help fulfill that vision, we've actually just launched a new digital enablement program that'll turn any accessory or wearable into a payment-enabled device. That gives consumers the ability to shop using the thing that is most convenient to them with the highest level of security available.
That program will launch with the support of several marquee partners across multiple industries. Prototypes from a fashion designer, Adam Selman, automaker General Motors, smartband developer Nymi, and fashion brand Ringly were all on display using our technology at Money20/20 just earlier this week, and we worked with NXP and Qualcomm to develop the technology, and Capital One is actually the first issuer to embrace it. In addition, Capital One has also announced the availability of contactless mobile payment capability to its wallet app and actually becomes the first issuer in the U.S. to do so using our cloud-based payments technology. These announcements kind of endorse how we're trying to advance our digital strategy, eliminate the boundaries of how consumers pay by delivering a secure digital payment experience to virtually anything. Every device can be a device of commerce. That's the idea.
Mobility, cloud-based payments, the Internet of Things, and big data are all coming together. EMV, contactless, and our MDES-enabled secure transactions across all channels, all devices. As new players enter the digital payment landscape, we continue to see our technology as the foundation for new innovative payment services. With that, I'm going to turn the call over to Martina to update on our financial results and operational metrics. Martina?
Thanks, Ajay, good morning, everyone. Let me begin on page three of our slide deck, where you see the difference between non-GAAP reported and FX-adjusted growth rates for this quarter. The differential continues to be primarily driven by the euro-U.S. dollar exchange rate. These figures also exclude the impact of a special item of $70 million on a pre-tax basis.
Seventy-nine
$79 million on a pre-tax basis taken this quarter related to the termination of our U.S. employee pension plan. I'd like to point out a few items here, then I'll talk about the major P&L line items in subsequent slides. First, EPS growth was 5% or 11% after adjusting for currency. Continued revenue momentum, good cost control, executing on our tax strategies, and repurchasing shares all contributed to that performance. As expected, acquisitions that we made in 2014 and 2015 drove $0.03 of EPS dilution in the quarter. Second, the tax rate was 28.2% in the quarter, primarily due to our continued focus on better aligning our tax structure with our business footprint. Third, share repurchases contributed $0.02 per share to our third-quarter results. As of October 22nd, we have $1.2 billion remaining under our current authorization.
Lastly, cash flow from operations was $1.3 billion, and we ended the quarter with cash equivalents, and other liquid investments of about $5.1 billion. Let me turn to page four, here you can see the operational metrics for the second quarter. Worldwide gross dollar volume or GDV was up 13% on a local currency basis, and that's pretty much the same as the last quarter. Overall, our U.S. dollar GDV grew 8%, made up of credit and debit growth of 9% and 7% respectively. Total U.S. GDV was up 1 PPT versus last quarter, with stronger growth in our consumer credit programs offset by slightly lower growth in our debit programs, primarily due to lapping some debit wins and a continued 2 PPT headwind from lower gas prices. Outside of the U.S., volume growth was 16% on a local currency basis.
It's again same as the last quarter, with mid-to-high teens growth in each region. Cross-border volume grew 16% on a local currency basis, slightly lower than the 17% we saw in the second quarter, primarily driven by Europe. Turning to page five, here you can see global process transaction growth slowed slightly to 12% from the 13% we saw in the second quarter, primarily driven by fewer PIN POS transactions in the U.S. We continue to see double-digit growth in all other regions. Globally, the numbers of cards grew 8%, with 2.2 billion Mastercard and Maestro-branded cards issued. Let's turn to page six for highlights on a few of the revenue line items. Net revenue growth was 2% as reported or 8% FX-adjusted given currency headwinds.
Additionally, the impact of local currency exchange rates was slightly higher than we expected at about three PPT, primarily driven by the Russian ruble to the EUR and the Canadian dollar to the U.S. dollar exchange rates. After eliminating all impacts of currency, our underlying net revenue growth was 11%. Acquisitions contributed about one PPT to that net revenue growth. Looking quickly at the individual revenue line items on an FX-adjusted basis. Domestic assessments grew 9%, while worldwide GDV grew 13%. This four PPT gap is primarily due to the impact of local currency, somewhat offset by pricing. Cross-border volume fees grew 11%, while cross-border volume grew 16%. Of the five PPT gap, the majority is due to a higher mix of intra-Europe activity, some local currency impact, as well as lower inbound U.S. cross-border volume.
Transaction processing fees grew 16%, primarily driven by the 12% growth in processed transactions and some pricing. Finally, other revenues grew 15%, driven primarily this quarter by our safety and security products and the APT acquisition. Moving on to page seven. Here you can see that total operating expenses, after excluding the special item, increased 1% in the quarter or 5% on an FX-adjusted basis. Of this, M&A activities contributed almost four PPT to total FX-adjusted expense growth, and you can see the impact acquisitions had to the individual expense categories in the lower box there on the chart. After excluding the special item, the growth in G&A of 3% or 6% on an FX-adjusted basis is mostly due to the impact of acquisitions. Finally, most of the increase in D&A continues to be also related to acquisitions.
Turning to slide eight, let's discuss what we have seen in October through the 21st. Our business drivers are similar or just a bit lower compared to the third quarter. The numbers through October 21st are as follows. Starting with processed volume, we saw global growth of 12%, which is unchanged from the third quarter. In the U.S., our processed volume grew 7%. That is also unchanged from what we saw in the last quarter. Processed volume outside the U.S. grew 17%. That's about one PPT lower than the third quarter, with similar growth in Europe and slightly lower growth in the other regions. Globally, processed transaction growth was 11%, down one PPT from what we saw in the third quarter, with double-digit growth in all regions except the U.S., which grew in the low single digits.
This slower U.S. growth was driven by routing decisions of PIN debit transactions. With respect to cross border, our volume grew 14% globally, two PPT lower than our third quarter growth, with slower growth in all regions except the U.S. Our APMEA region saw the largest slowdown, driven by the timing of holidays in the Middle East versus last year. Moving on, our volume and transactions metrics, as you can see, show that our underlying business remains strong. When looking at our full year 2015 outlook, it's mostly unchanged from my comments last month at our Investor Day. I'll just quickly call out a few items that have changed very slightly or need some clarification. First, similar to what we saw in Q3, we now expect a slightly higher local currency headwind of about three PPT in Q4, which primarily impacts net revenue.
When you combine this with the impact from FX translation, the total expected impact of currency on our results continues to be an 8 to 10 PPT headwind for fiscal year 2015, depending whether we're talking about revenue or net income. Turning to rebates and incentives, we continue to expect the full year 2015 growth rate to be similar to the growth rate we saw in Q1. However, the individual quarterly impact has changed slightly due to the timing of some deals shifting from Q3 into Q4. When looking at expenses, we haven't changed our expectations for total operating expense growth, but we have had several questions on this topic as some of you work on your models.
When I spoke previously about expecting mid-single digit growth for full year 2015 on a, quote, "as reported basis," so that excludes any of the special items taken this year, but it does not exclude the impact of last year's Q4 severance charge, as that was not a special item. Let me just make a quick comment on our 2016 to 2018 performance objectives that we announced at Investor Day last month. Based on some conversation that we've had, I'd like to clarify a couple of points around how we look at our long-term performance objectives to help you with your modeling. First, our objectives represent a compound growth rate over a three-year period. As you know, actual performance could be above or below our stated three-year objective in any given year.
Factors that could impact any individual year include things like the economic environment, the impact of local effects that we don't adjust for, or market share changes. In fact, we expect that we will likely see 2015 come in lower than the range of our 2013 to 2015 objectives based on the first two factors I just mentioned, even though we expect to meet our three-year objectives. Second, I said at Investor Day that our 2016 tax rate would be about 29%, higher than our expected 2015 rate, since we don't expect the discrete and one-time items that already have or could occur this year will repeat in 2016. Remember that our practice has been to adjust for one-time tax items in the base year from which the three-year EPS CAGR is calculated.
We will be providing you with a pro forma fiscal year 2015 EPS figure on our year-end earnings call based on a normalized 2015 tax rate. As you begin to model out future years' performance, you need to factor something about this into your thinking until we have the final numbers to provide you at the end of 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. Chris?
Thank you. At this time, I'll just remind everyone that if you would like to ask a question, that's star 1 on your telephone keypad. The first question is from Donald Fandetti with Citi. Your line is open.
Good morning. Ajay, I was wondering if you could, just given the volatility of the economics around the world and a little bit of a dip in cross-border this quarter, although last year you had a similar sort of holiday seasonal dip, is there any concern structurally about cross-border, or do you feel like it's likely to remain on track despite what's going on?
Yeah, I think it's more likely to remain on track despite what's going on. Just the reality is when the dollar is strong, you're going to get some lower inflow into the U.S. of tourism. We have seen more Americans travel overseas over the last six, seven months, and that does show up in some of our results in terms of acquired volume in countries overseas. The Europeans seem continue to be traveling, but they travel more in Europe and outside than two, three years ago. There's kind of these trends moving around. Fewer Chinese are traveling overseas, no doubt, and that's all part of it, the way the Chinese economy is. You see ins and outs. I don't think I can give you a clear prediction of where it could go, but I don't see any structural change, if that's what your question was.
Okay, that's helpful. Chase Pay , what do you think from a network perspective, and are you just waiting to see if any of your issuing banks decide to pursue some type of ChaseNet type approach, or do you feel like that's something you might push the issuers to kind of maintain market share?
Well, you've got to remember that ChaseNet is a very unique piece for Chase, which has a certain size of an acquiring business and a issuing business, and they tend to be similar size in terms of market share, and they own the acquiring business. There aren't a lot of other banks around the world that do that directly. It doesn't mean there isn't potential to be discussed with every one of them. A lot of them were interested when the first set of announcements came out. There is lower interest over time because people are still trying to figure out what the benefits and the pluses and minuses, the plus and takes are on it. I don't think there's clarity yet, the conversations continue in all kinds of countries.
We've done something similar in a couple of countries overseas, it just depends on the construct of a country.
Great, thanks.
The next question is from Bryan Keane with Deutsche Bank. Your line is open.
Hi, guys. Just hoping to get some comments on USAA's bank, I guess their flip over to Visa. I guess they were talking about the benefits including the elimination of foreign transaction fees. Just trying to get a sense of what exactly happened in your guys' eyes there. Thanks.
USAA is a long-time client of ours, and we actually think they're a very good client. It's pretty sad for us that inside the company, we feel bad about the fact that we no longer have them as our client over the course of the next year. We're still going to be doing work with them on services, on rewards and debit processing, and in that form, we'll remain in contact with them. The fact is that we tried our best to pursue that business, but at a point, we lost out, and that's just the way it is.
Yeah. One thing I just want to jump in, we knew this unfortunate loss before we actually had our Investor Day . For all of those who had asked Barbara over the last few days, we had actually factored that already into our long-term guidance.
Yeah. What kind of impact will it have on the numbers in 2016 or 2017, Martina?
Well, as you know, Bryan, we are not calling out individual years. We factored it in for a three-year period, we feel like that we can digest that given the kind of targets that we put out there.
Okay, super. Thanks.
The next question is from Glenn Greene with Oppenheimer. Your line is open.
Thanks. Good morning. Martina, maybe you could go back through the expense growth guidance. Looked like the margins in this quarter were way above our expectations, and I suspect generally most people. Could you clarify what you're sort of suggesting or is implied for the fourth quarter expense guidance as it relates to that mid-single-digit reported expense growth?
Yeah. Guys, you have now three quarters of actuals. For the full year, what you're going to have to do from an as-reported basis, which is excluding the special item, right? You're excluding that $79 million and last quarter's litigation reserve that we took. Exclude those, for the whole year, you should be lining up the fourth quarter so that you're getting into mid-single-digit growth for the full year of 2015.
Weren't you suggesting an adjustment from last year too, though?
What did you say?
Weren't you suggesting there's an adjustment to make from last year's numbers as well?
No. What I was suggesting, you're not making adjustments for the 2014 numbers. You might remember that in Q4, we took a severance charge of around $87 million last year. That was not a special item, so do not pull that out. You need to put that and keep that into the base expenses when you do the calculation of mid-single-digit growth.
Okay, great. Thank you.
The next question is from Tien-tsin Huang with J.P. Morgan. Your line is open.
Hey. Great, thanks. Good morning. I just wanted to ask a follow-up on USAA. Been thinking about it a little bit. Just trying to better understand how you balance pricing discipline, which I think was mentioned in a few articles, with the indirect cost of losing economies of scale, given that it's such a big client. I know Visa is obviously bigger, and they're going to get even bigger with this win and Costco. Just trying to understand those dynamics, if that makes sense.
Yeah, sure, Tien-tsin. Actually, in terms of economies of scale, this is not a material enough dimension to move when you've got tens of billions of transactions and so many clients. Look, we win business and we lose some business. It's the nature of our business. When it's very large, it can make an impact to the way we think.
Remember that Chase was a very large movement away, and we still navigated our way through the years, delivering on our three-year commitment. USAA is nowhere near the size of Chase, you all know that. It's well factored into our thinking, but it's not a scale versus pricing issue. At the end of the day, it's not just pricing. There's a lot of factors that go into winning and losing deals. Pricing is one of them. Pricing is always a first conversation in a B2B business. We kind of felt at some point in time this was a business we couldn't win, and we had to get away from it. It's very sad because as I said, good client and somebody we've had for 30 years, but we're gonna still keep doing business with them in portions of processing with rewards and the like.
Got it. Appreciate that. Thanks.
The next question is from Jason Kupferberg with Jefferies. Your line is open.
Hey, guys. Just wanted to ask a little bit about the commercial business. We've been doing a lot more work on that. Seems like you guys have a really good position in the virtual card space, specifically within commercial. Can you talk about some of the growth rates you're seeing here, maybe which verticals are driving some of the strength in virtual specifically and the commercial business more broadly? Just a quick one for Martina on buyback authorization. Any reason we haven't seen a refresh on that now that you're down closer to $1 billion left?
Martina, you want to cover off the buyback first?
Look, Jason, we have a particular cadence in terms of established of the last many years in terms of the buyback authorizations, I don't think we ever had a reauthorization when we were still over the $1 billion mark. That's a decision that will be taken at some point in time. At this point in time, we still have plenty of opportunity and room left on the current program.
Jason, back to the commercial cards. I think we continue to be an area of growth. We did spend a little time, as you remember, at Investor Day on the topic. We've recently signed a deal with Barclays in the U.K. We're continuing to see sort of strong adoption of our product, Smart Data, which is our reporting and reconciliation tool, as well as InControl, which is the virtual card question you were getting at. What I'm also seeing is some increasing interest beyond the typical bank card issuers, you see technology providers who kind of embed commercial payment solutions either into their software or their platforms, as well as some payment aggregators in verticals like insurance and healthcare. All in all, this global business remains robust.
We are looking at low double-digit volume growth over the past several quarters. There's no doubt that virtual cards are a key part of that growth area. As you know, InControl, when we bought Orbiscom years ago, InControl came with some IP protection around the virtual card space, and it's embedded into what we are doing in the commercial space.
Thank you.
The next question is from Sanjay Sakhrani with KBW. Your line is open.
Thanks. I just wanna go back to some comments of yours, Ajay, on the ChaseNet deal and how you guys have a similar product. I was just wondering, specific to the U.S., have there been a steady stream of discussions with some of the banks that are able to do it, and what's their interest level? Thanks.
There've been discussions over time. I wouldn't call it a steady stream. It's kind of some banks pursue it for a period of time. Others come in and out of the discussion. I'd say every once in a while there are conversations on it with different banks here. There's nobody else who's got that same position. Yes, it's something that we're doing overseas, as I said, in some countries, and there's always the opportunity to do it in the U.S. as well if the stars and the moon align.
One quick follow-up on EMV. You guys mentioned a pretty big number of EMV-capable terminals, but how many are actually using it?
40% of them are capable is what I said. I actually don't have a specific number on the top of my head as to how many are using it. We've seen tens of millions of EMV transactions already between these last few weeks. It's picking up. I'm quite hopeful that the way the payment security task force that was set up between the industry and merchants some time ago, that payment security task force had some assumptions on how cards would get replaced and how terminals would get upgraded. While the end of 2017 is when all the cards get replaced, it's actually not a linear line till there. It's pretty high already at 60 odd % by the end of this year. I think by the end of next year, it's mostly done with a few left in 2017.
It's a similar trend for terminals, but remember, smaller merchants will take longer because they've got to work through the ISO network, and there's a whole game out there to be played. Over the next couple of years, it should be quite well embedded.
Which by the way, is much faster than we've seen in any other country around the world.
Okay, great. Thank you.
The next question is from Chris Brendler with Stifel. Your line is open.
Morning. Another question on Chase Pay and Masterpass. Can you just talk about your strategy and today for merchant adoption on the online wallet side?
Yeah. You're talking about the recent announcement at Money20/20 when Chase Pay talked about linking up with MCX, right?
Well, that's what-
Chris, if you have a headset on or something, you're cutting out
Hey, Chris.
Chris, we can't hear you.
Better?
Much better.
Got it. This is a 2-part question. One is, I guess, primarily in the U.S. for Masterpass in the online space and trying to compete with PayPal and all the other competitors that are targeting that space. It just doesn't seem like we've seen a lot of traction. We've got some big-name merchants, I just don't understand exactly why merchants aren't eager to adopt something that would help consumers check out. The second part of the question is, when it comes to MCX, just any current thoughts on the competitive threat there. Do you expect it to be included in MCX at some point? Do you expect to also include your 2-stage wallet fee as part of any arrangement with MCX? Thanks.
The first part, the part about adoption. Building acceptance is a relatively long marathon, we've kind of all forgotten that because we built it in the physical space over a period of time with cards. As cards became more and more ubiquitous, acceptance tends to roll out faster. We know what it's like to build acceptance in emerging markets, for example, where the infrastructure may not be as strong or where the number of cards in people's pockets may be lower. It's a little bit of a chicken and egg. Merchants begin to accept electronic payments when there's enough pull from consumers for that. Consumers also tend to pick up electronic payments when there's enough acceptance for them. This symbiotic thing takes a little time to pick up a roll on a mountainside, a bit like a snowball rolling downhill.
Think of it that way, it's pretty much the same here. PayPal's been around for a long time. They've done a very good job of building their acceptance. We've only started a little while ago. I think as you make progress on building acceptance on this, you get chunks of merchants at some times, and at other times it's a one-by-one kind of thing. One of the things we have learned is that it's really important to build acceptance for this in the day-to-day merchant usage category because that'll encourage consumers to use their Masterpass wallet or their bank wallet more often. The moment you do that, the merchant gets reinforced that this is a good thing to connect up with, and that's what we're trying to do.
You'll see us make a lot of effort on this as you see the whole industry making efforts over the last year or so. You'll see us all doing this for the next couple of years. Don't judge Masterpass or the digital payment system as a whole by a sprint. Judge it as a marathon. Otherwise, by that logic, none of the current mobile payment or digital payment systems have reached any scale. Don't do that because I think it's a cumulative effect over a period of time. That's the way I'd look at it.
Okay, then on MCX?
I think MCX is interesting. I haven't changed my opinion about my previous view. I haven't yet seen anything new roll out from them. I consider them to all be very large and useful merchants with whom we have many relationships. We're kind of working with all of them. We'll see when they launch something, and what the consumer experience is. Finally, in digital payments or mobile-based payments, a lot of this is going to be about the consumer experience because if it's going to be clunky, then what problem are you trying to solve with that technology that the consumer's feeling today with a card. You're not solving for their convenience and for the ease of use. It's all about the consumer experience in addition to all the other elements of the ecosystem. I'm waiting. I'm working with them. We meet them.
We talk to them. We'll see. The staged wallet fee is very much something that's a principle policy in our company. We believe that if you were to take funding sources from different sources and not provide clarity to the merchant, the consumer, and the issuing institution at the end of what funding source was used for what purchase, you're kind of mixing up a lot of things. You're mixing up a lot of the issues in the marketplace, including how you provide customer service and the value of different payment systems, both for the merchant and the consumer and the issuing bank. We've kind of got a policy around that, and we're sticking to that policy.
Great. Thanks so much.
The next question is from James Faucette with Morgan Stanley. Your line is open.
Great. Thank you. Just wanted to follow up on the debit business. Just wondering if you could give more details in terms of what happened to the PIN debit business in the past quarter, and if those same factors will continue in the coming quarters. While we're on the topic of debit, I'm just wondering, too, if you could share with us your thoughts on what you potentially see in terms of the competitive dynamics in the signature debit market, given that one of the largest acquirers will be entering that market next year.
First of all, on the first question, Smitty. Look, the PIN POS business is a tough business, right? It's a very competitive business. We've been explaining to you that we are extremely price-conscious about that and that every month we are making sure that we get the right kind of transactions and the right number of transactions coming into our network. Things move, right? Competitively, they move. Some cards get added, other PIN options. That moves then in terms of what you see on your network. Every month, we're basically working it off. This month or this quarter, you saw a little bit of a step down. You also saw that in October. I think over the next three, four months, we'll be regaining some of that as we're working through that competitive environment.
Okay. Thank you.
The signature debit.
Can you repeat your question on signature debit and what you're trying to get after there?
Signature debit, right now it's just you guys and Visa, right? First Data has talked about entering that market next year. I'm just wondering if we can get your thoughts in terms of how you see that market developing.
Look, Smitty, we'll see. Obviously, in a number of countries around the world, you're not having just one or two choices, right? You have a number of choices, including local providers, and we'll see what happens in the United States. At this point in time, it's a little too early to pontificate about how this could happen and how this would be impacting the business.
Okay, thank you.
The next question is from Andrew Jeffrey with SunTrust. Your line is open.
Hi, good morning. Thanks for taking the question. In the other revenue line, you called out, Martina, safety and security solutions. I'm wondering if you could just elaborate a little bit on that in terms of being able to monetize or commercialize tokenization and encryption offerings or what specifically is in there. Can that be a driver of revenue growth at the margin looking out over the next several years?
Look, safety and security, you can't just look at this in terms of what we're doing on the tokenization or on the MDES piece. Safety and security is a much broader kind of umbrella, and we actually pulled all of our safety and security product offering together a couple of years ago under one leadership. Really what we're after is what are kind of products and services can we offer that keeps the consumer safe, that keeps the merchant safe, and that keeps the financial institutions and the processors safe in the space. You have a number of players in the industry that are having the same kind of thinking in terms of keeping everybody safe. We have a ton of unbelievably interesting products that we had built on a very good base over the last couple of years. I'll give you one example.
For instance, the product that we call SafetyNet, some of you saw that, of course, at our Investor Day. On SafetyNet, we basically have, in the network, algorithms that allow us to detect if particular cards or portfolios have been penetrated in such a way that there are red flags coming up, and we have to make sure that the financial institutions or the related party actually knows how to deal with that. We do that within nanoseconds, right? Those kind of products which have been rolled out worldwide, SafetyNet has been now rolled out worldwide, we can absolutely charge for. That is some of the things that the charges that people will agree to, they have to agree to if they want to utilize these products. Those are the kind of revenues that you see coming in here.
You had a second part of your question, which was about tokenization and all that mixed up inside that. The safety and security business to me is about prevention, detection, and finally enhancing the experience of the consumer and the merchant and the issuing institution. We're actually building a strategic thought process in it over the last couple of years, not just selling product. You're seeing the result of some of that beginning to show up in our revenue lines. I'm quite hopeful that safety and security will be a good way for us to grow. We are a natural provider of some of these thinkings for those people in the ecosystem, and it's necessarily a part of what we do. For a consumer, we've got ID theft solutions, to we've got Authorization IQ solutions for merchants, to issuing solutions, to using data, to all that.
We've got new technology stuff coming in where the tokenization comes, also Selfie Pay and biometrics and heartbeat monitors with Nymi, and we've launched that with TD Bank in Canada. There's just a whole series of things in this space. I don't think tokenization itself should be counted as a revenue stream per se. Tokenization is probably like table stakes. We don't charge for EMV. A chip manufacturer may be charging some money to provide the chip. We don't charge for a Magstripe. That's table stakes in digital. That's all I'm trying to do with tokenization, trying to make it safer, more secure, EMV-type security in digital for the future of payments that are going to go digital.
There's a lot of other places in safety and security where you can make good money and good revenue for providing a service that people can opt into and use. That's what we're trying to do.
Thank you very much.
The next question is from James Schneider with Goldman Sachs. Your line is open. James Schneider with Goldman Sachs, your line is open.
Jim, are you on mute?
We'll move on to the next question from Darrin Peller with Barclays. Your line is open.
Thanks, guys. Look, I wanted to ask about how you think your positioning might be in a post-Visa/Visa Europe environment if they were to consolidate. We've heard some opinions that it could be a benefit for you guys given that obviously pricing could become more rational. Maybe you could touch on that as well as maybe market share, just given that right now obviously Visa Europe is owned by the banks. Some of that loyalty may break apart.
There's a lot of questions back and forth on Visa and Visa Europe. I think we've answered them a few times, but I'll go over a couple of parts for you. The first one is that whatever price and whenever the deal happens, there is going to be some period of time during which the integration of these businesses from a technology, culture, operation point of view will take some energy, effort, and dedication. We've seen that in our prior transactions in Mastercard even before I joined, not just with the IPO, but even before the IPO with the purchase of Europay. There is a fair amount of work and challenge that needs to go into it. That'll happen.
When that's done over a period of some years, there's no doubt that one of the things that we do use today to go talk to global banks or global merchants and recognize there aren't too many global banks left, but there are global merchants. The ability to offer a unified proposition, that one which was unique to us in some ways, will no longer be unique to us. That'll change the competitive landscape in some ways when this integration is completely done. In the meanwhile, there'll be lots of moving around and lots of opportunities. You yourself raised some of those around maybe it's pricing, maybe it's deal terms, and all those could be interesting ideas for us to explore. We're going to try. As you can imagine, we've got people who have been thinking about this for a while.
I'm pretty certain that as Visa is going through their thinking, they've got people thinking about how to prevent that from happening. That's the usual game in B2B. It'll be a lot of fun.
Okay, that's helpful. Just my quick follow-up is on the regulatory changes in Europe also. That's something that's been presented as an opportunity and obviously an impact. Have you quantified, I mean, that's obviously in your guidance already, but have you really accounted on any market share gains on the local networks into your guidance? Thanks a lot, guys.
The only thing that we comprehended in our long-term guidance is what we have been doing over the last many years. As you know, we've been gaining market share profitably in Europe over many, many years. You know that our business is in the mid-teens, kind of really driving very significant bottom-line results for us. That's the kind of continuation that we baked in. We did not bake in anything above that.
Okay. That's helpful, guys. Thank you.
The next question is from Craig Maurer with Autonomous. Your line is open.
Yeah, hi. I was just hoping you could help me think about some of these recent co-brand deals where interchange has been presumably guaranteed at a much lower rate. In these warehouse deals like Costco and Sam's Club, where you might see a large influx of small business spend because of the nature of those businesses. How do you reconcile for the bank where interchange has been cut down to 40 basis points, but they might have a small business card with 150 basis point cash back and no receivables balances that roll over. I would imagine there's got to be over the coming years some breaking point in this paradigm where something has to change.
Craig, that's a very specific, certain aspect of our business, right? I don't know all those numbers you just talked about because some of them are unfamiliar to me and probably known to somebody else who may have done deals of that type. I don't know about those. I do know that at the end of the day, interchange, which was once upon a time, many years ago, just basically an announcement that went out with some kind of levels built in for category of spend. Over the years, as you've noticed in many parts of the world, interchange discussions aren't that inflexible, and they do have discussions with merchants. It's not just in the United States. It happens elsewhere as well.
If you, for example, were to look at the interchange on a high-value payment for electricity bills or for utilities, it's very different from the interchange in a different kind of store. In a way, in fact, the setting of merchant discount rates and interchange based on these kinds of conversations between merchants and acquirers and networks and issuing banks is part of what the industry is dealing with. I don't know that that's such a bad thing.
I think, in fact, if anything, it makes some of the claims of there being only a one-sided perspective of this pricing being one way a little less tenuous, a little less provable, because if these transactions are being discussed, then at that point of time, that means there's a relatively open negotiation between some categories of merchants and some acquirers and some issuers and some networks and so on. I don't know that all that is a bad thing, and I think the fact that rewards are in some cards and some card may go to one merchant, which may have a different interchange flow, makes you think that the only revenue stream for a card is from interchange. I think that's inappropriate, too.
There are multiple revenue streams into a card, multiple revenue streams into an issuer, multiple revenue streams that get used for providing a series of consumer benefits across tens of millions of merchants, not one. I wouldn't try and equate one merchant with one card. That's kind of not how this business is built.
If I can follow up quickly. We've seen Congress look at why merchants are not getting any break for putting EMV in place if it supposedly will lower fraud costs. It just seems like the networks are missing an opportunity to grab the narrative. You have the most secure technologies seen in payments ever with tokenization biometrics out there. It would make sense to me to grab that narrative back and say, "You put in this capability and we will offer a discount, but you have to do this for us and we'll reciprocate." I'm not sure why there isn't any discussion.
Craig, the liability shift is what that's all about.
I-
That's exactly what the liability shift is. It is.
Understood
About saying that if a merchant were to put in the appropriate level of terminal and type, they will have the benefit in that. That's exactly what it is.
Understood, you have a technology out there that goes beyond EMV.
No, no. Digital is a very small start. We're still talking. Look, 1% of the transactions are right now on a mobile phone, in some cases in certain markets. 99% of the stuff is still happening in a certain way. Even e-commerce, in-browser-based payments, e-commerce is 6% or 7% of retail transactions in the U.S. I'm very focused on making sure that we get the EMV done, get the liability shift discussion out there, have it established, have it be the way in which the system is set. I'm sure over time, when the digital space becomes larger, similar logic will prevail. I don't know exactly how it'll prevail. I don't know what the nature of it will be. I'm not going to speculate, but one step at a time.
This itself, to me, the liability shift, if you remember when we first announced it a couple of years ago, we were pretty much out there on our own for a while because it's new, and it needs to settle in. I'd say watch that space over time as it grows.
Okay. Thank you.
The next question is from Thomas McCrohan with CLSA. Your line is open.
Hi, guys. I just had a question on the appetite that you're seeing in your conversations with your largest issuers to invest in new client acquisition, particularly given that rates still are low. Are they waiting for rates to go higher before they do that? There just seems to be a lot of turmoil in the market, and particularly at American Express with all the management changes. I'm just wondering what kind of conversations you're having with your largest issuers.
Hey, Tom. My sense is that over the last year or two, a number of the larger and even some of the medium-sized and smaller issuers are clearly back in the market with an appetite for driving consumer acquisition. I mean that in the credit debit kind of space. Prepaid has been growing for a while. Commercial's been growing for a while. Some banks, even during the crisis, were able to sustain their ability to keep acquiring. You know that they've come out of this with the right vintages, and you can see the results in their growth rates of card ownership and spend rates. Others had to hold back for a while and are now back in the market. I kind of see things happening. I don't think that card acquisition growth rates are being held back only by rate differential.
It's also by their comfort around credit quality. In fact, that's where it starts from. You can see that as credit quality for the banks has improved, delinquencies have come down, write-offs have come down, their whole approach to being thoughtful about how to acquire consumers is very much back in the space.
Great. Thank you.
The next question is from Lisa Ellis with Bernstein. Your line is open.
Hey, good morning, guys. You're now a few quarters into the APT and 5one acquisitions. Can you just give a little bit of an update on how you feel like those are going, what kind of traction you're seeing incrementally on the merchant side as a result?
APT actually is just a quarter. The second quarter is now, right? It's really new news, but we're making good traction with APT. We've actually got a number of deals that are in different stages of either having been signed and getting implemented as pilots, because that's typically it's a test-and-learn thing. That's what APT is into. You tend to start at the pilot of the client. If it works well, you'll get a bigger piece of business from them, or it'll move into a different space. That's pretty much what's going on. We are actually very excited about APT. It's got a huge potential for us with merchants. Remember, the best part about APT is that the data doesn't have to leave the merchant shop. It stays in the merchant shop.
What's built into the terminals at the merchant shop is different tools that the APT team develops with their intellectual property on the test-and-learn capability. It makes merchants far more comfortable. Our anonymized data can be used to make that tool even more predictable, but their data doesn't leave their shop. It's actually a pretty interesting opportunity. 5one . Five One was a much smaller business when we bought it, but it's completely integrated into what we're doing and giving us a great deal of merchant traction across the world. They were very focused on a few markets. It's moving to other places. You saw when Kevin Stanton was standing up at the investor day recently, he talked about examples of what we were doing with merchants, and that's where we're headed. I'd say watch this space. It's early days.
We're beginning to see good relationships and frequent repurchasing from the merchants of things we're doing with them. It'll take us three, four, five years to make this what we want it to be, but we're very focused on it.
Lisa, what's good is even early days, even for 5one, which we just had about half a year. For both 5one and APT, we already put some points on the board in terms of real agreements that are driving some revenues for those businesses, and that's very gratifying to see.
Operator, I think we have time for one last question.
Certainly. The final question is from Kenneth Bruce with Bank of America Merrill Lynch. Your line is open.
Thank you. Good morning. My question's probably a little far afield, but there's a lot of energy going into this topic, I'm interested in your perspective on how blockchain technologies or distributed ledger technologies may be integrated into remittance and payments generally and specifically what Mastercard's activities are in the space. I'm ignoring Bitcoin. I have no interest in that really, just blockchain technologies, please.
Yes, Ken, I think blockchain's got potential. I've said this publicly quite a few times now on different panels and statements that I make. I think the real issue here will be, will legal dispute settlement systems accept a distributed ledger as a way of resolving a conflict if and when it were to arise between a payer and a receiver? Finally, the whole payment system works on two or three things. Trust that the money will get there. Two, that it'll be accurate. Three, that if it's not accurate, there's a methodology to get your money back. I think that's going to have to be both a methodology of reaching people, which in this case, if there's a distributed chain that you don't know who the hell they are, that's a little complicated. Alternatively, a legal settlement process that you have recourse to.
I think all that needs to be figured out in addition to the basics, which is, will all this be accepted for, in the case of remittances and other things, will it be accepted for the right kind of level playing field by the regulators on KYC and anti-money laundering and those kinds of things? I believe that over a period of time, either the blockchain the way it is today or some derivative of it, as we all experiment and evolve with it and engage in a dialogue with it, I'm sure it'll have a role to play, whether it's in remittance and payments or it's in different kinds of record keeping or it's in asset transfer or it's a mix of all those, I don't yet know. I think not engaging with it would be a serious error.
A lot of people in our Mastercard lab, Garry Lyons, actually, if you ever run into him, that would be a good guy to talk to about this. He knows more about this than I'll ever learn. He will tell you that we've been experimenting in this space for a while. We've got patents in the space. We've got experimentations and lab designs in the space. We've got investments with venture capital firms in the space. We've got investments directly in companies in that space to learn and I guess make our mistakes along the way, but that's what we're doing.
Great. Thank you.
Ajay.
Thank you all for your questions. I'm going to leave you with a very short list of a few closing thoughts. The first is I continue to think our business is performing well. You can see that reflected in our continuing strong volume, strong transaction growth. The global economic uncertainty remains. We are seeing that in the pace of growth in some regions, in some aspects as the first question I got about cross-border. We are pleased with the progress of the rollout of EMV in the U.S., continuing to build on our momentum with Masterpass and MDES and tokenization in the digital payment space, but it's early days. We remain focused on driving future growth opportunities while managing what we're going through today and the needs of our business today.
Thank you so much for your continued support of the company, and thank you for joining us today.
Ladies and gentlemen, this concludes today's conference call.