Mastercard Incorporated

ladies and gentlemen thank you for standing by and welcome to the mastercard second quarter 2021 earnings conference call at this time all participants are in a listen-only mode After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. I would now like to hand the conference over to your speaker today, Warren Nishaw, Head of Investor Relations. Thank you. You may begin.

Thank you, Crystal, and good morning, everyone, and thank you for joining us for our second quarter 21 earnings call. We hope you're all safe and sound. With me today are Michael Niebach, our Chief Executive Officer, and Sachin Mehra, our Chief Financial Officer. Following comments from Michael and Sachin, the operator will announce your opportunity to get into the queue for the Q&A section. It is only then that the queue will open for questions. You can access our earnings release, supplemental performance data, and the slide deck that accompany this call in the investor relations section of our website, MasterCard.com. Additionally, the release was furnished with the FCC earlier this morning. Our comments today regarding our financial results will be on a non-GAAP currency neutral basis unless otherwise noted. But the release and the slide deck include reconciliations of non-GAAP measures to GAAP reported amounts. Finally, as set forth in more detail in our earnings release, I would like to remind everyone that today's call will include forward-looking statements regarding MasterCard's future performance. Actual performance could differ materially from these forward-looking statements. Information about the factors that could affect future performance are summarized at the end of our earnings release and in our recent SEC filings. A replay of this call will be posted on our website. With that, I'll now turn the call over to our Chief Executive Officer, Michael Hiebach.

Thank you, Warren. And good morning, everyone. So here are the highlights of the quarter. The strong momentum we started the year with accelerated this quarter, with net revenue up 31% and EPS up 37% versus a year ago, all that on a non-GAF currency neutral basis. On that same basis, quarter two net revenues are now 10% over 2019 levels, even though international travel is in the early stages of recovery, which is showing the strength of our diversified revenue stream. Domestic switch volumes are well above pre-pandemic levels with all regions going at a healthy rate. We're seeing improvements in both domestic and cross-border travel with significant upside potential. Within this context, we're making progress against our strategic objectives and have expanded our relationships with key partners like Citi, JPMorgan Chase, Barclays, Stripe, and Verizon. Let's dive in, looking first at the broader economy. Domestic spending levels continue to show improved in-store sales and strength in e-commerce. According to our quarter two spending pulse report, which is based on all payment types, including cash and checks, U.S. retail sales, ex-auto, ex-gas, were up 14% versus a year ago and up 10% versus 2019, reflecting improved consumer mobility and some residual effects of fiscal stimulus. Spending Pulse also indicated that overall European retail sales in quarter two were up 13% versus a year ago and 6% versus 2019. The vaccine rollout has scaled in the U.S., U.K., and Germany and several other countries, with over 35 countries now reporting that over 50% of their populations are at least partially vaccinated. Broadening this effort is critical, but will, of course, take time. Turning to our business specifically and the four-phase framework we established for managing through the COVID environment. We believe that most markets are in the growth phase domestically, while cross-border spend is now starting to normalize, where border restrictions are being relaxed. Looking at MasterCard, spending trends, switched volumes, continue to improve quarter over quarter, with strength across all products. Debit spend remains elevated, and we are seeing further recovery in credit. Driven in part by the return of travel, and increased discretionary spending. This recovery is led by consumer credit, but it's important to note that commercial credit is also improving and has now reached pre-pandemic levels as well. In terms of how people are spending, they are definitely getting out more, as we're seeing improvement in car credit spending, particularly in the travel, retail, and restaurant categories, while e-commerce continues to be strong. Now turning to cross-borders. Cross-border card not present spending, excluding online travel spend, continues to be very strong. On the travel front itself, it is clear people want to travel, and they do so where and when able to. We've seen this domestically and across borders where there are limited restrictions. For example, we're seeing strength between the U.S. and Latin America, as well as an increase in travel within Europe. Our industry reports there has been a recent increase in bookings for travel between the U.S. and Europe, and the quarantine requirements for entry into Canada are starting to be relaxed, so that's a further opportunity. Overall, we expect more borders to open in the second half of the year, dependent, of course, on infection rates, including the recent variants, and progress on the vaccination front. Against this improving backdrop, we are focusing on our strategic priorities. One, growing our core products supported by our services. Second, driving digital enablement both in-store and online. Third, ensuring the ecosystem is safe and secure. And fourth, providing choice through our multi-rail capabilities. As always, we will do this with an eye towards driving top and bottom line growth over the long term by continuing to manage our expenses carefully. Let's look at them one by one. First off, we're driving growth in our core products and are leveraging our comprehensive services to do so, working with new and existing customers to solve their pain points, both in payments and beyond. We're not positioned to capitalize on the return of travel and remain focused on building on our strengths in this area by expanding relationships with our travel partners. For example, we have renewed our exclusive co-brand with JetBlue Airlines in the U.S. We also entered into a long-term global partnership with Cafe Pacific and Asia Miles, who will migrate their existing co-brand portfolio to MasterCard. In the Middle East, we have expanded our British Airways co-brand, and in Latin America, we are now the preferred brand for LATAM Airlines. It is important to note that our services played a critical role in enabling all these deals, including our data analytics, test and learn, loyalty, consulting, and cybersecurity solutions. Of course, we also continue to drive growth and decor outside of travel. Here are a few examples. We're excited about our partnership with Citi to launch the new Citi Custom Cash MasterCard, offering card members cash back in their top eligible spend category. With JPMorgan Chase, we have extended and deepened our agreement in the commercial space, and we have renewed our master brand relationship with Chase in the U.S. We also continue to partner closely with community banks throughout the U.S., including a flip of First Southern National Bank's debit portfolio to become their exclusive network brand. On the digital front, we're well-positioned to drive the acceleration of the secular shift with our digital capabilities, no matter how consumers want to shop, in-store, online, or both. As consumers return to in-person shopping, adoption of contactless continues to grow. The second quarter, contactless penetration represented 45% of in-person purchase transactions globally, according to our switch transaction. That's up from 37% a year ago. At the same time, e-commerce continues its strong growth, and we are providing consumers choice on how they want to pay online. For example, click-to-pay. which improves the guest checkout experience, is now rolled out in over 10 markets, and we continue to launch with significant new merchants, such as the Canadian Tire Group. On to the Buy Now, Pay Later space in Australia, we're partnering with Citi and Commonwealth Bank of Australia to offer installments to consumers wherever MasterCard is accepted. And whether in-store or online, we are securing and streamlining the consumer experience through our tokenization services. Tokenized transactions across in-store, online, and in apps surpass 1 billion per month throughout the second quarter. We continue to partner with major digital players to expand the reach of our digital capabilities. For example, we just entered a strategic partnership with Stripe. to give businesses more control over how they spend their money by enabling strut users to create, manage, and distribute virtual and physical cards for small business, commercial and consumer, across printed, debit, and prepaid. We've also entered a partnership with Verizon to bring 5G innovation to the global payments industry. Leveraging our services and insights and pairing MasterCard's solution with Verizon's 5G connectivity will allow us to create better experiences from the checkout line to being built, even to how businesses are run. Increased capacity and reduced latency of 5G will enable us to take another step toward making every device a commerce device. Now, onto securing the ecosystem. As more merchants and consumers shift to digital, the importance of keeping the ecosystem safe and secure is paramount. It is creating a strong demand for our cyber solutions. In addition to organic growth, a number of our acquisitions in this space continue to perform well. For example, Ethica has strong deal momentum, including a fraud and dispute management agreement with eBanks, a payment solution provider operating across 15 countries in Latin America. Risk Recon, which monitors and assesses customers' third-party cybersecurity risk, is now scanning millions of companies globally, up from thousands when we acquired them at the end of 2019. And new data is providing biometric fraud prevention tools to Major League Baseball and a new bank, Nickel. And we're happy to advance our digital identity capabilities with the acquisition of Ecata, that has now closed and off to a strong start on the deal front. Last, but certainly not least, let's turn to our initiatives focused on addressing a broader set of payment flows with our multi-rail capabilities. The key here is to provide choice, essentially the right tool for the job. With our multi-rail approach, including our expertise and capabilities in cards, real-time payments, and support for digital currencies, we're able to deploy the right combination of assets to meet our customers' needs. And more than just having this range of capabilities, we're making these solutions work together seamlessly, Let me give you a few examples. In B2B, we're making progress with Mastercard Track, building out our global open-loop network by working with buyer agents and supplier agents, such as banks, software companies, and ERP vendors. On the bank side, we're very excited to have signed Barclaycard Payments, who will use Track to connect their global business customers on both the buyer and the supplier sides of the ecosystem across multiple rails. We've also signed FreshBooks, a premier accounting software platform with customers in over 100 countries. In the bill pay space, we continue to scale the MasterCard bill pay exchange, which leverages our real-time payment capabilities to provide a transformative mobile-first experience to bill payments, with city treasury and trade solutions now connecting into the platform. As MasterCard sends, we continue to penetrate a variety of new payment flows beyond traditional card payments. We've enabled dozens of use cases and hundreds of programs across every region of the world. For example, we're partnering with innovative digital messaging platforms to offer P2P services to consumers. Today, users of WhatsApp in Brazil can transfer money directly in-app, leveraging Mastercard Send. We're also partnering with MoneyGram and Checkout to enable near real-time, cross-border P2P transfers across Europe. And on the BBC front, we continue to support the fast-growing gig economy And I'm partnering with Payfair to enable instant earnings payouts for some of the largest gig platforms in the U.S. Through open banking, MonsterCard is empowering people and businesses across the globe to easily and securely gain access to their financial data to create new opportunities for themselves. In the U.S., our efforts with finicity are running ahead of expectations as we continue to enhance direct API connectivity for banks and fintechs. For example, we're partnering with Jack Henry to enable consumers who bank at more than 400 community financial institutions to use its digital platform to access, use, and benefit from their own financial data. And Navy Federal Credit Union recently signed direct data access agreements with Finicity. Finicity is also leveraging its best-in-class data connections to launch new products and new verticals, such as its Mortgage Verification Service. And finally, in terms of cryptocurrency, we're making it easier for cryptocurrency wallets to connect seamlessly to our network through a pilot with Paxos, Circle, and Evolve Bank & Trust, which simplifies the conversion of crypto into fiat. Separately, we're partnering with ConsenSys, the Ethereum software engineering firm, to accelerate the development of crypto applications and services for our customers. Now, summing all this up, We delivered strong revenue and earnings growth this quarter, benefiting from our revenue diversification efforts. We believe that most markets are in a growth phase domestically, and there's upside potential in cross-border travel. We're winning significant new deals, and we continue to focus on our strategic priorities to drive growth over the long term.

Sachin, over to you. Thanks, Michael. Now turning to page three, which shows our financial performance for the quarter on a currency-neutral basis, excluding special items and the impact of gains and losses on the company's equity investments. Net revenue was up 31%, reflecting the continued execution of our strategy amidst a strong recovery in spending. Acquisitions contributed 3 ppt to this growth. Operating expenses increased 28%, including an 8 ppt increase from acquisitions. Offering income was up 34% and net income was up 36%, both of which include a 2 PPT decrease related to acquisitions. EPS was up 37% year-over-year to $1.95, which includes $0.03 of dilution related to our recent acquisitions offset by a $0.02 contribution from share repurchases. During the quarter, we repurchased $1.7 billion worth of stock and an additional $398 million through July 26, 2021. So now let's turn to page four, where you can see the operational metrics for the second quarter. Worldwide gross dollar volume, or GDP, increased by 33% year-over-year on a local currency basis. We are seeing significant strength in debit and credit. U.S. GDP increased by 34%, with debit growth of 23% and credit growth of 50%. Outside of the U.S., volume increased 32%, with debit growth of 39% and credit growth of 25%. Cross-border volume was up 58% globally for the quarter, with intra-Europe volumes up 48% and other cross-border volumes up 71%, reflecting continued improvement and the lapping of the depths of the pandemic last year. In the second quarter, cross-border volume was 87% of 2019 levels. with intra-Euro almost back to even at 97% and other cross-border volume at 79% of 2019 levels. Turning to page 5, switch transactions grew 41% year-over-year in Q2 and were at 127% of 2019 levels. Card-not-present growth rates remained strong, and card-present growth continued to improve, aided in part by increases in contactless penetration across every region. In addition, card growth was 8%. Globally, there are 2.9 billion MasterCard and Maestro-branded cards issued. Now, let's turn to page 6 for highlights on a few of the revenue line items, again, described on a currency-neutral basis and that's otherwise noted. The increase in net revenue of 31% was primarily driven by domestic and cross-border transaction and volume growth, as well as strong growth in services, partially offset by higher rebates and incentives. As previously mentioned, acquisitions contributed approximately 3 ppt to net revenue growth. Looking quickly at the individual revenue line items, domestic assessments were up 36%, while worldwide GDP growth was up 33%. The 3 PPP difference is mainly driven by pricing and mix. Cross-border volume fees increased 60%, while cross-border volumes increased 58%. The 2 PPP difference is primarily due to favorable mix as cross-border volumes X intra-Europe grew faster than intra-Europe volumes this quarter, partially offset by the lapping of elevated levels of return activity a year ago. Transaction processing fees were up 33%, while switch transactions were up 41%. The 8 PPP difference is primarily driven by the lapping of elevated return activity a year ago and adverse mix. Other revenues were up 32%, including a 9 PPP contribution from acquisitions. The remaining growth was mostly driven by our cyber and intelligence and data and services solutions. Finally, rebates and incentives were up 49%, reflecting the strong growth in volumes and transactions and new and renewed deal activity. Moving on to page seven, you can see that on a currency neutral basis, total operating expenses increased 28%, including an HPVG impact from acquisitions. The remaining growth in operating expenses was primarily due to higher personnel costs as we invest in our strategic initiatives, increased spending on advertising and marketing, and increased data processing costs. Turning now to page A, let's discuss the specific metrics for the first three weeks of July. We are seeing significant improvements in the growth rates across our operating metrics versus 2020, in part due to the lapping effects related to the pandemic that began last year. To provide you better visibility into current spending levels, we thought it would be useful to once again present the 2021 volumes and transactions as a percentage of the 2019 amount when we were not experiencing the impact of the pandemic. So, if you look at spending levels as a percentage of 2019 for switched volumes, the broad-based recovery continued through the second quarter and into July. Specifically, in the first three weeks of July, Switched volume spend levels are at 130% of 2019 levels, which is a 90% improvement over Q1. We have seen a further recovery in car presence spending with improvements in travel-related categories, including lodging and restaurants. Of note, in the U.S., we have seen consumer airline spend improve significantly since the early part of Q2, with volumes now back to pre-pandemic levels. Trends in switch transactions remain steady and are generally tracking the trends we are seeing in switch volumes. In terms of cross-border, spending levels as a percentage of 2019 show an improving travel trend. Cross-border travel, which includes both card-present and travel-related card-not-present volumes, increased from 39% to 66% of 2019 levels from April to July, primarily driven by strength in Europe and between the U.S. and Latin America. Asia-Pacific has been slower to recover. Cross-border card-not-present X-travel continues to grow at a healthy rate above pre-pandemic levels. This has moderated recently relative to 2019 levels in part due to a reduced contribution from the purchase of cryptocurrencies and the lapping of significant e-com promotional activity in 2019. Turning now to page 9, I wanted to share our current thoughts looking forward. First off, we continue to make strong progress against our strategic objectives and our position to grow with the new and renewed deals we continue to sign. Domestic spending levels are showing healthy growth, and we are well positioned for the return of travel with travel-oriented portfolios. Further, our service lines continue to grow at a healthy rate. Turning to the third quarter, if spending levels continue to improve along their current trajectory, we would expect Q3 net revenues to grow at the high end of mid-20s growth rate year-over-year on a currency-neutral basis, excluding acquisitions. As a reminder, Q2 2020 marked the low point of the pandemic from a spending standpoint, with some recovery in the following quarter. So, we will be facing a more difficult time of approximately 3 TPT in the third quarter. It is also important to point out that this is just one potential scenario, and the level of uncertainty remains related to new COVID variants and the progress of vaccinations. And therefore, the pace of recovery may not be linear. In terms of operating expenses, we will continue our disciplined approach to expense management while advancing our strategic objectives in key areas such as digital, cybersecurity, data analytics, B2B, and our material solutions, including related brand and product marketing investments. For Q3, we expect operating expenses to grow at the high end of mid-teens rate versus a year ago on a currency neutral basis, excluding acquisitions. As a reminder, we are lapping the spending actions we took last year as the pandemic developed. With respect to acquisitions, we are pleased to have closed on the transaction with ICATA earlier than expected and expect acquisitions will contribute about 2 to 3 ppt to revenue in Q3 and Q4. Similarly, acquisitions will contribute approximately 9 to 10 PPP to operating expense growth in both Q3 and Q4 as we integrate several acquisitions in promising new growth areas such as open banking, digital identity, and real-time payments. As a reminder, we discreetly disclose the impact of acquisitions for the year in which they close and the subsequent year, after which time we do not split them out. Other items to keep in mind. Foreign exchange is expected to be a 0 to 1 PPT tailwind to net revenues and a 1 to 2 PPT headwind to operating expenses in Q3. On the other income and expense line, we are at an expense run rate of approximately $115 million per quarter given the prevailing interest rates. This excludes gains and losses on our equity investments, which are excluded from our non-GAAP metrics. And finally, we expect a tax rate of approximately 17% to 18% for the year based on the current geographic mix of our business and improvement over previous expectation due to some discrete tax benefits realized in Q2. One last point. I wanted to let you know that we are planning an investment community meeting for the fall in New York. We are planning a hybrid event on November 10th, and we look forward to discussing our future plans with you at that time. And with that, I will turn the call back over to Warren. Thanks, Sachin. Crystal, we're now ready for questions.

As a reminder, to ask a question, you'll need to press star 1 on your telephone. To withdraw your question, press the pound or hash key. Your first question comes from the line of Tenjin Wong with JP Morgan.

Hey, good morning, everyone. Thanks for all the, all the details as usual. Just, just want to just going through such and some of the numbers you gave and just want to get your updated thinking here on, on operating leverage in the second half of the year, including the digestion of, of deals. That looks like there is some, but I'm just curious how, um, how aggressive some of the spending will be on the integrations given that there's a lot going on, a lot of good things going on there with some of the evolution you've done and the focus on services, if that makes sense.

Yes, it's like I said in my comments. I think what we have line of sight on is the acquisitions which we have done, which we have announced, and that's what I've given you some level of guidance on as it relates to what contribution they're going to have from a revenue standpoint and expense standpoint, all of which I just went through in my prepared remarks. Look, the reality is We're running the business for the long term. We're trying to drive long-term revenue growth and at the same time, long-term bottom line growth. And I will do this in a disciplined manner. We have demonstrated over the period of the pandemic that we have sufficient flexibility in our expense space to actually make sure that we continue to execute on our strategic objectives and at the same time keep an eye on how we're seeing the top line come around. So I guess my point to you is the following, which is we will continue to do what's right for the business to drive long-term growth by investing in key strategic areas, both organic and inorganic. And, you know, that's kind of where we are. In terms of the specifics of the numbers, it's what I just shared with you. We expect that acquisitions will contribute between two and three points to revenue in the third and the fourth quarter, and between nine and ten points of expense growth in the third and the fourth quarter.

Yeah, just something to add, Timson, here, is if you look at the three big acquisitions that, you know, have come in over the last year or so, NET's the largest one we have done, giving us a real advantage in terms you know, real-time payments around the world. You have finicity, open banking. You know, that's a trend that's very hot. We feel really good about that one. Now, digital identity, ECADA, is foundational to everything that we do online. So very critical acquisitions to Sachin's point. We have to do what is right. But one thing is not changing, and that is that's very clearly that our discipline on execution, we stick to our 24-month non-dilutive measure on all of these. So I just want to put that out there with you as well.

All fair points, and those are all important areas. Thank you.

Your next question comes from the line of Harshita Rawat with Bernstein. Hi, good morning.

Thank you for taking my question. Michael, last week you announced a card offering for crypto companies, which simplifies crypto conversion to fiat. And this builds on some of the other announcements you've made in crypto. Take a step back. Can you talk about the value proposition MasterCard is bringing to the table for crypto companies, central banks or CBTCs, stablecoin providers? and the different ways you're engaging there. Thanks.

Right. Thanks, Archita. Great question. Very important topic. It's obviously a vibrant space around digital currencies. You know, let me go back to what we discussed in a previous call, where we said there's broadly three different categories that are at play here, which is central bank digital currencies, and there's private sector stable coins, and there's floating cryptos. So we told you that we want to be playing a role across all of them. We also said in the first quarter call that as far as stable coins are concerned, we are getting ready to technologically enable our network to carry these stable coins as settlement currency, provided they meet all three of our criteria, which is regulatory compliance, consumer protection, and stability. So none of that has changed. Let me just give you a view on what has happened since we had that conversation. So on the central bank digital currency front, things are definitely continuing to move forward. You see a lot of central banks engaged on the topic. The ECB has just recently announced that they will actually move forward with the digital euro after a period of industry consultation. The Bank of England is in this period of industry engagement at this point right now. So there is clear progress. What is our value proposition to, you know, central banks and government in this space is, first of all, we bring a unique perspective to the market as a – to these players as a – multi-rail provider because all these countries have to make the trade-off what is my existing financial system delivering my existing financial infrastructure and what else is the central bank video currency solving for everybody has different motivations ranging from financial inclusion to cross-border payments And hence, we're a sought-after party because we have experience in all of that. I think a particularly critical proposition here is our virtual test platform because all of these design choices that governments have to make and that we consult them on will then have to live in the wild, so to say. They've got to work with the existing financial infrastructure, and that's what our virtual test platform does for them. So that's a proposition at this stage for central banks, under private sector stablecoins. nothing much different other than us engaging with private sector players as well as regulators on what does good policy look like around private sector stable coins. Because this question about regulatory compliance is still unresolved. Regulators do need to weigh in, and we're a part of that dialogue. On floating cryptos, Here, the point of currency stability is not solved, so we won't be enabling that as settlement currency on our network. But clearly, people want to invest in that and want to sell their investments, and we've got to make this as easy as possible. So we have all these partnerships out there. Now, here's the thing with our announcement last week, and that is that, you know, digital currency wallets out there oftentimes prefer to stay in crypto as these transactions are made selling and buying of investments. And here's where our partnerships, for example, with Paxos come in. It is our partner that allows the digital wallet to stay in crypto as they settle with Paxos and then Paxos settles with us in fiat. That's an interim step for us. as in when we reached a point that we might be enabling stable coins in our network itself. So that's kind of where we are, playing a role across the board. This is relevant technology. As a multi-rail player, we've got to be in the space because, you know, people are looking for answers.

Perfect. Thank you very much. Your next question comes from the line of Lisa Ellis with Moffitt Nathanson.

Good morning. Good stuff. Thanks for taking my question. I have a question on B2B payments. Michael, in your prepared remarks, you called out progress on MasterCard track and bill pay exchange. Taking a step back, can you just give us a sense right now of where you are in terms of scale and trajectory holistically in the digitization of B2B payments? especially as it seems like some of that digitization has, you know, gotten a bit of a jumpstart through the pandemic. Anything you can dimensionalize around volumes, growth rates, et cetera. Thank you.

All right. Thanks, Lisa. B2B, you know, huge, huge space, obviously. TAM, $125 trillion. So how are we going about it? One bite at a time, I would say. So the first thing I should say is our commercial business is, you know, It's coming back. Commercial travel is coming back, as I noted earlier in my comments. So here the focus is on small business, virtual card, and, you know, in the B2B space, specifically virtual card solutions, for example, and online travel agencies. So all that is continuing, but it's worth noting, you know, we gave you a number sometime back in 2020. This was 11% of our GDP, and that is what we're happy about that. Now, when it comes to B2B, very specifically, the multifaceted approach I talked you through earlier across bill pay, track, and the whole list that I talked about. Here, I see that if I take bill pay today, if you look at the fact that we have a quarter of all of all bills being paid addressable and a third of the billers. So that gives us real scale. So I think we have come to a point of scalability here with the right kind of players. Last quarter we added Verizon as a biller to the mix. So that is encouraging. We haven't given specific numbers and we haven't done it this quarter yet, but I really see that's going in the right direction. And with Nest coming in, uh we have a significant footprint in europe they run a scaled bill pay business over there so when the time is right we will share some numbers around that now um at b2b specifically track you know the excitement around a large bank like barclays joining the track ecosystem is great we've fine-tuned our go-to market with erp and software providers so the rollout here is progressing well with both sides, buyer and supplier, and buyer and supplier agent. Again, we haven't given numbers yet, but it would be what you would expect when you build a two-side network. We're starting to have players on both sides. We could start to connect the corridors. So the value proposition of TRACK, a data switch, payment optimization engine and the choice in multi-rail payments is really starting to get hold. We said to you a couple of times this is going to be a multi-rail journey. COVID, while there was a realization that B2B supply chains have been affected by COVID and there's a desire to digitize, it wasn't exactly top of mind through COVID. So we're starting to see this interest coming back. So that's kind of where we are. Satya, do you have anything to add? Yeah, sure.

I'll just make one more point, which is, as we think about B2B, we also think about it from a segment approach, right? What is the micro kind of business environment, small business environment, mid-market, and then large corporates? And when you actually dissect it along those lines, you will see that there's a significant amount of spend which takes place across the micro and small business space. And if you further break that down, you will see that there is a significant amount of that spend which takes place in cash. So the only point I'm kind of trying to make is that the value prop of the card rails in B2B still stands and stands pretty strong. to displace cash, much like it has in the consumer space, and there's a tremendous opportunity for digitalization to continue down that path there as well. So I know we talk a lot about the accounts payable flow, and I think that's super important, but we certainly, internally, are not losing sight of the fact that there's a significant amount of cash spent, which still takes place where the value of a proper card stands good.

Terrific. Yeah, lots of checks, too. Awesome. Terrific colors we saw.

Your next question comes from the line of Craig Moore with Autonomous Research.

Hi. Thanks for taking the questions. Two questions for you. One, any thoughts on the reopening of the Durbin Amendment discussion? And second, are you planning to update your three-year guide at the Investor Day later this year? And I know you just announced it, but figured I'd ask anyway. Thanks.

Okay, so let me take the last one with kind of like a bit of a cheeky response. I think you will just have to tune in, Craig, to find out if we're going to give three-year guidance or longer-term guidance at the time. On interchange, so complex topic for sure. And, you know, the new administration is looking at various, you know, regulatory and lawmaking initiatives, as we all know. We've just seen news developed yesterday. Now, from the outset, we've leaned in with the new administration. We built a really positive relationship, so that is very good. And we're continuing, obviously, the same kind of interaction and engagement on a topic is important as Interchange to our industry with lawmakers on the Hill House and Senate, both sides of the aisle. We're monitoring this very closely. There is chatter here and there on Interchange. It's a topic that's always been focused by different parties. What I would say is we've had the benefit of now having many years of playing, seeing the exchange regulation on debit play out. There's enough data for us out there to say that really what it was intended to do, we can't really see it. Costs for consumers have gone up and benefits have been reduced. We keep providing that data to lawmakers and other interested parties and say, here's what the facts are stating. Now, when it comes to interchange regulation applied to credit, you would expect the same in terms of cost impact, in terms of benefits impact, but there is another aspect here. That is the access to credit. You should assume that the access to credit for middle class Americans is going to be impact it and not in a positive way if this interchange regulation comes in. So it is all something that needs to be thought through very carefully. What are the puts and takes? Why does this make sense? And that's the dialogue that we're leaning in. The good thing is we've seen this play out in many other markets around the world and have some experience with that and can that bring to the table as well. So that's kind of where we are closely monitoring.

Thank you.

Our next question comes from the line of Sanjay Sakrani with ABW.

Thanks. Good morning. Obviously, a lot of eyes on cross-border travel spending, and there were some constructive data points this quarter. Maybe two interrelated questions. Understanding the Delta variant adds complexity to a view, but do you think that we continue to see progress on travel spending going forward? And I think, Sachin, you mentioned in your third quarter view you expect continued spending trends. Is there a view on cross-border as well?

Thank you. Yeah. Hey, Sanjay. Sure. Why don't I go ahead and take that question. So really, I will preface by saying the following, which is, again, it's the uncertainty in the environment prevails given all these variants which are kind of showing up. But the reality is the following, which is it has been clearly demonstrated that people want to travel. and they do so when they're able to travel. And that's been shown in the domestic environment, and that's been now shown in the cross-border environment. So one of the things which is something which we very closely track is how is it that booking levels are taking place, what's kind of that trajectory of spend looking like, or that trajectory of kind of data looking like, and then which of the corridors which are opening up based on, you know, For example, earlier this week, there was some dialogue around how the UK is going to open up to vaccinated people coming from, you know, the US and from other countries. So the reality is the following, which is the data as we've seen it is what we've shared with you through the first three weeks of July. You know, we are positive in terms of our sentiment as we progress through the second half of the year, that as people get more vaccinated, more corridors will open up. And as more corridors open up, people will exercise their ability to travel because they have the intent to travel. And this is really, really important because as I look at what's going on across the globe, you can see that the U.S. and Latin America, which has the ability to travel with the borders being open, people are exercising that and they're showing that come through. Similarly, now we're hearing about Canada opening up, which will be, again, something which is encouraging from our perspective in terms of how people play that out. Asia, on the other hand, is still, I would say, at a pretty kind of subdued level just because of the reality of the situation in Asia being what it is, with the variants now actually getting to higher levels in certain countries in Asia. So, look, hard to predict, but longer term, I guess when I kind of look through all of this, what we feel encouraged about is that the vibrancy of travel is something which will come back, and most importantly, we are very well positioned to capitalize on that as and when it does come back.

You know, I just want to add one point as I listen to Sachin. What I find very noteworthy here is the fact that it's common about like 35 countries have now over 50% of vaccinations level. This kind of sequence of you're vaccinated and you are willing to travel, which we have both seen as proof points, and then governments finding ways now to enable these corridors. As what we've seen with Canada and the UK, there's a whole stock of people that are vaccinated and want to travel. And until you come to the point of who else is not vaccinated, there's a long runway for this to play out. But as Sachin said, very difficult to predict at this point, but those are facts that are on the table at least that we're looking at and we've seen that over the last three weeks.

Thank you.

Our next question comes from the line of Darren Teller with Wolf Research.

Hey, thanks, guys. You know, we're now a year and a quarter basically into the pandemic, and it Like when we think, Michael, when we think about the structural and sustainable elements of what we're seeing in volume and even some of the other aspects of your revenue, like some of the value-added services, you've really been growing well, probably better than I think we would have expected pre-pandemic. Can you give us a sense now, if you revisited that, what you see as now sustainably elevated, structurally better, that could persist over the next few years beyond just stimulus and pent-up demand?

Yeah, so, Darren, the pent-up demand, you know, at some point in time, it's going to level out. I think you're right. You know, once you've caught up time and met everybody again, we're going to come to the back of that. But there's still some more pent-up demand to go, particularly on commercial travel. And we'll see how that will play out. You know, it's interesting. When you look over the last two quarters, we see continued elevated levels of digital e-commerce spend, but we see in-store coming back. So there is not a net zero game going on. I think this is actually really generally secular trend against cash, and that is going to continue to run for a very long time. So it's good to have these two legs to stand on from our business model. I think that will remain. You'll see some of the e-commerce going to reduce over time, but I don't think we will go back to the levels that we had before the pandemic because people would have learned better experiences and they would like to continue with that. I think every bit of consumer research that we do tells us that. And by the way, this is not just for online shopping. It's for digital banking. It's for contactless. It's for everything across the board. Generally, between 60% and 70% of the people that we ask, and we ask them every month, say exactly that. With this push towards a more digital world, more data, More data that needs to be kept safe. So I see that the path for our cybersecurity solutions is a very clear one and a very good one, and we will not see a reversion to something there before because you have the elevated driver of more digital just out there driving that business. And, Frank, that's the same for data and analytics. Data analytics, again, more data. People want to understand it. But back to what Satya was talking about on small business. Here's a bunch of players that have traditionally maybe not used tools like that, understanding and managing their business through data and analytics. But now they can't. So there's a whole new segment that's opening up that we would like to serve through our partners in terms of real insights and how do you run a business online from whatever you might have been doing in the brick and mortar space before. So I think those are structural changes that are here to last. Cross-border, I don't think there's going to be something dramatically structurally changing that's really the Well, cross-border e-commerce. I think that, again, people would have figured out that this does actually work. They couldn't go anywhere. They were using cross-border e-commerce platforms and tools, and I think that will continue. One more thing that comes to mind structurally is the heightened and elevated interest of governments in electronic payments and digital payments. That has started last year. Again, that was driven by the crisis initially. How do I get my stimulus payments out? To now a conversation, wow, this is an interesting space, and I found that my infrastructure is dated. I need to partner with people. So that is something that I see fundamentally as an opportunity, but it's important to engage with governments. as a fair partner and see that local footprints and things like that do matter. We are well positioned with our multi-rail infrastructure to do exactly that. So those are a few things that come to mind. Back to Lisa's earlier question on B2B, I think there's continued interest in digitizing B2B supply chains and therefore B2B payments that will also play out and grow over time over the next two, three years.

All right. That's really helpful. Thanks, Michael. Thanks, Sarah.

Your next question comes from the line of Dan Dolev with Mizuho.

Oh, hey, guys. Thank you so much. You know, I was very interested in the Stripe partnership and in some of the other partnerships. Can you maybe shed some more light on what you're doing with Stripe? It sounds very differentiated. Thank you.

Yeah, Dan. Hello, and thank you for the question. Have a good day. The joint partnership, as you heard me say, This is really across the board, a true strategic partnership. So this is enabling their customer set with basically every payment tool that is available and providing choice. That's in the end what this is about. Verizon, an entirely different strategic partnership, but here's another network, but a 5G network. We said, what could we do? We talked about SME on this call on a couple of occasions now. Think about an SME that today has a car terminal and how they're going to compete with the marketplace. If you imagine for a moment you have a full internet connectivity with not much infrastructure that you need to bring in and then you can provide a true omnichannel experience, even the smallest business can do that, that is what 5G can deliver at any endpoint, anywhere, at any situation. And that is the vision that Verizon, Hansen's team, and our folks that we have developed. This is very specific. We've been on it for a while, and we're expecting to make a real difference there. So two different types of strategic partnerships. I think they both matter. Come back to the point that it's for us, it's about providing choice and payment to anyone out there that is transacting in payments.

Yeah, she's done. Super. Thank you.

Your next question comes from the line of Brian King with Deutsche Bank.

Hi, guys. Good morning. I know we talked about cross-border travel. Just thinking about cross-border Cardinal President X travel. I know that dropped a touch in June and then month to date in July. Just wondering what the outlook might be. Should we see further modernization or lower growth numbers there as we head into, you know, further through the year as we think about maybe more in-store activity, tougher comps, less e-comp promotional activity? Just trying to get a pulse on that number as we go forward. Thanks.

Yeah, Brian. So a couple of things kind of to point out on that line item, really. At the end of the day, there are things which are, I would call, episodic, which took place in the months of April and June as there's volatility in the price of crypto. there's more and more purchases which took place there. And then as the price came down, then you had the inverse effect of that taking place. So the reality is that to us is one of those things which will remain volatile. And I say that only because I don't know where the price is going to go and how people are going to exercise their choice to purchase crypto on an ongoing basis. What I will tell you is we've seen a decent level of deceleration take place in how people are utilizing MasterCard products to purchase these digital currencies like crypto over the last three weeks, as reflected in the numbers. So that's kind of one of the factors which influenced that. The second being just a tougher comp, where the timing of that e-com promotional activity, which took place in 2008, and 19 happened to be in, you know, the first three weeks of July. So the comp is a tougher comp here. So that I don't view as something which is on a going forward basis going to be impacting what the so-called index growth rate is for this line item 2021 versus 2019. Suffice it to say the following, which is the trend towards digital continues. It's true in domestic. It's true in cross-border. And the fact that that is a positive deal went back to what Michael just talked about in terms of structural changes is something we are well positioned to actually keep participating in as, you know, as economies evolve and things start to open up in different parts of the globe. So that's what I'd like to share with you on that one.

Got it. Thanks for the call. Sure.

Our next question comes from the line of Jason Kupferberg with Bank of America.

Thanks, guys. Good morning. I just wanted to ask a follow-up on cross-border. In the second quarter, the cross-border volume growth at Central Europe was a really good proxy for your overall cross-border revenue growth. So, I mean, just hypothetically, if July month-to-date trends hold for these volumes for the rest of Q3, It would seem like cross-border revenue growth could approach 60% this quarter. So I just wanted to see if that's a fair characterization or if there's any other moving parts we should be aware of. And then if you can just give us some quick comments on Q3, Q4 rebates, that would be great. Thank you.

Sure. So on cross-border, Jason, he's been mentioning that, you know, you're aware about the fact that intra-Europe cross-border is lower yielding than all other cross-border. And I think that's one thing to keep in mind because growth rates across those populations of spend will determine what revenue growth rate ultimately looks like. You know, the reality is in the second quarter, we had a tougher comp from an elevated level of returns that we had seen in last year, which had the impact of subduing our cross-border volume fee growth rate some in this second quarter. And again, you know, it's not like those returns and elevated evidence of returns only took place in the second quarter of last year. As the pandemic hit, people started to make cancellations in terms of their airline bookings, their hotel bookings, and that kind of, while it tapered, it still occurred going into the third quarter as well. So just something to keep in mind as to what the puts and takes are when you're thinking about growth rates. On rebates and incentives, You know, here's what I tell you. I think you're very well aware about the focus of the company on making sure we are setting ourselves up to continue to win market share. And winning market share comes through creating fantastic value propositions and then delivering them at great value to our customers, which is where the rebates and incentives come into play. So we continue to do that, and we will continue to, you know, do new and renewed deals, which will have an impact on rebates and incentives. You know, The one piece of information I'll share with you is that as it relates to Q3, we expect rebates and incentives as a percentage of growth to be generally in line with what we saw in Q2. That's the extent of what I'm going to share with you in terms of where I kind of see rebates and incentives playing out. Obviously, the mix of volumes impacts that line item as well.

Thank you. Very helpful.

Your next question comes from the line of Andrew Jeffrey with Truist Securities.

Hi. Good morning. Appreciate you taking the question. Michael, lots of progress on risk, fraud, ID, et cetera. It sounds like value-added services generally are a pretty important growth driver. I wonder if you could compare and contrast what MasterCard is doing versus some of the sort of purpose-built services risk and fraud products in the market, different channels, different capabilities, kind of how you coexist and compete with some of those independent providers, like a Riskify, for example. Right, right. Thanks, Andrew.

Great question. So, you know, if you look at our services portfolio to start with, we try to seek an entry point that's a sweet spot leveraging our footprint in payments and our data, and then have the technological capabilities and the talent and all of that coming together to a differentiated proposition. So you'll rarely see us compete with other services players on a pure play that has nothing to do with our position in payments. So that's the starting point of our strategy. And we're looking for adjacencies that just leverage our core competencies. Now, when it comes to the cyber solutions, if I think about a product like Decision Intelligence, which basically helps our customers to decide what's a good decision and what is not a good decision. It is exactly at the sweet spot of everything that I said. It's the transaction data, it's the availability, having this in real time in our system available, and then using state-of-the-art AI to make the decisions for our customers. So here I think we have, from a competitive landscape perspective, a real leg up versus pure plays. Similar in loyalty. We're one of the largest loyalty players in the world. They are pure plays, but the fact that we see all the transaction flow and we can look at aggregated, anonymized data of lookalikes and what they're interested in and how their preferences go in terms of rewards, offers, mileage programs, and so forth, again, puts us in a differentiated proposition. But you see us building out our proposition in cyber and coming back to that, looking at the whole value chain, decision intelligence about the transaction. Before the transaction, what we're now doing with ACATA is saying it's a foundational element. So here we go in. ACATA in itself has a set of data that allows us, in real time to help a customer, one of our customers, decide if this account opening request is a good one or a bad one. That's a very high confidence store. That customer is obviously then interested in working with us on the downstream through the whole value chain of the transaction and other cyber and security solutions all the way to fulfillment. They again say, is that address actually a real address? Or is it somebody that is just ordering something in somebody else's name? So that's how we're thinking about it holistically and leveraging our footprint in payments. Crystal, I think we have time for one final question.

Your next question comes from the line of Bob Napoli with William Blair.

Thank you, and good morning. Andrew kind of stole my lead question there, but also a question on Open banking, I think it has been suggested that it's performing, that Finicity is performing better than expected. So I was hoping to maybe get a little bit more color on what's working better than expected and the longer term open banking strategy for MasterCard.

Right, Bob. Great point. So open banking, you know, important trend. You know, what we really like is this whole concept of putting power into the hand of the individual using their own data to get a better choice in services, the financial services and other services eventually. So we like that. We've been active in Europe for three years now, two years now. We went live in summer 2019 over there. Good momentum. You heard us talk about Tesco and Lloyd's in the UK. You know, a set of use cases that are now alive. So I'm happy about that, good footprint over there. And then here with Finicity, that was a real kick for us, closing that transaction in November last year. And the Finicity team, first of all, they're deep in permission API, the inventions of the SDX standard. So they live and breathe open banking, and that was really critical for us. as a player here in the U.S., great incumbent in the market. Now, what is going better than expectations? I see a lot of momentum in engaging with banks. They have best-in-class data connections, and they had a best footprint in banks. But now that everybody else is looking at that and said, you know, let's just connect with Finicity. We also see progress on the FinTech side because this is an ecosystem that works on both sides. So we're excited about that. They had an interesting set of solutions today that, you know, account verification, credit decisioning assistance. And now with, you know, the mortgage verification service, we're starting to build out at the same time of a driving, you know, on the deal front. We're also expanding the product set. by bringing our data together with their data and our tech talent with their tech talent. So on every dimension, really around finicity, we're quite happy with what we have.

Great. Thank you. Appreciate it.

All right. Good. I think that brings us to the end of our time. I gave you a summary of a quarter just earlier on, so I'm not just going to repeat that again. Just want to thank you for all your support all throughout. And Looking forward to speaking to you in a quarter from now. Thank you very much, and goodbye. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.