Mastercard Q3 2022 Earnings Call Transcript

Quartr
Provided by Quartr
October 27, 2022

Key Takeaways

  • Strong financial performance: Q3 net revenues were up 23% and adjusted operating income rose 27% year-over-year on a non-GAAP currency-neutral basis.
  • Consumer spending remained resilient—domestic switched volumes grew above 2019 levels—and cross-border travel volumes recovered sequentially across most regions.
  • Mastercard accelerated its growth strategy with over 3 billion cards in circulation, 200+ Digital First customers, high-profile partnerships (Chase-DoorDash co-brand, Uber ProCard) and expanded processing and Open Banking deals.
  • Despite anticipated high-teens net revenue growth in Q4, Mastercard faces a significant ~6–7 ppt foreign exchange headwind, mainly from euro depreciation.
  • Operating expenses rose 17% in Q3 (including acquisitions) and are forecast to grow low double-digits in Q4, with the company prepared to flex costs if growth slows.
AI Generated. May Contain Errors.
Earnings Conference Call
Mastercard Q3 2022
00:00 / 00:00

There are 15 speakers on the call.

Operator

Good morning. My name is Adra, and I will be your conference operator today. At this time, I would like to welcome everyone to the Mastercard Incorporated Q3 2022 Earnings Conference Call. Today's conference is being recorded. All lines have been placed on mute to prevent any background noise.

Operator

After the speakers' remarks, there will be a question and answer session. 22. Q3 2022. At this time, I'd like to turn the conference over to Warren Kneeshaw, Head of Investor Relations. Please go ahead.

Speaker 1

Thank you, Audra. Good morning, everyone, and thank you for joining us for our Q3 2022 earnings call. With me today are Michael Miebach, our Chief Executive Officer and Sachin Mehra, our Chief Financial Officer. Following comments from Michael and Sachin, the operator will announce You can access our earnings release, supplemental performance data and the slide deck that accompany this call in the Investor Relations section of our website, mastercard.com. Additionally, the release was furnished with the SEC earlier this morning.

Speaker 1

Our comments today regarding our financial results will be on a non GAAP currency neutral basis unless otherwise noted. Both 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.

Speaker 1

A replay of this call will be posted on our website for 30 days. With that, I'll now turn the call over to Michael.

Speaker 2

Thank you, Warren. Good morning, everyone. Let's get right into it. So the headline is that consumer spending remains resilient and cross border travel continues to recover. With this backdrop, we delivered strong revenue and earnings growth through the focused execution of our strategy.

Speaker 2

3rd quarter net revenues were up 23% and adjusted operating income up 27%, both versus a year ago on a non GAAP currency neutral basis, excluding special items. Now the macroeconomic and geopolitical environment remains uncertain. Inflationary pressures have remained elevated Central banks are continuing to take aggressive steps to bring inflation in line. Tensions remain high with the war in Ukraine and the supply of natural gas to Europe is a concern. Despite all of this, unemployment rates remain low, wages are rising, consumer savings levels remain elevated and credit is readily accessible.

Speaker 2

Looking at our switched volume trends, domestic volumes remained steady, showing growth relative to 2019 levels relatively consistent to the Q2 2022. The trend towards spending on experiences continues. We saw notable strength in airline, lodging and restaurant and with a shift away from categories like home furnishings and appliances. The current mix between retail T and E and other categories of spend is now broadly similar to pre pandemic levels. Cross border.

Speaker 2

Cross border continues to recover as border restrictions Relative to 2019 levels, most regions are up sequentially, including a notable improvement in Asia. Cross border card not present ex travel continued to hold up well. Notwithstanding the continued strength in consumer spending, we will continue to watch the closely, including fiscal, monetary and other policy actions taken in response to events. This will inform our actions as it always has. Ability to respond quickly across a number of levers and will do so while maintaining focus on our 3 key strategic priorities.

Speaker 2

To focus on these areas that will create new opportunities for growth. It starts by solidifying our positions and payments, complemented by our differentiated services lines and our expansion into adjacent activities like open banking and digital identity. Moving on to some examples of how we are progressing against each of these. 1st, we are expanding in payments by enabling digital transformation with customers, putting volume growth, expanding acceptance and capturing new payment flows. There are now over 3,000,000,000 Master cards in circulation supported in part by programs such as our Digital First initiative.

Speaker 2

A Digital First solution starts with the ability for a consumer to acquire and then use a new card digitally in near real time. It's helping customers create a best in class digital experience leading to increased approval rates on average by 2 percentage points, reduced fraud on average by 4 basis points and increased spend for active account on average by 10%. To date, we have launched over 200 digital first customers around the globe, Santander in Mexico, Chase in the UK, Citi Banamex, ING in Spain and Nubank in Brazil are amongst the latest customers to partner with Mastercard deliver an end to end digital first customer journey. Also, we're driving growth in volume with new and renewed wins across a broad set of partners. In the U.

Speaker 2

S, we recently extended our exclusive deal with KeyBanc for debit, credit, commercial and small business as well as deepened our relationship on services. This quarter in partnership with Chase, we will launch a new co brand program with DoorDash. This deal further expands our presence in the digital food delivery space. We also went live with the Uber ProCard, enhanced loyalty and payments experience that will help drivers and couriers save on gas, fees and other expenses. In Europe, we have seen momentum in Italy with Credit Agricole securing an expanded deal that includes a credit and prepaid flip as well as securing the current Mastercard portfolio.

Speaker 2

And in Latin America, we have renewed our exclusivity agreement with MercadoLibre and secured incremental credit share with Banco Scotiabank Co Patria. Overall, another great quarter with notable wins. Let's shift to one area that is sometimes underappreciated. That is how we are enabling growth in payments by giving people and businesses more places to use their Mastercard. We have added more acceptance locations in the last 5 years than the previous 50s, and we are now accepted at more than 90,000,000 merchant locations.

Speaker 2

The preference for contactless payments that grew over the last 2 years continues. More than half of the in person switch purchase transactions are now tapped, up from approximately 1 third pre pandemic. And this trend will be bolstered by the adoption of new technologies such as tap on phone. Further, our technology and global reach enable growth and acceptance, while helping our partners drive their digital strategy. For example, we have signed with McDonald's to use our gateway capabilities, enabling them to easily offer more solutions to new markets beginning in Middle East and Africa.

Speaker 2

Finally, we're driving growth in payments by leading into innovation to capture a prioritized set of new payment flows. We continue to make progress in going after flows in the disbursements and remittances space by expanding into new use cases and geographies. For example, in the U. S. Gig economy, We signed a new global agreement with Airbnb to facilitate host payouts using Mastercard Send in select markets.

Speaker 2

We've also expanded with gaming payouts, launching our gaming fast payout program. To address account to account for sport and domestic payments, we signed a deal with Paguero, a leading global B2B network and solutions provider that provides accounts payable automation to some of the world's largest Corporate Brands. We're also growing commercial point of sale transactions by targeting small business, corporate T and E, purchasing and fleet flows. In the U. S, we announced our exclusive co brand partnership with First National Bank of Omaha to issue the HelloEllo Small Business Card.

Speaker 2

This product offers small business owners industry leading access to tools, benefits and services with a focus on equitable access to credit, very important. We also continue to target B2B accounts payable flows by expanding access and reach leveraging our virtual card capabilities. We signed a deal with Marketo to enable our next generation virtual card solution, Instant Pay. This solution intelligently and automatically sends instant payments to suppliers. We have also signed an agreement with SAP Talia to integrate our virtual card solutions into Talia and SAP solutions, enabling their customers to facilitate virtual card payments.

Speaker 2

We're also well positioned to capitalize on the return of travel with our Mastercard wholesale travel program. In Bahrain, we signed a deal with Infineas for their online travel agency and travel management company volumes. And in Europe, we signed a deal with the Fintech Swyle who are going after B2B travel flows in Europe and Latin America. As you can see, we continue to make steady progress in addressing our prioritized set of new payment flows. Now turning to services, where we delivered another quarter of strong revenue growth.

Speaker 2

Our services deliver a diversified revenue stream for Mastercard beyond payments. We accomplished this by adding new service capabilities as well as extending existing service offerings into new and existing customers. That continues to be a tremendous growth opportunity in this space. First up, we're excited about Dynamic Yield's unique personalization platform, which offers a great example of how we're adding new service capabilities. Since complementing the acquisition earlier this year, We've added dozens of new retail and commerce customers.

Speaker 2

A great example is Cionar, a German fashion store. I always share German examples if I can. They have more than 1400 stores in Europe and we have deployed our content personalization capabilities to additional markets. In addition, we are expanding our capabilities to financial institutions. Now beyond adding new services, there's an opportunity to grow by extending existing offerings into new and existing customers.

Speaker 2

In the Q3, we signed an agreement with Sky Italia,

Speaker 3

part of Sky Group,

Speaker 2

one of Europe's leading media and entertainment companies to enrich and commercialize a new service to support small businesses. Imbursed, a technology provider to insurance companies, is implementing our card linked services for their microsavings programs with Generali Insurance in Switzerland. And in Spain, we have grown our relationship with CaixaBank with 1 of our largest European Ethoca deals. The deal enables them to provide a more efficient chargeback flow for all the card portfolios. Beyond expanding in payments and extending in services, our 3rd key priority area is embracing new networks.

Speaker 2

As a reminder, our current focus is on 2 areas, Open Banking and Digital Identity. This quarter, I'll touch on Open Banking. While Open Banking is early in the game, it is a tremendous opportunity. We are engaged with a broad set of financial institutions and fintechs who are increasingly interested in a wide range of use cases. And what's unique and interesting here is that we are the partner that brings what is needed to scale and instill confidence in this space.

Speaker 2

Things like Responsible Data Practices, Consumer Protection and Deep Compliance, all on top of our robust technical capabilities, broad connectivity and extensive applications. So just to give you a flavor in the U. S, Quicken, a leading provider of financial management solutions, has selected Mastercard provider of consumer permission data for its popular simplified budgeting platform. We're also working with Fidelity with their innovation in student loan repayment for organizations that want to help their employees improve their financial wellness. And then the Jeff Henry, which will enable the community and regional financial institutions to be at the center of their account holder financial lives.

Speaker 2

They will do this, provide ability to securely see all of their financial accounts within and outside the primary financial institution in a single view. This will help enable consumers and businesses to make more informed financial decisions. This is just the beginning much more to come in open banking. Before wrapping up, I'd like to share an example of how we are incorporating our capabilities across all three strategic pillars. Our strategy to engage in the crypto economy leverages assets across payments, services and new networks, a combination that yields a truly differentiated value proposition.

Speaker 2

Here, we're deploying our payment capabilities to enable consumers to spend their crypto holdings on card and cash out their crypto wallets via Mastercard Send. This quarter, we partnered with Evonex, who will become our 1st partner in Australia to issue crypto funded cards. We're enabling off ramp solutions with Mastercard Send and recently added 5 new players in North America and Europe, including Binance, supported by checkout.com and new way. In all instances, we do not handle crypto, but rather take delivery of fiat currency. Our services and new networks capabilities are providing identity, cyber and consulting services for market participants.

Speaker 2

CryptoSecure is an innovative solution designed to bring additional security and trust to this digital ecosystem by helping card issuers address regulatory risks. We also recognize the interest people continue to have buying and holding crypto through trusted businesses like their banks. So last week, we announced CryptoSource, which is designed to give our financial institutions partners access to a comprehensive suite of buy, hold and sell services for select crypto assets. This will be augmented with our proven identity, cyber security and advisory services. To support these upcoming pilot programs, Mastercard is expanding its partnership with Paxos Trust Company to leverage their crypto asset trading and custody services.

Speaker 4

As you

Speaker 2

can see, our crypto strategy is bringing together best in class capabilities at scale, all built on our core principles of providing strong consumer protections, safety and security. In summary, we delivered another strong quarter of revenue and earnings growth, aided by a resilient consumer and a continued recovery in cross border travel. We continue executing against our 3 strategic priorities. We have strong momentum with our customers offering a diverse set of innovative solutions. We will continue to manage our expenses carefully within this macroeconomic environment and our well diversified and flexible business model positions us well for the future.

Speaker 2

Sachin, over to you.

Speaker 3

Thanks, Michael. Turning to Page 3, which shows our financial performance for the quarter on a currency neutral basis, excluding special items and the impact of gains and losses on our equity investments. Net revenue was up 23% supported by resilient consumer spending and the continued recovery of cross border travel relative to 2019 levels. Acquisitions contributed 1 ppt to this growth. Operating expenses increased 17%, including a 3 ppt increase from acquisitions.

Speaker 3

Operating income was up 27%, which includes a 1 ppt decrease related to acquisitions. EPS was up 22% year over year to $2.68 which includes a $0.06 contribution from share repurchases. During the quarter, we repurchased $1,600,000,000 worth of stock and an additional $505,000,000 through October 24, 2022. So let's turn to Page 4, where you can see the operational metrics for the 3rd quarter. Worldwide gross dollar volume or GDV increased by 11% year over year on a local currency basis.

Speaker 3

On the same basis, if you exclude Russia from the prior period, GDV increased by 18%. In the U. S, GDV increased by 10% with credit growth of 20%, reflecting in part the recovery of spending on travel. Debit increased 2%. Excluding the impact of the roll off of a previously discussed customer agreement, debit increased approximately 5%.

Speaker 3

Outside of the U. S, volume increased 12% with credit growth of 15% and debit growth of 9%. Cross border volume was up 44% globally for the quarter, reflecting continued improvement travel related cross border spending. Turning to Page 5, switch transactions grew 9% year over year in Q3. Excluding Russia from the prior year, switch transactions grew 19% year over year in Q3.

Speaker 3

Card present and card not present growth rates remained strong. Card Present growth was aided in part by increases in contactless penetration in all regions when excluding Russia. Contactless now represents 54% of all in person switch purchase transactions. In addition, card growth was 5% or 10% if we exclude cards issued by Russian banks from the prior year card count. Globally, there are 3,000,000,000 Mastercard and Maestro branded cards issued.

Speaker 3

Now let's turn to Page 6 for highlights on the revenue line items, again described on a currency neutral basis unless otherwise noted. The increase in net revenue of 23% was primarily driven by domestic and cross border transaction and volume growth as well as growth in services, partially offset by growth in rebates and incentives. Acquisitions contributed 1 ppt to this growth. Looking quickly at the individual revenue line items, domestic assessments were up 9%, while worldwide GDV grew 11%. The difference is primarily driven by mix.

Speaker 3

Cross border volume fees increased 57%, while cross border volumes increased 44%. The 13 ppt difference is primarily due to favorable mix at higher yielding ex intra Europe cross border volumes grew faster than intra euro cross border volumes this quarter. Transaction processing fees were up 22%, while switch transactions grew 9%. The 13 ppt difference is primarily due to favorable mix, FX related revenues and pricing. Other revenues were up 22%, including a 2 ppt contribution from acquisitions.

Speaker 3

The remaining growth was driven primarily by our cyber and intelligence and data and services solutions. Finally, rebids and incentives were up 26%, reflecting the strong growth in volumes and transactions and new and renewed deal activity. Moving on to Page 7, you can see that on a non GAAP currency neutral basis, total adjusted operating expenses increased 17%, including a 3 ppt impact from acquisitions. Excluding acquisitions, the remaining increase was primarily due to higher personnel costs to support the continued execution of our strategic initiatives. Turning now to Page 8, Let's discuss the operating metrics for the 1st 3 weeks of October.

Speaker 3

For your reference, to help you understand the trends in the business ex Russia where we suspended operations in March 2022. We have included an appendix later in this deck to show all the data points from the schedule if you excluded activity from Russian issued cards from prior periods. As a general comment, our metrics are holding up well in October. As expected, the year over year growth metrics faced tougher comps as we began lapping periods in 2021 when COVID related restrictions eased and spending levels started to rebound. However, it is important to note that all metrics continue to hold up well relative to 2019 levels.

Speaker 3

Going through the metrics in turn, starting with Switch volumes. For the 1st 3 weeks of October, we grew 17% year over year, down 1 ppt versus Q3. Switch transactions grew 9% year over year through the 1st 3 weeks of October, consistent with Q3. As a reminder, Russia has a relatively low average ticket size, which results in a larger relative impact to this metric. Overall, cross border volumes through the 1st 3 weeks of October grew 36% year over year, down 8 ppt8 versus Q3.

Speaker 3

Cross border travel had another quarter of strong growth as border restrictions continue to be lifted. In the 1st 3 weeks of October, cross border travel was up 62% year over year, down 11 ppt versus Q3 due to more difficult year ago comps as I just noted. 5% of 2019 levels, up 1 ppt from Q3 levels. Cross border card not present, excluding travel, was up 12% year over year in October, which includes the impact of significant e commerce promotional activities and is down 1 ppt from Q3. This metric continues to hold up well in relation to 2019 levels.

Speaker 3

Turning to Page 9, I wanted to share our thoughts on Q4. Let me begin by saying that the execution of our strategic priorities is translating into expanded and deeper customer relationships and the broader adoption of our material solutions and differentiated services. Consumer spending remains resilient in the face of macroeconomic headwinds and cross border travel continues to recover as border restrictions ease and consumers shift their spending back towards travel. Just to update you on some metrics we are tracking. Asia, which represented approximately 14% of cross border inbound travel pre pandemic in 2019 is at approximately 76% of 2019 levels in Q3, up from about 60% in Q2.

Speaker 3

We continue to believe there is more room to grow as several travel corridors, particularly in Asia, still remain restricted and airline industry capacity continues to build back up. We remain well positioned to capitalize on this growth with our travel oriented portfolios and service offerings, including access to an extensive airport lounge network and concierge services and our Global Mastercard Travel Rewards program, which allows issuers and merchants to connect to provide consumers with unique benefits through a simple digital experience. As we have laid out, there are a number of factors that could influence future economic growth. These include elevated inflation and rising interest rates and geopolitical tensions balanced against low unemployment, rising wages and high savings levels in particular. We are monitoring each of these.

Speaker 3

As Michael just said, we are prepared to act quickly to adjust our expenses to reflect any meaningful change top line growth. With respect to the Q4, we expect year over year net revenue to grow at the high end of a mid teens rate on a currency neutral basis excluding acquisitions. This is consistent with prior expectations and sequentially reflects: 1, generally resilient consumer spending relative to 2019 levels 2, stable to slightly improved cross border travel growth relative to 2019 levels with some continued improvement into Asia and some moderation within Europe 3, higher rebates and incentives as a percent of gross revenues due to elevated deal activity consistent with seasonal norms and finally, the lapping of a strong year ago quarter as border restrictions were lifted in the U. S, UK and Canada during Q4 2021. Acquisitions are forecasted to add about 1 ppt to this growth, while foreign exchange is expected to be a headwind of approximately 6 to 7 ppt for the quarter.

Speaker 3

As a reminder, the euro has depreciated significantly year over year and is the primary driver of this headwind. From a sensitivity standpoint, based on the current mix of the business, the annual impact of net to net revenue of a $0.01 change in the value of the euro relative to the U. S. Dollar is approximately $55,000,000 From an operating expense standpoint, we expect Q4 operating expenses to grow at a low double digit rate versus a year ago on a currency neutral basis, excluding acquisitions and special items. Acquisitions are forecast to add about 3 ppt to this group.

Speaker 3

Foreign exchange is expected to be a tailwind of approximately 4 to 5 ppg for the quarter. Other items to keep in mind On the other income and expense line, we are at an expense run rate of approximately $100,000,000 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 19% in Q4 based on the current geographic mix of our business. And with that, I'll turn the call back over to Warren.

Speaker 1

Thanks, Sachin. Audra, we're now ready for the Q and A session.

Operator

Thank you. May affect your position in the queue. We'll take our first question from Sanjay Sakhrani at KBW.

Speaker 5

Thanks. Good morning. Sachin, I was just wondering if you could just parse out a little bit of the 4th quarter net revenue expectations. It was a little bit lower than We were thinking, I'm just curious, is it incentives kind of spiking up in the Q4 or is it just the gross number? Any color there would be helpful.

Speaker 5

Thanks.

Speaker 2

Sure, Saiy. First, I'm just going

Speaker 3

to kick it off by saying the Q4 thoughts that I You are very consistent with what we had shared in our implied 4th quarter numbers when we gave you our full year guidance at the last earnings call. So very consistent in terms of what we're sharing with you in terms of Q4. But just a few things I want to kind of emphasize as to what our key assumptions going into the Q4 are. One is, we continue to believe that There will be a resilient consumer and spending from the consumer relative to 2019 levels will be generally resilient. Number 2, we are expecting stable to slightly improved cross border travel growth relative to 2019 levels.

Speaker 3

In terms of rebates and incentives to your question, As a percentage of gross revenues, we expect them to be higher in the Q4. This is very consistent with our seasonal norms. So nothing unusual as far as I'm concerned there. And then also again, if you look at it on a sequential basis back to comparing Q4 to Q3, there is the lapping effect, which I So really, I mean, the summary of what I guess I'm sharing with you is our Q4 thoughts are very consistent to what we had actually shared with you previously.

Speaker 5

Okay. Thank you.

Operator

We'll move next to Lisa Ellis at MoffettNathanson SVB.

Speaker 6

Terrific. Good morning, guys. Thanks for taking my question. I wanted a question about business resilience, I guess, looking forward in the face of a potential economic downturn. I'm just thinking about the fact that over the last several years, Mastercard increased the diversification in the business significantly with more debit, more fast ACH, more services, etcetera, more B2B.

Speaker 6

So how do you think about kind of where you are now in terms of resilience of the business if we do at some point see a slowdown in the consumer side of spending? Thank you.

Speaker 2

Good morning, Lisa. Thank you for your questions. So let me kick off on that one. You imply the answer in your question actually. It is the nature of our continued diversification.

Speaker 2

I mean just to remind everybody on why are we diversifying. It is to give us a diversified revenue stream, but it's also to differentiate our payments. And all of that plays hand in hand with better services. We're going to see More payment volumes come out with better service. It's easier to get into some of the new payment flows.

Speaker 2

For example, our safety security solutions are Well, sought after in the P2P space where there is fraud issues all over the place. So all that, I think it's a good starting point for us. If I just look back over the last 2 years, where we certainly had, a slowdown On the payment side, in the macroeconomic overall, end services carried today very significantly for us. So We're just going to continue to push harder there. And then new flows, I gave you a whole range of examples earlier on how we are building out the new flows.

Speaker 3

And if you

Speaker 2

just put some light on to commercial POS. So here is this is existing tools that we have. We don't need to build a lot for it. It's a space that we haven't penetrated significantly in the past, and we are ready and we're going in. This is a $14,000,000,000,000 opportunity that we're going after, which is payments diversification going on in addition to our services diversification.

Speaker 2

And Earlier on, the stats on acceptance, just more places where people can spend. In the end, then your people will spend even in a downturn. It doesn't actually matter for us What they spend on, what they spend on the Mastercard, we give them more opportunities to do so. So diversification is the name of the game.

Speaker 7

Thank you.

Operator

We'll move next to Darrin Peller at Wolfe Research.

Speaker 8

Hey guys, thanks. Your model is clearly still showing benefits of inflation. And If you could just kind of remind us again the sensitivity in the areas you see in the basis points driven inflation impact, but also Whether or not there's any pricing changes you guys are interested in employing on the non basis point side, whether it's transactions or it's services probably more importantly, just given what we've seen or if you've done so already. And then maybe just on a side note on that, on the other side would be the expense management and the willingness, Just how willing you are on, for example, marketing to flex there if necessary? Thanks guys.

Speaker 2

Hey, Darren. I'll take that question. I guess to your

Speaker 3

point around inflation, look, I mean, persistent inflation for long periods of time, which calls For a shift in share of wallet away from carded categories into non carded categories would be the one area I would actually flag as a potential headwind as it relates our business model. But putting that issue aside, the reality is you're very correct about the fact that we charge our basis points and cents per transaction. Our basis points are our nominal value spend and that reflects the impact of inflation in there. So the reality is, as we said in the past, modest inflation and inflation in carded categories, we're generally We kind of our business model accounts for that because depending on if it's carded, it doesn't matter like Michael said, whether it's happening in travel or it's happening In food and clothing, those are carded categories and you kind of get the benefit of that come through. Look, I mean, as it relates to your question on We've always remained disciplined on expenses.

Speaker 3

The thing which we always keep in mind is a few things. One, we want to make sure that we're investing in the long term growth of our business along the 3 strategic priorities, which Mike will talk about. We will continue to do that. That being said, as we demonstrated during the COVID environment, We do have the opportunity to flex our expenses, whether it's around marketing, whether it's around professional fees, whether it's around T and E, it all is a function of making sure we are keeping an eye on the top line, keeping an eye on the bottom line while we're actually delivering what we need to do from an expenses standpoint. And we'll continue to do that going forward.

Speaker 3

The reality is we keep a close eye on to what are the things which are in demand from our customers, what is it that the consumer wants, and we are pulsing our expenses in that regard. An example would be as you remember in COVID, when travel is out of favor, We started to pull back on A and M related to travel. It just didn't make sense for us to be doing at that point in time. So we'll remain flexible on that. And then there are initiatives which we've got, which are longer term initiatives, which will pay off over many, many years in the future, where we have the opportunity to actually pulse the base at which we're incurring expenses on those to the event in the event we start to see a little bit of a slowdown in terms of top line.

Speaker 3

You asked the question on pricing. Our philosophy around pricing is very consistent as it's always been. We price for the value we deliver and our assumption from a pricing standpoint, whether it's pricing in basis points or cents per transaction is very tightly correlated to the value we're delivering to our customers and to the end consumers and to our merchant partners. So all of that's very consistent at the end of the day. We assume minimal net pricing, net of rebates and interest from our pricing standpoint.

Speaker 2

Yes. I just want to kind of Darren, I just want to add one point here. And that is looking back at the last over 2.5 years now, back to the Q2 of 2020 when revenue was severely impacted by a truly unprecedented event out there. So to the power of the levers that we have and a range of levers that we have to modulate our expenses, hiring, AMM, professional fees, P and E, your market appetite and all of that, it just showed that we did not have to make any compromises when it comes to driving our strategic priorities. We pulled through on new flows, we pulled through on services expansions and so forth.

Speaker 2

The model is wide and flexible. That helps us a lot. And as I look forward, there's optimism in how we're going to navigate that.

Speaker 8

Thanks guys.

Operator

We'll take our next question from Harshita Rawat at Bernstein.

Speaker 7

Good morning. Michael Sachin, can you talk about online debit routing in the U. S? The Fed very recently put out clarification accruals. If I recall correctly, last time you ended up gaining market share, but Durbin was implemented.

Speaker 7

So how does it impact Mastercard online debit routing. Thank you.

Speaker 2

Right. Hey, Hashita. Thanks for the question. There's always something in debit routing going on. So here we have Clarification of the rule by the Fed.

Speaker 2

And it takes us all the way back to a decade ago when there was this requirement to have 2 networks on every debit card. And basically what the Fed here clarified is that this is applying to whether it's a debit transaction that's made online or in store. So pretty simple, pretty straightforward implementation by mid of 2023. So we have some time, but we will be ready and we'll be implementing. I think really what that does is we will just continue to compete with all the assets that we have in debit.

Speaker 2

I'm not really sure what this will do to the market, but we will Certainly be there leveraging our technology to win more debit in the United States.

Speaker 6

Thank you.

Speaker 3

And Rajit, I'll just add one additional comment to Michael just said, which is, as you know, we've been investing pretty heavily in our services capabilities, some of which relate to cyber intelligence. And in an environment where our partners, whether it's the merchants or the issuers, need more of our services to better manage their forward capabilities. In the online environment, we stand ready to do that as well.

Speaker 7

Thanks very much.

Operator

We'll take our next question from Tien Tsin Huang at JPMorgan.

Speaker 9

Hey, thank you. Good morning. Just You mentioned nothing unusual on rebates and incentives, but I just wanted to ask as I sometimes always do with deal activity versus 90 days ago. Any change there, is your appetite to drive program growth versus maybe more disciplined growth on their side? Are there changes in timing of deals and implementation, things of that nature?

Speaker 3

Thanks. Sure, Tien Tsin, I can take that. Tien Tsin, I think you know that we've been active in the marketplace. We've been winning share globally, and that's just part of strategy of what we want to do, which is on a disciplined profitable basis. We want to win share and deliver more in the nature of services on that share to optimize and grow our overall net revenue.

Speaker 3

I'll start with that as kind of the headline. But on your specific question on Q4 on rebates and incentives, nothing unusual. It's a rich pipeline. We continue to be active in the marketplace. We're not seeing any changed kind of behavior of patents as it relates to how our issuing partners are in the marketplace, and we just remain active, and that's really the essence of what we're seeing there.

Speaker 9

Great. Thanks for the update.

Operator

Next, we'll move to Ashwin Shirvaikar at Citi.

Speaker 4

Thank you. Hi, Michael. Hi, Sachin. If I can ask about cross border now that you've seen some normalization in Travel. If you could kind of talk about how much more travel improvement there is yet to come in your view and the mix of cross border now that some of the normalization has happened as we look to travel versus non travel.

Speaker 3

Sure, Ashwin. I can take that question. So first, Ed kind of mentioned that We said in the last earnings call, we saw opportunity in terms of further recovery in travel. We saw some of that come through in our Q3 numbers. We still believe there's potential from a cross border travel recovery standpoint, in particular in Asia Pacific.

Speaker 3

I shared a metric about how Asia Pacific inbound cross border travel and approximately 76% in Q3 of 2019 levels. That just goes to show there's some more room to grow there. I mean there are several markets in Asia Pacific which should remain to be open. Also airlines are bringing more capacity back on. As you know from our Personal experiences, getting seats on planes is hard and it's expensive.

Speaker 3

And so the reality is all of that should be Helpful in terms of the potential for cross border travel recovery. The other point, which I think you alluded to Ashwin, is as it relates to the mix. And the mix is also important because the mix of cross border has not reverted back to historical mixes. So said differently, if you remember, as we were going through COVID, we first saw recovery take place in intra Europe. And intra Europe is generally lower yielding.

Speaker 3

We've recently been seeing a stronger growth pattern in ex intra Europe cross border. And so the reality is That makes us not back to the pre pandemic levels at this point in time.

Speaker 2

And just one thing to add. It isn't exactly your question, but that whole space has been in focus for us pre pandemic, during the pandemic and now while airlines were struggling With really no flights taking off, we were a strong partner and it showed in how the engagement with airlines and travel oriented portfolios work now. So we stand well positioned to benefit from the trend that Sachin just talked about, on the services side as well as on the payments and the co brand side. So exciting space. I think our bets are paying off.

Speaker 10

Thank you.

Operator

We'll go next to Rayna Kumar at UBS.

Speaker 11

Good morning. Thanks for taking my question. You continue to see very strong growth in Latin America, 29% GDV growth in the quarter. Can you discuss some of the key drivers of that growth and how sustainable you think it could be going into 4Q and into 2023? Thank you.

Speaker 2

Frina, let me start off on that. Latin America, fascinating region for us, highly diverse from a super well developed Brazil to markets at the other spectrum high travel markets with the Caribbean, so Mexico. So you have all of that in the mix. It's really interesting when you Peel the onion of it and you look at some of these markets and you compare them, 2 of the largest markets, for example, Brazil and Mexico. If You look at the digital penetration in Mexico compared to Brazil, there is so much more potential to go.

Speaker 2

So there is upside in digitization. There's other issues that require some of our solutions. The region has experienced some fraud issues Generally in payments, so our safety and security solutions are in great demand and a great driver for growth for us in the region while the underlining digitalization continues. So you put those trends together, it's all fairly attractive. And I talked to you about our engagement in the crypto economy.

Speaker 2

If there is one place in the world where crypto is really in focus, it's in that a lot of innovation in the space. So across all payments services and new payment flows and innovation, this is a region that has showing full ferment for us. Yes, right, I'll just bring to life one

Speaker 3

of the points which Michael talked about in terms of increased trends towards digitalization. As it relates to our performance in Latin America in Q3 and going forward, the reality has been we've been very focused on the conversion of Maestro to Debit Mastercard. And this has been part of what we as a company have been doing for a very long time. You're seeing the fruits of that come through. Because as you know, as you go down the path of converting Maestro to debit Mastercard, whether It's a companion digital debit Mastercard or it's an actual conversion of the card.

Speaker 3

It now becomes enabled for online transactions back to the trend, which Michael is talking about. So it's all about us trying to enable those cards and we've been seeing good migrations take place from Maestro to debit Mastercard.

Operator

We'll go next to Jason Kupferberg at Bank of America.

Speaker 12

Thanks guys. Good morning. I wanted to see if you can unpack a little bit what you're seeing in terms of consumer spending across different parts of Europe. And then Sachin, I wanted to see if you can make just a quick comment around what you guys are envisioning the potential FX headwind to revenue in 2023 just based on current rates? Thanks.

Speaker 3

Sure. So Jason, I'll give you just on your Moments in Europe. Remember, in terms of what you're seeing in our metrics, you're seeing not only what the underlying economies are doing, but also the impact of our share growth, which has been taking place in Europe. So it's kind of the amalgamation of all of that which is coming through. In terms of regional patterns, I would tell you that We are not necessarily seeing any meaningful change in terms of trends across the continent in terms of how the spending patterns are taking place.

Speaker 3

The consumer generally back to our comment earlier on consumer being resilient and strengthen consumer, that's certainly the case. Now as you think about different markets, in markets like the U. K, we're seeing stronger growth. A large part of that is being driven by the fact that we've had recent share wins in the U. K.

Speaker 3

And then there are share wins we've spoken about in the past in Continental Europe, which are still to come to effect, right? So for example, we have talked about our win with Deutsche Bank in Germany, that's still to come to effect. So anyway, So there's a mix of all of that, which is kind of taking place at this point in time. On your question around FX, I shared with you in my prepared remarks what the annual impact to net revenue of a $0.01 change in the value of the euro would be relative to the U. S.

Speaker 3

Dollar, which is about $55,000,000 on an annual basis. We wanted to put that out there so you kind of have a sense on What the potential headwind or tailwind could be depending on what happens with FX rates. The hard part is predicting FX rates. And so Given the current mix of our business, that's the sensitivity I'll share with you as it relates to how you should think about what the impact could be for 2023.

Operator

And we'll go next to Tim Chiodo at Credit Suisse.

Speaker 13

Great. Thank you for taking the question. I want to dig in a little bit on Mastercard Send relative to Visa Direct. I was wondering if you could call out For us and investors, any of the different maybe strategic focus areas, if there are any pricing differences or if there are any mechanical differences or maybe use cases where you seem to be getting traction relative to Visa Direct? That would be extremely helpful.

Speaker 2

All right. Let me take that. So all the Visa related stuff, you should ask them, obviously. So I'm not going to do a direct comparison here, but I can tell you how we are thinking about it. So first of all, Just earlier on, I talked a lot about the crypto space.

Speaker 2

So just give you one example. Here is an interesting new technology and a growing ecosystem. And what's the way to get out of your crypto wallet balances is you turn it into fiat and you use Mastercard Send. We were right on this from the 1st day and we have all these partnerships that do exactly that. Then you go around and Basically, there is new flows, there is geographies, there is use cases.

Speaker 2

So those are the dimensions on how we are looking at this. We are very systematic about it. This has to have ubiquity. We're looking at all regions from a coverage perspective. We're looking at the key use cases.

Speaker 2

We're very selective on use case Because here you could get lost in 1,000 flowers bloom. The examples I gave to you on partnering with large global firms Like Airbnb, that is the approach where you're going to say, you partner with somebody that is in all the regions and covers the use case that just matters to people out there. So that's essentially the approach on Mastercard Send. It has a domestic angle to it. It has a cross border angle to it.

Speaker 2

It grows at significant rates. We're very happy with it across all of these aspects that I just said. So one thing to add, earlier we were talking about the numbers ex Russia. So Russia was a huge success From day 1, that's in fact where a lot of our learnings came from. And we exited Russia, as you know, in March this year.

Speaker 2

So that is skewing the numbers a little bit, but the learnings are not going away. We're putting that into a whole set of other markets. And to the earlier question around Europe, particularly in Europe, we see some of those learnings translate in other parts of Eastern Europe countries and so forth.

Speaker 3

And just to add to what Michael said, particularly on the remittances side, we're seeing very good traction take place in terms of cross border remittances and the capabilities we've Got there and the capabilities we're building there. Our global reach out there is holding us in really good stead as it relates to how we are able to tap our partners to generate more and more going down that path. So that's a it's a bright spot in terms of the broader remittances piece as well.

Speaker 13

Excellent. Thank you for all that context on Mastercard Send.

Operator

We'll go next to Andrew Jeffrey at Truist Securities.

Speaker 13

Hi, good morning. Thank you for taking the question.

Speaker 10

Michael, I wonder if you could give us

Speaker 13

an update on your processing efforts globally, maybe with an emphasis in Europe, whether you're taking share and winning business in processing and how you think that can affect over time both the net revenue yield and maybe the profitability of the business too.

Speaker 2

Right. So Andrew, thanks for that question. So starting with Europe, but then we could extend this conversation looking at the Middle East or at Asia. So we have processing assets in those parts of the world. And just to illustrate how this matters.

Speaker 2

There is obviously a whole new set of players that are entering the payment space who are whose prime raison d'etre isn't really the process. They want to have a great financial app. So they're looking downstream for a whole set of solutions that complete what they do, make it relatively easy out of one hand, and that's what we provide. And this is really the explanation for some of our progress on the FinTech side or the NeoBank side. Those guys, where we have those partnerships, 70% win rate, I'd like to add here, is really to a large extent coming down to our processing capabilities, which are state of the art modern fintech oriented processing capability.

Speaker 2

So it's been a joy for us to watch. In some parts of the world, we do partnerships. In some parts of the world, we are doing partnerships, for example, with Network International, parts of Africa and so forth. So it's a combination of our own assets where we feel there is scale and differentiation and sometimes is through partners. So overall, there's a good play here in processing and it's one of the services that we have in our portfolio.

Speaker 2

I'll just add

Speaker 3

some color as it relates to beyond the processing piece on our efforts around switching and the proportion of our total Mastercard branded transactions, which as you know, we've been pushing hard to actually get more switching share. And the reality is that is working very nicely. We are seeing growth in our proportion of switch transactions, which now stands at greater than 60% of total transactions worldwide. And that's Super important, particularly where we are seeing improvements and progress is in Latin America and in Asia Pacific, both of which had been generally low index markets from a switch transaction share standpoint in the past. So lots of good effort going on there and we're seeing good progress come through.

Speaker 13

Thank you very much.

Speaker 1

Sure.

Operator

Our next question comes from Bryan Keane at Deutsche Bank.

Speaker 14

Hi, good morning. Satya, just wanted to go through the yield improvements again. It sounds like it's a lot of mix and some pricing in there. How do we think about the yields going forward into the Q4 and into next year? Does is there some comps get a little tougher as we get into next year for these yields?

Speaker 14

Thanks.

Speaker 2

Sure. So Brian, what you're seeing in

Speaker 3

nature of yield improvement quarter over quarter. This is net revenue yield divided by GDV. You can attribute a large part of that to just mix. As you know, our inter cross border has come back pretty nicely. And as that has come back nicely, that is high yielding and that gives us the benefit and the I will point out that as it relates to Q4, you should expect that the yield will decline some, which is very consistent with what you see every year.

Speaker 3

That is just the nature of how the business works just because Q3 happens to be a large cross border quarter and you still tend to see the benefit of that come through. In Q4, you start to see some of that slowdown. Now you asked the question about 2023. I would tell you, we as a business continue to remain very focused on driving and maximizing our net revenue yield. And there's multiple factors which are going to influence that, some of which is the mix of cross border domestic certainly, but also things around Just like we just talked about how we're increasing our proportion of switch transactions.

Speaker 3

The more the switching we do, the greater the yield gets and that's what we're focused on. How we talked about the shift from Maestro to debit Mastercard. Again, lots of focus around that and so we're very focused on driving that. All of which when you overlay all the services we've been bringing to the market. You get the benefit of that coming through as well.

Speaker 3

So generally speaking, as I look forward, I kind of feel like Our focus as a business from a driving yield standpoint continues and I don't see anything necessarily which is going to change dramatically going into 2023 from yield trajectory standpoint. And Sachin just kind

Speaker 2

of explained the strategy again. That's what we're trying to be in the payment transaction annual at profitable levels, but then use our services to continue to improve the overall revenue yield. And that is that combination that So it makes us look at the future very optimistically. So I don't really see anything changing here. These are the tools that we have and we're using them effectively.

Speaker 13

Great. Thank you both.

Operator

Next we'll move to Ramsey El Assal at Barclays.

Speaker 10

Hi, thank you for taking my question. I had one on rebates and incentives and more specifically kind of how the mix of those rebates and incentives have changed over the past several years. I guess the underlying question is, are you having to incentivize an expanding number of value chain players, fintechs, merchants to kind of support consistent growth? How has that mix evolved over time and how do you expect it to evolve in the future?

Speaker 3

Yes. So in terms of rebates incentives, the mix in terms of how we're We've historically been more focused as in we have actually delivered higher levels of rebates and incentives to our issuing partners that continues to be the case as to where we are actually expanding most of our rebates and incentives dollars. And that really hasn't changed. And as it glitched the mix between rebates and incentives for domestic volumes versus cross border, I'd say that mix also hasn't really changed. As you know, cross border has generally been index lower from a rebates and incentive standpoint and that continues very much to be the pattern right now as well Ramsey.

Speaker 10

Okay. So pretty stable

Operator

We'll move next to David Togut at Evercore ISI.

Speaker 1

David, are you there?

Operator

And sir, you may have your line on mute. We're not hearing you.

Speaker 1

Andrea, maybe we go to the next please and then we'll see

Speaker 3

if we can get back on.

Operator

Yes. We'll move next to Bob Napoli at William Blair.

Speaker 2

Hi, thank you and good morning. Just would like an update on your B2B your thoughts around the B2B payments market and the opportunities there. I know you called out a commercial POS of $14,000,000,000,000 And what inning are we in? What is any thoughts on the changes of that market, the growth of that market. And thank you.

Speaker 2

Right. Yes. So I'm really not into baseball analogies. So that's Earlier, I was talking about the first half of the game. But to your question, very specifically, B2B, huge opportunity from a volume perspective.

Speaker 2

We called it out and We cut it down into very distinct types of flows at our Investor Day at the end of last year. To focus on B2B accounts payable on one hand, but there's other B2B flows, which we're very active in. For example, through all the illustrations I gave you earlier on virtual card use cases. So virtual card is The current and most immediate answer to go after B2B flows. There is the commercial POS piece somewhere, which is kind of in between space between B2B and small business.

Speaker 2

And that's a huge space with a lot of cash and checks. So you build it up over those into the accounts payable piece. And you know, the long range vision that we have on accounts payable It's really the Mastercard Track Business Payment Service piece where we say over time, we're building a 2 sided network here. That continues to grow, but that takes time. But we have the large we have large players around the table HSBC, JP and so forth.

Speaker 2

So That's a good initiative for us. But for now, we are very active on virtual cards to solve the issues of buyers and suppliers in the space. So We have not moved away from this by any stretch of the imagination. This is a huge opportunity, and we're going to go after it. Thank you.

Speaker 1

Audra, I think we have time for one last question.

Operator

We'll take that question from Jamie Friedman at Susquehanna Financial Group.

Speaker 2

Hi. Sachin, transaction processing fees increased 15%, but switched transactions increased 9%. I know you called out in your prepared remarks mixed changes. I was just wondering if you could elaborate on that. Thank you.

Speaker 2

Sure. So There are

Speaker 3

a few things going on right there where our transaction processing fees are growing faster than the underlying driver, one of which is the mix change. And really remember, When we make cross border revenues, we make cross border revenues on a basis point basis as well as on a cents per transaction. And The component which is on basis points sits in cross border volume fees and there's some component of cross border related cents per transaction that sits in terms of number of transactions which we process with the transaction processing fees, which is where the mix effect comes through because as you've seen, inter cross border grow at a rapid pace. That's contributing to that delta between what we're seeing in the revenue line and what we're seeing in the driver, Because cross border is higher yielding than this domestic. There are a couple of other factors which cause for that differential as well.

Speaker 3

I talked about FX related revenues and some level of pricing. Those are the 2 other contributors, which go into that, Jamie.

Speaker 5

Thank you. Sure.

Speaker 2

All right. Let me bring the call to a close. First, This morning, I sent a note to all colleagues here at Mastercard, thanking them for a strong quarter because they are the ones who make all of this happen. So a shout out to them as always. And with that, we'll talk to you in the next quarter.

Speaker 2

Thank you very much. Thank you.

Operator

This concludes today's conference call. You may now disconnect.

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