Mastercard Q3 2021 Earnings Call Transcript

Quartr
Provided by Quartr
October 27, 2021

Key Takeaways

  • Mastercard reported Q3 net revenue up 29% and EPS up 48% versus last year on a non-GAAP currency-neutral basis, lifting net revenues to 11% above pre-COVID 2019 levels.
  • Domestic spending remained robust and overall cross-border volumes returned to 2019 levels, with cross-border travel recovering to 72% of 2019, suggesting significant upside as global travel corridors fully reopen.
  • The company advanced its strategic priorities by launching Mastercard Installments (an open-loop BNPL solution), securing new core and fintech deals worldwide, and planning acquisitions in Open Banking (Aya) and crypto services (CipherTrace).
  • Mastercard diversified and differentiated its services with major partnerships—extending PayPal debit across Europe, teaming with Vodafone for mobile money in Egypt, expanding B2B rails with Track Business Payment Service and launching crypto integrations with wallets and exchanges.
  • For Q4, management expects net revenue growth in the low-20s percentage range (currency-neutral, excluding acquisitions) with disciplined expense growth in the low double digits and a ~2–3 ppt revenue lift from recent acquisitions.
AI Generated. May Contain Errors.
Earnings Conference Call
Mastercard Q3 2021
00:00 / 00:00

There are 10 speakers on the call.

Operator

Good day and thank you for standing by. Welcome to the Mastercard Third Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen only mode. After the speaker presentation, there will be a question and answer session. Please be advised that today's conference is being recorded.

Operator

I would now like to hand the conference over to your speaker today, Mr. Warren Jha, Head of Investor Relations, please go ahead.

Speaker 1

Thank you, Jomarya. Good morning, everyone, and thank you for joining us for our Q3 2021 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, 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 Additionally, the release was furnished with the SEC earlier this morning. Our comments today regarding our financial results will be 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.

Speaker 1

Actual performance could differ materially from these forward looking statements. Information about the factors that could affect future performance are summarized at the end of our earnings release and in our recent SEC filings. A replay of this call will be posted on our website for 30 days. With that, I will now turn the call over to our Chief Executive Officer, Mike Miebach.

Speaker 2

Thank you, Warren. Good morning, everyone. So let me start by giving you the highlights of the quarter. Strong revenue and earnings growth continued. Net revenue up 29% and EPS up 48% versus a year ago, as always on a non GAAP currency neutral basis.

Speaker 2

On the same basis, Quarter 3 net revenues are now 11% above pre COVID levels in 2019. We're seeing continued strength in domestic spending, And overall, cross border volumes are now back at 2019 levels, though there still remains significant growth in cross border travel. We continue to execute against our strategic priorities with good progress on the product and deal fronts this quarter, and we're excited About our acquisition of CipherTrace in the crypto services area and our planned acquisition of Aya in Open Banking. So those are the highlights. Looking at the broader economy, domestic spending levels continue to improve even though economies are facing supply chain constraints, Energy prices and some other inflationary pressures.

Speaker 2

According to our quarter 3 spending pulse report, which is based on all payment types, including cash and check, U. S. Retail sales ex auto, ex gas were up 5% versus a year ago and 12% versus 2019, reflecting the return to in person shopping and the ongoing e commerce strength. Spending costs also indicated that overall European retail sales in quarter 3 were up 5% And 6% versus 2019. As it relates to COVID specifically, the outlook continues to get better.

Speaker 2

Case numbers generally improving, new therapeutics in the pipeline, progress on vaccinations and businesses becoming more agile in the face of remaining We're also seeing a general trend with the opening of travel corridors, notably inbound into the U. S. And some easing of restrictions And Asia. Now turning to our business. While the pandemic is not fully behind us, we're now in the growth phase in most markets domestically, And in many markets, in cross border spending as well.

Speaker 2

We will therefore turn the page and move beyond the 4 phase framework that guided us through the last 19 months Switch volumes improved quarter over quarter. We saw particular strength in consumer and commercial credit. Debit spend remains elevated, although it has moderated in recent weeks in part due to waning stimulus benefits. In terms of how people are spending, Cart present volumes continue to improve as people are getting out and shopping more, while we're still seeing sustained strength in cart not present spend. So regardless of whether people want to shop online or in person, our solutions support that choice and position us well to participate in both trends.

Speaker 2

Now let's take a look at cross border. Overall, cross border returned to 2019 levels in August, driven by improvements in consumer And commercial travel as well as the ongoing strength of cross border card not present spending ex travel. Our cross border travel improved from 48% of 2019 levels in the 2nd quarter to 72% this quarter, Substantial upside potential still remaining as and when borders open. Against this backdrop, we're investing in the growth for our business, Including the enhancement of our leading technology capabilities, like expanding our network edge to connect directly with our customers through the cloud, providing faster And of course, we remain focused on our strategic Number 1, growing our core products while driving the shift to digital 2, differentiating and diversifying with our services And 3, leveraging our multi rail capabilities to offer choice across payment applications. Now let's take them 1 by 1 and turn to how we're growing our core products and driving the shift through digital, through Mastercard installments, By winning core deals and by continuing our momentum in the FinTech space.

Speaker 2

First, let me tell you about our recently announced Mastercard installments, Our scalable open loop buy now, pay later solution. Mastercard Installments is differentiated and that it enables banks, lenders, Fintechs and wallets to seamlessly bring buy now, pay later solutions to consumers and merchants at scale and in a secure, tokenized manner. With little to no integration for merchants, our solution avoids the need for lenders to engage merchants 1 by 1 to roll this Our consumers will be able to access buy now, pay later offers through their bank's mobile banking app at the point of checkout and soon directly through The embedded power of Finicity will help lenders with credit decisioning and enable consumers to easily choose different repayment options. Mastercard installments will power our core payments, enable us to provide additional value through services such as data analytics, loyalty and fraud tools. We've seen strong interest from players on all sides of the ecosystem and look forward to growing our partnerships in this area.

Speaker 2

As always, we remain focused on continuing to grow share, and we've won deals across the globe this quarter. In the U. K, we're partnering with Canada and in Brazil, we signed a deal with AutoPass to issue more than 10,000,000 cards to mass transit users in the Sao Paulo area, And along with that, open contactless acceptance across their subways, trains and city buses. We're also building our leading position with Fintechs Mobile Money Providers. Here are a few recent examples.

Speaker 2

PayPal has extended its PayPal business debit card Into our 4th markets in Europe, PayPal will also directly leverage Mastercard Send for domestic wallet cash outs and P2P transactions In the U. S, we're partnering with Vodafone in Egypt across all of their mobile money use cases, including cash outs, P2P and bill payment. We expanded our strategic partnership with Yandex in Russia and will be their preferred international partner for all of their FinTech initiatives. N Synctera, an innovative market leader that connects U. S.

Speaker 2

Banks and Fintechs to get cards and financial products into the market, will leverage our Digital First, Finicity, Monster cost and cybersecurity assets. Now shifting to services. Our services support and differentiate our core products and have played a critical role in enabling many of the wins I just mentioned. We, of course, also diversify our business. We've had many wins in this area in this quarter.

Speaker 2

Starting with the cybersecurity Ithaca is helping multiple players, including AT and T and MercadoLibre reduce chargebacks through collaboration, thereby creating purchase transparency. Banco de Vocalcha is using our artificial intelligence capabilities to improve consumer experiences, increase profitability and And in Europe, Motorium is leveraging new data's behavioral biometrics to help Using services like Tourism Insights and Managed Services to gather greater visibility of trends and drive deeper insights to Innovate, experiment and roll out new products for better customer engagement. And we're having success in the loyalty space Our innovative digital solutions driving wins with players like the global fitness chain Barrie's and by First and Saudi National Bank. Now let's turn to the progress we've made in offering Choice to Consumers across payment applications with our multi rail capabilities, Including Open Banking, B2B and Crypto. In Open Banking, we're happy about our planned acquisition of AAIA.

Speaker 2

IR is a leading European Open Banking player whose platform, expertise, strong API connectivity and payment capabilities complement our existing Open Banking assets. We will combine IR's European footprint with Finicity's connectivity in the U. S. And our expansion into other markets like Australia. This will allow us to extend each organization's best in class capabilities, such as credit decisioning, credit scoring, Account information services and payment applications across markets.

Speaker 2

Talking about markets. We continue to make progress with our Open Banking products in Europe, Players like Entercard, one of Scandinavia's leading credit card companies. And in the U. S, Visty is working with Usio to enable account opening Along with future plans to expand into payments. In B2B, we continue to On the Trac Business Payment Service network with key partners like JPMorgan Chase as well as merchant acquirers such as Monares, the largest acquirer leading processor of B2B transactions in Canada and Priority Commercial Payments, a leading payments technology company in commercial payment solutions We're also adding new functionality to TrackVPS and are partnering with Demeka to launch a supply chain finance capability.

Speaker 2

This functionality empowers payment agents to provide their business customers with access to affordable working capital directly through the Mastercard Track

Speaker 3

EPS platform. And in the U. K, HSBC

Speaker 2

will be And in the U. K, HSBC will be the 1st to issue our Mastercard Track card to account transfer product, An innovative B2B payment solution that allows businesses to use their commercial card program to make payments with any supplier, Even if that supplier does not accept card payments, again, a true multi rail offering. And finally, in the crypto space,

Speaker 4

we're making it easier

Speaker 2

for crypto players to connect to our network. We signed up a number of new crypto wallet providers and exchanges this quarter, Including: Bitsume, Novotago UK, tanga by zen.com, Coinmotion and CoinJar. Our crypto program, which is based on key principles of engagement, allows consumers to easily buy crypto assets with their Mastercard, spend their crypto Cash out their proceeds with Mastercard Send and earn rewards in the form of crypto or even NFTs. We're also seeing a growing services opportunity in the space. Earlier this month, we acquired CipherTrace, Security and Fraud Monitoring Company's expertise technology insights into more than 900 cryptocurrencies.

Speaker 2

Our recently announced agreement with Bakkt will also add to our expanding crypto services portfolio. So let me sum this up One more time, we delivered strong revenue, earnings growth this quarter. We are seeing continued strength in domestic spending in most markets. And while overall cross border volumes are back at 2019 levels, there remains significant room for growth in cross border travel. We're executing against our strategic priorities with good progress on the product and deal fronts, as you heard.

Speaker 2

We're doing all of that while carefully managing our expenses. That's it for me. Sachin, over to

Speaker 4

you. Thanks, Michael, and good morning, everyone. So 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 29 reflecting the continued execution of our strategy and the ongoing recovery in spending. Acquisitions contributed 3 ppt to this growth.

Speaker 4

Operating expenses increased 23%, including an 8 ppt increase from acquisitions. Operating income was up 34% and net income was up 45%, both of which include a 1 ppt decrease related to acquisitions. Further, net income growth was also positively impacted by 6 ppt due to the recognition of higher onetime discrete U. S. Tax benefits versus year ago.

Speaker 4

EPS was up 48% year over year to 2 point which includes $0.02 of dilution related to our recent acquisitions, offset by a $0.04 contribution from share repurchases. During the quarter, we repurchased $1,600,000,000 worth of stock and an additional $361,000,000 through October 25, 2021. So now let's turn to Page 4, where you can see the operational metrics for the Q3. Worldwide gross dollar volume, or GDV, increased by 20% year over year on a local currency basis. We are seeing continued strength in both debit and credit.

Speaker 4

U. S. GDV increased by 20% with debit growth of 9% and credit growth of 36%. Outside of the U. S, volume increased 20% with debit growth of 23% and credit growth of 16%.

Speaker 4

To put this in perspective, as a percentage of 2019 levels, GDV is at 121%, up 2 ppt sequentially, With credit at 111%, up 4 ppt sequentially and debit at 131%, flat quarter over quarter. Cross border volume was up 52% globally for the quarter with intra Europe cross border volumes up 47% And other cross border volumes up 60%, reflecting continued improvement and the lapping of the pandemic last year. In the Q3, cross border volume was at 97% of 2019 levels with intra Europe at 112 and other cross border volume at 83% of 2019 levels. Notably, cross border volumes averaged At or above 100 percent of 2019 levels in the months of August September. Turning now to Page 5, Switch transactions grew 25% year over year in Q3 and were at 131% of 2019 levels.

Speaker 4

Card not present growth rates remain strong and card present growth continue to improve. Card present growth was aided in part by Increases in contactless penetration in several regions. In Q3, contactless transactions represented 48% of in person purchase transactions globally, up from 45% last quarter. In addition, card growth was 8%. Globally, there are 2,900,000,000 Mastercard and Maestro branded cards issued.

Speaker 4

Now let's turn to Page 6 for highlights on a few of the revenue line items, Again described on a currency neutral basis unless otherwise noted. The increase in net revenue of 29% 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 21%, while worldwide GDV grew 20%.

Speaker 4

Cross border volume fees increased 59%, while cross volumes increased 52%. The 7 ppt difference is primarily due to favorable mix as higher yielding ex intra Europe cross border volumes Faster than intra Europe cross border volumes this quarter. Transaction processing fees were up 26%, Generally in line with switch transaction growth of 25%. Other revenues were up 35%, including a 10 PPT contribution from acquisitions. The remaining growth was mostly driven by our Cyber and Intelligence and Data and Services solutions.

Speaker 4

Finally, rebates and incentives were up 34%, Reflecting the strong growth in volume and transactions and new and renewed deal activities.

Operator

Moving on

Speaker 4

to Page 7. You can see that on a currency neutral basis, Total operating expenses increased 23%, including an 8 ppt impact from acquisitions. Excluding acquisitions, Operating expenses grew 16%, primarily due to higher personnel costs as we invest in our strategic initiatives, including sorry, increased Spending on advertising and marketing and increased data processing costs. Turning to Page 8, Let's discuss the specific metrics for the 1st 3 weeks of October. We are seeing continued strength in growth rates across our operating metrics versus 2020, In part due to the lapping effects related to the pandemic that began last year.

Speaker 4

To provide you better visibility into Spending levels, we are once again showing 2021 volumes and transactions as a percentage of the 2019 amounts, But we are not experiencing the impact of the pandemic. So if you look at spending levels as a percentage of 2019 for switch volumes Through the 1st 3 weeks of October, the recent trends have continued with overall switched volumes at 134% of 2019 levels, Up 3 ppt versus Q3. The U. S. Has held steady with some moderation in growth from earlier levels due to the roll off of stimulus.

Speaker 4

And outside the U. S, we are seeing continued improvement. Trends in switched transactions remain steady and are generally tracking the trends we are seeing in switched volumes. In terms of cross border, as I noted earlier, spending levels as a percentage of 2019 were back to pre pandemic levels Starting in August, that improvement trend has continued through the 1st 3 weeks of October, as we are now at 105% of 2019 levels. This improvement is driven by increases in both travel and non travel cross border volumes.

Speaker 4

As it relates to travel, We have seen it picking up in all regions, notably within and through Europe and recently into Canada as well. Turning to Page 9, I wanted to share our current thoughts looking forward. First off, our deal momentum and service lines continue to position us well for growth And diversify our revenues and we continue to make strong progress against our strategic objectives. Domestic spending levels remain healthy And we are encouraged by the recent resurgence in international travel. We are optimistic about the announced relaxation of border restrictions in cases like the U.

Speaker 4

S. And the U. K, given that we have seen travel pick up when borders have opened in the past. Further, the airlines have recently reported increased travel bookings, including long haul travel. With this as context, assuming domestic and cross border spending trends relative to 2019 continue to improve, We would expect Q4 net revenues to grow at a low 20s rate year over year on a currency neutral basis, excluding acquisitions.

Speaker 4

As a reminder, spending recovered progressively in 2020, so we will be facing a more difficult comp Approximately 7 ppt in the 4th quarter relative to the 3rd quarter. It is also important to point out that this is just one potential scenario As the level of uncertainty remains related to the pandemic and therefore the pace of recovery may not be linear. In terms of operating expenses for the Q4, we expect operating expenses to grow at the low end of low double digits versus a year ago This reflects our disciplined approach to expense management, while advancing our innovation agenda across payments, Services and promising new adjacencies and continued investment in brand and product marketing. With respect to acquisitions, we are pleased to now have closed on the Cyclotrace transaction and we expect acquisitions will contribute About 2 to 3 ppt to revenue and 8 ppt to operating expense growth in Q4. This reflects integration of several acquisitions in the Open Banking, Digital Identity and Real Time Payment Areas.

Speaker 4

Other items to keep in mind, Foreign exchange is expected to be about a half the PPT headwinds to both net revenues and operating expenses in Q4. On the other income and expense line, we are at an expense run rate of approximately $120,000,000 per quarter given the prevailing interest rates. This excludes gains and losses on our equity investments, which are excluded from our non GAAP metrics. As filing, We expect the tax rate of approximately 18% to 19% for the Q4. Thanks, and I hope you will be able to participate In our virtual investment community meeting on November 10th, we look forward to discussing our future plans with you at that time.

Speaker 4

And with that, I will turn the call back over to Warren.

Operator

Our first question will come from the line of Lisa Ellis from MoffettNathanson. Please proceed with your question. Hi, good morning. Thanks for taking my question. Since you launched Mastercard installments now a few weeks ago, can you Give some color on what kind of reaction you're seeing from your FinTech and bank partners?

Operator

And also, are you expecting that some of the specialized BNPL Providers may use elements of Mastercard installments. Why or why not? Like what would be the trade off that they would be making there? Thank you.

Speaker 2

Thank you, Lisa. Let me take that question first. So, find out, pay later exciting space. We talked about it For years, invested with our own installment proposition facing off to banks 5, 6 years ago. The partnerships and now as of late Mastercard installments, as you said, you saw a strong lineup of initial partners, Bank partners initially, I mean, the thought just to remind everybody again, here is the proposition that we have built into our network.

Speaker 2

So this is really delivered with no hassle for merchants or for lenders, at the point of sale. So the reaction from Banks are strong. Here in the U. S, that's where our lineup of U. S.

Speaker 2

Partners, lending partners was. But I've spent Time on the road over the last 3 weeks in Europe and similar conversation emerged there. It was just a couple of days after the announcement over in Italy and thanks for saying, wow, this makes a lot of sense. It's really Avoiding a significant headache for us and get into a space that we all believe is important from a consumer perspective. On the FinTech side, FinTech lenders, novel lenders, we lean in with FinTechs, some call them disruptors.

Speaker 2

We These are partnerships we should enable anybody who wants to come on our network and we're certainly marketing this to ensure that we have The full breadth of what the market has in terms of lending offering, that's going to be good for consumers and merchants. So watch this space, more to

Speaker 3

come, but I think

Speaker 2

it's a very compelling proposition. Thank you.

Speaker 5

Thank you.

Operator

Our next question will come from the line of Don Fendetti from Wells Fargo. Please proceed with your question.

Speaker 3

Hi, good morning. Michael, I was wondering if you could talk a little bit about disintermediation and it seems like investors are more focused on it after the Square Afterpay deal. Can you talk about that and your thoughts on more direct payments out of consumer accounts in the U. S?

Speaker 2

Right. So, Don, great question. Choice in payments has been a theme for Mastercard now for, I think, Basically always, but specifically with our investments in the account to account space over the last 6 years. So we see the demand from merchants And from consumers, for the consumer it makes sense because all your spend into you can see it all on one bank account. That will be one aspect to why consumers might like that.

Speaker 2

Merchant likes it for choice and higher baskets of more sales. So the interest is clearly there. We've been on this journey For a while and we don't necessarily see this as an anticipation of mediation opportunity. I mean, that's certainly something to watch, but we look at it as an opportunity. We say this could be additional volumes that we've not been involved with.

Speaker 2

This could be what was historically the consumer finance business. This would be something that was Just the direct debit business that we've seen in some European countries and so forth. So that's broadly how we look at it. We build a full stack around this that It helps to get you money from A to B, but that's just half of the story, probably not even half of the story, because it's the whole experience that really matters.

Speaker 3

You got

Speaker 2

to have the security. What happens if you do a push payment and you want your money back? Some of those best practices that we've learned over the last decades in It's what we are intending to build here. So it's interesting to see blogs out there on how account to account might look like. We have 4 years now in pay by account in the U.

Speaker 2

K. We've got those learnings. We're ahead of the market here very clearly knowing what works, what the economic model should look like, what I don't see a dissension mediation risk. I see an opportunity for us to extend our partnerships and gain new flows.

Speaker 4

And I'll just add on to what Michael As it relates to your question around specifically on the threat of closed loops, look, we're big believers in the benefits of the open loop We believe it's very powerful. I mean, for the reasons Michael just mentioned, we bring consumers at scale, we bring global acceptance. I mean, we have North of $80,000,000,000 merchant acceptance points, and this is growing rapidly. And the cost of acceptance is very competitive. And when you Take that along with what Michael talked about around the various technologies and the expertise we bring, everything from digital per solutions,

Operator

Our next question comes from the line of Bryan Keane from Deutsche Bank. Please proceed with your question.

Speaker 3

Not getting to 100% on the 2 year until summer of calendar year 'twenty three. Just wanted to get your thoughts on when do you think we'll get to reach back to 100% on cross border travel? And then secondly, it looks like you guys are running a little bit faster, a little bit ahead of Visa's number for Cross border travel, I'm just wondering what might be some of the factors that are driving a little stronger demand for you guys so far? Thanks.

Speaker 4

Sure. So Brian, I'll go ahead and take that. First, I know you're asking specifically about cross border travel, but I just want to kind of put the headline out there, For cross border as a whole, we have seen very strong growth in Q3 as you've seen. And yes, travel has been a big component of that. Specifically, travel Between Q2 and Q3 has gone from what was 48% of 2019 levels to 72% in Q3.

Speaker 4

And now in the 1st 3 weeks of October, it's tracking more like at 77%. And look, what this signals to us very clearly is If people can travel, they will travel. And I think that's really, really important to recognize. And then when you overlay that with what's going on in the nature of announcements Around opening of orders, more specifically, the U. S.

Speaker 4

Has recently talked about inbound travel into the U. S. In fact, think just a couple of days ago, they laid out the actual details around how people can come into the U. S. Maybe you combine that with the fact that Europe has opened up, the U.

Speaker 4

K. Is showing good Even in Asia, we're starting to see corridors between Singapore and Australia, Singapore and India. These corridors are all starting to open up. These are all encouraging signs for us from a cross border travel standpoint. We remain optimistic on that front, especially given that if those borders open up And they come with what would be light burdens from a quarantining standpoint, which is what we're seeing right now.

Speaker 4

People have said that they will travel and they've demonstrated that through Q3. So net net, here's what I tell you. I think travel is something which people want to do. They're showing that willingness to do it. Now it's a question of which are the other countries which will open up in addition to the borders I've just talked about.

Speaker 4

And you're reflecting you're seeing this to be reflected in the bookings which Airlines are reporting as well. So we remain optimistic on this front. I can't really tell you specifically which day, which month it's going to reach To 100% of 2019 levels, but generally the trend is moving in the right direction there.

Speaker 2

Right. And coming back to being on the road For quite a few weeks, you start to see also the mix changing. While initially this was leisure travel, You start to see business travel really kicking in. So that gives us another signal that really the pent up demand is coming across all channels. People want to see their I wanted to see their family first, now they want to

Speaker 4

see their customers. It's happening. And just one final point I'll make. You'll remember over the last few quarters, we've talked about how In anticipation for the return of travel, we have been investing and bolstering our capabilities from a travel standpoint. And we've been doing this actually for many years now.

Speaker 4

But Even through the pandemic, we've been winning deals in travel, as also our teams have been very focused on the ground in terms of making sure We're optimizing our travel portfolios the best we can. So we're ready to actually jump on this as soon as we start to see this trend come back, which we are seeing now.

Speaker 3

Great. Thanks for taking the question.

Speaker 2

Sure. Our

Operator

next question will come from the line of George Mihalos from Cowen. Please proceed with your question.

Speaker 6

Great. Thanks for taking my question, guys.

Speaker 7

Maybe dovetailing a little bit onto Brian's question. I just wanted Focus a little bit on how we should be thinking maybe about rebates and incentives going forward. Sachin, should we be thinking this level is sort of similar For 4Q, a similar level to 3Q. And then, again, not asking for guidance for next year, obviously, but as you do have Cross border revenues coming back strongly and actually eclipsing 2019 in aggregate. Should that sort of put cap on rebates and incentives as a percentage of revenue, meaning should it It might

Speaker 2

be flattish, if not maybe even a

Speaker 7

little bit down from 2021. Thank you.

Speaker 4

Sure. So George, a couple of things I kind of just point out on rebates and incentives. I think you know all of this, but I'll just kind of state it here. A few things, we can say that this is very dependent on the timing of deals and how volume and mix plays out. And it goes to your point around what the mix is between domestic and cross border and how you model that and bring that in there.

Speaker 4

In Q4, we expect rebates and incentives as a percentage of Gross to be up sequentially due to increased deal activity. This is pretty normal for us in Q4 and that's what you should expect also going into Q4 of this year. At the end of the day, a lot is going to depend upon like I said what the mix is going to look like. We have In the past that cross border revenues are less indexed from a rebates and incentive standpoint. So again, depending on mix between domestic and Cross border, that will inform our kind of views around where previous incentives will go on a going forward basis.

Speaker 4

Of course, new and renewed deals, We remain very active in the markets are also going to be a contributing factor.

Speaker 7

Great. Thank you.

Operator

Our next question will come from the line of Tien Tsin Huang from JPMorgan. Please proceed with your question.

Speaker 3

Hey, thanks so much. Good morning, guys. Just wanted to ask on the Europe front with the discontinuance of the 400,000,000 Maestro cards that's been in the press here. What are The implications there from a I'm trying to take from a P and L perspective as you look to convert at a time when open banking is really heating up here. Just trying to better Thanks.

Speaker 2

Hi, Tien Tsin. Let me start on that and then Sachin can come in on the P and L side of things. So, we've been on this journey of Maestro to debit MasterCard conversion around the world. You heard us talk about this for a number of years. In Europe, we've really made substantial progress on that front over the years and we felt it would be important to put a stake in the ground and give To consumers as well as other ecosystem participants, banks, so forth, banking associations on when we see the end of life For the Master product, why are we doing that?

Speaker 2

We're doing it because here's the 450,000,000 consumers who cannot use a Mastercard Mastercard online because it doesn't work online. Debit Mastercard is now in its latest form available in the digital first form. You don't even need Hard any longer if that's what you want to do or you want it with contactless, it gives you the full breadth of choice. So that is why we're doing this. The timing is right.

Speaker 2

The reaction It was essentially okay. It has to do in some of the leading European tabloids. We made it onto the front page with that news. It is big news in Europe, as you rightly said. But it's just the right thing to do.

Speaker 2

And what we've seen from a performance perspective, it is a more engaging payment tool And people use it across all channels and that's what we want, so we're very encouraged about that. And then Sachin, if you can look at the P and L side of things.

Speaker 4

Sure. So, Tidjane, first, this will not take effect until 2023. And Michael talked about approximately 400,000,000 Maestro cards globally. Again, this is Europe specific. This has been a trend which has currently been underway for some time now.

Speaker 4

And the reality is it's about not issuing new Maestro Existing Maestro cards will continue to be in operation. We've been on this migration path. It makes imminent sense. It just provides better utility for our products Increasingly digital world. So the reality is I kind of view this as a step in the right direction.

Speaker 4

And we've been on this journey. We'll get down this path.

Speaker 2

Right. And one last aspect here is, what we've learned here is Over the last couple of years as we are moving the shift from Maestro Debit Mastercard is how do we use this as an opportunity To not only retain our business that we have on the debit front, but also to expand our business on the debit front. So we don't have any concerns on that front.

Speaker 3

Understood. Thanks for the thoughts.

Operator

Our next question comes from the line of Darrin Peller with Wolfe Research. Please proceed with your question.

Speaker 1

Thanks guys. Nice job. Listen, when

Speaker 3

we look at a couple of quick ones is on and first on inflation and what the impact to your business model would be. Thinking about it from a perspective How much is obviously basis points volume driven, but also where you see pricing power in your model to change? And then second question would be, when you think of the structural impacts from the impacts from the pandemic and where you are now and thinking ahead of the Investor Day a minute, I mean, is the long term or medium term growth potential Similar, different, better, worse than it was last time we had an Investor Day out of curiosity. Thanks guys.

Speaker 4

Sure. So Darren, I'll take your question on inflation. So look, I mean, there's been obviously a lot of talk recently about High inflation levels, whether it's permanent, whether it's long term, whether it's just transitionary, the reality is the structure of our business model is Quite conducive because of the way we price, right? I mean we've got basis points, we've got cents per transaction as it relates to how we kind of price. So we kind of view the Following, which is to the extent that inflation is moderate, right, we think that of that to be a positive tailwind kind of So to our business, again, gradual and moderate inflation is going to be helpful.

Speaker 4

And the reason I bring that up is any sort of shock to the economy, I. E, any sort of high Oftentimes comes with drastic measures from an interest rate standpoint and comes in with cost pressures which come along with that. So to the extent it's moderate, It's moderately kind of positive for our business.

Speaker 2

The other thing I would say is

Speaker 4

it's important to actually see in the basket of goods and services, What are the products and services which are subject to inflation? And what is the amount of electronification of the flows which Taken place and relevance to our business. So to the extent that inflation, general inflation taking place In categories which are unrelated to card payments, I mean that kind of is a net non event for us.

Speaker 3

To the

Speaker 4

extent it's on things which Related to consumer spending, which have been electrified, it goes back to my point around moderate inflation being a mild positive here.

Speaker 2

All right. Now, Darren, on your second question, Structural changes, are they here to last? What makes a trend? Fascinating question. I don't want to upfront the Investor Day, but since you asked the question, I'll give you a couple Highlights on how we're thinking about that.

Speaker 2

So Jan, the first thing is, it helps to understand the The changing consumer of the small business, so everybody who's kind of in the payment space as an end user. And we now have 19 months of studies Looking at this, and the numbers have really not changed. Somewhere around 70% of people and business are saying More digital banking will be what they will be doing going forward. More online shopping is what they will be doing going forward and more contactless. So The secular trend that was playing in our favor for years has clearly accelerated.

Speaker 2

And if you just look at this quarter's numbers, we talked about sustained e commerce While in person shopping is coming back. So behavior is truly sticking. So that is I think that's the most fundamental point No point that we're seeing coming through. The race to this digital economy, it's on. And what that also means is a lot of players want to come in.

Speaker 3

So there's structural changes in the sense of that the competitive

Speaker 2

playing field is changes in the sense of that the competitive playing field is opening up, more partners are coming in, which for B2B To see player like us is a great opportunity to facilitate the entry of all of these bottoms. So that's what we're doing. Then you start to look around and say, well, who else is looking at this, these kind of trends and these kind of developments, most notably governments. Governments are looking at this and they have found that over the last 19 months that payments is indeed national critical infrastructure. So that comes with government engagement, which is not always necessarily positive.

Speaker 2

But what Which is not always necessarily positive, but what we're seeing is a real drive to modernize payment infrastructure. And that is where we are invited to the table because we're a true multi rail network and they're saying, hey, you're locally invested, you're locally Relevant partner, let's talk about how do we make this better in our country. So that is certainly a structural change as in, you know, Timpson Asked earlier about new payment flows coming in, open banking, etcetera in Europe. So we're playing on all of those trends Going forward, so I think that is what is happening. You could I could go on for a while longer.

Speaker 2

B2B, clearly digitizing supply chains It's a drive that is in focus. We're seeing that. Data analytics and cybersecurity, that's the last point I want to make on this. With the race towards a more digital economy, there's going to be more data that is available, more business will seek to use that data And run their business in a better way, find more customers. Our test and learn capabilities, our data analytics capabilities help on that.

Speaker 2

So Again, that's a structural trend that's helpful. And the same applies for cyber and security. More digital transactions need to be made safe. More people need to be authenticated as they use these tools. Again, that plays into our offering.

Speaker 2

So structural changes really driven by COVID accelerating the rates to digital.

Operator

Our next question will come from the line of David Togut from Evercore ISI. Please proceed with your question.

Speaker 6

Thank you. Good morning. What are your expectations over the next year for the pace of European adoption of account to account payments Under Open Banking, especially given the shift online that you've really underscored during COVID. And in particular, I'm wondering If you see strong customer authentication, which is really a key to account to account payments in Europe being rolled out Broadly enough to really affect, let's say, broader adoption of account to account payments throughout Europe.

Speaker 2

David, let me start on that and maybe Sachin wants to chime in. So, the journey towards Account to account in Europe, I think it's still early days. So if you look at how PSD2 has rolled out in Europe starting in September 2019, including the strong customer authentication, has been a long journey. Dates have been moved on multiple occasions to give time to the industry To get this right and get right means that the transaction isn't so secure that nobody can use it any longer. So the trade off between Consumer experience and security is actually found in a balanced way.

Speaker 2

And what we are seeing in our engagements in Europe is that balance is starting to So we will reach a point where such strong customer authentication in cards as well as in other forms of payments will be Actually a reality in Europe. So that's the first thing I want to say. When it comes to Open Banking specifically, So it's been over the last 2 years really a focus on driving connectivity in Europe in terms of getting the Open Banking ecosystem stood up. That's exactly why we put out in our connectivity product in June 2019. That was the first lead into the region And we've been quite busy with that.

Speaker 2

Use cases emerging on the basis of that really started in 2020. The U. K. Being ahead of Continental Europe on that, while This was still 1 Europe. And UK is still pushing ahead.

Speaker 2

You heard us talk about Lloyd's on card repayments, about our partnership With Tesco, so the payment capability part of Open Banking is really leading in the U. K. And Here, our proposition is very well positioned, so we start to see that. And I see the wave coming over to Continental Europe as Connectivity is now there. Our acquisition of Aya is perfectly timed here.

Speaker 2

We expect to close this by the end of the year to not bring in additional only bring in additional Activity, but also additional payment capabilities, because I do see this is not just a data capability, it's a big data, a kind of a data play account aggregation, Personal Finance Management and so forth, but it's also a payment opportunity.

Speaker 6

Thank you very much.

Operator

Our next question comes from the line of Harshita Rawat from Bernstein. Please proceed with your question.

Speaker 8

Hi, good morning. Thanks for taking my question. Michael, I want to follow-up on your comments in crypto. This year you've made several announcements and including the recent Thanks, Rafe. Can you talk about how you see the overall ecosystem evolving and what ways Mastercard can

Speaker 2

Yes, Harshita. So, always an exciting topic and we could not have an earnings call without talking about crypto. So, I'm happy you brought it Looking at this from a number of perspectives, other than that, it's there's a lot going on in the space. We are pretty clear on

Speaker 4

how we

Speaker 2

want So the first is we see significant volumes in terms of people actually investing in crypto and Selling crypto, so as an asset class, there's a lot going on. And I think we have a role to play to facilitate consumers wanting to do If that's what they choose to do. So these partnership programs on exchanges, crypto exchanges and wallet partners and so forth Have been quite important for us and that is good from a volume perspective. There's real activity. When it comes to Crypto as a payment tool, then we take a somewhat differentiated You are bad, versus that, we just step into that.

Speaker 2

We are saying, at this point in time, the most likely chance of this kind of technology to work for payments is issued through a government in the form of Central Bank Digital Currency. We've said that on a couple of calls before, and we said we will Make our network ready to do that as and when a government is ready to put out a Central Bank Digital Currency And then it will exist alongside the dollar or the euro settlement currency in our network. So we've done that. But that's easily said. How will the government test that?

Speaker 2

How will a country figure out between the private sector banks and the governments how to do this? That's where our SandBox comes in. So we Provide a safe space for government and private sector banks to figure out how that would actually work. Questions like The last mile, how do you bring utility into the hand of your

Speaker 4

citizens if you put

Speaker 2

out a Central Bank Digital Currency, acceptance questions and so forth. So Facilitating investments as an asset class, we do that and we get ready for CBDC. Should there be a private sector stablecoin, we might We'll do that, but we have

Speaker 4

very strict principles on when to

Speaker 2

do this and when not. Now let me talk about CipherTrades for a moment, Because this space is a really interesting space in so many ways. Questions on data privacy, questions on authentication, we just touched on that in the context of Europe Strong customer authentication, you have to expect the Europeans will say, well, strong customer authentication will of course play a role in crypto Transactions as well, which is where we always need the security and trust. I mean, that is really synonymous with the name of Mastercard when it comes Payments that we have to do the same role. So it's massive services opportunity.

Speaker 2

CipherTrace, 900 cryptocurrencies. What does CipherTrades actually do? They drive compliance and AML checks into Crypto transactions. We can't run fast enough right now to get into the space because a lot of other people are deep into crypto and these questions are not resolved. So asset class, CBDCs and our services opportunity, those are the 3 ways that we feel we Want to play and we need to play and we have the differentiated assets to do so.

Speaker 8

Thanks, Michael.

Operator

Our next question comes from the line of Dan Dolev from Mizuho. Please proceed with your question.

Speaker 5

Hey, thanks for taking my question. So, How do the new offering by Plaid with the acquirers or any of that sort of potential disruption there impacting And the networks in general, what is the kind of general strategy around it? We're getting a lot of calls on this topic. Thank

Speaker 2

you. Dan, so I think I touched a little bit on an earlier question that we had On this topic, so here's a blog post that describes the counter account. We have a counter account technology Really since the acquisition of VocaLink, and we've learned how that works. We like it because it's an additional choice that Provided to consumers and to merchants. But we also have all the learnings.

Speaker 2

And the learnings go around like how do you create acceptance into that? How do you make it easy for a merchant? How do you actually convince a consumer that actually likes the card proposition? So all of that, Yes, it is about standing up an ecosystem. So what we believe is this should be something that is built into our network, into our multi rail capabilities, and that's actually how we're approaching it.

Speaker 2

So And that's actually how we're approaching it. So we're leaning into this. I don't see it as a disruption. That's In our stated strategy, and we have 5 years of learnings, and I think that puts us ahead of the curve to make this a reality. I think this is a Interesting alternative when it comes to consumer payments in store, and we have it, we build it.

Speaker 2

It's for us to really figure out whether the economics settle, What other capabilities that are currently built into our card franchise can we extend into the world of account to account payments, for example, Chargebacks, those kind of data protection and so forth. So that's the direction that we're taking. Not really An interesting blog, good things we've done in reality.

Speaker 4

Yes. And Dan, I'll just add to that. Just we've got to remember, right, there's a sizable TAM out there A fair amount of that TAM is likely not going to be able to be reached by COD Products. This is where our multi rail

Speaker 2

Our philosophy and strategy as well

Speaker 4

as our ability to provide choice across various rails, one of which would be an open banking rail used for payment services, Very helpful because it helps open up the TAM, which is available to us from what used to be primarily card focused to much more than card focused. And We do see that opportunity come through here in Open Banking as well.

Operator

Our next question comes from the line of Bob Napoli from William Blair, please proceed with your question.

Speaker 6

Thank you and good morning. A follow-up on the cross border business. Obviously, very important business for Mastercard. As you look at that business and as we get to full recovery, do you think that The economics of that business will be similar to what they were prior to the pandemic. I mean, as the continued development of blockchain and other technologies or account to account, is that going to pressure the economics So, that business?

Speaker 4

Sure, Bob. Why don't I take that? So, look, I mean, the value prop we used to deliver through cross border payments on our carded products Pre pandemic and post pandemic is exactly the same. So we don't expect that the economic returns with which they will generate should be any different Given that the value we delivered previously, if anything, has only gotten better over a period of time with more electronification All flows taking place. To your point around several other account to account capabilities, which are there in the cross The reality is we're participating in them today, but it happened to be going after flows which are not carded flows.

Speaker 4

They're not point of sale flow. There happen to be more in the nature of business to business payments. We do that with our you'll remember we acquired a company called Transfast. In addition to the fact that we have our capabilities from HomeSend, the combined capability of that is our cross border send capabilities, which is account to account cross border payments. And we'll participate in those flows, but those are separate and distinct from what goes on at the point of sale with our car products today.

Speaker 4

So net net, I kind of view the whole cross border space as a positive for us as and when travel comes back from a card And in the meantime, we continue to actually flag flags in different parts of the world with the reach we've established on our B2B flows from a cross border standpoint.

Speaker 6

Great. Thank you. Appreciate it.

Operator

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

Speaker 9

Yes. Good morning, guys. Just a follow-up on cross border. I guess, in the Q3, the volume growth ex intra Europe With 60%, it was again a very, very good proxy for the overall cross border revenue growth in the quarter. So now if we just look at October month to date trends, If those hold hypothetically through the rest of Q4, it would seem like cross border revenue growth could again be around 60% this quarter.

Speaker 9

And arguably, that would be even before most of the potential benefits of the U. S. Reopening kicks in. So is all that a fair Characterization, are there other moving parts that should we be aware of? And can you just comment on which cross border corridors are the highest yielding in your system?

Speaker 4

Yes. So I think the answer to the first part of your question, I think you kind of touched upon in the second part of your question, which talked about How revenues are realized on cross border is very much a function even in that extra intra Europe kind of Yes, Gauri. It will depend on every quarter. Every quarter has got different yields and depending on which ones come back first, which Come back after the numbers from a cross border revenue standpoint, we'll kind of move around. As it relates to what we're seeing, look, I mean, I'll tell you, pre pandemic, important corridors from Mastercard included obviously U.

Speaker 4

S. To Canada, the U. S. To the U. K, The U.

Speaker 4

K. To various parts in Continental Europe, these are all very important corridors. We've seen intra Europe come back pretty nicely. The U. S.

Speaker 2

Inbound is still to happen.

Speaker 4

I mean, there's a little bit of happening, but there's more to come as borders open. Canada started to open up. As you know, Canada opened up in the Q3. We've seen signs of recovery take place in terms of inbound into Canada as well. And these are important corridors for our business.

Speaker 4

The one area which I would say is still a little bit kind of Yet to be seen is Asia Pacific, right? In Asia Pacific, recovery in cross border has still been kind of somewhat muted. We'll see how borders open up there and what that kind of shapes up to be. But net net yields, what I tell you from a yield standpoint. Intra Europe, low yielding, Ex intra Europe high yielding.

Speaker 4

In the Ex intra Europe bucket, the yields vary by corridors. Jomari,

Speaker 1

I think we have time for one last question.

Operator

Our next question will come from Sanjay Sakhrani from KBW. Please proceed with your question.

Speaker 7

Thanks. Good morning. I think Michael mentioned the waning impact of U. S. Stimulus and we've seen the U.

Speaker 7

S. Volume sort of Stabilize here in terms of the growth. I'm just curious how you guys feel about the other side, which is credit rebounding and just thinking through the economic impact As lending comes back, lending related volumes come back? Thanks.

Speaker 2

Yes, Sanjeet, let me just start on the rebound of credit. Back to changing in how people spend, start to see more in person and more in person certainly includes T and E, Discretionary, those are all use cases that are very much oriented towards credit. So that is what is driving that. The impact of stimulus on the debit side, we still see an elevated use of sustained use of debit going forward. So It's not a zero sum game yet again.

Speaker 2

It's balancing out in a way that one is coming back and the other remains elevated. It really comes down to the size of the available wallet that consumers have, And you know, Satya, you have any other thoughts on that? Satya,

Speaker 4

I think it's interesting. If you take us Back to a couple of quarters ago, maybe 3 or 4 quarters ago, we talked about to the same question as to what our views around credit and debit mix is going to look like. And we And to maintain that we think that there will be a revolution to the mean as economies come back and as discretionary spending picks up. And that's exactly what you're seeing right now, right? I mean, as people are spending more in discretionary categories, lodging, travel, restaurants, credit is definitely coming right back And we expect that as the economy continues to recover in different parts of the globe that promotion to mean will continue.

Speaker 4

And that's kind of our view as it relates to how credit plays out over the near to medium term.

Speaker 2

All righty, good. Thanks, everybody. Thank you for your questions. We are going to close the call now. I hope to see you at the investor community meeting.

Speaker 2

Generally, on these calls, it's not only the analyst community listening, the investor community, it's also our staff. So I want to thank our staff for everything they have done through this It feels like a bit of like a marathon as we turn out of COVID. See you at the ICM. Please do tune in. Thank you very much everybody.

Speaker 2

Bye bye.

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