Mastercard CEO: AI Shopping Agents, Machine-to-Machine Payments, and the New Infrastructure of Commerce

Speaker A: Looking forward a few years, by 2030, the amount of fraud and cyber risk driven and damage is going to amount to $15.6 trillion. If cyber risk were a country that would be the third largest economy in the world.

Speaker B: That was Michael Meebock, CEO of MasterCard. On the scale of the cybersecurity threat facing the global economy right now, I'm Motley fool producer Bart Shannon. Mastercard is one of the most admired companies we follow. A business that has quietly become as much a cybersecurity and data company as a payments network. Molly Fool CEO Tom Gardner sat down with Michael on the day of mastercard's second quarter earnings to talk through how the payment network actually works, why cybersecurity has become one of its most important growth businesses, and what stablecoins really mean for the future of um, money. We hope you enjoy part one.

Speaker C: Well, we're really excited here at the Motley fool to have Michael Meebok, the CEO of MasterCard, uh, joining us on the day of your second quarter earnings. Uh, we should probably start there but because I don't think there's much introduction that's needed for MasterCard. Although if you talk to the average consumer or talk to even the average investor, they may not understand exactly how your global payments network works. We'll uh, go through a little bit of that as well. But I do think we should start with second quarter earnings which showed some pretty uh, remarkable uh, growth. Another round of amazing operating margins of the company above 60%. And I know cross border business and your value added services, uh, growth are pretty pleasing to you. Any highlights that you'd like to share with us on a single quarter, a 90 day period, which I know isn't the uh, uh, the necessarily the best way to measure a, uh.

Speaker A: First of all, thank you for having me, Tom. So I was looking forward to our conversation today. Yeah, it's been a, been a good quarter, um, and uh, a good uh, engagement with investors uh, today and analysts, um, and you actually hit the highlights just now. So strong, uh, strong volumes. You know, it's interesting when you, when you look around the world and you read the headlines, see you know, geopolitical complexity and volatility and then you see varying impacts uh, on the macro economy. And in the end it all kind of balances out with a pretty healthy consumer and uh, continued healthy spending on the consumer and on the business side, which obviously is a big part of our business, uh, that's what we facilitate spending, we're powering the economy and value exchange in all Forms. So it's good to be in payments uh, at this time. Um, you know something, a few of the topics that we talked about on the call, which you didn't mention is there's a lot of innovation uh, in payments right now is a lot of competition in payments. Um, the rise of Fintech, the rise of stablecoins, uh, the headline of Agent E Commerce. There is so much going on and we're at the forefront uh, of all of that shaping where the future of uh, the digital economy is going. So exciting times for us at MasterCard.

Speaker C: It is amazing how much dynamic change there is in the world today and in the marketplace and yet a very stable, ah, solid performance from companies like MasterCard again showing the strength of the consumer. As you shared. Can we just talk a little bit about the relationship between the bank, the merchant and the cardholder? Just to set the table. For example, when we get to stablecoin, we will ask you to define stablecoin because there will be viewers of the Motley fool that are encountering some of this for the first time. So maybe just walk through a little bit. You know, 4 billion card holders, tens of millions of merchants and how the uh, how the network interacts just to

Speaker A: stick to the facts. 3.7 billion cardholders, uh, that's still a lot. Um, in fact it probably is the uh, we are probably certainly geographically speaking the uh, most prevalent way to um, pay around the world over 3.7 billion cards. Um, so you talked about the relationship between a consumer and a bank and you know, a shop, wherever you shop something. So let's just take uh, a step back on exactly that. So you're gonna go and you're gonna buy something, you buy it online and you buy it in a shop, um, of your choice. And whatever it is there magically you can either leave the website and you know, the product will be shipped to you or can leave the shop and take it with you. So why is that? Uh, because there's a payment guarantee in the background, uh, which is issued by MasterCard that says to the merchant, you can let this person go because uh, we will ensure you will be paid. And this all works in a square, so to say a four party model, um, between the bank of the consumer and between the bank of the shop. So uh, your bank will take money from out of your account, out of your card account and pass it on to the shop of the uh, shop's bank and then the shop gets paid. This is how this works. Now if you think about this in 3.7 billion times in 220 countries and territories. That is massive scale and that is massive complexity. Regulatory, uh, rules are different around the world. Um, infrastructure is different around the world. And we took 60 years to build this amazing system that powers the digital economy around the world. So that is what is at the heart of when you pull out your MasterCard and happens behind. Now there's a lot more happening behind because this payment is not only happening, it's happening in a safe way. So you're protected. Um, you know, um, if you use, uh, a MasterCard and you make a payment on a website and it turns out to be a fake website, that's one of the cyber risks that we all face today. You are still protected, uh, because it was not your fault. So you have a payment guarantee. Um, but in order to ensure, um, that, um, we prevent fraud at the outset, there's a lot of safety and security happening, uh, behind the scenes. Trillions of data points will be scanned in nanoseconds to ensure that, uh, there's the right relationship between you and this merchant. Can you actually be in this place right now? Have you ever done a transaction like that? Are you spending more than you actually have ever done before, Et cetera, et cetera? So all of this is happening in the background, and those are the kind of tools that we provide to our customers. So the cardholder is not our customer. The customer is a bank. Um, the customer could be a merchant. It could be a very large merchant, Walmart or somebody like that. So partner, like over ours, or a very large bank like JP Morgan here in the US Et cetera. Those are our partners, and we provide them with services to make their payments. Uh, that is the MasterCard payments, they run with us safer, uh, and smarter and simpler, actually.

Speaker C: Uh, thank you. So, in a way, we should think of it as a trust and security network. And for that reason, I'd like to move towards cybersecurity because I know you've made some significant investments. I think, um, I'm not counting this quarter, over $8 billion invested in cybersecurity and fraud. So generative AI is arriving faster and the tools are upgrading faster than, than I, um, think anyone was estimating, except for maybe Ray Kurzweil. And they're finding holes in systems, uh, faster. So what types of crimes are you seeing that are new? Uh, and, and, and what's MasterCard's unique approach?

Speaker A: So it's important to talk about cybersecurity, and you put it in the context of artificial intelligence. Now, artificial Intelligence is not new, but generative AI is new. Um, and you know, since the launch of ChatGPT, first version in um, the first quarter of 2023, we've seen tremendous progress there. And that's good for productivity, it's good for better user experience, good for many things. But it also empowers the fraudsters and the scammers and the hackers. So we're starting to see an arms race, new technology. Um, and you can use this technology to drive exploits and scams at the same time you, you can use this technology to defend. So we have an arms race going on. Um, when you just think about what's the magnitude of all of this. So there is an expectation, studies been done, uh, looking forward a few years, 2030, that by 2030 the amount of fraud and cyber risk driven and damage is going to amount to $15.6 trillion. If cyber risk were a country that would be the third largest economy in the world. So that's kind of what we're looking at now historically. Take um, the last 10 years across the financial services industry in particular, um, there was a lot of uh, focus, um, put on preventing fraud. So we've been always a leader in that. As a payment network we're the one that stand out to have invested in cybersecurity earliest and most significantly and today we have the broadest portfolio there. Um, initially this all started about defense. So a transaction happens and you're going to decide if you're going to let it through. Yes or no. Is this the transaction that is real from you or should it not? You know, should we ask the bank to make some extra checks? Now if you do this 3.7 billion card times around the world, one, um, hundred eighty billion transactions go through our network. You really need technology in a very big way, uh, to do that, to power that and drive that security level up. Um, now banks, um, get attacked, they get hacked, uh, and all of that. Governments get attacked and hacked, individual consumers get hacked and attacked. So the system is becoming um, under threat from all angles and the weakest link in the chain is usually where the uh, the hackers and the scammers get in. So we need to erect our defenses and do even more to prevent all of this to happen and protect cardholders and our customers and governments and so forth. So how do you do that? Um, what we essentially need to do is moving from defense to offense. And that's where our last investments have been in threat intelligence. If I can tell you as the CEO of a bank, you are under attack from this um, consortium. They're going after this kind of fraud to attack you and your customers. And here's what you need to do to prevent that. You can do something about this. If I tell you you're going to have to defend against every threat vector there is that is almost impossible to do. So threat intelligence is the last investment that we've made. We bought the world's largest independent threat intelligence company at the end of 2024 record. And they now kind of top up a vast portfolio of fraud management identity, uh, solutions and cyber solutions that we have with this proactive defense um, approach. So this is what's going on. This is what sets us apart in the world of uh, payments, but not only payments because we provide cybersecurity uh, solutions at large today.

Speaker C: I mean is it right to think, and was it always right to think in human civilization? Um, or is it even more correct to think that we're permanently at financial war of some sort worldwide across state actors, non state actors, organized crime, uh, it's, it's a continual, never ending battle. Is that a, is that an accurate view of the world or not?

Speaker A: So I think that the general, um, the general statement this is going to continue be a fight between the good people and the bad people. I think that's very much true. That it's broader and more consistent and the latest technology will be used is also true. Um, so what is even more true and which is a good thing is that governments and private sector are very clear about this. So we are moving from every sector and every company doing their own thing to the private sector m working much closer together. So it's not just about the financial services companies working together to prevent, in cyber maneuvers and cyber ranges and sharing insights and threats with each other. But it goes across sectors as well. But here's the point. The private sector is really good at making investments and driving the innovation to push back against these scams and frauds. But you do need the enforcement and the regulatory rule side of the government as well. So public private defense is moving very much into the focus. Uh, we go and frequent the um, Munich Security Conference every year which uh, is probably the preeminent global uh, security forum there is. And this was the big dialogue this year. So we were there and everybody was clear. We need to get more organized, uh, across the public sector and the private sector to work together. So that's a positive sign.

Speaker C: I mean do you anticipate, do you see the MasterCard brand becoming more and more associated with, with security with cybersecurity, with threat intelligence or that's something that we want to keep invisible and under the radar pretty much and be the relied upon network.

Speaker A: Definitely not uh, definitely not visible and under the radar because uh, it's a threat to everybody and we need to uh, ensure that we work together. So it needs to be known what we do. But if I take a step back, massacre is a lot of things to a lot of people. Some people call us a card company, other people say it's about payments, some people say it's about cybersecurity because we're deeply engaged with them on that. It's about all of the above. In the end, it's about where the operating system of the digital economy and operating system should have a security layer that's exactly what we do. But it also has a money movement layer which is across stablecoins and account to account and cards. We move value, your hard earned money. We do all of the above. And then on top of that this produces a lot of data and gives a lot of insights on where the digital economy is going. If we can help our uh, partners, uh, to our uh, partners, banks for example, or large merchants as I mentioned before, with better business insights to run their business in a better way. So all of that, yes, we are big in cybersecurity, but we're so much more.

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Speaker C: I'd like to take a step back and go to some of the broader drivers just to remind us of what's happening, uh, sort of at the trend level for um Transactions, ah, worldwide and for MasterCard specifically. So we'll just go to the first one which is the cash to digital to card shift. Like where are we in that process now? You know, like what, how many, how many transactions were done in cash 10 years ago, ballpark versus today? And, and how much further do we have to go in that?

Speaker A: It's an answer that uh, is varying by region, um, and by type of payment. Um, no surprise. So when I started at this company here in 2010, um, my first job was about uh, you know, running our business in the Middle east and in Africa. And the average cash ratio in Africa was north of 90%. So most of transactions in the Arab and Sub Saharan economies were in cash and not digitally. Um, if you go to the Nordics today, um, Northern Europe, Sweden, uh, Denmark and so forth, um, you're going to be again north of 90%. But it's north of 90% in terms of digital transactions. So the world has come a long way but in between, um, there's all shades of gray, um, on kind of like where every country is. Um, so take ah, a large European economy like Italy or so you have somewhere between 40 and 50% of cash transactions. It's north of 50 for the United States. Take other, you know, take emerging markets like Africa still today you find markets where you're annoyed 90%. So if you take that lens, um, that is one lens but then there's different, there's types of payments as well and types of value exchange. What's going on in the digital economy? Some, some countries just doesn't do not have a particularly good um, ah e commerce ecosystem yet. So a lot of that is still physical of course with card not present e commerce shopping from websites, uh, that's all digital per definition. And you see those countries ahead of the others. So uh, various aspects. Take uh, small business as a largest employer in the world. Um, still the uh, share of physical installations and then physical payments, um, cash payments is still very high in small business because uh, the vast majority of them don't have a digital footprint yet. That uh, has dramatically changed post Covid. A lot of small businesses were the hardest hit by Covid. Nobody went to their shops any longer and then they weren't online. So if you look at some of the data from the United States, uh, what is the share of small businesses that have reopened after Covid and how much of those, the vast majority of them had a digital as part of their business thereafter. So you start to see that catching up. So there's so Many dimensions around this, uh, to our investors we say big part of our growth, uh, you know engine so to say is to turn uh, cash and checks, um, and other very basic digital payments into really clever smart mastercard payments. That's what we do. And there's plenty of Runway around the dimensions I shared with you. But you know I give you another, another uh, dimension of that. A lot of countries have their own kind of payment card system but it's very, very uh back to cybersecurity. There's many other things you should be doing for your payment system. We come in and we take those transactions and also put them into the MasterCard network to make it a better payment. So the Runway in payments and digital payments is tremendous. We charted it out to be um, um I think uh, we're somewhere in the trillions um, of what is still the opportunity is out there in terms of payments.

Speaker C: Uh, let's talk about cross border transactions, travel and non travel, MasterCard move and uh, the significance of this trend for you.

Speaker A: Yes. So um, cross border, um, uh it's such an interesting term uh but basically just let's bring it back to uh, everyday's lives. So you travel um, and you go on holiday. It's holiday time uh where at the end of July a lot of people are out on the road visiting uh family going to their dream destination and then they pay a hotel or they shop a uh, souvenir whatever it is and it magically still works despite the fact you're not in your home country. Uh so all of the payments I described earlier that happened between the bank and the shops, bank and everybody in this four party model that I described go across countries. Then that's rather complicated to do. Um so that's a big part of what we do today. That's a tremendous uh, value add to uh economies. Um tourism is a great uh driver. We've seen it here in the United States with the World Cup. A lot of people came and you really saw it in the numbers. Quite a significant boost on that. So a big part of our business complicated to do. It took us 60 years. Um, so MasterCard is 60 years old. We just celebrated our 20 year IPO anniversary uh and we were very busy to build this very very large cross border network which uh as of two years now also includes China, um, where um, your MasterCard will work, your local Chinese MasterCard will work and others will work. So um, these are high octane revenue uh for us because it's uh, difficult to do. Um, and then we price for the value that we create, uh, it's not really affecting the consumer that much, but it cuts across the ecosystem because there's a lot of investments that we had to, uh, make for that. So interesting though, um, from an investor perspective, we talked a lot about that in the earnings call today. So the latest growth, uh, rate number here is 12%. And if you think about some of the macroeconomic issues that we've been facing, particularly in the Middle east, um, um, across those countries, travel, uh, was hit, um, but it kind of rebounded, uh, quite significantly and it's looking pretty solid at this point. So big part of our business, um, it will for years to come. Um, and we work, uh, with our partners to ensure that travel corridors, the marketing works and, you know, here's where you want to go and then you can get there and then you have great deals and hotel deals and all these things. There's all stuff that we do behind the scenes with our partners.

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Speaker C: uh now in some ways presents some threats to uh, transactions that have typically um, one could expect to go through MasterCard's network. Uh so I'm wondering what the impact might be from stablecoin on international transfers, larger business to business payments. Um, obviously I think it's probably going to be a while before that gets down to the level of the consumer purchases or ordinary purchases. I don't think consumers want a lot of different currencies to work with. So maybe I'm misinterpreting that. Please guide, guide us uh, to think more clearly on it. But where, where is stablecoin a threat, an opportunity for you and obviously the acquisition you made.

Speaker A: So stablecoin is an opportunity. Um, so it is another way to exchange value. Um we've always been of the view um, as a large payment network, as a cybersecurity company, as an insights company, as a data company, whatever term you pick um, that for value exchange cards is a really big part of the answers but it's certainly not the answer for all types of payments. So we've been investing since UH 2016 into account to account systems where you just pay whatever you pay directly from your bank account into somebody else's bank account or through a shop, um you can just pay the shop into their bank account, et cetera. So all of that. So we're one of the largest providers of account to account solutions. So about 12, 13 years ago um, blockchain uh comes up and blockchain and then obviously uh one of the first payment applications on blockchain was cryptocurrencies. So we all familiar with Bitcoin, um, that's pretty cool technology. So in terms of facilitating a value exchange. So I'm going to send you a fraction of a bitcoin today. This will happen instantly and you have it and I have it. So that's great. So we looked at this and say that is good technology. So definitely we should have that. We started to build that out, uh, build out our Expertise. Today the MasterCard network can handle uh, US dollars, any other fiat currency, but it can also handle um, stablecoins which is a cryptocurrency that's backed by fiat. So that's the real distinction here. So the store value function of that works um, and it can go through our Rails. So we're very open to that. In fact what we do is we're not just having the stablecoins run through our system but we provide the same protections that you expect from your card payment alongside with that. Because whenever you deal with MasterCard you see the two interlocking circles of our brand. You said you know I'm protected and the same should be true for stablecoin. So I'm pretty agnostic uh, when it comes to what is the underlying rail. But important point to say it is really not needed uh, for anybody to go and buy their coffee at the local coffee shop with a stablecoin. So why would you do that? There is no problem to solve because the card ecosystem um, system does handle with that. But if you think about remittances or a small business sending some money to another small business, another country where they bought some parts from, that's really complicated today. You know that's correspondent banking. There's high fees, lack of transparency. You don't really know is the $100 that you send actually arriving or have two uh, parties in between taking $5 out each and only 90 is arriving, et cetera, et cetera. So we deal with all of that complexity by actually uh, do uh, use stablecoin uh for cross border payments. So we think there's B2B cross border opportunity, there's P2B cross border uh, opportunity. But P2M as in everyday purchases, we saw that pretty well. So we are putting our energy where we really think there is a problem to solve. Which is generally my mindset. You know it's never about the technology, it's about whose problem can we solve.

Speaker C: When you say you're pretty agnostic about what rail it runs on, um, are you completely agnostic or there are just certain. Better.

Speaker A: We're pretty agnostic and you know the reason. But here's the reason if you. So your follow up question should be why um, uh, why are we not completely agnostic? Because we have built 60 years, we have invested 60 years into building the largest acceptance footprint uh, um, out there and you know any merchant, um, any individual does not want a payment solution and it can only reach a fraction of the potential endpoints. So you want scale, you want predictability, you want protection. So those things are not actually delivered through stablecoins. So we still would like to go that route. But there are certain things where it say, you know, probably it doesn't actually matter that much here, or it's such a specific use case, we use this technology and we invest the time to build out those protections over there anyway, that just takes a little bit more time. So this answer is true for today and for tomorrow, in the near term future. But, you know, in five years this might look very different and we're going to certainly be on the forefront of that.

Speaker B: That was part one of the discussion. Tune in next week for part two. As always, people on the program may have interest in the stocks they talk about, and the Motley fool may have formal recommendations for, for or against. So don't buy or sell stocks based solely on what you hear. All personal finance content follows Motley fool editorial standards and is not approved by advertisers. Advertisements are sponsored content and provided for informational purposes only. To see our full advertising disclosure, please check out our show notes for the Motley Fool Hidden Gems investing team. I'm producer Bart Shannon. Thanks for listening. See you next time.

Speaker D: It.