Mastercard CEO: The $15.6 Trillion Threat Most Investors Are Ignoring

0:02Looking forward a few years, by 2030, the amount of fraud and cyber risk driven 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.

0:28That was Michael Meebok, 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. Motley 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 money.

1:03We hope you enjoy part one. Well, we're really excited here at The Motley Fool to have Michael Meebock, the CEO of MasterCard, joining us on the day of your second quarter earnings. 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 go through a little bit of that as well, but I do think we should start with second quarter earnings, which showed some pretty remarkable growth.

1:35Another round of amazing operating margins of the company above 60%. And I know cross-border business and your value-added services 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 necessarily the best way to measure? First of all, thank you for having me, Tom. So I was looking forward to our conversation today. Yeah, it's been a good quarter and a good engagement with investors today and analysts. And you actually hit the highlights just now. So strong volumes. You know, the world and you read the headlines see your you know geopolitical complexity and volatility and then you you see varying impacts on the macro economy and in the end it all kind of balances out with a pretty healthy consumer and continued healthy spending on the consumer and on the business side which obviously is a big part of our business 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 at this time.

2:41You 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 in payments right now is a lot of competition in payments. You know, the rise of fintech, the rise of stablecoins, the headline of Argentic Commerce. There is so much going on and we're at the forefront of all of that, shaping where the future of the digital economy is going. So exciting times for us at MasterCard. It is amazing how much dynamic change there is in the world today and in the marketplace, and yet a very stable, solid performance from companies like MasterCard, again, showing the strength of the consumer, as you shared.

3:18Can 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 cardholders, tens of millions of merchants, and how the network interacts. just to stick to the facts 3.7 billion cardholders uh that's still a lot uh in fact it probably is the uh we are probably and certainly geographically speaking the uh most prevalent way to um pay around the world over 3.7 billion cards um so the you talked about the relationship between a consumer and a bank and you know a shop wherever you shop something let's just uh take a step back on exactly that so you're gonna go and you're gonna buy something you buy it online or you buy it in a shop 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 happening because there's a payment guarantee in the background which is issued by MasterCard that says to the merchant you can let this person go because we will ensure you will be paid and this all works in a square sort of say a four-party model between the bank of the consumer and between the bank of the shop.

4:35So your bank will take money from out of your account, out of your card account, and pass it on to the shop of the 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 rules are different around the world. 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's 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 you know if you use 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 because it was not your fault so you have a payment guarantee but in order to ensure that you know we prevent fraud at the outset there's a lot of safety and security happening behind the scenes trillions of data points will be scanned in nanoseconds to ensure 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 etc etc so all of this is happening in the background and those are the kind of tools that we provide to our customers so the card holder 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 it's a partner like with ours or a very large bank like jp morgan here in the u.s etc those are our partners and we provide them with services to make their payments uh i.e the mastercard payments they run with us safer and smarter and simpler, actually.

6:27Thank 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, 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 I think anyone was estimating, except for maybe Ray Kurzweil, and they're finding holes in systems faster. So what types of crimes are you seeing that are new? And what's MasterCard's unique approach? So it's important to talk about cybersecurity and you put it in the context of artificial intelligence.

7:05Now, artificial intelligence is not new, but generative AI is new. And, you know, since the launch of ChatGBT, first version in 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 because 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.

7:59If 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 the last 10 years, across the financial services industry in particular, there was a lot of focus put on preventing fraud so we've been always a leader in that as a payment networks we're the one that stand out to have invested in cyber security earliest and most significantly and today we have the broadest portfolio there 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 really from you or should it not you know should we ask the bank to make some extra checks.

8:42Now if you do this 3.7 billion card times around the world, 180 billion transactions go through our network. You really need technology in a very big way to do that, to power that and drive that security level up. Now banks get attacked, they get hacked and all of that. Governments get attacked and hacked. Individual consumers get hacked and attacked. So the system is becoming under threat from all angles and the weakest link in the chain is usually where 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 you know 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 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 recorded future And they now kind of top up a vast portfolio of fraud management, identity solutions, and cyber solutions that we have with this proactive defense approach.

10:13So this is what's going on. This is what sets us apart in the world of payments, but not only payments, because we provide cybersecurity solutions at large today. I mean, is it right to think and was it always right to think in human civilization or is it even more correct to think that we're permanently a financial war of some sort worldwide across state actors, non-state actors, organized crime? It's a continual, never-ending battle. Is that an accurate view of the world or not? So I think that the general statement, this is going to continue to be a fight between the good people and the bad people, I think that's very much true.

10:54That it's broader and more consistent and the latest technology will be used is also true. 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 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.

11:34But you do need the enforcement and the regulatory rule inside of the government as well. So public-private defense is moving very much into the focus. We go and frequent the Munich Security Conference every year, which is probably the preeminent global 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 across the public sector and the private sector to work together. So that's a positive sign. I mean, do you see the MasterCard brand becoming more and more associated 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 relied upon that work?

12:20Definitely not visible and under the radar because it's a threat to everybody and we need to ensure that we work together. So it needs to be known what we do. um so but if i take a step back is you know mastercard 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 cyber security because we're we're deeply engaged with them on that it's about all of the above in the end it's about where the you know the operating system of the digital economy and operating system should have a security layer that's exactly what we do but it's also as a movement layer which is across stable coins and account to account and cards we move value your hard-earned money.

12:59We 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. And we can help our partners to our 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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14:41So 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? How many transactions were done in cash 10 years ago, ballpark versus today? And how much further do we have to go in that? It's an answer that is varying by region and by type of payment, no surprise. So when I started at this company here in 2010, My first job was about 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 sub-Saharan economies were in cash and not digitally. If you go to the Nordics today, Northern Europe, Sweden, Denmark, and so forth, you're going to be, again, north of 90%.

15:33but it's north of 90 % in terms of digital transactions. So the world has come a long way, but in between, there's all shades of gray on kind of like where every country is. So take 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 emerging markets like Africa. Still today, you find markets where you're 90%. So if you take that lens, that is one lens, but then there's different types of payments as well and types of value exchange of what's going on in the digital economy. Some countries just do not have a particularly good e-commerce ecosystem yet.

16:16So a lot of that is still physical. Of course, with Cardinal Press and e-commerce shopping from websites, that's all digital by definition. And you see those countries ahead of the others. So various aspects. Take small business as the largest employer in the world. Still, the share of physical installations and then physical payments, cash payments, is still very high in small business. because the vast majority of them don't have a digital footprint yet. Now, that 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.

16:58So if you look at some of the data from the United States, 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 part of their business thereafter? So you start to see that catching up. So there's so many dimensions around this. to our investors we say big part of our growth you know engine so to say is to turn cash and checks 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 that I shared with you but you know I give you another another dimension of that a lot of countries have their own kind of payment card system but it's very very basic uh back to cyber security you 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 let's talk about cross-border transactions travel and non-travel mastercard move and the significance of this trend for you yes so cross-border it's such an interesting term but basically just let's bring it back to every day's life so you travel you go on holiday it's holiday time where at the end of July a lot of people are out on the road visiting family going to their dream destination and then they pay a hotel or they shop a souvenir, whatever it is, and it magically still works, despite the fact you're not in your home country.

18:45So 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. So that's a big part of what we do today. That's a tremendous value add to economies. Tourism is a great 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. A quite a significant boost on that. So a big part of our business, complicated to do, it took us 60 years. So MasterCard is 60 years old. We just celebrated our 20-year IPO anniversary.

19:21And we were very busy to build this very, very large cross-border network, which as of two years now also includes China, where your MasterCard will work, your local Chinese MasterCard will work and others will work. So these are high octane revenue for us because it's difficult to do and then we price for the value that we create. It's not really affecting the consumer that much but you know it cuts across the ecosystem because there's a lot of investments that we had to make for that. So interesting though from an investor perspective we talked a lot about that in the earnings call today. So the latest growth rate number here is 12%.

20:01And if you think about some of the macroeconomic issues that we've been facing, particularly in the Middle East, across those countries, travel was hit, but it kind of rebounded quite significantly. And it's looking pretty solid at this point. So a big part of our business, it will for years to come. And we work 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 is all stuff that we do behind the scenes with our partners.

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23:07Obviously, I think it's probably going to be a while before that gets down to the level 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 us to think more clearly on it. But where is stablecoin a threat and an opportunity for you? And obviously the acquisition you made. So stablecoin is an opportunity. So it is another way to exchange value. We've always been of the view, you know, as a large payment network, as a cybersecurity company, as an insights company, as a data company, whatever term you pick that for value exchange cards is a really good big part of the answers but it's certainly not the answer for all types of payments so we've been investing since 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 you can just pay the shop into their bank account etc 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 comes up and blockchain and then always the first 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 you know facilitating a value exchange so i'm going to send you a fraction of a bitcoin today you know 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 uh handle us dollars any other fiat currency but it can also handle um you know stable coins 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.

25:04In 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 when it comes to what is the underlying rail. But important point to say, it is really not need it for anybody to go and buy their coffee at the local coffee shop with a stablecoin. So why would you do that? There's no problem to solve because the card ecosystem does handle with that.

25:42But 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 hundred dollars that you sent actually arriving or have two parties in between taking five dollars out each and only 90 is arriving etc etc so we deal with all of that complexity by actually do using uh do use stablecoin for cross-border payments so we think there's b2b cross-border opportunity there's p2b cross-border opportunity but p2m as in everyday purchases we saw that pretty well so we're putting our energy where we really think there is a problem to solve Which is generally my mindset.

26:27You know, it's never about the technology. It's about whose problem can we solve. When you say you're pretty agnostic about what rail it runs on, are you completely agnostic or are there just certain better... No, we're pretty agnostic. And you know, the reason, but here's the reason. So your follow-up question should be why? Why are we not completely agnostic? Because we have built 60 years. we have invested 60 years into building the largest acceptance footprint out there and you know any merchant 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 stable coins so we still would like to go that route but there are certain things where it's a you know probably it doesn't actually matter that much here?

27:21Or 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 and 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. That was part one of the discussion. Tune in next week for part two. As always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear.

27:52All 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.

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