Research presentation with Mastercard and Arizent.
Transcription:
Michael Moeser: (00:07)
Hello everyone, I'm Michael Moeser, Research Analyst at Arizent. I am joined by Wade Plummer, Senior Vice President at Mastercard Access and Connectivity Solutions. We are here today to talk about some research we recently conducted on behalf of Mastercard on the evolving payments ecosystem and to hear about MasterCard's experiences. I realized, we are the last session before lunch. So we are gonna try to keep on time. So, let me dive into the research disclaimer. So this research was conducted on behalf of Mastercard in January to understand the market challenges, opportunities, and perspectives of banks, credit unions, card issuers and others in the payment space for the respondents to join the study. They had to qualify by being knowledgeable of their organization's payment policies and have a role in transaction processing, acceptance, acquiring and card issuing. Okay, so now that we have gone through the research qualifications and before we dive in, I would like to ask Wade to maybe provide some opening comments.
Wade Plummer: (01:15)
Yeah, thanks Michael. We look at developing strategies and obviously go out to validate and look at different drivers. And the research that we are able to conduct here does some things that are typically expect. There are some very obvious answers, meaning that the challenges that continue to present themselves to the industry are pervasive. And they have been around for many years and they will continue for many years, but they are certainly changing to some degree and also presenting significant opportunities. So, we will go through some of the data and we will get right on with it.
Michael Moeser: (01:55)
Well, here is a slide that I would like to tee up. So we ask people two questions on specific areas of payments. And what you see here is we ask the relative importance on the horizontal axis and their expected investment on the vertical access in the next five years. And I broke it in this down to three different boxes. You have got the must haves things like fraud management, real time payments, should haves the mobile wallets card level controls, digital commerce, and then could have or wishes at sort of prioritizations cryptocurrencies buyout pay later. And we have heard a lot about cryptocurrencies today as well as yesterday. And I am sure we are gonna hear more about that. But the interesting thing is this is what they see the market in five years where they see their priorities and if I were to say, what is it today?
Michael Moeser: (02:41)
It is probably gonna be the same, just a little down. Fraud is top issue. And what you will see over the next five years is fraud, may be at that 80% investment level, it will go to 90. Whereas things like mobile wallets card controls etc. May be more the 40 50, but they are gonna be rising. But the fact remains that as we continue to talk about apple wallet in general, digital commerce, it is the should haves that you see here. And if you step back five years or to today there is still gonna be, should haves. They are not into that must have category and Wade I would really like to ask you a question here. It feels like the goal posts on things like fraud are continuing to move. And as companies continue to put off things like innovation, I will get to that. As soon as I have addressed fraud controls, I will work on the customer experience. I know that is important, it feels like this chart's gonna look the same in another five years, and I really wanna understand what do banks really have to change what they're doing? What can they do to get ahead?
Wade Plummer: (03:49)
Yeah, I agree. These will predominantly look the same. In the end leveraging technology looking forward into that technology transformation is gonna make a number of things, different in terms of the attainability of some of these things. So, things that are up in the right hand quadrant represent those things that are perennially difficult. And they remain difficult because as regulations change and as consumers behaviors change and their desires for access and so forth continue to evolve the access to data and information that consumers want is continuing to get broader and more demanding.
Wade Plummer: (04:40)
And as a result as providers, you are not gonna be very successful if you are not delivering on those things. So the extent to which customers get more and more access to their data and want more and more things that exposes any provider to the risk associated with providing those things. So, it's a perennial thing because technology won't stop advancing and consumers won't stop asking for more and more things. The more you give them the more risk you are exposed to. So I think these things will kind of remain
Michael Moeser: (05:12)
The more they want almost.
Wade Plummer: (05:13)
Absolutely.
Michael Moeser: (05:14)
Let me jump through the next two slides quickly in succession, because individually these next two slides, they make sense. But when you look at them combined, there is sort of a paradoxand I would like to ask you about that paradox. So in the research, we asked eight outta 10 banks, carers etc, said that streamlining payment services across portfolios is key to driving profitability that makes sense. I mean, if I think of the analogy of a restaurant, if I offer fewer choices then it allows me to focus on just the main ingredients, like say in and out burger, there is pretty much five or six minus the secret menu but compared to say a McDonald's that has lots and lots of choices. So this seems to make sense that limiting choice and whether that's product features or set of vendors that you use partners, etc. Certainly can drive that profitability. Now, then when I look at the next slide about 85%, almost all a vast majority say there is a significant competitive advantage to be gained from using a single point of access to card networks. Now it almost feels like by limiting down the choice, it's creating a competitive advantage that sort of feels like, aren't those the opposite. And also doesn't that sort of create a potential risk by using a single provider.
Wade Plummer: (06:38)
Yeah, somebody a long time ago told me that taco bell was the greatest business in the world because they made a whole menu outta seven ingredients who just assembled them differently. So, what I do think that, but that's again a perpetual issue because you are having to deal with the technology to create the flexibility and you have efficiency and effectiveness and they don't always kind of marry up, right. You typically have to give up efficiency to get something let's call it effective. Well, let's call it differentiation, right?
Michael Moeser: (07:11)
Meaning that the product in a reaction right. Meaning product innovation.
Wade Plummer: (07:12)
Exactly product innovation. I am putting something out there that distinguishes my company, my offering from those out there at the same time that you sacrifice the efficiency, but the question is, can you have both? And in the end that you can.
Michael Moeser: (07:29)
So you can have your cake and eat too.
Wade Plummer: (07:30)
You can make some significant steps toward that while still maintaining a way of managing the things that you re gonna absolutely have to manage as a functional reality.
Michael Moeser: (07:45)
Now, when we asked in the research, top benefits of outsourcing the single third party partner service provider, what surprised me was that, greater operational efficiency and ROI was number two on this metric. The number one was faster speed to market with new products. And I don't know whether this is a factor of FinTech providing new solutions that legacy organizations have difficulty with. But when I look at the following elements, following benefits of improved AC access to data, better data analytics, greater ability to innovate, it really surprised me from the standpoint of that innovation. And so I guess my question here to you is, does it surprise you that companies are looking for as much help on product innovation as they are on gaining efficiencies?
Wade Plummer: (08:36)
No, it does not really surprise me because, those are the things that we have to persist with, right. And we have to focus on them and it comes down to focusing on what you can be good at and looking at how, again, looking at the model between where do I put my resources. So if you can find, trusted partners that that can bring the types of capabilities that help you advance your overall products and speed to market at the same time, helping your ROI and helping Toray costs and allow you to free up resources to focus on those things. It really does come down to how do you do with a limited set of resources and timeline, align your resources in a place where you can get the most bang for the buck? And, we do think that part of the strategy, part of how we focused our strategy is around putting you in a position to have flexibility and options while also creating a streamlined way to go about working with partners and certainly MasterCard and then being able to pivot those resources against the things that will actually create competitive advantage for you.
Michael Moeser: (09:46)
Is it also recognition that when I look at the earlier slide, let me go back here. If I can that must have category of a bank as a credit union, as a card issuer that I have gotta focus on fraud and risk management. I have gotta deal with real time payments whether I am using, whatever rail I may be using, but it's that recognition that I have really gotta focus on these. And, the things that I had in that, should have bucket. I recognize that's probably still gonna be or should have in five years, but I have to think about, can I leverage a partner to move that should have to the must have category? Maybe that's the accelerator, the nitrous if you will.
Wade Plummer: (10:28)
Yeah. Well, I mean, that's actually the substance of some of the things that I'll get into, because I think that is absolutely the case. I think, um, I think there are, uh, players in the market, uh, that like MasterCard, where we're looking at ways to actually do that, really focus in on those, those, those ways to help you move, um, as customers, things out of your immediate development shop and, and, and, um, and be able to still be able to leverage those, the things that you want wanna be able to do. So,
Michael Moeser: (10:56)
So in the research, when we looked at distilling down the needs and wants of these organizations, it came down to sort of these five pillars that potentially could create a simpler operating model everything from a single payment network access point to the ability to deliver value added services. I guess the question for you, Wade, do these make sense is one more important than the other or is it sort of, you have to have, I guess, as your taco bell analogy, you have to have all of them.
Wade Plummer: (11:23)
Yeah, I think you do have to have all of them but everything comes with weight. So, as I think about your ability to deliver value added services and some things that are absolutely critical, like connections and being able to manage and have access to give your customers access to networks and various rails those things are one you for sure need, you need partners for various reasons and basic ability to evaluate a ton of options. And then how do you bring those options to market talking about services? And if you think about it on the network side networks are incredibly complicated. 20 years ago, there were complicated things to be able to integrate to, and then remain in compliance with and search through the options of features and capabilities that various networks offer especially in the debit card space and prepaid space.
Wade Plummer: (12:13)
And some of the places where you have got multiple rails on the same card. And as you get out to other parts of the world, it becomes even more complicated with domestic schemes and data residency and all these things. So, the extent to which you can find somebody to take that heavy lifting off and reduce the breadth of need to be able to provide those access points. Again goes back to our basic theory for the case, which is you can redeploy resources to those things that will really help you focus on creating that differentiation for your own products and services with your own consumers as opposed to having what has historically been the lion share of your resources focused on the backend, keeping the lights on, which doesn't really do it justice. keeping the lights on is acute way to say these things are hard and they require a lot of resources and if anything slips has an issue, you can't just pivot on a diamond correct. It reissue a new card because something happens. You have a problem.
Michael Moeser: (13:19)
So let's dive into some of the things there is great mug of weight, but let's dive into some of the things that you are seeing in terms of the trends.
Wade Plummer: (13:27)
Yeah, so the first thing is really is that this whole transformation among within technology and obviously the demands of consumers is quite obviously I know this kind of goes without saying to a degree is look, it's a long term force and it's here to stay. And we would like to think about it about, we would like to think about it within the context of creating choices rather than necessarily problems. The problems in the challenges exist but ultimately I think a growing problem, if you will, is actually the growing number of choices. The degree to which you can partner with technology providers that give you access to a wide breadth of opportunities. Now, how do you figure out which one you want to use? And if there is multiple things that are relatively similar, it's not a very effective way to go about deploying resources, having multiple types of services that do more or less the same thing in different ways. And do you get more value from unifying and standardizing on a single type of capability. And I will try to get into a little bit more of that.
Michael Moeser: (14:36)
Are fintech's an issue here in terms of they are providing these choices. I see ads on TV, on the internet X, Y, Z bank, you can get access to your paycheck two days earlier, all these cool things that maybe if I am strapped, I might go to that bank to get that access, but are they sort of creating some of that choice, that's pushing legacy organizations back to say, how do I do this? Or where do I, do I partner with somebody to deliver this?
Wade Plummer: (15:05)
Yeah, I would say, we are all familiar. We all are out in the world and living every single day and we can download any of these things in two minutes and give a try and we see how they see how they work. I mean, their attention is not generally divided. So they do have an advantage in being able to focus on this, this one particular use case or two or three use cases. And if you are part of a big financial institution, or you are part of a merchant service provider or some sort, you are contending with a lot of different things. And you can take your cues. We all can take cues from there, but fundamentally it's a slicker, oftentimes it's a slicker, not necessarily materially enhanced, but slicker way of doing the same thing.
Wade Plummer: (15:48)
So nothing to fintech's a great place, and they are creating, they have the mind space and the ability to spend time thinking about that next little tweak. That makes a huge difference in the way that a consumer goes through working their app on their phone or how they can do a virtual card instantly and things of that nature, which generally speaking, I think mainline financial institutions are doing a relatively good job keeping up with the issue is at what expense.
Michael Moeser: (16:16)
Yeah, that's an important one cuz yeah. New things aren't free necessarily. So, walk us through this slide here.
Wade Plummer: (16:23)
Yeah, so the way to think about this is that consumers want more ways to buy and more value added features when they are doing it in a nutshell. And there is a lot of stuff on here that talks about fragmented access and managing vendors and so forth. But there is an opportunity in all of this because customers do not really wanna pay. I have always kind of thought about is the payment experience, there is really a payment experience. It is a buying experience right at the point of decided to pay I bought or my inclination is to buy. So, what does that mean? What does it mean to all of us? Again, getting back to this notion that providing more ways to buy means integrating to more networks and or more rails.
Michael Moeser: (17:16)
Doesn't that mean more problems. When I think about integrating more solutions, I am going out to another vendor you have got a point here about complex vendor management. It feels like it brings a whole compliance set of issues. And one of the things that we learned in the research was that managing compliance is a relatively difficult burden that people feel I have often heard of executives talk about how many new compliance officers they are hiring relative to the product innovation people. And it is that back office lights on issue. But, it is a complex vendor management issue. And, I think if I am a legacy organization and I am gonna bring somebody else in to help me provide that service, whether it is easier access to two days advanced pay, if that is one issue or some other card control feature, then sounds like giving these giving consumers greater choices, which they want and want it for free it becomes now all of a sudden, not just the cost of how do I do this, but then there's the added burden of the regulatory compliance.
Michael Moeser: (18:22)
I mean, what is your perspective on that?
Wade Plummer: (18:24)
Yeah, look that's one of the reasons why we have gone down the path that we have because we have been in the network business a very long time. We have been in the value added services business a very long time. And the way we think about it is understanding exactly that, how do we create capabilities and services that allow customers to offload that compliance burden, cuz it's dramatic and we will get into things around regulation and so forth. What we did, I should say in previous slides but the regulation I have been in this business for a very long time and there is nothing that I have seen like there is in the last few years.
Michael Moeser: (19:04)
It almost feels like with regulation that you feel like you have with Patriot act and KYC, you always feel like you are moving that one. You are finally reaching the goal post. And then all of a sudden you have got a war and now you have got sanctions and you have gotta have that compliance issue. It certainly feels like a complex issue, but why don't we talk about MasterCard? Yeah, access as a potential solution here.
Wade Plummer: (19:28)
Yeah, absolutely. And exactly to that point we have been creating our strategy around unifying the ability to have access and finding that sweet spot that is complimentary to customers. So the things that we do really well are the things that we have designed around our strategy is MasterCard access is to be able to do the things that we really do well and present options and take advantage of the infrastructure and so forth that we have put down over decades and decades. And so, what we have really done with MasterCard access is we have created what we like to call a single connection to intelligent network of services.
Wade Plummer: (20:20)
And so, for us these are all services and I will just kind of break down a little bit. Yeah, for just a couple seconds here. So with MasterCard networks exchange, what we have done is we have provided a service behind MasterCard access as a vertical that allows customers to come to us connect and get access to a vast array of different networks. And, capability of that capabilities basic operations is to be a backend partner. So you do not have to connect to three networks and then decide you need a fourth. And that's another giant project and another giant expense and another amount of expense to throw on for mandates compliance and sifting through reams and reams and reams of documents to determine what kind of features are coming through what networks and what things you have to do and what things you don't.
Wade Plummer: (21:12)
And it seems very simple in concept cuz it kind of is we were very good at it. And customers need it. And as we get further and further down this technology transformation journey and you wanna take advantage of choices and things that you wanna do for customers, this will change a lot the rails that you need access to wanna provide access to will continue to expand. And they will continue to change at the same time. So one connection that gets you access to many connections and you can so.
Michael Moeser: (21:43)
It sounds like future proofs against, or not against, but future proofs, business model as new rails come online.
Wade Plummer: (21:50)
And absolutely that is exactly the point and our experiences tells us that because that's what we spent 50 some odd years doing. And then very exciting for us is what we call MasterCard direct services and MasterCard direct services uses. Again uses a protocol and an orchestration capability to allow customers to access services to apply to transactions irrespective of what inbound pathway those transactions may have taken to the customer. So when you think about being able to make a call in real time to obtain a fraud scoring service or a consumer controls score in order to know what you might want to do for a consumer turn, take that card on, turn it off. That sort of thing is how direct services has been designed.
Wade Plummer: (22:50)
And what it does is it gives you access to a wide range of services, which you can then begin to think about standardizing on, which goes back to this notion of cardholder experience, where regardless of the way that transaction took place in various parts of the world in the US, a great example is within the framework of DOD, Frank and Durban, you must have multiple routes and merchants have merchant routing choice. So what happens if you want to apply a particular service, a loyalty service, a fraud score, you wanna get the view of that entire business, but you have a large fleet of ATM's. You have a partner with an off-prem ATM provider, right? You have got some arrangements that allow for bilaterals and you have got multiple networks. So how does that transaction hit a service and have that service in every instance be able to invoke the service.
Michael Moeser: (23:44)
So, for example, card control, it sounds like, if it's an honest transaction for a card control makes a lot of sense. It works, but I think as you mentioned with DOD Frank Durbin, where there is a requirement to have a second network and it becomes an office transaction, you are saying that those service features are still available to a bank card issuer etc.
Wade Plummer: (24:06)
Absolutely, because the customer connects directly into it via an API or standard ISO connection which means when the inbound transaction hits their host, they are now in control of that transaction. They have centralized it. They make a call out to direct services provides the service back and then they can apply it. So regardless of where that transaction originated from inbound, once it hits the financial institution, they can apply a service to any transaction that cardholder may have conducted in whatever manner they may have conducted It.
Michael Moeser: (24:43)
So, sounds like you have taken some of those should haves plus the must haves and really moving them all up the value chain. Could you talk to us maybe here on the next slide about what your customers are telling you their experiences with MasterCard access?
Wade Plummer: (25:00)
For sure, yeah. We have a relatively large number of customers running in every region of the world at this point. So we thought we would call it a couple of interesting ones. And I will just start kind of up in the upper left hand left corner with European customer. So, this customer had a large number significant number more than half of their transactions that were simply conducted between owned banks under a holding company, okay. When we began to talk to them about services, they well geez, we do not have any fraud on our transactions. And we don't really have much of a need for services outside of what we are currently doing. But what they did say was that hang on a second regulation in Europe tells me that I have to provide proof that I, in fact, conducted a particular type of fraud scoring and or risk mitigation.
Wade Plummer: (26:01)
So I am gonna have to report that back to the European union which opened the door for us to talk about, well, why don't you connect with direct services? What does that mean? Sure. What does it do for me? And it allowed them to get access to fraud scoring our decision intelligence capability at MasterCard, which they were then able to apply broadly speaking across their entire portfolio. What ended up happening was what you see here in the chart. Not only did the total dollars of fraud decrease but the incidence of alerts and other things that go right to effectiveness and efficiency all just played out significantly that is pretty massive advantage. Yeah. Yeah.
Michael Moeser: (26:42)
33%. Wow.
Wade Plummer: (26:44)
Absolutely. And you know, what happened next? What happened next was they said, well, what other services do you have?
Michael Moeser: (26:48)
Right, right. I can imagine.
Wade Plummer: (26:49)
And, how can I get them? We said, well, actually you subscribe to the service and you have actually already got the capability in place. So once you have decided what it is that you want we can turn it on and it's immediately intermate that's amazing transaction. Similarly in the US, we had a customer that was a private label issue and they again wanted to find a way to standardize their complaint to themselves was again, we have got a particular use case here, another one here and another one here. And we have to use specific scores and tools for each inbound path of transaction types. And they wanted to find a way to standardize and effectively the same approach and the same result was that a significant advantage was achieved. Again, similarly with the example in Canada, again, they all come from a different kind of initial need, right. But the answer becomes the same thing. We have this thing, this capability, this intelligent network of services, direct services. And that allows you to gain access to various solutions that can be called at anytime and applied to any transaction.
Michael Moeser: (28:07)
So, definitely I see the value here in terms of the fraud and clearly that's in the must have category. It definitely addresses the pain point. And as you said, sounds like it opens the doors to other services. I have got a question here for you Wade in terms of, you have talked about seeking a partner, gaining that competitive advantage. What about the companies that take one Wolf approach of, I can do it on my own. Are they putting themselves at a competitive disadvantage?
Wade Plummer: (28:42)
Ultimately, we all know there is advantages to being able to develop secret sauce and invest heavily in that. And if you get it really right, you hit a bullseye, a great advantage because you have got this pretty good moat and it will last for a while but it won't last forever. But at the same time you have to wonder how long that can really last. And, so that, we are gonna see less and less of that, and I especially think we will see less and less of that as major players across the spectrum, whether they are processors, MSP types, acquires issuers, as they begin to move more aggressively toward the cloud, which I do think we will see. And probably the audience is seeing now is they have to be all considering how do I put myself in a position where I can control my own destiny and intermediate various services and capabilities more in a more custom way without having to build and be a lone Wolf in a fortified data center with bespoke software and all the things that come with it.
Michael Moeser: (29:56)
Last question for you, can MasterCard access create a competitive advantage for a company?
Wade Plummer: (30:02)
We certainly think this is for us, again a network of services, strategy approach and to the extent that we can provide flexibility and options for customers. I think that is a huge competitive advantage because you are not stuck with one thing you are coming to partner it, to be able to get access to many things. And those many things will continue to evolve and will add to them. And I think it will create a very interesting opportunity for partnerships.
Michael Moeser: (30:35)
Well, thank you, Wade. If you want to connect with Wade, here's his LinkedIn, we really appreciate you folks taking the time to listen to us. So thank you and enjoy lunch.
Wade Plummer: (30:44)
Thank you.