Earnings Call Transcript
Mastercard Inc (MA)
Earnings Call Transcript - MA Q4 2022
Operator, Operator
Good morning. My name is Audra, and I will be your conference operator today. At this time, I would like to welcome everyone to the Mastercard Inc. Q4 and Full Year 2022 Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. Mr. Warren Kneeshaw, Head of Investor Relations, you may begin your conference.
Warren Kneeshaw, Head of Investor Relations
Thank you, Audra. Good morning, everyone, and thank you for joining us for our fourth quarter 2022 earnings call. With me today are Michael Miebach, our Chief Executive Officer; and Sachin Mehra, our Chief Financial Officer. Following comments from Michael and Sachin, we’ll open up the call for the Q&A session. You can access our earnings release, supplemental performance data, and the slide deck that accompany this call in the Investor Relations section of our website, mastercard.com. Additionally, the release was furnished with the SEC earlier this morning. Our comments today regarding our financial results will be on a non-GAAP currency-neutral basis unless otherwise noted. Both the release and the slide deck include reconciliations of non-GAAP measures to GAAP reported amounts. Finally, as set forth in more detail in our earnings release, I would like to remind everyone that today’s call will include forward-looking statements regarding Mastercard’s future performance. Actual performance could differ materially from these forward-looking statements. Information about the factors that could affect future performance are summarized at the end of our earnings release and in our recent SEC filings. A replay of this call will be posted on our website for 30 days. With that, I’ll now turn the call over to our Chief Executive Officer, Michael Miebach.
Michael Miebach, CEO
Thank you, Warren. Good morning, everyone. Let’s get right into it. So, starting with the big picture. Consumer spending has remained resilient, and we are very well positioned to capitalize on the growth opportunities ahead. We closed out the year with strong financial results and several notable wins. Quarter four net revenues were up 17% and adjusted operating income up 19%, both versus a year ago, as always, on a non-GAAP currency-neutral basis, excluding special items. While the macroeconomic and geopolitical environment remains uncertain, we are keeping a close eye on a variety of positive and negative factors. The broadly resilient labor market with low unemployment and rising wages, coupled with elevated consumer savings levels, are key drivers of consumer spending. We’re also tracking efforts by the central banks to curb inflation, along with moderating energy prices and the reopening of China. So, still lots of moving pieces. From an overall consumer spending standpoint, we expect the consumer to be relatively resilient. Spending patterns have largely normalized relative to the effects of the pandemic with the notable exception of China. In terms of switched volumes, domestic volumes in the fourth quarter remained steady relative to 2019 levels with some slight moderation in the U.S. related to lower gas prices recently. Cross-border travel continued to recover in quarter four with inbound travel either flat or up in every region sequentially relative to 2019 levels. As of the first three weeks of January, inbound cross-border travel to all regions is now above 2019 levels. We will continue to monitor the economic environment closely, and should the outlook change, we’re prepared to move quickly to adjust our spending levels as we have done in the past. In the meantime, we continue to focus on the things we can control. This starts with our three strategic priorities: expanding in payments; extending our services; and embracing new networks. And here are some examples of how we’re progressing against each of these. Starting with payments. We won substantial new business this quarter. Our innovative products, differentiated services, and partnership approach enabled us to secure major portfolio flips, extend relationships, and launch new programs with banks, co-brand partners and transit systems around the world. I am very excited about our expanded partnership with Citizens to become their exclusive payments provider across all product portfolios in the United States. We will shift their debit portfolio to Mastercard, and we will maintain exclusivity on credit and commercial. Citizens selected Mastercard based on our digital assets, open banking capabilities, and safety and security tools. We have also extended and enhanced our long-term partnership with Citi. It solidifies Mastercard as Citi’s exclusive global partner for Citi-branded consumer credit, debit, and small business cards. We look forward to continuing to partner to deliver digital initiatives, new technologies, and innovative payment solutions together. We’ve extended our longstanding relationship with Bank of America across their consumer and small business debit and credit lines of business. They’re great partners. We’re especially proud to continue as the lead brand for all newly issued small business cards. And our positive momentum with Chase continued this quarter as well. Building on our recent co-brand, commercial, and Pay-by-Bank partnership announcements, we are excited to announce that we have renewed the Chase Freedom Flex portfolio. Turning to the UK, we recently extended our credit deal with NatWest Group for consumer and commercial. We’re partnering with Belbim in Istanbul to convert over 17 million closed-loop cards to Mastercards and add 24,000 new acceptance locations across the city. We’ve partnered with QNB Finansbank and Trendyol, a large e-commerce marketplace in Turkey with over 30 million customers, to launch a new Mastercard co-brand credit product. Now, an important driver of our success in core payments is our ability to deliver innovation and thought leadership. We are designing and deploying innovative solutions at scale, which makes us the clear partner of choice for our customers. Three recent examples include our work in Installments, Tokenization, and Click to Pay. Starting off with installments. SoFi launched Pay in 4, becoming the first bank in the U.S. to launch within the Mastercard Installments program. SoFi valued the broad acceptance, strong consumer protections, and commission-based open banking capabilities that all make Mastercard Installments unique. We’ve got a strong pipeline for Mastercard Installments and plan to add several additional programs across multiple regions throughout the year. Turning to Tokenization. We surpassed 2 billion tokenized transactions per month, and for the year, we are up 38%. We’re currently enabling digital transactions in over 110 countries. Tokenization helps keep the ecosystem safe and secure across a wide range of use cases. One example that I think is particularly cool is the work we are doing with in-car payments. We’re working with car manufacturers and fintechs to integrate payments using our tokenization platform and biometric authentication capabilities. Think about the simplicity it brings to paying for gas, tolls, charging, or entertainment right from your car. This is a great example of Mastercard working with partners to drive the convergence of the Internet of Things, 5G, and addressing consumer demand for cool digital experiences. It also highlights how we’re expanding the reach and the value of our acceptance network through new channels to support new use cases. This is just the beginning. Watch for more to come in this space. And on Click to Pay, we partnered with Adyen to launch Click to Pay on their global payment platform, recognizing the value that it brings to guest checkouts and millions of online shoppers. Adyen joins more than 20 other payment service providers around the world, bringing Click to Pay to thousands of merchants globally. Now, this focus on innovation and partnership is also a critical part of our strategy to penetrate the prioritized set of new flows that we outlined at our 2021 Investor Day. We continue to make solid progress. Here are some examples of how we’re driving growth in each area. First, disbursements and remittances. Mastercard Send and our cross-border services capabilities are solving for an expanding set of use cases across multiple geographies. For example, we partnered with social marketplace platform, Poshmark, to enable seller payouts. And for cross-border payments, we’ve teamed up with Paysend to broaden our global reach and expand the ability to send international payments across card brands. Second, we’re deploying digital capabilities to displace cash and check-based commercial payments at the point of sale, a huge opportunity. In France, we signed an agreement with Société Générale to develop their corporate card book. And in South Korea, we partnered with KakaoBank and Samsung Card to launch new debit and credit co-brand offerings for small businesses. The third flow is B2B accounts payable payments. Our virtual card capabilities provide an effective digital solution to address the working capital, process efficiency, and data challenges that are prevalent in B2B. We are a global leader in virtual cards. We’re seeing rapid growth in this space. We’re bolstering our position through new partnerships and capabilities. For example, we announced plans to partner with Sabre and confirm our pay to accelerate the use of virtual cards for B2B travel payments. We also signed an agreement with fintech partner, Extenet, to offer virtual mobile corporate cards in the U.S. and Canada. And finally, on the consumer bill payment front, we are focused on deploying market-specific solutions to meet the unique needs of consumers and businesses. For example, in Norway, we are powering the eFaktura service, which is used by the vast majority of citizens to pay their bills. In 2022, we hit a milestone as over 200 million digital invoices were sent using eFaktura. As you can see, we’re making significant progress expanding in payments, and we are excited about the opportunity in front of us. Now turning to the second of our three strategic priorities, services. Services provide differentiation and diversification for Mastercard. Our strategy is to leverage our services to drive growth at the core and to expand into new segments and use cases. We’re making steady progress on both and have significant opportunities for future growth. Our services continue to drive growth in the core as evidenced by our wins and extensions with Citizens, Citi, NatWest, and others, as I mentioned earlier. One example of a service that enhances the value of payments is Consumer Clarity. The service provides cardholders with merchant details in digital receipts to reduce disputes, low charge-back costs, and improve the consumer experience. We recently partnered with TSYS, who will offer Consumer Clarity to over 25 million cardholders in the U.S. and the UK. In 2022, we signed up over 50 financial institutions and merchant partners for Consumer Clarity, including large issuers like Itaú in Brazil. We’re also expanding our services to new segments and new use cases, including governments, retailers, digital partners, and financial institutions. This quarter, we partnered with research and consulting firms in Germany, as well as the Barbados Ministry of Tourism and International Transport to provide governments with detailed insights into tourism and retail spending trends. We engage with retailers like Lowe’s, who are leveraging our Test & Learn capabilities to conduct analytics on their core business. We partner with large fintechs like Monzo in the UK to advise on product development strategies. And we are deploying our personalization solutions, which we acquired through Dynamic Yield, across a range of retail and financial institutions, including Carrefour, Argentina, and Height to enhance and scale their personalization efforts. I’m very encouraged by the continued momentum in our services growth strategy and the differentiation and diversification that these capabilities bring. I’ll now move on to our third strategic priority, which is embracing new networks, namely open banking and digital identity. This quarter, I’d like to highlight an example of how our open banking capabilities have come together with our other strategic priorities to offer a new solution. As I mentioned earlier, in quarter four, JPMorgan Payments and Mastercard announced an innovative Pay-by-Bank solution. The solution utilizes the Mastercard open banking platform to modernize existing ACH payments and allow customers to pay bills from their bank accounts in a frictionless manner. Pay-by-Bank offers choice and provides a simple and secure experience for billers and merchants as well as consumers by enhancing existing ACH transactions. This deal is a manifestation of our multi-rail strategy, expands our addressable market through our open banking capabilities, and it deepens our relationship with JPMorgan Chase. We’re actively working with them to take the solution to market this year. We also continue to make our progress with open banking in Europe. Mastercard is connected to more than 3,000 banks and financial institutions across 18 markets to power their open banking efforts. This quarter, we partnered with Secure Trust Bank in the UK, which will leverage our open banking capabilities to provide safe and convenient ways for their customers to repay retail loans directly from their bank accounts. In summary, we delivered another strong quarter of revenue and earnings growth, aided by a resilient consumer and the continued recovery in cross-border travel. In payments, we won substantial new business this quarter, including Citizens. We’re expanding our differentiated services and embracing new networks, including leveraging our open banking capabilities to power solutions like JPMorgan’s Pay-by-Bank. With all that, we’re well positioned for the opportunities ahead. We will manage the business with agility should the macroeconomic outlook change. Sachin, over to you.
Sachin Mehra, CFO
Thanks, Michael. Turning to page 3, 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, showed net revenue increased by 17%, driven by strong consumer spending and the ongoing recovery of cross-border travel compared to 2019. Acquisitions added 1 percentage point to this growth. Operating expenses rose by 13%, which included a 3 percentage point impact from acquisitions. Operating income increased by 19%, factoring in a 1 percentage point decrease related to acquisitions. Net income was up 16%, which accounts for a 2 percentage point decrease from acquisitions. Earnings per share rose by 19% year-over-year to $2.65, including a $0.06 contribution from share repurchases. During the quarter, we bought back $2.4 billion in stock and an additional $590 million through January 23, 2023. Now, let’s look at page 4, which presents the operational metrics for the fourth quarter. Worldwide gross dollar volume, or GDV, was up 8% year-over-year on a local currency basis. Excluding Russia from the previous period, GDV would have increased by 14%. In the U.S., GDV rose by 7% with credit growth of 14%, partially reflecting the recovery in travel spending. Debit grew by 1%, and after excluding the effects of a previously discussed customer agreement, it increased by about 5%. Outside the U.S., volume was up 8%, with credit growing by 9% and debit by 7%. Cross-border volume increased by 31% globally for the quarter, indicating significant improvement in travel-related cross-border spending. Moving to page 5, switched transactions grew by 8% year-over-year in Q4. Excluding Russia from last year, they increased by 18% year-over-year in Q4. Both card-present and card-not-present growth rates remained strong. Card-present growth benefitted from increased contactless payment usage across all regions, excluding Russia. Contactless transactions now make up 56% of all in-person switched purchases. Additionally, card growth was at 5%, or 9% when excluding cards issued by Russian banks from last year's figures. Globally, there are 3.1 billion Mastercard and Maestro-branded cards in circulation. Now let's turn to page 6 for a look at revenue line items, again on a currency-neutral basis unless noted. The 17% rise in net revenue was mainly due to growth in domestic and cross-border transactions and services, slightly offset by higher rebates and incentives. Acquisitions contributed 1 percentage point to this growth. Looking briefly at individual revenue items, domestic assessments increased by 6%, while worldwide GDV grew by 8%, primarily due to mix differences. Cross-border volume fees increased by 40%, aligned with a 31% rise in cross-border volumes. The 9 percentage point difference stems from favorable mix, with higher-yield intra-Europe cross-border volumes growing faster than other volumes. Transaction processing fees increased by 16%, compared to the 8% growth in switched transactions, with the difference attributable to favorable mix, FX-related revenues, and pricing. Other revenues rose by 16%, including a 1 percentage point contribution from acquisitions. The remaining growth came mainly from our cyber and intelligence as well as data and services segments. Rebates and incentives increased by 18%, which reflects strong growth in volumes, transactions, and new deal activities. Moving to page 7, on a non-GAAP currency-neutral basis, excluding special items, total adjusted operating expenses rose by 13%, including a 3 percentage point impact from acquisitions. The increase excluding acquisitions was mainly due to higher personnel costs associated with our strategic initiatives, partially offset by lower advertising and marketing expenses. Now on page 8, let’s discuss operating metrics for the first three weeks of January compared to Q4 2022. All metrics, except for cross-border card-not-present excluding travel, were positively impacted by the slower growth experienced in January 2022 due to the Omicron variant. Switched volumes increased by 21% year-over-year, up 7 percentage points from Q4. Switched transactions were up 12% year-over-year, an increase of 4 percentage points from Q4. Overall, cross-border volumes grew by 42% year-over-year, up 11 percentage points from Q4, propelled by an 84% increase in cross-border travel year-over-year, up 25 percentage points from Q4. Cross-border card-not-present excluding travel grew by 10% year-over-year, reflecting a 2 percentage point increase from Q4. A couple of notes to help understand business trends: Excluding Russia, where operations were suspended in March 2022, an appendix later in this deck lists all relevant data points, excluding Russian-issued cards from prior periods. As pandemic effects lessen, we will stop providing operating metric levels as a percentage of 2019. Now moving to page 9, I'd like to discuss our outlook for the upcoming year. I believe we are well positioned to seize the significant growth opportunities ahead. We have identified clear strategic priorities and are making steady progress on each of them, evidenced by the numerous wins across our products and services discussed by Michael. On the macroeconomic side, as Michael mentioned, we're monitoring various positive and negative factors. We expect consumer spending to remain relatively robust, partly due to a strong labor market. It's important to note that we are coming off a year of strong growth as we move past pandemic effects, and we anticipate that our growth rates will moderate going forward. Most regions have bounced back in cross-border travel and exceed Q4 2019 levels, except for Asia, which can still improve with China's reopening. For context, China accounted for about 1% of inbound cross-border travel volumes pre-pandemic in 2019; this volume rebounded to approximately 20% of Q4 2019 levels in Q4. Similarly, it represented about 2% of outbound cross-border travel volumes in 2019, with Q4 figures at about 50% of that level. Thus, our base case for 2023 is net revenue growth at the high end of a low-double-digit rate on a currency-neutral basis, excluding acquisitions and special items. This rate would increase by around 1.5 percentage points if excluding Russia-related revenues from 2022. We expect acquisitions to have a minimal impact on this growth, while foreign exchange will likely provide a 1 percentage point boost for the year due to the recent strengthening of the euro against the U.S. dollar. In terms of operating expenses, we will continue to manage our expenses carefully while investing in payments, services, and new network priorities to foster growth. For the year, we anticipate operating expenses to increase at the high end of a high-single-digit rate on a currency-neutral basis, excluding acquisitions and special items. Acquisitions are expected to add about 0.5 percentage points to this growth, while foreign exchange is likely to pose a 1 percentage point headwind for the year. Looking at Q1, we predict low double-digit year-over-year net revenue growth on a currency-neutral basis, excluding acquisitions and special items, reflecting resilient consumer spending. A couple of key points: Q1 will be the last quarter to feel the impacts of our decision to halt operations in Russia in Q1 2022, and we expect elevated cross-border volume growth in Q1 2023 due to the Omicron effects from Q1 2022. Acquisitions are anticipated to contribute about 0.5 percentage points to this growth, while foreign exchange will likely be a 2 percentage point headwind for the quarter. From an operational expense perspective, we expect Q1 operating expense growth to be at the low end of a high-single-digit rate compared to a year ago on a currency-neutral basis, excluding acquisitions and special items. Acquisitions are projected to add around 2 percentage points to this growth, while foreign exchange is expected to give a 1 percentage point boost for the quarter. Additional considerations: On the other income and expense line, we estimate an expense run rate of roughly $100 million per quarter, based on current interest rates and debt levels, without accounting for gains and losses on our equity investments, which are excluded from our non-GAAP metrics. Finally, we expect a non-GAAP tax rate of about 18% in Q1 and between 18% to 18.5% for the year, given the current geographic mix of our business. Now, I will pass it back to Warren.
Warren Kneeshaw, Head of Investor Relations
Thank you, Sachin. Audra, we’re now ready for the Q&A session.
Operator, Operator
Thank you. We will now go to Harshita Rawat at Bernstein.
Harshita Rawat, Analyst
So Mike or Sachin, I wanted to ask about Pay-by-Bank. Over the years, you’ve developed and acquired capabilities for Pay-by-Bank in different countries. You talked about this new partnership with JPMorgan. But a skeptic could also argue that Pay-by-Bank is a risk to cards long-term, and there’s some precedence in countries. So, can you talk about the push and pull for severe? And also maybe touch upon where is Pay-by-Bank being used versus cards and how’s Mastercard able to participate in those transactions? Thank you.
Michael Miebach, CEO
Right. Harshita, let me start off on that. So, the way we think about this is in the end, it is about delivering choice to consumers, choice of merchants, choice to banks, and we are therefore in all relevant ways to pay. But it’s also true that the card ecosystem over the years has driven tremendous value. So, it is a prevalent way to pay for many use cases. But on the side, we have alternative payment methods emerging. And we look at those as options to go after new use cases. That’s exactly what happened here in the context of our partnership with JPMorgan. This is focused on existing ACH payments, which are not bringing the value to the biller or the consumer that they are looking for. Frankly, though, very specifically, what we’re doing here, the issue with some of these account-to-account payments is you never really know what balance is on the account. Our open banking capabilities are really providing a payment success factor here that tells the biller this is a good time to debit this particular account, so true value brought that somebody is willing to pay for, in this case, the biller/the merchant. So, a good example of where there can be value created with alternative payment tools while this doesn’t take away from the power the cards are bringing to consumers and merchants. So, we see this as coexistence. Where this is going over time, we don’t quite know, but our multi-rail strategy positions us well to play in either field.
Darrin Peller, Analyst
Great job this quarter and over the year. Looking forward, based on the trends you’re showing for January, even with easier comparisons due to Omicron, it seems that your growth projections for the year are quite conservative, expecting low double-digit growth. Considering the trends beyond January, excluding Russia, you should see significantly higher growth rates after March. Can you share your assumptions regarding the macroeconomic factors from current activity moving forward? Are rebates and incentives playing a role in your projections? Thank you again.
Sachin Mehra, CFO
Good morning, Darrin. Let me provide some insight. Our base assumptions indicate that consumer spending will remain resilient through 2023, and we currently see a steady trend in consumer spending going forward. In terms of cross-border travel, most regions are growing at a stable but not accelerating pace. As you recall, intra-Europe travel bounced back first after COVID, followed by cross-border travel to markets like the U.S., UK, Canada, and Latin America, all of which are also expected to continue growing steadily. The area we anticipate stronger growth in is Asia Pacific, which has lagged in cross-border travel recovery. With recent border openings in several AP markets, we expect some recovery relative to 2019 levels. We believe that strong consumer spending and our expanding services capabilities will support our growth. It’s worth noting that in 2022, we experienced high foreign exchange volatility, which positively affected growth. Predicting future FX volatility is challenging, but it's factored into our projections. Regarding rebates and incentives, we’re consistently winning new customers and expanding with existing ones, and we're building our assumptions around rebates and incentives in line with our successful track record.
Lisa Ellis, Analyst
Michael, I wanted to follow up in your prepared remarks related to new flows. You highlighted that B2B POS payments are a notable opportunity area and highlighted a few new SMB co-brand wins there. Can you just talk a little bit more holistically about this opportunity? Remind us, a, how big it is; and then b, what’s different about it? What do you have to do differently as Mastercard to capture this opportunity relative to the consumer side? Thank you.
Michael Miebach, CEO
Right, Lisa. So, the opportunity here lies really in taking our existing set of tools, namely from the card ecosystem, very specifically the virtual card capability, which came through an acquisition many years ago that we’ve built out into a leader here. So this existing set of tools presents a huge opportunity in terms of flows to be addressed and make them more efficient. We’re looking at $14 trillion from an opportunity perspective. If you recall what we laid out across the 4 flows, new flows, this is one of the large ones we quoted. The way to go about this is really to say, all right, who are the different players that we already have in our ecosystem. We bring BCNs in too. There are a lot of deals with financial institutions, but there are also a lot of deals with partners out in the travel space, and the travel space has been most promising for us, and that is coming back right now. This is a near-term opportunity. Cash and checks dominated existing tools, existing partners. This is right for us to go after it, and we’re leaning in.
Sachin Mehra, CFO
And Lisa, maybe I can just add a little bit out here, particularly as you think about the virtual card opportunity, which Mike just talked about. The differentiation, which is provided by technology, is what Michael talked about by virtue of the acquisition, which we had with our virtual card capabilities, but there’s also differentiation in terms of our approach from a go-to-market standpoint. Specifically, when you target flows from a go-to-market standpoint, you go on a vertical-by-vertical basis. So, as you know, we’ve been very successful in the travel vertical. Part of the reason we’ve been successful in the travel vertical is having a deep understanding of what it takes at the travel integrator level to be able to embed your technology so that you are the payment choice, which people will exercise when they have to make those payments. Similarly, as we look at that opportunity going forward, there are several other verticals where we’re making similar kinds of advances. So, that’s specific as it relates to the BCN piece. But you also asked about small business and the commercial point-of-sale opportunity, which is there. The reality is we’ve been winning significant new deals in that small business opportunity. We see, candidly, a very sizable market opportunity in commercial point of sale, and a large part of that is still in cash and check. Just like we did in B2M where we displace cash and check utilizing digital technologies and innovation, that’s kind of the advances we’re making in commercial point of sale.
Tien-Tsin Huang, Analyst
I wanted to ask just big picture, if you would characterize visibility here for us on revenue versus, I guess, you can go back to pandemic or pre-pandemic. Just curious on visibility given you mentioned lots of moving pieces. And then, same thing on expenses, you said in the prepared remarks here that you’re prepared to adjust investments, if necessary. If the base case and the outlook here is to show some operating leverage, can we assume the same operating leverage if revenue weakens relative to expectations? Sorry for the long question.
Sachin Mehra, CFO
Sure, Tien-Tsin. Regarding your question about revenue, we've established our base case with our assumptions. Ultimately, we can't predict the future with certainty, but based on current trends and leading indicators, especially in terms of the labor market's strength, we feel optimistic about our revenue outlook. One aspect of revenue we consider is the difference between reported figures and currency-neutral figures, which is difficult to forecast due to fluctuations in foreign exchange markets. Recently, we've noticed the euro strengthening, and that informs our foreign exchange assumptions. As for operating leverage, we have always aimed to maintain positive operating leverage in the long term. We assess our revenue alongside our expenses and have previously shown that we can adjust our expenses in response to changes in revenue. However, we want to avoid compromising the long-term growth potential of our business. We will continue to invest wisely, focusing on long-term outcomes, but will be careful not to allocate operational expenses to areas that aren't in demand. Our commitment to delivering positive operating leverage remains unchanged, and we have the capability to adjust expenses if long-term revenue growth faces challenges.
Sanjay Sakhrani, Analyst
First off, I’m glad we’re getting rid of the relative to 2019 metric, for good reason. Just a question on cross-border and sort of the operating assumption this year. I know there are a number of different trends that you guys talked about. But there’s still a decent amount of pent-up demand. I guess, how do you think cross-border travel behaves in a backdrop where the macro might get worse from here? Maybe you could use some historical precedent here. Maybe just give us sort of how you’re thinking about it. Thanks.
Sachin Mehra, CFO
Sure. Let me share some thoughts on how we view cross-border travel. There are many factors that influence how people travel and spend in this area. First, I want to emphasize that the foundations of our cross-border offering at Mastercard remain strong, just like they were before the pandemic. We maintained this perspective throughout the pandemic, and it has proven to be accurate. Now, regarding pent-up demand, we know from airline earnings calls that their capacity is currently limited. This constraint, combined with higher prices, affects spending, as price times quantity leads to the overall spending impact. As airline capacity increases, we would expect some adjustment in prices as supply and demand reach a more balanced state. However, we do not assume that this will necessarily create a tailwind, as price adjustments will take place as capacity increases. We hope to be mistaken and that cross-border spending will grow with capacity and that prices will remain high, prompting continued consumer spending. But we must take a cautious viewpoint on this matter. Additionally, regarding the impact of foreign exchange rates on cross-border travel, we have observed that when the dollar strengthens, there is a lag effect that tends to decrease inbound travel to the U.S. It becomes more costly for travelers from other regions. We have also seen that individuals often redirect their cross-border spending to other areas where they do not experience the same impact. Therefore, fluctuations in currency exchange rates are significant in shaping our outlook on cross-border travel moving forward.
Michael Miebach, CEO
Over the last two years, we have been acquiring portfolios in this market. We have concentrated our efforts on this area, anticipating its recovery. To remind everyone, we have secured partnerships across airlines, travel agencies, lodging, and other transportation services like trains. This includes Myriad, Virgin Atlantic, Amtrak, JetBlue, Cathay Pacific, British Airways, and many more. We have strengthened our market access through these partnerships by introducing additional products, such as Mastercard Travel Rewards, which is now available in 80 countries. Given the macroeconomic conditions that were just outlined, we believe we have a compelling offering. This sector remains promising, and our growth rate will depend on future developments, as mentioned earlier. However, we believe we stand out in this area. Additionally, I appreciate your enthusiasm about our metrics and the changes we are making. To address an earlier question, I noted the $14 trillion in commercial POS. There is also $24 trillion in accounts payable, bringing the total opportunity in this combined sector to $38 trillion. This earlier discussion was significant regarding our major priorities.
Jason Kupferberg, Analyst
I really appreciate the China cross-border data you gave there for both inbound and outbound. I think you said that inbound is running at about 20% of 2019 levels in the fourth quarter and outbound at about 50% of 2019 levels. Can you give us a sense of how much improvement you’re expecting in those metrics in 2023 as the reopening progresses? And then separately, can you just make any high-level comments on growth for each of your three strategic pillars in ‘23? Thank you.
Sachin Mehra, CFO
Sure. So first, Jason, I’m not going to share specifics as it relates to how we built our model up for the full year. What I will share with you is as it relates to the recovery of both inbound and outbound for China, we have built in some level of recovery as the year progresses. It’s our best estimate as to what we expect to happen by virtue of the borders opening and the quantity and requirements being lifted. But suffice it to say that the opportunity is pretty sizable. The fact that we were in Q4 at 20% of 2019 levels from an inbound travel standpoint and cross-border travel standpoint is just suggestive of the fact that if you think about what’s gone on around the regions and how they’ve recovered and bounced right back and gone well above 2019 levels, there’s a significant opportunity both on inbound and outbound as it relates to China. And sorry, the second part of your question, Jason? When discussing our strategic priorities, particularly in payment services and new networks, it's clear that we have been focused on these areas for many years, which significantly contributes to our revenue growth. Over the past decade, we've demonstrated that our services have been growing steadily and continue to do so. The demand for our service capabilities remains strong, and our service growth has outpaced our overall business growth. I don’t expect this to change moving forward. New networks are still in their early stages, but they are experiencing rapid growth from a small starting point. However, they still need to make a significant impact on the overall performance of Mastercard. That's the most I can convey on that topic.
Michael Miebach, CEO
The model is not composed of separate pillars. It represents an integrated business proposition where services enhance payments. Payments often serve as a gateway to expanding a wider range of services. This creates a virtuous circle. In the past, we indicated that services made up a third of our quarterly performance, and that segment has been growing at a faster rate. For instance, I mentioned Consumer Clarity, which is transaction-related and is experiencing faster growth with 50 new issuers. There is significant momentum in that area. Additionally, some services are independent of our core payments business, such as Test & Learn, where we collaborate with clients like Lowe’s to enhance their foundational operations. These various dynamics are interconnected, illustrating the strength of our differentiated and diversified business model.
Warren Kneeshaw, Head of Investor Relations
Rayna, are you on mute? Operator, let’s go to the next, and try to get Rayna back on line.
Operator, Operator
We’ll go next to Will Nance at Goldman Sachs.
Will Nance, Analyst
Maybe I'll ask one last question comparing 2019 metrics before they disappear. When we looked at some of the changes in December, it appeared that certain metrics took a slight dip compared to 2019. Can you provide any insights on the regional performance, particularly between e-commerce and travel, and how those trends have carried into January, excluding some of the effects from China? Additionally, I appreciate the information you shared about the China metrics on inbound and outbound travel. I'm curious if you could also comment on the overall contribution of China to cross-border volumes.
Sachin Mehra, CFO
I’ll address your questions in order. You mentioned our outlook for Q4 compared to 2019 levels. We're seeing stable levels regarding switched volumes and transactions in cross-border, with slight increases in both quarter-over-quarter. For instance, in Q3, switched volumes were 154% of 2019, and in Q4, they rose to 156%. This is illustrated in the slide deck we shared. It's important to note that in the U.S. for Q4, lower gas prices have had a slight impact on our numbers. Regarding regional growth, we see consistent growth across most areas. Europe remains strong, as do Latin America and EMEA. However, in Q4, China experienced negative growth, especially in domestic volumes, largely due to a resurgence in COVID cases. While we don't make significant revenue from domestic operations, it did affect overall performance. In India, we are moving past the embargo, and while new card issuance has started, there’s still an ongoing effects from the previous year of not issuing new cards, leading to attrition of older cards that must be offset by new ones. This ramp-up takes time, and we’ve observed this in Q4. Overall, we continue to witness solid and consistent growth across all our metrics compared to 2019.
Michael Miebach, CEO
And a step down compared to last year and the year before is, of course, there because you get the mathematics and the lapping effects, and so forth. But to 2019, I think that’s an instructive view here. It tells us that, yes, we’re expecting a resilient consumer will continue to spend.
Sachin Mehra, CFO
Will, regarding your question about China, I mentioned in my prepared remarks that inbound cross-border travel to China was approximately 1% of our total volumes pre-pandemic, while the outbound figure was around 2%. This addresses the second part of your question.
David Togut, Analyst
Europe continues to be a driver of differentiated growth for Mastercard. For the year ahead, could you talk through some of your assumptions on the biggest opportunities in Europe, Germany, Poland, Italy, when you think about both economic outlook and cash digitization? We’ve seen mixed reports 6, 9 months ago more concerned about Europe given high gas prices. Now, it seems like the outlook has been a little better with lower gas prices and a more mild winter. But any insights would be greatly appreciated.
Michael Miebach, CEO
David, let me start off on that. So, looking at Europe really in three categories, there’s the UK on one hand and there’s emerging Europe, and then there is Continental Central Europe, and slightly different picture on all of them. First of all, starting off with the continent. Here, the concern has been around for a while on rising gas prices and energy prices and the impact on the consumers’ ability to spend. A combination of fiscal measures to provide cushions to consumers, along with energy-saving measures, along with the gas storage now reaching full capacity has really alleviated some of these concerns. So, we continue to see a fairly resilient European consumer. That’s our base assumption as we look forward. The UK has a somewhat different economic outlook, and that might be a little more shaky there. But fundamentally, in this market, we are seeing a lot of tailwind for us from share gains over the last couple of years, so that works well for us. And emerging Europe continues to be a dramatic digitization opportunity as we’ve seen in markets like Russia, which unfortunately is not in our P&L any longer. But we have seen very high digitization rates, and we’re pushing that in these more emerging markets. Somewhere between, there are peculiarities like Germany, where there was a significant digitization opportunity, and there still remains. But we caught up a lot in Germany over the last two years, particularly on the contactless side, which is now reaching half of the transactions there. So, a healthy mix in Europe and a very strong share position with opportunities to come through from portfolio wins that we have shared with you over the last couple of years as they go into effect.
Sachin Mehra, CFO
And I’ll just add, David, to Michael’s point around the deals which we’ve recently won and announced. Just to give you a little bit of perspective, we had talked about Santander historically. That migration is in progress, and we’re through the bulk of a 9 million card migration there. We expect to be complete by early 2023 on that one. NatWest commenced the issuance of Mastercard debit cards in December of 2021. That’s well underway, and we would expect some of that to continue to happen in 2023. The other one we had spoken about historically was Deutsche Bank, and we expect that the migration of one will commence somewhere in the middle of 2023. So, just to give you a little bit of sense as to how we’re kind of thinking about things.
Ashwin Shirvaikar, Analyst
I just wanted to drill into a couple of things, now that we’re getting rid of 2019 over the past few years and looking forward. What has changed in terms of the growth algo? How should we think of that as we think of normalized growth visibility? And then, there’s a smaller question with regards to - specifically for ‘23, the spread between how should one think of that?
Sachin Mehra, CFO
I’m going to need a little bit more clarity on the second part of your question, but we’ll get to that. Let me take the first question first, which is as it relates to the growth algorithm. Just suffice it to say that the fundamentals of our business actually are very, very sound. The growth algorithm, which has actually enabled the strong growth we have delivered pre-pandemic, very much stands sound even today. The reality is if you think about PCE growth, you think about the opportunity for the secular shift to electronic forms of payment, you think about the fact that we’re growing market share, you think about how we’re delivering on our services capabilities and driving growth from that, and now as we’re doing new and different things around new payment flows as well as new networks, that growth algorithm actually is very sound, very stable, very consistent with what we’ve historically had. And that’s the way we think about the business for, call it, not only the near term but near medium to long term for Mastercard. Now, Ashwin, I’m not sure I got the second part of your question. Could you repeat that, please? Our cross-border proposition is sound and stable. The reality is that most regions are now back to stable growth rates that we would normally expect to see in the pre-pandemic phase. The one exception is Asia, which presents some opportunities that we are considering for 2023.
Ken Suchoski, Analyst
Hi. Good morning, Michael and Sachin. Thanks for taking the question. I wanted to ask about the cross-border recovery. We see the volumes for cross-border travel are well above 2019 levels. Where are you seeing the transactions versus 2019 levels on that same metric? Sachin, you made some interesting comments on price versus units. I’m just trying to get a sense for how much the cross-border travel volumes are benefiting from inflation and spend per transaction, and how much recovery is still left from a number of transaction standpoint. Thank you.
Sachin Mehra, CFO
Sure, Ken. My comment applies not only to cross-border but largely to the business overall. Our transaction growth is influenced by our average ticket size, which is affected by various factors, including inflation and the mix of card-present versus card-not-present transactions. Generally, higher card-not-present transactions result in a higher average ticket size but lower transaction growth rates. However, increasing card-not-present transactions also enable us to offer more services, which can balance our revenue. Additionally, the regional mix plays a role since different countries have varying average ticket sizes that impact growth rates. Specifically for cross-border average ticket sizes, they have remained stable year-over-year. As we consider our future expectations, we account for uncertainties in inflation and the factors I mentioned when projecting transaction growth going forward.
Dave Koning, Analyst
Let's revisit the guidance for Q1. You mentioned that revenue on a non-GAAP basis is slowing down by about 5%. However, every core metric in January improved by approximately 4% to 11%. Can you explain if there are tougher comparisons coming for some of these key metrics, or if this is related to rebates? Please discuss the gap and what we can expect for the remainder of the quarter.
Sachin Mehra, CFO
Sure, Dave. Here are a couple of thoughts. First, in Q1, acquisitions contribute less to our growth compared to Q4 due to the comparison between those quarters. Secondly, the suspension of operations in Russia has a more significant impact in Q1 than in Q4, due to the revenue patterns. Additionally, Michael mentioned the various wins we have and the active deal activity that we need to consider in our Q1 outlook. Lastly, we experienced high levels of foreign exchange volatility in Q4, and while we have made our best guesses about future FX volatility, those factors will influence our performance.
Michael Miebach, CEO
Yes. So, thanks for your questions. Thanks for your trust. Rayna, we will figure out your questions offline. We couldn’t get to those, unfortunately. The day will come when there’s a call where there’s more questions for me than for Sachin. I’m still hopeful. We will get there at some point. But the story has been resilient consumer, and we still see some opportunity in cross-border for Asia. That’s the base. We’re winning. That feels good as we look ahead into 2023. And we have 28,000 excited people at Mastercard that are going to deliver on that opportunity. With that, thank you very much and speak to you next quarter.
Sachin Mehra, CFO
Thank you.
Operator, Operator
And this concludes today’s conference call. You may now disconnect.