Mastercard - Earnings Call - Q2 2011
August 3, 2011
Transcript
Speaker 0
Good day, ladies and gentlemen, and welcome to the second quarter 2011 Mastercard earnings call. My name is Modesta, and I will be your coordinator for today. At this time, all participants are in listen-only mode. Later, we will conduct a question and answer session. If at any time you require operator assistance, please press star followed by zero, and we will be happy to assist you. As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Ms. Barbara Gasper, Head of Investor Relations. Please proceed.
Speaker 5
Thank you, Modesta. Good morning, everyone, and thank you for joining us today, either by phone or webcast, for a discussion about our second quarter 2011 financial results. With me on the call today are Ajay Banga, our President and Chief Executive Officer; Martina Hund-Mejean, our Chief Financial Officer; and Chris McWilton, President of the U.S. Market. Following comments from Ajay, Chris, and Martina, we will open up the call for your questions. This morning's earnings release and the slide deck that will be referenced on this call can be found in the investor relations section of our website, mastercard.com. The earnings release and slide deck have also been attached to an AK that we filed with the SEC earlier this morning. A dial-in replay of this call will be available for one week through August 10th.
Finally, as set forth in more detail in today's earnings release, I need to remind everyone that today's call may include some forward-looking statements about Mastercard's future performance. Actual performance could differ materially from what is suggested by our comments today. Information about the factors that could affect future performance are summarized at the end of our press release, as well as contained in our recent SEC filings. With that, I'd now like to turn the call over to our President and CEO, Ajay Banga. Ajay?
Speaker 2
Thank you, Ravi. Good morning, everybody. As usual, Martina will get into the details of our results, but let me just start with some high-level comments. In the second quarter, we saw net revenue growth of 22.1%, 18% actually on a constant currency basis, driven by high teens growth rates in GDV, cross-border volume, and processed transactions. This helped fuel operating income growth of 23.3%, net income growth of 32.8%, and an EPS growth of 36.4%. We've delivered another quarter of strong results, including record quarterly GDV, over $800 billion, and our third consecutive quarter of double-digit volume growth. Within our geographies, the strongest growth remains in Latin America and the Asia-Pacific, Middle East, and Africa region. In Europe, consumers continue to spend domestically and abroad. In the U.S., we posted our strongest quarterly volume growth since the fourth quarter of 2007.
This was led by debit, which is benefiting from the roll-on of new business wins, as well as continued strength in commercial credit. Consumer credit growth in the U.S. remains positive and was up slightly over the first quarter, but nowhere near as strong as either debit or commercial credit. On the other side of the strong growth is what we're all seeing in the global economy. In Europe, consumer sentiment is lower than it has been in recent months, kind of not surprising given the sovereign debt issues and concerns around economic growth that persist in several markets in Europe. Of course, we have our own issues here in the U.S., where economic signals remain mixed. Unemployment remains above 9%. The housing market remains relatively weak. Both are likely contributing to consumer sentiment, in the U.S. being at its lowest level in two years.
Our SpendingPulse data shows that retail sales growth ex-auto and gas has remained above 6% over the last four months, including July. However, much of this increase is likely driven by inflation, given persistently higher prices for gas and other commodities. In addition, easier year-over-year comparisons might be fueling some of this percentage growth, given the significant slowdown in spending we saw during the summer months of last year. Latin America and Asia, on the other hand, seem to have a brighter picture, both in terms of economic performance and consumer sentiment. Even there, given the nature of the global economy, the second half of the year could well be more measured than the first half in terms of economic indicators. Overall, it feels like the global economy is still struggling to get back on solid footing.
As I said earlier, consumer spending appears to be holding up through this volatility. With this as our backdrop, we remain cautiously optimistic about our business. I'm sure that you're all keen to hear our thoughts on the U.S. debit business. We've got Chris McWilton, the President of our U.S. region, to talk to you. Chris?
Speaker 4
Thank you, Ajay. A little déjà vu. It's been a while since I've been on an earnings call, but good to be with you on the phone today.
Speaker 2
Be careful what you wish for.
Speaker 4
Over the last several quarters, the Durbin Amendment and its potential impact on our business and our customers has been top of mind for us, and I'm sure many of you on the phone today. With the Fed issuing its final rules in late June, there's now greater clarity, and we're moving forward with our strategy based on scenario planning and making the necessary operational changes. I really doubt we'll be able to answer all of your questions on today's call because there are still a lot of moving pieces that need to play out. I think it's important to share with you what we can today. The exclusivity provisions of the Durbin Amendment were designed to provide merchants with the ability to direct the routing of debit transactions over competing networks. Therefore, it is not surprising that large merchants are looking for incentives from the networks for routing preference.
At the same time, acquirers for smaller merchants see themselves as directing routing to debit networks when there are multiple PIN marks on the card. They too are seeking incentives for routing. Finally, issuers are looking to reduce the cost, complexity, and uncertainty of maintaining multiple-PIN network functionality on their debit cards. They will need to decide whether they put one exclusive PIN mark on their cards or maintain multiple marks. We are confident that the superior value proposition our PIN debit offering brings will result in more U.S. debit cards with our mark on them. Remember that Maestro is the only globally interoperable PIN POS network accepted at more locations globally than any other brand. Until those PIN mark decisions are made, it is difficult for anyone to predict what kind of PIN debit share shifts might occur among the networks.
It is also tough to know how rebate and incentive structures might change until there's more clarity around routing decisions. The battle lines over routing are still unfolding. Being the smaller player in U.S. debit, Mastercard is in a completely different competitive situation. Ours is one of potential upside, not the need to defend a large incumbent position. As a result, we will be looking at strategic, surgical opportunities with issuers, acquirers, and merchants to incent new PIN enablement on cards, as well as routing to our network. Our final pricing approach will be dependent on how much we win on the back of the card and in what form, exclusive or multiple marks. Therefore, a deal-specific approach is needed to give us the flexibility to navigate all the complexities. For competitive reasons, we cannot expand further on the details right now.
In addition, we have made some initial decisions to help customers with the new reality of these rules. We recently informed our issuers that we will implement a two-tiered interchange structure across both debit and prepaid products for issuers above and below the $10 billion asset level. We continue to work through the operational details of the structure and will be working with issuers and acquirers to implement the necessary changes prior to October 1. A potential risk that investors often ask me about is related to issuer debit pricing going forward. It didn't take the Durbin Amendment to create a competitive pricing environment. It existed long before that, and I expect it would have continued even without the new regulations. As you know, under the final Fed regs, network processing fees are not regulated but are now included in the debit interchange calculation.
Any impact on network processing fees for debit will ultimately flow back to the calculation of the interchange rate, which should provide some moderation in issuers' thinking about network pricing. We will work to help our customers and consumers recognize the superior value of Mastercard's PIN debit offering by continuing to innovate product features and functionality that will allow our customers flexibility to both control their cost and generate incremental revenue. Last September, at our Investor Day, I told you that I was confident that whatever the final outcome of the Durbin Amendment, it would present Mastercard with net opportunities to grow its U.S. debit business, and I continue to feel that way. As we only have about a 9% share of PIN debit transactions today, we continue to believe the exclusivity provisions of the Durbin Amendment provide a net opportunity for us.
The pending decisions by issuers, merchants, and acquirers will influence routing and also ultimately determine how much opportunity we have. However, please remember that PIN debit economics pre-Durbin were quite thin and will become even thinner after paying routing incentives. As a result, volume growth rates will exceed revenue growth rates as the space unfolds. Let me also take a minute to remind you that lower revenue yield does not necessarily equal lower operating margin. Given the scalability of our network, we're able to process additional transactions at a very low incremental cost. We'll be strategic and selective when considering situations where we're willing to pay enhanced economics for routing. Let me hand the call back to Ajay now for the business highlights discussion.
Speaker 2
Thanks, Chris. While all this is going on in the U.S., we remain focused on executing our growth strategy around the rest of the world. That's why I'd take a moment to highlight a few recent news items. Let's start with prepaid. Early in the second quarter, as you know, we completed the acquisition of the card program management business of Travelex, which we have now renamed Access Prepaid Worldwide. Of course, they're in the midst of converting non-Mastercard branded portfolios in their book. In addition, I'm pleased to say we have signed our first new Access Prepaid deal since the close. It's with Ryanair, Europe's leading low-cost airline. We will be the prepaid card program manager in five markets, with issuance beginning this year itself. In the U.S., we launched two Mastercard general-purpose reloadable card programs into Walmart's 3,500 U.S. stores.
The programs are based on consumer insights and targeting, and we actually brought proactively to Walmart. In the spring, with our partners at SunTrust, we launched the SunTrust Campus Card. This integrates a student ID card with a Mastercard reloadable prepaid card. Another example, the Turkish Post Office, which is one of the largest government institutions that perform financial services, has now signed a contract with us to issue co-branded credit, debit, and prepaid cards under the Mastercard and Maestro brands. Also, during the second quarter, we signed a new multi-product agreement with Swedbank, one of the largest issuers in the Nordics and Baltics region. The debit Mastercard portion of this agreement will significantly increase our debit footprint in this region, where the debit category is growing four times faster than credit.
The agreement does include commercial and consumer credit as well, and we expect the results of the deal to show up in the market early next year. In South Africa, AFSA, one of the country's largest banks, has begun to convert two portfolios to World Mastercard. The first is an affluent credit portfolio and a pillar of AFSA's affluent banking strategy. The second is actually fairly interesting. It's a conversion of its Islamic-compliant debit card to World Debit Mastercard, the first of its kind in the region. We have a couple of new deals in our commercial business as well. We signed with HSBC for the 2012 launch of a commercial card offering for businesses with operations across continental Europe. In Latin America, we launched two small business commercial card programs with Banco de Bogotá, whose commercial programs have actually been exclusively with a competitor till now.
Turning to mobile, we are making traction in key markets around the world as we look to help define what the ecosystems look like in these markets. In Turkey, Turkcell and Yapı Kredi have launched a mobile wallet service with Mastercard PayPass, and consumers can basically just exchange their SIM cards for NFC-enabled cards. Of course, we continue to build PayPass acceptance in Turkey, where one of the largest acquirers has now enabled their terminals at thousands of locations to accept PayPass. In mid-May, Barclaycard and Orange launched their first commercially available NFC-enabled phone in the U.K. It's powered by Mastercard PayPass. It's currently available for purchase by consumers at retail outlets of Orange. In the U.S., as you heard, we are partnering with Google, Citi, Sprint, and FirstData in the development of the Google Wallet.
The wallet will become preloaded with a Mastercard prepaid card, and initially, Citibank cardholders will be able to load their PayPass-enabled credit cards into the wallet. Also in the U.S., ISIS, the JV created by the major U.S. telcos, has announced that it is opening its efforts to include all the major payment networks. As I said earlier, we believe this was a critical step in the future success of ISIS. Open systems allow for the required scale in this space. For this effort and for the others, we're actually excited about the capabilities that Mastercard can bring to bear. Finally, last example, in June, we signed the first broad commercial agreement stemming from our MOU with China UnionPay. The agreement will equip the Mastercard payment gateway with the ability to process e-commerce transactions made with CUP cards.
Also, we've extended our MOU with CUP for another four years, and I'm actually quite pleased to be working closely with them for non-domestic transactions. As you know, as an example, the co-brand deals in China that we have talked about in previous earnings calls are helping to drive cross-border volume growth when cardholders travel outside of China. With those examples, let me turn the call over to Martina for a detailed update on our financial results and operational metrics. Martina?
Speaker 3
Thank you, Ajay, and good morning, everyone. Let me begin on page three of the deck, which shows our reported results versus last year's second quarter. As you just heard, we had a terrific quarter. Net revenue grew over 22%, driven by very strong volume and transaction growth across our base business, as well as the addition of new deals. Acquisitions contributed about three percentage points to this growth, resulting in a very robust top-line growth rate of 19%, excluding acquisitions. Total operating expenses were up 20.8%, which included about seven percentage points of expenses coming from the inclusion of acquisitions. Therefore, expense growth, excluding acquisitions, was 14%. Overall, foreign exchange contributed roughly four percentage points to both net revenue and operating expense growth. Operating income was up 23.3%. This resulted in an operating margin for the quarter of 53.1%, up from 52.6% in last year's second quarter.
Bottom line, we delivered net income of $608 million, up 32.8%, and diluted earnings per share of $4.76, up 36.4%. Over the next couple of slides, we are presenting the operational metrics for the second quarter of 2011 compared to the same quarter a year ago. On page four, you can see the worldwide gross dollar volume, or GDV, was up 16.4% on a local currency basis, or 23.6% on a U.S. dollar converted basis. As Ajay said, this is the first time quarterly GDV has exceeded $800 billion. This is driven by the highest quarterly growth rate we have seen in more than four years. U.S. volume growth was 9.9%. Across the rest of the world, volume growth was 19.9% on a local currency basis, including almost 25% growth in both APMEA and Latin America.
Worldwide credit volume grew 13.3% on a local currency basis, which breaks down into 5.3% growth for the U.S. and 16.5% for the rest of the world. Worldwide debit volume grew 22.2% on a local currency basis. In the U.S., debit growth was 15.1%, and outside of the U.S., debit growth was 28.5%, with the highest growth rates coming from APMEA and Europe. Cross-border volume growth on a local currency basis was up 19.3%, the sixth consecutive quarter of double-digit growth. This was supported by double-digit growth in every region, including the United States. Turning now to slide five, processed transactions were up 17.4% compared with a year ago quarter to $6.6 billion. This was the second consecutive quarter of double-digit growth. While it was driven by Latin America and APMEA, all regions experienced healthy growth in processed transactions.
This included the U.S., which was up double digits for the first time since the third quarter of 2008, as new business, such as our SunTrust and Sovereign wins, has overtaken the diminishing impact of prior debit portfolio losses. Overall growth in processed transactions was further aided by our expanded processing relationship with Itaú in Brazil and domestic processed transactions that we have picked up in the Netherlands. Global card growth was 6.4% to about 1.7 billion Mastercard and Maestro cards. The number of Mastercard branded cards surpassed one billion for the first time, led by a greater than 20% increase in debit cards. Now let's turn to page six to discuss revenue versus last year's second quarter in a bit more detail. Net revenue generated outside of the U.S. represented 60% of total revenues, compared with 57% last year.
This shift was driven by revenues growing at a higher rate outside of the U.S., at about 30%, compared with 12% growth for U.S. revenue. Turning to the components of net revenue, domestic assessments increased 24.5%, primarily due to strong volume growth. Cross-border volume fees increased 9.2%. If you exclude the impact of the October 2010 cross-border pricing structure change, these fees actually increased about 25%, driven by double-digit cross-border volume growth in all regions. Transaction processing fees grew 18.2%, driven largely by growth in processed transactions due to the new business in Latin America, in Europe, and in the United States. Other revenue grew 41.9%, driven mainly by the inclusion of revenues from the acquisition of Access Prepaid Worldwide. As an aside, all of Access Prepaid Worldwide's revenue is included in the Other Revenue line item.
This is in contrast to revenue from our acquisition of DataCash, which is included in three of our revenue lines: domestic assessments, transaction processing fees, and other revenue. In total, gross revenue increased by $373 million, or 20.5%. Rebates and incentives were at $534 million, up $71 million, or 15.5%. However, the increase was about $130 million, or roughly 33%, when you adjust for the cross-border pricing change. This increase was due to the impact of new and renewed deals, as well as stronger volume performance. Overall, net revenue growth benefited by approximately two percentage points from pricings. Now let's turn to page seven for some details on expenses. Within total operating expense, general and administrative expenses increased by 24.8% or 21.3% on a constant currency basis.
This growth was primarily due to higher personnel expenses and other expenses related to the inclusion of acquisitions and strategic growth initiatives such as mobile, prepaid, and information services. In total, acquisitions contributed about eight percentage points to G&A growth. Advertising and marketing expenses were up 7.1%, with almost five percentage points of this growth driven by foreign exchange fluctuations. Sponsorships, as well as customer-specific and strategic initiatives, accounted for most of the remainder. Depreciation amortization increased 43.2%, primarily due to the amortization of intangible assets from our recent acquisitions. Let's move to the cash flow statement and balance sheet highlights on page eight. We generated $538 million in cash from operations in the second quarter, and we ended the quarter with cash, cash equivalent, and other liquid investments of $3.6 billion.
We purchased about 1.5 million shares of Class A stock during the second quarter at a cost of approximately $387 million. In the third quarter, through July 28, we actually purchased almost 78,000 additional shares at a cost of about $24 million. Year to date, through July 28, we have repurchased approximately 4.2 million shares of Class A common stock at a cost of about $1.1 billion and have $935 million remaining of the $2 billion in total authorizations. We will continue to look to repurchase shares on an opportunistic basis. Turning to slide nine, let's discuss 2011, and I'll start with an update of what we have seen for Mastercard processed volumes for the third quarter through July 28. Our cross-border volumes grew 22% globally, ahead of what we saw in the first and second quarters.
This was driven by double-digit growth in all regions, with slight upticks in growth in APMEA, Europe, and the United States. Although not a perfect proxy for GDV, total U.S. processed volume grew 12%, ahead of the level that we saw in the first and the second quarter. Higher gas prices are contributing a little bit, perhaps a couple percentage points, to this growth rate, which is further benefiting from an easy year-over-year comparison. Recall that U.S. processed volume growth was actually slightly negative in July of 2010. In July, total processed volume growth for the rest of the world was about 24%, slightly ahead of the 22% pace we saw in the second quarter due to an uptick in growth in APMEA and Europe.
Globally, processed transaction growth was 20%, ahead of the 17% growth we saw in the second quarter and the 11% growth we saw in the first quarter. This is really in part due to Itaú in Brazil, the domestic processing in the Netherlands, and the U.S. debit deals coming online. Based on what we see now, this is our view for 2011 on a constant currency basis. We had a strong first half with net revenue growth of 18.5%, and we continue to expect that the second half growth will be slightly higher. Keep in mind that deconversions will have a diminishing impact on the second half. Additionally, Access Prepaid Worldwide closed in mid-April and therefore will contribute to both the third and the fourth quarter, while it only contributed to part of the first half of the year.
Finally, the DataCash acquisition closed in late October last year and therefore will anniversary in the fourth quarter. Regarding foreign exchange, if current rates for the euro and the real hold for the balance of the year, we would expect a full-year net tailwind of around 2% to 3% to revenue. Our views on operating expenses remain unchanged as well. We remain committed to our target of a minimum 50% annual operating margin and continue to expect only a small operating margin expansion in 2011 relative to 2010. Operating expenses continue to include investments in strategic areas such as mobile, e-commerce, prepaid, and commercial. It will also include the operating expenses of both DataCash and Access Prepaid Worldwide.
The vast majority of the impact of these acquisitions will be felt in G&A, which is likely to be up about a similar dollar amount year over year in each of the third and the fourth quarters, as it was in the second quarter. As a reminder, there will also be an impact to depreciation amortization, which we now expect to grow more than 35% versus 2010. In total, as we said on our last earnings call, the acquisitions will contribute more to growth of operating expense for the full year than they will to growth of net revenue. We expect the acquisitions to have a $0.04 to $0.06 dilutive impact to EPS for the full year. We now expect the proportion of annual advertising and marketing spend by quarter to be similar to the patterns we saw in both 2009 and 2010.
For modeling purposes, we now believe that the 2011 full-year tax rate could be slightly lower than the 33% we originally communicated due to the currently expected impact of some of our tax planning initiatives. Now let's discuss our long-term financial objectives. Each year, we address our objectives, we evaluate any potential changes in the economic environment, business development, and other issues on a global basis that might impact our overall financial outlook. While you have heard Ajay Banga discuss the global environment and Chris McWilton talk specifically about our U.S. debit business, our overall assessment is that our long-term financial objectives remain unchanged. For the 2011 to 2013 period, these objectives are: a net revenue compounded annual growth rate of 12% to 14%, a minimum annual operating margin of 50%, and an earnings per share compounded annual growth rate of at least 20%.
Finally, we have said that these objectives are all on a constant currency basis and exclude acquisitions, with the exception of DataCash and Access Prepaid Worldwide. Let me now turn the call back to Barbara Gasper to begin the Q&A session. Thank you, Martina. We're now ready to begin the question and answer period. In order to get to as many people in the queue as we can during our allotted timeframe, we ask that you limit yourself to a single question and then queue back in for additional questions. Operator?
Speaker 0
Ladies and gentlemen, if you have a question, please press star followed by one on your phone. If your question has been answered or you would like to withdraw your question, press star followed by two. Questions will be taken in the order received. Please press star one to begin. Your first question today comes from the line of Sanjay Sakhrani with KBW. Please proceed.
Speaker 4
Thank you. Good morning. Ajay or Chris, could you maybe just talk about, from your conversations with bank issuers, what they're thinking about that one mark or two marks on the back of the card and the pluses and minuses when thinking through that decision? Are they thinking of other alternatives in terms of card products other than debit cards, maybe something along the lines of credit to offset some lost debit economics? Thank you. Sure. Hi, Sanjay. What the issuers are thinking about with the placement of marks or the adding of functionality of PIN debit on the back is to do a number of things. I mentioned these in my remarks. One is there is operational complexity with maintaining multiple PIN debit functionality. You have to maintain, we call them pipes or communication lines into the different networks. There is some added complexity to that.
The other thing they're thinking about is just the fact that having multiple marks on the cards does seed some additional routing ability to the merchants. In addition to being able for the merchant to route between signature and PIN, they now have the ability to route with multiple marks on the card between signature and perhaps one or more PIN marks. There comes with that a level of uncertainty and a level of preference that's given to the merchant in their routing considerations. They're thinking through that. Obviously, they're also thinking through, in addition to products, how they price for the different services that their deposit holders have with their institutions, whether that's annual fees for checking accounts, whether it's fees for the debit card themselves, reducing perhaps the cost base of their products by perhaps limiting their usage to just the U.S.
Some of them are considering limiting the amount that can actually go on a debit card, limiting the transaction amount, etc. Of course, they're also looking at credit again as write-off rates start to moderate as we come through the economic cycle. Credit, again, is beginning to look a little bit more attractive as a revenue replacement.
Speaker 3
Next question, operator?
Speaker 0
Your next question comes from the line of Rod Bourgeois with Bernstein. Please proceed.
Speaker 4
Yes. Can you just give us the numbers on how much your revenue and volume growth, and maybe even transaction growth, to what extent it benefited from the portfolio conversions of SunTrust and Sovereign in the quarter?
Speaker 3
At this point in time, you just had a little bit of a better benefit when you combine both the debit deconversions, the two portfolios that we had actually lost in the U.S., as well as the add-on of the several portfolios that we actually won. There was a slight benefit, and we are really expecting to turn the corner in the third quarter.
Speaker 4
Just so we can quantify the impact on the acceleration, can you tell us what the benefit was from SunTrust and Sovereign?
Speaker 3
No, Rod, we are not breaking those numbers out. As I said, you know there was a slight benefit in total.
Speaker 4
Okay. Just a couple of quick clarifications. Can you specify where the two points of pricing came from? Was that from the merchant acquirer fee increase lingering from April 2010? I just want to make sure I heard you correct. I think you might have said that U.S. transaction growth was negative in the month of July, but I want to make sure I heard that right.
Speaker 3
No. First of all, on your last question, that was July of 2010 when actually U.S. GDV growth was negative. With respect to your first question, from the 2 percentage points of pricing, you had about 50 basis points in there, which was really a lapping impact from the price actions that we took back in April of 2010. The remainder was really a lot of diversified small pricing actions all around the globe. There is no one particular big impact from any particular action.
Speaker 4
Will some of those small pricing effects continue over the next year, or are they largely anniversary at this point?
Speaker 3
No, you have a number of them that were actually implemented in January of 2011, and a couple that were implemented in April of 2011. You'll have, for the rest of the year until the first or second quarter of next year, a bit of a benefit there.
Speaker 4
Thank you very much.
Speaker 0
Your next question comes from the line of Glenn Fedor with Morgan Stanley. Please proceed.
Speaker 1
Hi. Thank you, and congratulations on the quarter. Question for Ajay. TransUnion recently put out an analysis suggesting consumers have been on a trend of aggressively paying down credit card balances. Just want to know what you think this could mean for the trajectory of U.S. credit growth over the next one to three years. I mean, does it imply there's a lot of dry powder now for spending, or do you think this reflects a cultural shift away from credit? Continuing on this point, do you think the U.S. credit market can realistically get to, say, high single-digit growth in payment volumes again, or is mid-single-digit about what we should be thinking about?
Speaker 2
I'm probably not a good guy to give you the last part, as in high single-digit versus mid-single-digit out the long term, because it's a little difficult to predict that level of accuracy today. I would say this to you. The down payments, the increased payments on the card balances that you read about, are comprised of two things. One part is actually, if you take the growth numbers, is the level of write-offs that a number of the banks in the U.S. have had to take over the last few years. That tends to decrease the total outstandings in their system by a fairly large amount. You've got to just keep that in mind when you look at the total number. Otherwise, you could mix up the write-offs with the actual change in consumer behavior. There is the actual numbers of what consumers are doing with higher spending.
I mean, savings rates these days and spending rates are very different from what they were three years ago. In fact, a year back, U.S. savings rates were up at 6%, 7%. They went back down to 4.5%, 5%. Recently released numbers, although I'd wait to make sure those are very accurate, show that about 5%, 5.5% of consumer savings is what you're seeing. Does all that translate into a secular change in the behavior towards credit? I don't think you can jump to that conclusion yet. I think consumers are rebalancing their balance sheets, are going through a somewhat uncertain time. I think those that are unemployed for quite a while now are not quite clear how they'll get back to employment. I do believe that those who are employed have a lower fear of an impending unemployment event on the horizon for them.
You've got two kinds of consumers even in that list. I think all that put together would lead me to conclude that I wouldn't come to a sort of conclusion that says that secular change in credit is happening. I just wouldn't get there yet. I think that with the advent of all these rules in debit, as somebody asked earlier, I think it was Rod, I think you will find banks trying to relook at their ability to generate revenue, given that the credit cycle has changed and turned for a number of the banks. I think that itself will drive a new form of offers and promotions and willingness to take on risk with the banks over the next couple of years. Some of them, by the way, have already been doing that for the last year or so already. It's a mixed bag.
I would just tell you, don't conclude that secular change is happening. That's too early.
Speaker 4
Thank you.
Speaker 3
All right. Operator, next question?
Speaker 0
Your next question comes from the line of Jason Kupferberg with Jefferies. Please proceed.
Speaker 4
Thanks. Good morning, guys. I just wanted to pick up on some of Chris's comments earlier in terms of the post-Durbin world here. Have you guys been asked by any of your issuer customers to revisit or renegotiate their contracts at this point? If so, how far into are you into that process? Have you been able to obtain extensions on any of these contracts as part of those negotiations? I think in the past, you guys have said that you have one big contract renewal in each of the next three years. If you can also just tack on to that any quick updates you might have on the merchant litigation, that would be great. Thanks. Sure. We're limiting our discussions to issuer contracts to compliance specifically with the Durbin regulations.
In situations where we have exclusivity provisions, which are fairly limited on our debit card base, or the computation of or the incentives that go into the computation of the net zero calculation, which I'm sure some of you are quite familiar with, may come into play. We would have to discuss with our issuers changes in terms and conditions around that. As we said before, we do not have material adverse change clauses in our contracts. We believe that the value we provide for our debit network is consistent with the pricing we have in place today. We think we're in pretty good shape from a pricing pressure standpoint with those debit contracts, with the exception of having to work through the net zero calculations. For an update on litigation, I'm going to defer to Barbara because that's not my area of expertise.
Speaker 3
Before we get to that, I just want to add on one thing, Jason. When we actually quote that we have contract renewals and one big contract renewal in each of the next three years, that was not limited to the U.S. That was a global statement. Okay? It is all of our business globally.
Speaker 2
As for the merchant litigation, you know there's nothing new compared to what we have written in our public disclosures. I mean, this stuff has been carrying on for years. There is a trial date scheduled for September 2012. We are all in mediation, which is a lot of fun, as you can imagine. We have made substantial progress in negotiations with the individual merchant plaintiffs. I would tell you we've got no such comment to make about the class merchants. Since the individual merchants represent less than 5% of the purchase volume of the class, I really don't know where this mediation will go right now. It is still out there. All we have is the judgment settlement sharing agreement that we already announced with you last earnings that I remember.
Speaker 4
Okay. Got it. Thank you, guys.
Speaker 0
Your next question comes from the line of Craig Maurer with CLSA. Please proceed.
Speaker 1
Yes, good morning. Following on your discussion of the Netherlands, I was wondering if the problems that European banks are having might be hastening negotiations to outsource processing and move on to Maestro and whatnot to comply with SEPA. Thanks.
Speaker 2
Yeah. Hi. Hi, Craig. It's Ajay. I don't think that I have yet to that I can say that they are hastening any of those discussions. Europe tends to move at a glacial pace because of the complexity of the number of banks, the country rules, and the EC rules. That's a fairly complex needle to thread through. You should not expect dramatic moves up and down. Having said that, the breakthrough we had in the Netherlands was very welcome and very helpful. In fact, you know our European processing volume that we now see was up this quarter over 100%. Whereas if you remember the last earnings call, I talked about over 40% odd. In a sense, there is an improvement in that number. It's caused largely by this Netherlands piece.
There are lots of negotiations going on with a number of banks, but don't conclude it because of any reason. This work has been going on for years. Thanks.
Speaker 0
Your next question comes from the line of Sinsin Hong with J.P. Morgan. Please proceed.
Speaker 1
Hi. Great results here. Happy to see your investing as well. I guess I'll ask about Visa's network participation fee, you know what the implications would mean for Mastercard. I'm asking because it's a pretty drastic change in how acquiring fees are going to be billed. I wonder if Mastercard needs to match that.
Speaker 4
Yeah. Hi, Tien-tsin. It's Chris. At this point in time, we don't see a need to match it. As I said in my comments, we're going to be very thoughtful and very surgical in how we approach the opportunities in PIN and signature debit as it unfolds under Durbin. As I mentioned, there are a lot of moving parts that need to be sorted through. To put in place a sort of blanket across-the-board network participation fee, I think suboptimizes our economics when it comes to grabbing some of this opportunity. We are going to be looking perhaps at specific acquiring relationships. We're going to be looking at certain verticals of merchants and certain categories of merchants that we believe will provide the best market share increase for the best economics. Our objective is not to go out there and buy every PIN transaction that exists in the U.S. today.
It's to do it in a very thoughtful way with more precise economic tactics than a network participation fee.
Speaker 2
Tintin, it's Ajay. All true as stated when this regulation came out. We've been working our way through different situations. The basis of everything we've looked at is that we have a lower market share, and our position therefore is different. We don't need to defend as much as find ways to find the chinks in the place that we could build and capitalize on. That's the way we're looking at it, rather than doing any blanket pricing or blanket efforts for acquirers, offer merchants, large or small, offer issuers, large or small. We still think our benefit comes from being flexible, deal by deal, and thoughtful, deal by deal because of where we stand versus some of our large competitors who I think are doing things that are appropriate for their market position.
Speaker 1
Understood. Makes sense. Thank you.
Speaker 2
By the way, one day we'll get your name pronounced right.
Speaker 3
One day. Next question, please.
Speaker 0
Your next question comes from the line of Don Bandetti with Citigroup. Please proceed.
Speaker 1
Hi. Good morning. Ajay, your growth in regions such as Asia continues to be very strong. I was curious if you think you're still in a market share gain mode, and our work suggests that you are. I was wondering if you could comment on some of the regional networks from a competitive standpoint, maybe talk about how you see them. Is their emergence actually a benefit for you, or does it become a threat at some threshold?
Speaker 2
Yeah. Hi, Don. We are still very much keen to make sure that not only do we benefit from the secular growth of spending on electronic payments and the move from cash to electronic payments, and frankly, the benefit of growing middle classes and global travel in a region like Asia, we want to benefit from all that. We also have a game to play to pick back some of the market share we'd like to have in Asia compared to our competitors. It is a mix of both things that are going on in the ground, and our results actually are benefiting from both substantially in Asia. Now, CUP. CUP is a very interesting circumstance. CUP, as you know, domestically in China, has a state-mandated position that is very clear in their rules and construct.
That is a place that global companies like ours cannot play in the domestic processing business. What we are focused on, on the other hand, is the increasing capability of affluent and middle-class Chinese to be spending money outside of China and, of course, more inward travel into China of Mastercard holders like ourselves. That is where our entire arrangement with CUP is constructed. It is constructed on improving Mastercard acceptance in China for people like you and me. It is constructed on improving CUP acceptance outside of China, both physically and in the e-commerce space, but in return for revenue in both these examples. We make some money by facilitating that acceptance. They make some money by facilitating our acceptance. That is all cross-border. Domestically, as of now, it is still a very closed marketplace. That is something that I have no idea when it'll change.
I don't know what I could tell you about that portion. I'm just focused on the non-domestic portion of our relationship with CUP.
Speaker 1
Okay. Thanks.
Speaker 0
Your next question comes from the line of Bruce Harding with Barclays Capital. Please proceed.
Speaker 1
Thanks. Just trying to reconcile your terrific volume number printed here and given by Martina through July, even with adjustments for acquisitions in SunTrust, etc. With the doom and gloom out there in terms of an emerging recession, possibly here, and all the problems we read about daily in Europe, can you get a little more granular with any geographies or maybe give examples? Particular strength in Europe. I mean, the numbers you're putting up in Europe defy what we read about every day there. Asia numbers, the APMEA numbers. I mean, it looks like back of the envelope in a couple of years, those numbers could be as strong as the U.S. in terms of volumes. Is this mostly your war on cash playing out, or is this PCE rising in these countries or both?
Just trying to get a little bit, is the market, you know, maybe your opinion on what you're seeing from the bottoms up here, is the market overly pessimistic, or is this just the shift to digital payments? I think the answer is important for, you know, your stock could be one of the best to hold if we are going into a recession, if the answer is the war on cash, because you'll sustain these growth rates, you know, even through a downturn. Thanks.
Speaker 3
All right, Bruce, it's Martina. Really, all of the factors that are impacting our growth, you have just quoted. Let me talk a little bit about it. The United States is a bit different than the rest of the world. Let me start with the rest of the world first. When you look at Asia-Pacific and Latin America, as Ajay already said, there is a significant secular trend going on in terms of people using less and less cash and check in those countries where you have check or more electronic forms of payments. In addition to that, all the work that our people are actually doing on the ground in terms of winning business and helping financial institutions, as well as a number of other companies, as well as governments around the world, to be converting, really taking advantage of the secular opportunity that is benefiting really our growth.
In Europe, you have some of the same going on. There are obviously also market share gains impacting on this. The Europeans are very interesting. You hear here in the United States, you hear a lot of doom and gloom. When you go into Europe, you don't hear quite as much doom and gloom. In fact, when you talk to a lot of Europeans, and it is August today, they will be all going on vacation still. They might be doing vacation in a little bit of a different way than they have been doing in the past, but they still will be going for two or three or four weeks at times on vacation. People will be still continuing to spend. Because of the secular trend and because of our product being readily available in the market, we will obviously benefit from that.
The United States is a little bit different. When you really look at the underlying growth rate, I already said in my remark that gas prices did contribute a couple of percentage points. I mean, when you just look at gas prices alone, they increased by $1 per gallon from the year-ago quarter. That has a significant impact on the volume growth. Transactions, by the way, haven't changed too much when you just look at the gas portion. In addition to that, you see a number of other commodities actually having increased price. Look at food and what all goes into the food. Look at the energy prices. Look at the gold prices that go into luxury products, for instance. A number of the drivers are really impacted by what's going on from an inflation point of view.
Last but not least, Ajay already told the story about we have two types of consumers in the U.S. We have those people who have a job, who feel, you know, that they will have that job for quite some while to come, who feel that they can go out and do the spending that they need to do. On the other hand, you have the consumer who is not quite as well off, who is not able to do it like that. I hope that gives you a little bit more of a clarification where we are.
Speaker 0
Your next question comes from the line of Andrew Jeffrey with SunTrust. Please proceed.
Speaker 1
Hi. Thanks for taking the question. Chris, I realize that it's a strategy that's still evolving, and you've made some specific comments vis-à-vis your PIN debit share and desire, I guess, directionally to take share. Can you just talk a little bit philosophically about your willingness to go after routing volume, both in terms of kind of the pricing initiatives you might be willing to take opportunistically, as you mentioned, but also the economics and the ROI considerations? I mean, Martina mentioned that PIN debit economics weren't so hot to begin with. I imagine they only get worse post-Durbin. Maybe just a little thought on the puts and takes and Mastercard's willingness to be aggressive versus just sit back and let volume flow your way?
Speaker 4
Yeah. I think I mentioned in my comments that PIN debit economics are very thin, pre-Durbin. You know, think in terms of a couple of cents a transaction. That's sort of the zip code size of revenue yield off these transactions. You start taking that pre-Durbin, and then you start thinking about how much do we pay large merchants to route, how much do we pay acquirers to route, and how much do we pay issuers to position ourselves in an optimal space with their routing configuration on the back of their card. It doesn't leave a lot of money left over. Because of that, we're not going at this with a blanket approach to pricing. We, as I mentioned earlier, I think Tien-tsin asked the question, much more surgical, much more precise in terms of where we think we can play in this space.
You have to remember that PIN debit transactions are very inexpensive to start with. They're single-message transactions. There are a multitude of PIN networks out there. In addition to Mastercard and our big competitor, there are a number of regional PIN networks out there, which makes it very competitive. There's a lot of capacity on PIN networks today. The volume increase that we will see or anybody will see with PIN debit changes will far exceed the revenue implications of that going forward. That's just the way it is. That's why I said we are not in the game to go out and buy every PIN transaction we can. We're going to do this in a way that optimizes our economics.
Speaker 1
Is there a consideration to just say, "Hey, we don't want to be in this business," or it's not good, the economics don't justify getting here?
Speaker 4
I think we absolutely want this business, but we want it in a thoughtful way, in a way that makes economic sense to us. We have a great network. We have global acceptance. We'd like to see transactions across our network. It gives us information capabilities that we otherwise wouldn't have. We're not going to do it in a way that just doesn't make economic sense.
Speaker 3
Yeah. Scott, let me just add to this. You know, our network is really scalable, right? We are able to add additional transactions at a very low incremental cost. From a positioning point of view, from a cost structure point of view, we are obviously in a very good position to be able to pick up deals in a selective manner. Because of all of the things that have to still shake out in the market between the issuers, the acquirers, and the merchants, we said that we do believe that there will be opportunity. We're not sure yet how much opportunity. For us, it is really a way of how are we going to go after profitable growth, and then how much are we really going to get that?
Speaker 2
This is Ajay. Let me tell you that I think part of the confusion that comes in this topic comes from the use of the word economics. When we say economics are thin, what we mean is the revenue economics of a PIN debit transaction, not the profitability economics of a PIN debit transaction, not the operating margin economics of a PIN debit transaction. When Chris is talking about revenue, he's crystal clear that it's thin. That's why he says you may get more volume growth than revenue % growth. Yet, as he said in his remarks and Martina just said, the cost of processing those transactions incrementally at the margin is very small for our company.
We still think there's enough business there to not only make decent operating margins from if he's in those deals, but also use that incremental data that we get, the incremental transactions that we see to add value to many other products we sell, whether it be inventory, whether it be the sort of export monitoring services or risk. There's a ton of things we do with that data. You've got to just understand that logic of revenue economics versus operating margin economics.
Speaker 3
Operator, next question?
Speaker 0
Your next question comes from the line of Jim Kassane with Bank of America Merrill Lynch. Please proceed.
Speaker 4
Yes. Thanks. Great job on the numbers, guys. Just a clarification, Martina, what portion of your U.S. volume is from gas? A question for Chris. You kind of alluded to the Fed reevaluating interchange caps. Would you have a sense in terms of how often they'll review debit issuer costs and ultimately the interchange cap? Thanks.
Speaker 3
Jim, it's a relatively small portion, obviously, of overall volume. The only thing that we did see in the quarter ticking up, and that's totally in keeping with the price change, is that actually it's now from 7.5%. We usually said that the volume as gas as part of volume is 7.5%. It's now a little bit over 9%. From a transaction point of view, though, we're seeing that it didn't change much. It's around just shy of 16%, 15.8%, I think, for the quarter.
Speaker 4
With respect to the Fed reviewing interchange caps, our indication is that it's going to be every two years or thereabouts. That's the time horizon you should be thinking through. Thanks, Chris.
Speaker 3
Operator, I think we've got time for just one more question.
Speaker 0
Your final question today comes from the line of Tom McRowan with CIBC Capital Markets. Please proceed.
Speaker 4
Thanks for squeezing me in. I was just wondering if Mastercard had a view on allowing bill payments on prepaid cards in light of the new language that prohibits access to funds loaded on GPR cards over the bank-owned ACH system. If you can just clarify that. I hear you say that there's a new GPR card that you've introduced to Walmart. If you can just clarify that. Thanks. With respect to allowing bill pay on the card, that's really the issuer's decision what they allow the functionality of the card, what it's allowed to do, whether ATM withdrawals, bill pay, direct access to DDA accounts, whatever the case might be, or to fund it. It's not whether we allow it or not allow it. It's whether once the issuer decided to provide that functionality, whether it qualifies for regulated or unregulated rates.
For the Walmart program, these were general-purpose reloadable cards put into the stores at their new financial centers, which you'll see some press around to enable their customers to avail themselves to prepaid functionality. As you know, all their associates in the United States receive their payroll on a prepaid card if they did not have a bank account. We've had some good traction with that major retailer in the prepaid space.
Speaker 0
Ladies and gentlemen, that concludes the Q&A portion of the call. I would now like to turn it back over to Ajay Banga for closing remarks.
Speaker 2
Thank you. Let me just leave you with a few closing thoughts. We have delivered really good results for the first half of 2011, due not only to the strength in our base business across all five of our regions, but also driven by volume and transactions from new deals. Chris spent some time talking about U.S. debit. It will take a year or so before this plays out across all the stakeholders. We remain confident we can increase our share in the U.S. debit category. We will maneuver to drive the maximum positive impact for Mastercard. Thinking about the business going forward, as I told you, there is economic uncertainty, particularly in the United States and Europe, that we need to keep a close eye on. At this point, growth remains relatively strong in Latin America and Asia-Pacific, Middle East, and Africa.
Through all this, we have not lost sight of the big picture. We remain focused on displacing the 85% of transactions across the globe that are conducted using cash and checks. That is our opportunity. We are executing on our growth strategy to invest in differentiated capabilities and win more than our fair share of this secular shift to electronic payments. With that, we are going to conclude the call. Thank you for your time today.
Speaker 0
Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.