Well, we're really excited here at The Motley Fool to have Michael Miebach, the CEO of Mastercard, joining us on the day of your second-quarter earnings. We should probably start there, because I don't think there's much introduction that's needed for Mastercard. Although, if you talk to the average consumer or talk to even the average investor, they may not understand exactly how your global payments network works. We'll go through a little bit of that as well. But I do think we should start with second-quarter earnings, which showed some pretty remarkable growth. Another round of amazing operating margins of the company, above 60%. I know cross-border business and your value-added services growth are pretty pleasing to you. Any highlights that you'd like to share with us on a single quarter, a 90-day period, which I know isn't necessarily the best way to measure.
First of all, thank you for having me, Tom. I was looking forward to our conversation today. Yeah, it's been a good quarter and a good engagement with investors today and analysts. You actually hit the highlights just now. Strong volumes. It's interesting when you look around the world and you read the headlines, see geopolitical complexity and volatility, and then you see varying impacts on the macroeconomy, and in the end it all balances out with a pretty healthy consumer and continued healthy spending on the consumer and on the business side, which obviously is a big part of our business. That's what we facilitate, spending. We're powering the economy and value exchange in all forms. It's good to be in payments at this time. A few of the topics that we talked about on the call, which you didn't mention, is there's a lot of innovation in payments right now. There's a lot of competition in payments. The rise of fintech, the rise of stablecoins, the headline of agent e-commerce. There is so much going on, and we're at the forefront of all of that, shaping where the future of the digital economy is going. Exciting times for us at Mastercard.
It is amazing how much dynamic change there is in the world today and in the marketplace, and yet a very stable, solid performance from companies like Mastercard, again, showing the strength of the consumer, as you shared. Can we just talk a little bit about the relationship between the bank, the merchant, and the cardholder, just to set the table? For example, when we get to stablecoin, we will ask you to define stablecoin, because there will be viewers of The Motley Fool that are encountering some of this for the first time. Maybe just walk through a little bit, four billion cardholders, tens of millions of merchants, and how the network interacts.
Just to stick to the facts, 3.7 billion cardholders. But that's still a lot. In fact, we are probably, and certainly geographically speaking, the most prevalent way to pay around the world, over 3.7 billion cards. You talked about the relationship between a consumer and a bank and a shop, wherever you shop. Let us just take a step back on exactly that. You're going to go and you're going to buy something. You buy it online or you buy it in a shop of your choice, and whatever it is, there magically, you can either leave the website and the product will be shipped to you, or you can leave the shop and take it with you. Why is that happening? Because there's a payment guarantee in the background, which is issued by Mastercard, that says to the merchant, "You can let this person go because we will ensure you will be paid." This all works in a square, so to say, a four-party model between the bank of the consumer and between the bank of the shop. Your bank will take money from out of your account, out of your card account, and pass it on to the shop's bank, and then the shop gets paid. This is how this works. Now, if you think about this in 3.7 billion times in 220 countries and territories, that is massive scale, and that is massive complexity. Regulatory rules are different around the world. Infrastructure is different around the world. We took 60 years to build this amazing system that powers the digital economy around the world. That is what is at the heart of when you pull out your Mastercard, it happens behind.
Now, there's a lot more happening behind because this payment is not only happening, it's happening in a safe way. So you're protected. If you use a Mastercard and you make a payment on a website and it turns out to be a fake website, that's one of the cyber risks that we all face today. You are still protected because it was not your fault, so you have a payment guarantee. But in order to ensure that we prevent fraud at the outset, there's a lot of safety and security happening behind the scenes. Trillions of data points will be scanned in nanoseconds to ensure there's the right relationship between you and this merchant. Can you actually be in this place right now? Have you ever done a transaction like that? Are you spending more than you actually have ever done before? Etc. All of this is happening in the background, and those are the kind of tools that we provide to our customers. The cardholder's not our customer. The customer is a bank. The customer could be a merchant. It could be a very large merchant, Walmart or somebody like that. It's a partner with ours or a very large bank like JPMorgan here in the US, etc. Those are our partners, and we provide them with services to make their payments, i.e. the Mastercard payments they run with us, safer and smarter, and simpler actually.
Thank you. In a way, we should think of it as a trust and security network. For that reason, I'd like to move towards cybersecurity because I know you've made some significant investments. I think, I'm not counting this quarter, over eight billion dollars invested in cybersecurity and fraud. Generative AI is arriving faster and the tools are upgrading faster than I think anyone was estimating, except for maybe Ray Kurzweil. They're finding holes in systems faster. What types of crimes are you seeing that are new? What's Mastercard's unique approach?
It's important to talk about cybersecurity, and you put it into context of artificial intelligence. Now, artificial intelligence is not new, but generative AI is new. Since the launch of ChatGPT, the first version, in the first quarter of 2023, we've seen tremendous progress there. That's good for productivity, it's good for better user experience, good for many things, but it also empowers the fraudsters, and the scammers, and the hackers. So we're starting to see an arms race. New technology, and you can use this technology to drive exploits and scams. At the same time, you can use this technology to defend. We have an arms race going on. When you just think about what's the magnitude of all of this, so there is an expectation, studies been done, looking forward a few years, 2030. That by 2030, the amount of fraud and cyber risk-driven and damage is going to amount to $15.6 trillion. If cyber risk were a country, that would be the third largest economy in the world. That's what we're looking at.
Now, historically, take the last 10 years across the financial services industry in particular, there was a lot of focus put on preventing fraud. We've been always a leader in that. As a payment networks, we're the one that stand out to have invested in cybersecurity earliest and most significantly, and today we have the broadest portfolio there. Initially, this all started about defense. A transaction happens, and you're going to decide if you're going to let it through, yes or no. Is this a transaction that is really from you, or should it not? Should we ask the bank to make some extra checks? Now, if you do this 3.7 billion card times around the world, 180 billion transactions go through our network. You really need technology in a very big way to do that, to power that, and drive that security level up. Now, banks get attacked, they get hacked, and all of that. Governments get attacked and hacked. Individual consumers get hacked and attacked. The system is becoming under threat from all angles, and the weakest link in the chain is usually where the hackers and the scammers get in. So we need to erect our defenses and do even more to prevent all of this to happen and protect cardholders and our customers, and governments and so forth. How do you do that?
What we essentially need to do is moving from defense to offense, and that's where our last investments have been in threat intelligence. If I can tell you as the CEO of a bank, you are under attack from this consortium, they're going after this kind of fraud to attack you and your customers, and here's what you need to do to prevent that, you can do something about this. If I tell you you're going to have to defend against every threat vector there is, that is almost impossible to do. Threat intelligence is the last investment that we've made. We bought the world's largest independent threat intelligence company at the end of 2024, Recorded Future, and they now top up a vast portfolio of fraud management, identity solutions, and cyber solutions that we have with this proactive defense approach. This is what's going on. This what sets us apart in the world of payments, but not only payments, because we provide cybersecurity at large and solutions at large today.
Is it right to think, and was it always right to think in human civilization, or is it even more correct to think that we're permanently at financial war of some sort worldwide across state actors, non-state actors, organized crime, it's a continual never-ending battle? Is that an accurate view of the world or not?
I think the general statement, this is going to continue to be a fight between the good people and the bad people, I think that's very much true, that it's broader and more consistent, and the latest technology will be used is also true. What is even more true, and which is a good thing, is that governments and private sector are very clear about this. We are moving from every sector and every company doing their own thing to the private sector working much closer together. It's not just about the financial services companies working together to prevent in cyber maneuvers and cyber ranges, and sharing insights and threats with each other, but it goes across sectors as well. But here's the point, the private sector is really good at making investments and driving the innovation to push back against these scams and frauds, but you do need the enforcement and the regulatory rule side of the government as well. Public-private defense is moving very much into the focus. We go and frequent the Munich Security Conference every year, which is probably the preeminent global security forum there is, and this was the big dialogue this year. We were there, and everybody was clear we need to get more organized across the public sector and the private sector to work together. That's a positive sign.
Do you see the Mastercard brand becoming more and more associated with security, with cybersecurity, with threat intelligence? Or that's something that we want to keep invisible and under the radar pretty much, and leave it?
Definitely not. Definitely not visible and under the radar because it's a threat to everybody, and we need to ensure that we work together, so it needs to be known what we do. But if I take a step back is Mastercard's a lot of things to a lot of people. Some people call us a card company, other people say it's about payments. Some people say it's about cybersecurity because we're deeply engaged with them on that. It's about all of the above. In the end, it's about we're the operating system of the digital economy, and operating system should have a security layer. That's exactly what we do. But it also has a money movement layer, which is across stablecoins and account to account, and cards. We move value, your hard-earned money. We do all of the above. Then on top of that, this produces a lot of data and gives a lot of insights on where the digital economy is going, and we can help our partners, our partners' banks, for example, or large merchants, as I mentioned before, with better business insights to run their business in a better way. All of that. Yes, we are big in cybersecurity, but we're so much more.
Every five words of that phrasing I want to have a follow-up question on, but actually I'd like to take a step back and go to some of the broader drivers just to remind us of what's happening at the trend level for transactions worldwide and for Mastercard specifically. We'll just go to the first one, which is the cash-to-digital-to-card shift. Where are we in that process now? How many transactions were done in cash 10 years ago, ballpark, versus today? How much further do we have to go in that, almost the end of?
It's an answer that is varying by region, and by type of payment, no surprise. When I started at this company here in 2010, my first job was about running our business in the Middle East and in Africa. The average cash ratio in Africa was north of 90%. Most of transactions in Sub-Saharan economies were in cash and not digitally. If you go to the Nordics today, Northern Europe, Sweden, Denmark, and so forth, you're going to be, again, north of 90%, but it's north of 90% in terms of digital transactions. The world has come a long way, but in between, there's all shades of gray on where every country is. Take a large European economy like Italy or so, you have somewhere between 40% and 50% of cash transactions. It's north of 50% for the United States. Take emerging markets like Africa, still today, you find markets where you're 90%. If you take that lens, that is one lens. But then there's different types of payments as well, and types of value exchange and what's going on in the digital economy. Some countries just do not have a particularly good e-commerce ecosystem yet, so a lot of that is still physical. Of course, with card not present, e-commerce, shopping from websites, that's all digital per definition, and you see those countries ahead of the others. Various aspects.
Take small business as the largest employer in the world. Still, the share of physical installations and then physical payments, cash payments, is still very high in small business because the vast majority of them don't have a digital footprint yet. Now, that has dramatically changed post-COVID. A lot of small businesses were the hardest hit by COVID. Nobody went to their shops any longer, and then they weren't online. If you look at some of the data from the United States, what is the share of small businesses that have reopened after COVID, and how much of those, the vast majority of them had a digital as part of their business thereafter. You start to see that catching up. There's so many dimensions around this. To our investors, we say, big part of our growth engine, so to say, is to turn cash and checks, and other very basic digital payments into really clever, smart Mastercard payments. That's what we do, and there's plenty of runway around the dimensions I just shared with you.
But I'll give you another dimension to that. A lot of countries have their own kind of payment card system, but it's very, very basic. Back to cybersecurity, there's many other things you should be doing for your payment system. We come in and we take those transactions and also put them into the Mastercard network to make it a better payment. The runway in digital payments is tremendous. We charted it out to be, I think, we're somewhere in the trillions of what is still the opportunity is out there in terms of payments.
Let's talk about cross-border transactions, travel and non-travel, Mastercard Move and the significance of this trend for you.
Yes. Cross border, it's such an interesting term. But basically, let's bring it back to every day's life. You travel, and you go on holiday. It's holiday time where at the end of July, a lot of people are out on the road visiting family, going to their dream destination, and then they pay a hotel or they shop a souvenir or whatever it and it magically still works, despite the fact you're not in your home country. All of the payments I described earlier that happened between the bank and the shops bank and everybody in this four-party model that I described go across countries then. That's rather complicated to do. That's a big part of what we do today. That's a tremendous value add to economies. Tourism is a great driver. We've seen it here in the United States, with the World Cup, a lot of people came, and you really saw it in the numbers, quite a significant boost on that. A big part of our business complicated to do. It took us 60 years. Our Mastercard is 60-years-old. We just celebrated our 20 year IPO anniversary, and we were very busy to build this very large cross-border network, which as of two years now also includes China, where your local Chinese Mastercard will work, and others will work. These are high octane revenue for us because it's difficult to do, and then we prize for the value that we create, which is not really affecting the consumer that much, but it cuts across the ecosystem because there's a lot of investments that we had to make for that.
Interesting, though, from an investor perspective, we talked a lot about that in your earnings call today. The latest growth rate number here is 12%. If you think about some of the macroeconomic issues that we've been facing, particularly in the Middle East, across those countries, travel was hit, but it rebounded quite significantly, and it's looking pretty solid at this point. Big part of our business, it will for years to come, and we work with our partners to ensure that travel corridors, the marketing works, and here's where you want to go, and then you can get there, and then you have great deals and hotel deals and all these things. There's all stuff that we do behind the scenes with our partners.
Stablecoin now in some ways, presents some threats to transactions that have typically one could expect to go through Mastercard's network. I'm wondering what the impact might be from Stablecoin on international transfers, larger business to business payments. Obviously, I think it's probably going to be a while before that gets down to the level of the consumer purchases or ordinary purchases. I don't think consumers want a lot of different currencies to work with. Maybe I'm misinterpreting that. Please guide us to think clearly on it. Where is Stablecoin a threat an opportunity for you and obviously, you made?
Stablecoin is an opportunity. It is another way to exchange value. We've always been of the view as a large payment network, as a cybersecurity company, as an insights company, as a data company, whatever term you pick that for value exchange, cards is a really big part of the answer, but it's certainly not the answer for all types of payments. We've been investing since 2016 into account to account systems where you just pay whatever you pay directly from your bank account into somebody else's bank account, or through a shop, you can just pay the shop into their bank account, etc. All of that. We're one of the largest providers of account to account solutions. About 12, 13 years ago, blockchain comes up and blockchain, and then also one of the first payment applications on blockchain was cryptocurrencies. We're all familiar with Bitcoin. That's pretty cool technology. In terms of facilitating a value exchange, so I'm going to send you a fraction of a Bitcoin today. This will happen instantly, and you have it, and I have it. That's great. We looked at this and say that is good technology. Definitely we should have that. We started to build that out and build out our expertise. Today, the Mastercard network can handle US dollars, any other Fiat currency, but it can also handle Stablecoins, which is a cryptocurrency that's backed by Fiat, so that's the real distinction here. The store value function of that works, and it can go through our rails. We're very open to that.
In fact, what we do is we're not just having the Stablecoins run through our system, but we provide the same protections that you expect from your card payment alongside with that. Because whenever you deal with Mastercard, you see the two interlocking circles of our brand, you say I'm protected, and the same should be true for Stablecoin. I'm pretty agnostic when it comes to what is the underlying rail. But important point to say, it is really not needed for anybody to go and buy their coffee at the local coffee shop with a Stablecoin. Why would you do that? There is no problem to solve because the system does handle with that. But if you think about remittances or small business sending some money to another small business, another country where they bought some parts from, that's really complicated today. That's correspondent banking. There's high fees, lack of transparency. You don't really know is the hundred dollars that you sent actually arriving or have two parties in between taking $5 out each and only 90 is arriving, etc. We deal with all of that complexity by actually do use Stablecoin for cross-border payments. We think there's B2B cross border opportunity, there's P2B cross border opportunity. But P2M, as in everyday purchases, we solve that pretty well, so we're putting our energy where we really think there is a problem to solve. Generally my mindset, it's never about the technology. It's about whose problem can we solve.
When you say you're pretty agnostic about what rail it runs on, are you completely agnostic or there just certain?
We're pretty agnostic. But here's the reason. Follow up question should be, why? Why are we not completely agnostic? Because we have built 60 years. We have invested 60 years into building the largest acceptance footprint out there. Any individual does not want a payment solution and it can only reach a fraction of the potential endpoints. You want scale. You want predictability, you want protection. Those things are not actually delivered through Stablecoins. We still would like to go that route. But there are certain things where I'd say probably it doesn't actually matter that much here. Or in such a specific use case, we use this technology, and we invest the time to build out those protections over there anyway. That just takes a little bit more time. This answer is true for today and for tomorrow in the near term future, but in five years, this might look very different, and we're going to certainly be on the forefront of that.
Let's talk about agentic commerce, where AI becomes the customer's main relationship, and that transaction then starts to look for the cheapest alternative. Maybe we can talk about AP4M, as well. I don't know if GPT should have allowed this, but I created an image here of AP4M. It actually put the Mastercard logo in the center there, which makes it questionable whether GPT should be able to place logos. Anyway, I'd like to hear a little bit about AP4M, and I will stop my screen.
