In this Part 2 episode of Motley Fool Hidden Gems Investing, Motley Fool CEO Tom Gardner speaks with Mastercard CEO Michael Miebach, who discusses:
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The company’s Agent Pay protocol.
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Why machine-to-machine payments could transform B2B commerce.
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Why Mastercard just acquired the world’s largest stablecoin platform.
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What the AI revolution really means for employment
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Why proprietary transaction data is Mastercard’s deepest competitive moat
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How he stays sharp running a $500 billion company.
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A full transcript is below.
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Michael Miebach: Who sits in the middle and drives interoperability, make sure all of this connects, and is not a plate full of spaghettis? Mastercard. We’re closing this quarter in acquisition of a company by the name of BVNK, which is a large stablecoin platform out there to connect all of this for the world.
Bart Shannon: That was Michael Miebach, CEO of Mastercard, on why the fragmented world of stablecoins and digital payments needs someone to hold it all together. Why Mastercard intends to be that someone. I’m Motley Fool producer Bart Shannon. Last week, in part 1, Tom Gardner and Michael covered how Mastercard’s payment network works, the $15.6 trillion cybersecurity threat, and why stablecoins are more opportunity than threat. This week, in part 2, they get into the future AI shopping agents, machine-to-machine payments, how Mastercard thinks about capital allocation, and what the AI revolution really means for employment and consumer spending. Hope you enjoy.
Tom Gardner: 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. I actually put the Mastercard logo in the center there, which makes it questionable whether GPT should be able to place logos. But anyway, I’d like to hear a little bit about AP4M, and I will stop.
Michael Miebach: Let’s talk about agentic commerce first and hang it up a little bit higher before we come to AP4M, and I can also decipher what that actually means when we get there. Agentic commerce. What’s actually happening is in straightforward online commerce, what happens today is, you might go and go to your favorite search website and just put in whatever you’re looking for. We give you a bunch of sponsored links, and then it gives you a set of more links, and then you pick where you go, or you might be just irritated by all of that and just go straight to your favorite marketplace. Those are all things that we probably have experienced as consumers. You just referred to an LLM, where you created this lovely image just now; ChatGPT is the example that you used.
What you might want to do today is get a potentially better and more holistic answer for whatever you’re trying to do. Let’s say you want to go on a camping trip and say, What do I need for a camping trip? It gives you 15 things. Because it knows your history, it could have given you 25 things, but it already knows you have a tent. It’s not offering the tent to you. It’s giving all the things you don’t have for that particular destination actually makes sense. If you have that result, then imagine you still have to go to every single website and say I’m going to find that tent now, or I’m going to find that little cooker or whatever the ingredient is, and then you’re all over the place, and you have just wasted half a day planning your trip. Wouldn’t it be much easier if you could check out right in that moment on whatever that recommendation is from the favorite LLM of your choice and say, I’m going to check out right there? I’m going to delegate the checkout to the agent through an agent, which in this case, would be the LLM that does all the checkout for you.
It uses a Mastercard behind it, and everything works. Would be so much easier. For that to happen, we need to recognize that suddenly there’s an entity in between that never existed before; that’s the agent. Then, back to cybersecurity, how do we know that this agent is actually an agent that is known, and it’s not a fraudulent agent? That the agent is actually what you’re trying to do, buy stuff for your camping trip, but not ordering something else, or that the agent actually makes mistakes or not. It orders two grills instead of one. How do you prove that in the end, when your card would be debited? Those are all things that we thought about today in the world of Mastercard payments. Straightforward payments work very easily. You have a chargeback. You’re always protected; you say that never happened. I never ordered that, and you just undo the whole thing.
We created Agent Pay. Agent Pay is basically a protocol that ensures that an agent is recognized as accredited as an additional party in the ecosystem. There could be an LLM, or it could be a very large retailer that has an agent for all their brands, etc., so that’s registered. The next thing is that this transaction is fully tokenized. What that means is every bit of data associated with this transaction is captured, so it can be used as a proof point to say this is exactly what the consumer wanted to do. Then the various parties in the ecosystem, the bank of the merchant, and the bank of the consumer, everybody knows, and it flows the same way as it does today at a Mastercard transaction. It’s very technical, so I’m going to keep it at that level. All of this is what is happening, and the ecosystem is ready, and these transactions are starting to flow now. For us, is this a growth opportunity? It is because tokenization is a service that we sell. All these transactions are fully tokenized, which is very different than the real world today, where not every transaction is tokenized just yet, so that’s a growth opportunity. The related cybersecurity solutions for these transactions is a growth opportunity for us, etc. Will people buy a lot more full bottom line? Will they buy five tents instead of one? No. It’s a bit of a replacement of existing flows, but with additional service opportunity for Mastercard.
Tom Gardner: Am I wrong to just insert one thing? Am I wrong to think that it might lead to more transactions, because it becomes so much more frictionless? Once I have a representative acting on my behalf, I knew things that I wouldn’t have found myself.
Michael Miebach: It could. You most likely will have a better recommendation, so your propensity to buy something might increase. The other thing for us is there is a transaction growth multiplier. If you would have instead today gone to a marketplace and have bought everything from one merchant, vis-a-vis go to different merchants and have different individual transactions, so there’s a transaction multiplier. We basically facilitate transactions. That’s our business model. It has that kind of an impact for us, but it’s still overall GDP will not dramatically rise because you still need one tent or not five. But now, here’s the other side of this. This is very interesting. We’re coming to AP4M, which means Mastercard Agent Pay for Machines. If you think in the context of B2B commerce, one company with another company, think about the chief procurement officer buying stuff on behalf of the company from some provider, some supplier. Today, this is often happening account to account. Invoices are being paid, all of that. But imagine the digital content that a company is buying; that could be APIs, that could be digital content, there could be data, there could be compute power, it could be all of those things. Why would you send an invoice and do that? You will want to do this, as you use your compute power. I need 10% more; you dial it up, you dial it down, and you pay as you need. If you pay as you need, your working capital efficiency is going to dramatically increase. How do we get a payment ecosystem that can facilitate always-on high-velocity microfractions of a dollar kind of payments that don’t exist today? That’s what the Chief Procurement Officer wants. It’s total optimization.
That’s what the treasury wants, what the CFO wants to really use the capital of the company in the most efficient way. We’ve launched just very recently, the Agent Pay for Machines Protocol, which basically is a further evolution of Agent Pay, which I described a bit earlier, and it just facilitates all of that. I spare you the technical details because it goes even further, but it does facilitate immediate high-velocity micro tickets between different machines, add machine speed, add machine scale with the same protections and with everything else that Mastercard promises behind them. The underlying rails and infrastructure are likely to be different than card rails. It could be stablecoins. It could be other rails for that. That is essentially going to come down to the choices of companies and what they want to use. We’re pretty agnostic about that, but the protocol to keep the trust and interoperable layer on top is critical.
Here’s the last thing on stablecoins. Agent Pay, stablecoins, agentic commerce; there’s this whole new way of doing commerce going forward. If you just play that out over the next year, you’re going to have multiple chains. You’re going to have multiple stablecoin currencies that might be powering all of this in the background, along with card systems and account-to-account. You have this very complicated world. You’re company A, I’m company B, and we just want to do machine-to-machine payments with each other. But your choice is stablecoin A, and my choice is stablecoin B. How are you going to pay me, and how am I going to receive that stablecoin from you? Who sits in the middle and drives interoperability? Make sure all of this connects, and it’s not a plate full of spaghettis. Mastercard. We’re closing this quarter and acquisition of a company by the name of BVNK, which is a large stablecoin platform out there to connect all of this for the world. That’s what we do in cards today. That’s what we will do in the brave world of stablecoins.
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Tom Gardner: There’s so many ways to express what Mastercard is doing. Just one question on the value-added services and the work that you’re doing. Should we think of Mastercard as partnering even more deeply with a variety of companies to bring these systems forward, or will you continue to be acquisitive, a balance between the two? What’s the process of moving deeper and deeper into new technologies like agentic commerce, all the cybersecurity challenges, stablecoins, etc.?
Michael Miebach: Our approach to this is when you take our business a decade ago, so very focused on card payments, very focused on consumer card payments. Today, it is consumers, businesses, it’s government in terms of customer set. It’s much more global. It’s all forms of payments, as we discussed; it’s also stablecoins, it’s also account-to-account. It’s a whole range of value-added services. We talked about the cybersecurity part of that. There’s a range of loyalty solutions, consumer engagement solutions, personalization solution, anything that powers trade. When you think that, our approach to this is bio build. That’s always the first question. We never go out and say the valuation cycle. Everything is cheap right now. Let’s go and buy something. It’s very strategy-driven. We say we need more capability on the personalization side. Our customers, large retailers, what are they trying to do this time to cut through the clutter and the noise that exists in social media and everywhere to get the right offer to their right customer at the right time, through the right channel. We do this at scale. We have a lot of consumer behavior data, not personalized. I should add.
We bought one of the best personalization companies in the world. Why did we buy versus build? We just don’t know much of personalization. I said, Why don’t we buy the best partner? But when we buy a company like that, we can leverage our huge data set, our global reach, and our network to take their solution and push it to our network to reach all those customers that we have around the world. That’s dramatic synergy. M&A and acquisition works very well in such scenarios. There are other things that are very close to our existing payment solution. We’re much better off building them ourselves. We will continue to be very acquisitive at the same time. We’re always very good stewards. We try to be very good stewards of our shareholder capital. Let’s say we’re actually better off building this ourselves.
Tom Gardner: You may or may not know that we’ve built a system at the Motley Fool where we score every public company. We have an LLM-based AI-powered system with coders around the world working with our investors to evaluate companies across leadership, the quality of their products, their competitive advantages, the valuation of the business, the financial capabilities. Out of 4,700 companies scored in the U.S., Mastercard is No. 14. [OVERLAPPING] Yes, you’re probably wondering why you’re not [OVERLAPPING].
Michael Miebach: We should be in a top-10 company. A top-five company.
Tom Gardner: I subscribe to your report there. We will send it to you without requiring your subscription.
Michael Miebach: Thank you very much.
Tom Gardner: But capital allocation is such an amazing strength of the business, and you have a lot of options with the amazing rates of return on invested capital. But I’m just wondering how you make the decisions about let’s take an example of buybacks. I think you did additional buybacks this quarter. I could pack seven questions together here for investors about this, but there was a moment in time where the stock fell to $470 or so; now it’s $570. There’s a subordinate question to how people should think as investors, as you might know, retail investors, and a lot of professional investors transact too frequently and don’t realize the capability of that organization to create value for you over long periods of time. I’m just curious how the share buyback process happens in a given quarter, how you determine how much to put against it, and whether the movement of the price in that quarter matters.
Michael Miebach: The first thing that I would say when it comes to our capital allocation principles is always the first thing is reinvest in the business. That’s the best thing that we would do, organic/inorganic, we just talked about that. Preference: start with organic. Reinvesting in the business, the first thing, ensuring a strong balance sheet, is the next thing because I mentioned a payment guarantee earlier that we have for every Mastercard payment, so that requires a healthy balance sheet, etc. When it comes to buybacks, we’re very opportunistic about that. We’re not in the business of buybacks. We do that when it makes sense. We had a DAI trade dominating the market, and we were a source of funds as a large high-cap company. While we have a lot to do and invest a lot in AI, we’re not AI trading in AI infrastructure. We’re all about applied artificial intelligence, and so we were a source of funds. The stock price was a little more volatile than I would have preferred. But it did exactly what you just described. I was at 470; now it’s at 570, and we’re getting closer in the right direction again, which is very good. But we were opportunistic. We said we believe in the continued growth of the company. We know exactly what we’re doing. We have a clear strategy, we’re driving operating leverage for the long term, etc., so we’re going to do some buybacks. That’s our approach. This is always a tool that is used for such times. But it’s not one that we use beyond that logic.
Tom Gardner: As you might imagine, I have more questions than this, but respecting your time, because 40 minutes was our target together, I want to just ask one question about employment. I would say employment looks relatively strong, wages look relatively strong, but at the same time, you have Elon Musk interviewed earlier this week saying we are five years away from AI exceeding the sum total of human intelligence, and virtually every job that I can see, paraphrasing Musk, is something that can be done as effectively and less expensively by artificial intelligence and breakthroughs in these technologies. What are you simulating forward? How far are you trying to see forward as the CEO of a company that requires that you’re thinking as far forward as you can? What do you think about employment dislocations and wage deflation? Last little portion of the question: what time we live in that the largest technology companies with the highest levels of cash flows and the strongest balance sheets in human history are actually thinning their staff? We’re seeing the workflows change, and we’re seeing employment levels change even at the most prosperous companies. What is this indicating? What will it mean for consumer spending? How do you think about it within the context of Mastercard
Michael Miebach: Very important topic, Tom, and I’m glad you’re raising it. Clearly, when you think about artificial intelligence and what it could do, I think it’s good to have a mindset that this is technology that needs to be explored if it’s deployed in the right way. It could drive a path to prosperity and growth. That’s all generally the direction that I think and that we think as well. It has downsides. We talked about AI-driven risk, cyber risk in particular. There’s always with everything up and down sides. As technology is evolving, one thing we have to do, because, clearly, certainly in our industry, but in most other industries, comes down to having the best talent. We’re going to have to upskill our talent. There’s significant focus on making AI tools available and ensuring that we can upgrade the jobs in the company for people who leverage AI to do an even better job and do the things that machines cannot do. Human-centered AI application is the focus that we’re driving and saying, “Use this tool to do a better job and don’t do the redundant stuff.” Stuff. I’ve just created myself an AI assistant for emails. I don’t have to deal with that any longer. That’s great. I still take a look at it, but it does take some of the menial task away from that. I think we need to be very thoughtful about that. Currently, when I see where our customers are on that. The number of customers that want to talk to us about agentic commerce, stablecoins, all the topics that we think about.
We use a lot of AI to prepare for those conversations because there’s a lot of public data that’s out there. But those customers, there’s a lot out there about the technologies available. We bring it together, and we save ourselves a lot of time to have more engagement with our customers on the topics that actually matter. Artificial intelligence and cybersecurity: 180 billion transactions a year. How do we keep them safe, leveraging GenAI and threat intelligence data? It’s all about technology. That was always about technology and Mastercard. That’s not about people, because we’ve always been a network company, actually, with a very light. If you think about our market cap, we think we’re only 40,000 people across 220 countries and territories. Our industry is not the one way you would start to think fundamentally, rethinking that. If you think about some of our services, who will win, and who will have a challenge in the world of AI? The companies that set themselves apart are the ones that can use all types of different models, but have proprietary data that they can feed the model with and then drive their business forward. We’re one of the companies that have the most unique data sets, transactional data. Those are all things that I think give us longevity and give us the right to a license to play, and we’re going to push forward on that basis. If you had the chance or will have the chance to listen to our earnings call today, the last thing I said on our earnings call today is I thank our employees for driving all those numbers and that output for us and our customer.
Tom Gardner: Last question, running a company with a market cap of $500 billion with as much change. Every business is going through so much change, but I would say, having gotten in no leadership at Starbucks over the last 25 or 30 years, there’s a lot of continuity of what they’re doing every day. They know what product they’re putting out. There’s not as many different decisions to be made on acquisitions all the way through to the technologies you’re choosing your workforce, etc. What is your approach to personal health to sustaining yourself and your leadership team? Because obviously, the top 15 people at Mastercard are connected into the business 24/7; in some ways, have to be. What is your approach to unplugging to sustaining this level with output? Obviously, we’re very happy and hope you’ll be CEO for the next 25 years. How are you going to do that?
Michael Miebach: I think it’s a really important point. The first is to recognize how important that point actually is. Across our leadership team, yes, it is 24/7. At the same time, it’s not 24/7 for everybody all the time. We’re a global leadership team, and that’s a good thing. Somebody is awake over in Singapore, and they can do their part. We manage in a somewhat balanced fashion around that. Divide and conquer is very clear. This is a strong team, and this is true for the broader population at Mastercard. I have to say, I personally value vacation. I think it’s a really important thing. I was having a conversation with somebody that works directly in my team, and I said, “Hey, what are you planning for this summer?” He said I might take a few days off. I said you should consider maybe taking two weeks off. Maybe this is growing up in Europe. I don’t know what it is, but I find that as important.
But then you have to find these other moments where you just can just think about something different. I’m involved in a set of activities outside of the companies on the nonprofit side. I just find that’s important; it takes my mind off. It’s a source of energy. Then, of course, being a good German, a lot of walking and a lot of talking. With my wife, these are things like that, and I mentioned it to you at the outset before we started. I do like motorcycling and skiing, those two activities that focus your mind completely. At the end of the day, you’re physically very tired, and you don’t think about anything else much on that day. Different ways, different approaches for everybody. One thing I regret which is I don’t read as much as I probably should. I read much more summaries and newsletters, and I have taken on the last couple of long weekends that came around to actually grab a book again, and I find that was a really good idea. I’ll try to do more of that.
Tom Gardner: Same. That’s a commitment. We’ll hold each other accountable, too. Michael, thank you so much for this time. We began investing in Mastercard maybe it was around 2013 with a stock below 50. We have [OVERLAPPING] more than 25 investments. Yes, we’ve had a good run, and we’re very thankful we loved the work of Ajay Banga, obviously. We didn’t even talk about your succession in the middle of COVID. That was fascinating. That’s got to be a good chapter of at least one book that you write at some point. But I don’t want to take any more of your time. Thank you so much, particularly on Earnings Day for giving us time at the Motley Fool. We wish you the very best and everyone on your team and have a great next staycation.
Michael Miebach: Thanks, Tom, and thank you for having me on.
Bart Shannon: As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don’t buy or sell stocks based solely on what you hear. All personal finance content follows Motley Fool editorial standards and is not approved by advertisers. Advertisements are sponsored content and provided for informational purposes only. To see our full advertising disclosure, please check out our show notes. For the Motley Fool Hidden Gems Investing team, I’m producer Bart Shannon. Thanks for listening. See you next time.
Tom Gardner has positions in Mastercard. The Motley Fool has positions in and recommends Mastercard and Starbucks. The Motley Fool has a disclosure policy.
Mastercard CEO: AI Shopping Agents, Machine-to-Machine Payments, and the New Infrastructure of Commerce was originally published by The Motley Fool