MASTERCARD INC, 10-Q filed on 4/29/2020
Quarterly Report
v3.20.1
Cover - shares
3 Months Ended
Mar. 31, 2020
Apr. 24, 2020
Document Type 10-Q  
Document Quarterly Report true  
Document Period End Date Mar. 31, 2020  
Document Transition Report false  
Entity File Number 001-32877  
Entity Registrant Name Mastercard Incorporated  
Entity Incorporation, State or Country Code DE  
Entity Tax Identification Number 13-4172551  
Entity Address, Address Line One 2000 Purchase Street  
Entity Address, Postal Zip Code 10577  
Entity Address, City or Town Purchase,  
Entity Address, State or Province NY  
City Area Code 914  
Local Phone Number 249-2000  
Entity Current Reporting Status Yes  
Entity Interactive Data Current Yes  
Entity Filer Category Large Accelerated Filer  
Entity Small Business false  
Entity Emerging Growth Company false  
Entity Shell Company false  
Entity Central Index Key 0001141391  
Current Fiscal Year End Date --12-31  
Document Fiscal Year Focus 2020  
Document Fiscal Period Focus Q1  
Amendment Flag false  
Class A Common Stock    
Title of 12(b) Security Class A Common Stock, par value $0.0001 per share  
Trading Symbol MA  
Security Exchange Name NYSE  
Entity Common Stock, Shares Outstanding   993,040,739
Class B Common Stock    
Entity Common Stock, Shares Outstanding   10,699,604
1.1% Notes due 2022    
Title of 12(b) Security 1.1% Notes due 2022  
Trading Symbol MA22  
Security Exchange Name NYSE  
2.1% Notes due 2027    
Title of 12(b) Security 2.1% Notes due 2027  
Trading Symbol MA27  
Security Exchange Name NYSE  
2.5% Notes due 2030    
Title of 12(b) Security 2.5% Notes due 2030  
Trading Symbol MA30  
Security Exchange Name NYSE  
v3.20.1
Consolidated Statement of Operations - USD ($)
shares in Millions, $ in Millions
3 Months Ended
Mar. 31, 2020
Mar. 31, 2019
Income Statement [Abstract]    
Net Revenue $ 4,009 $ 3,889
Operating Expenses    
General and administrative 1,494 1,367
Advertising and marketing 154 192
Depreciation and amortization 144 117
Provision for litigation 6 0
Total operating expenses 1,798 1,676
Operating income 2,211 2,213
Other Income (Expense)    
Investment income 16 27
Gains (losses) on equity investments, net (174) 5
Interest expense (69) (46)
Other income (expense), net 3 4
Total other income (expense) (224) (10)
Income before income taxes 1,987 2,203
Income tax expense 294 341
Net Income $ 1,693 $ 1,862
Basic Earnings per Share $ 1.68 $ 1.81
Basic weighted-average shares outstanding 1,005 1,026
Diluted Earnings per Share $ 1.68 $ 1.80
Diluted weighted-average shares outstanding 1,010 1,032
v3.20.1
Consolidated Statement of Comprehensive Income - USD ($)
$ in Millions
3 Months Ended
Mar. 31, 2020
Mar. 31, 2019
Statement of Comprehensive Income [Abstract]    
Net Income $ 1,693 $ 1,862
Other comprehensive income (loss):    
Foreign currency translation adjustments (281) 11
Income tax effect 14 3
Foreign currency translation adjustments, net of income tax effect (267) 14
Translation adjustments on net investment hedge 20 36
Income tax effect (4) (8)
Translation adjustments on net investment hedge, net of income tax effect 16 28
Cash flow hedges (189) 0
Income tax effect (39) 0
Cash flow hedges, net of income tax effect (150) 0
Investment securities available-for-sale (7) 4
Income tax effect 2 (1)
Investment securities available-for-sale, net of income tax effect (5) 3
Other comprehensive income (loss), net of tax (406) 45
Comprehensive Income $ 1,287 $ 1,907
v3.20.1
Consolidated Balance Sheet - USD ($)
$ in Millions
Mar. 31, 2020
Dec. 31, 2019
Assets    
Cash and cash equivalents $ 10,207 $ 6,988
Restricted cash for litigation settlement 587 584
Investments 477 688
Accounts receivable 2,441 2,514
Settlement due from customers 1,164 2,995
Restricted security deposits held for customers 1,518 1,370
Prepaid expenses and other current assets 1,729 1,763
Total current assets 18,123 16,902
Property, equipment and right-of-use assets, net of accumulated depreciation and amortization of $1,165 and $1,100, respectively 1,901 1,828
Deferred income taxes 550 543
Goodwill 4,070 4,021
Other intangible assets, net of accumulated amortization of $1,312 and $1,296, respectively 1,447 1,417
Other assets 4,557 4,525
Total Assets 30,648 29,236
Liabilities, Redeemable Non-controlling Interests and Equity    
Accounts payable 371 489
Settlement due to customers 1,149 2,714
Restricted security deposits held for customers 1,518 1,370
Accrued litigation 852 914
Accrued expenses 4,676 5,489
Other current liabilities 1,146 928
Total current liabilities 9,712 11,904
Long-term debt 12,466 8,527
Deferred income taxes 82 85
Other liabilities 2,890 2,729
Total Liabilities 25,150 23,245
Commitments and Contingencies
Redeemable Non-controlling Interests 75 74
Stockholders’ Equity    
Additional paid-in-capital 4,735 4,787
Class A treasury stock, at cost, 399 and 395 shares, respectively (33,531) (32,205)
Retained earnings 35,273 33,984
Accumulated other comprehensive income (loss) (1,079) (673)
Mastercard Incorporated Stockholders' Equity 5,398 5,893
Non-controlling interests 25 24
Total Equity 5,423 5,917
Total Liabilities, Redeemable Non-controlling Interests and Equity 30,648 29,236
Class A Common Stock    
Stockholders’ Equity    
Common stock 0 0
Class B Common Stock    
Stockholders’ Equity    
Common stock $ 0 $ 0
v3.20.1
Consolidated Balance Sheet (Parenthetical) - USD ($)
$ in Millions
Mar. 31, 2020
Dec. 31, 2019
Property, plant and equipment, accumulated depreciation and amortization $ 1,165 $ 1,100
Other intangible assets, accumulated amortization $ 1,312 $ 1,296
Class A treasury stock, shares 399,000,000 395,000,000
Class A Common Stock    
Common stock, par value $ 0.0001 $ 0.0001
Common stock, authorized 3,000,000,000 3,000,000,000
Common stock, issued 1,392,000,000 1,391,000,000
Common stock, outstanding 993,000,000 996,000,000
Class B Common Stock    
Common stock, par value $ 0.0001 $ 0.0001
Common stock, authorized 1,200,000,000 1,200,000,000
Common stock, issued 11,000,000 11,000,000
Common stock, outstanding 11,000,000 11,000,000
v3.20.1
Consolidated Statement of Changes in Equity - USD ($)
$ in Millions
Total
Common Stock
Class A
Common Stock
Class B
Additional Paid-In Capital
Class A Treasury Stock
Retained Earnings
Accumulated Other Comprehensive Income (Loss)
Mastercard Incorporated Stockholders’ Equity
Non- Controlling Interests
Balance at beginning of period at Dec. 31, 2018 $ 5,418 $ 0 $ 0 $ 4,580 $ (25,750) $ 27,283 $ (718) $ 5,395 $ 23
Increase (Decrease) in Stockholders' Equity [Roll Forward]                  
Net income 1,862         1,862   1,862  
Activity related to non-controlling interests (1)               (1)
Redeemable non-controlling interest adjustments (2)         (2)   (2)  
Other comprehensive income (loss) 45           45 45  
Dividends (337)         (337)   (337)  
Purchases of treasury stock (1,790)       (1,790)     (1,790)  
Share-based payments (5)     (11) 6     (5)  
Balance at end of period at Mar. 31, 2019 5,190 0 0 4,569 (27,534) 28,806 (673) 5,168 22
Balance at beginning of period at Dec. 31, 2019 5,917 0 0 4,787 (32,205) 33,984 (673) 5,893 24
Increase (Decrease) in Stockholders' Equity [Roll Forward]                  
Net income 1,693         1,693   1,693  
Activity related to non-controlling interests 1               1
Redeemable non-controlling interest adjustments (2)         (2)   (2)  
Other comprehensive income (loss) (406)           (406) (406)  
Dividends (402)         (402)   (402)  
Purchases of treasury stock (1,330)       (1,330)     (1,330)  
Share-based payments (48)     (52) 4     (48)  
Balance at end of period at Mar. 31, 2020 $ 5,423 $ 0 $ 0 $ 4,735 $ (33,531) $ 35,273 $ (1,079) $ 5,398 $ 25
v3.20.1
Consolidated Statement of Cash Flows - USD ($)
$ in Millions
3 Months Ended
Mar. 31, 2020
Mar. 31, 2019
Operating Activities    
Net income $ 1,693 $ 1,862
Adjustments to reconcile net income to net cash provided by operating activities:    
Amortization of customer and merchant incentives 237 345
Depreciation and amortization 144 117
(Gains) losses on equity investments, net 174 5
Share-based compensation 52 57
Deferred income taxes 26 38
Other 20 1
Changes in operating assets and liabilities:    
Accounts receivable (3) (320)
Settlement due from customers 1,831 1,026
Prepaid expenses (331) (497)
Accrued litigation and legal settlements (62) 1
Restricted security deposits held for customers 148 (35)
Accounts payable (102) (22)
Settlement due to customers (1,564) (1,000)
Accrued expenses (622) (483)
Net change in other assets and liabilities 218 217
Net cash provided by operating activities 1,859 1,312
Investing Activities    
Purchases of investment securities available-for-sale (74) (305)
Purchases of investments held-to-maturity (45) (99)
Proceeds from sales of investment securities available-for-sale 179 476
Proceeds from maturities of investment securities available-for-sale 64 139
Proceeds from maturities of investments held-to-maturity 65 155
Purchases of property and equipment (131) (83)
Capitalized software (78) (59)
Purchases of equity investments (135) 0
Settlement of interest rate derivative contracts (175) 0
Other investing activities (177) (11)
Net cash (used in) provided by investing activities (507) 213
Financing Activities    
Purchases of treasury stock (1,383) (1,824)
Dividends paid (403) (340)
Proceeds from debt, net 3,959 0
Tax withholdings related to share-based payments (131) (116)
Cash proceeds from exercise of stock options 31 54
Other financing activities 27 3
Net cash provided by (used in) financing activities 2,100 (2,223)
Effect of exchange rate changes on cash, cash equivalents, restricted cash and restricted cash equivalents (88) (54)
Net increase (decrease) in cash, cash equivalents, restricted cash and restricted cash equivalents 3,364 (752)
Cash, cash equivalents, restricted cash and restricted cash equivalents - beginning of period 8,969 8,337
Cash, cash equivalents, restricted cash and restricted cash equivalents - end of period $ 12,333 $ 7,585
v3.20.1
Summary of Significant Accounting Policies
3 Months Ended
Mar. 31, 2020
Accounting Policies [Abstract]  
Summary of Significant Accounting Policies Summary of Significant Accounting Policies
Organization
Mastercard Incorporated and its consolidated subsidiaries, including Mastercard International Incorporated (“Mastercard International” and together with Mastercard Incorporated, “Mastercard” or the “Company”), is a technology company in the global payments industry that connects consumers, financial institutions, merchants, governments, digital partners, businesses and other organizations worldwide, enabling them to use electronic forms of payment instead of cash and checks.
Consolidation and Basis of Presentation
The consolidated financial statements include the accounts of Mastercard and its majority-owned and controlled entities, including any variable interest entities (“VIEs”) for which the Company is the primary beneficiary. Investments in VIEs for which the Company is not considered the primary beneficiary are not consolidated and are accounted for as equity method or measurement alternative method investments and recorded in other assets on the consolidated balance sheet. At March 31, 2020 and December 31, 2019, there were no significant VIEs which required consolidation and the investments were not considered material to the consolidated financial statements. The Company consolidates acquisitions as of the date in which the Company has obtained a controlling financial interest. Intercompany transactions and balances have been eliminated in consolidation. Certain prior period amounts have been reclassified to conform to the 2020 presentation. The Company follows accounting principles generally accepted in the United States of America (“GAAP”).
The balance sheet as of December 31, 2019 was derived from the audited consolidated financial statements as of December 31, 2019. The consolidated financial statements for the three months ended March 31, 2020 and 2019 and as of March 31, 2020 are unaudited, and in the opinion of management, include all normal recurring adjustments that are necessary to present fairly the results for interim periods. The results of operations for the three months ended March 31, 2020 are not necessarily indicative of the results to be expected for the full year.
The accompanying unaudited consolidated financial statements are presented in accordance with the U.S. Securities and Exchange Commission (“SEC”) requirements for Quarterly Reports on Form 10-Q. Reference should be made to the Mastercard Incorporated Annual Report on Form 10-K for the year ended December 31, 2019 for additional disclosures, including a summary of the Company’s significant accounting policies.
Use of estimates - The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Future events and their effects cannot be predicted with certainty; accordingly, accounting estimates require the exercise of judgment. These financial statements were prepared using information reasonably available as of March 31, 2020 and through the date of this Report. The accounting estimates used in the preparation of the Company’s consolidated financial statements may change as new events occur, as more experience is acquired, as additional information is obtained and as the Company’s operating environment changes. Actual results may differ from these estimates due to the uncertainty around the magnitude and duration of the COVID-19 pandemic, as well as other factors.
For the three months ended March 31, 2020 and 2019, net losses from non-controlling interests were not material and, as a result, amounts are included in the consolidated statement of operations within other income (expense).
Accounting pronouncements not yet adopted
Simplifying the accounting for income taxes - In December 2019, the Financial Accounting Standards Board (the “FASB”) issued accounting guidance to simplify the accounting for income taxes. This guidance includes the removal of certain exceptions to the general income tax accounting principles and provides clarity and simplification to other areas of income tax accounting by amending the existing guidance. The guidance is effective for periods beginning after December 15, 2020. The Company expects to adopt this guidance effective January 1, 2021 and is in the process of evaluating the potential effects this will have on its consolidated financial statements.
Reference Rate Reform - In March 2020, the FASB issued accounting guidance to provide temporary optional expedients and exceptions to the current contract modifications and hedge accounting guidance in light of the expected market transition from LIBOR to alternative rates.  The new guidance provides optional expedients and exceptions to transactions affected by reference rate reform if certain criteria are met.  The transactions primarily include (1) contract modifications, (2) hedging relationships, and (3) sale or transfer of debt securities classified as held-to-maturity.  The amendments were effective immediately upon issuance of the update.  Companies may elect to adopt the amendments prospectively to transactions existing as of or entered from the date of adoption through December 31, 2022. The Company is in the process of evaluating the amendments, impacted contracts, and the potential effects of this will have on its consolidated financial statements.
v3.20.1
Acquisitions
3 Months Ended
Mar. 31, 2020
Business Combinations [Abstract]  
Business Combination Disclosure Acquisitions
In 2019, the Company acquired several businesses in separate transactions for total consideration of $1.5 billion. As of March 31, 2020, the Company has finalized the purchase accounting for certain businesses acquired during 2019 for total consideration of $783 million. For the final and preliminary estimated fair values of the purchase price allocations, as of the acquisition dates, refer to Note 2 (Acquisitions) to the consolidated financial statements included in Part II, Item 8 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.
In August 2019, Mastercard entered into a definitive agreement to acquire the majority of the Corporate Services business of Nets Denmark A/S, for €2.85 billion (approximately $3.16 billion as of March 31, 2020) after adjusting for cash and certain other liabilities at closing. The pending acquisition primarily comprises the clearing and instant payment services, and e-billing solutions of Nets Denmark A/S’s Corporate Services business. While the Company anticipates completing the acquisition in the third quarter of 2020, the transaction is subject to regulatory approval and other customary closing conditions.
v3.20.1
Revenue
3 Months Ended
Mar. 31, 2020
Revenue from Contract with Customer [Abstract]  
Revenue Revenue
The Company’s disaggregated net revenue by source and geographic region were as follows:
 
 
Three Months Ended March 31,
 
 
2020
 
2019
 
 
(in millions)
Revenue by source:
 
 
 
 
Domestic assessments
 
$
1,683

 
$
1,605

Cross-border volume fees
 
1,217

 
1,263

Transaction processing
 
2,200

 
1,922

Other revenues
 
1,062

 
842

Gross revenue
 
6,162

 
5,632

Rebates and incentives (contra-revenue)
 
(2,153
)
 
(1,743
)
Net revenue
 
$
4,009

 
$
3,889

Net revenue by geographic region:
 
 
 
 
North American Markets
 
$
1,334

 
$
1,347

International Markets
 
2,633

 
2,506

Other 1
 
42

 
36

Net revenue
 
$
4,009

 
$
3,889

1 
Includes revenues managed by corporate functions.
Receivables from contracts with customers of $2.3 billion at both March 31, 2020 and December 31, 2019 are recorded within accounts receivable on the consolidated balance sheet. The Company’s customers are generally billed weekly, however the frequency is dependent upon the nature of the performance obligation and the underlying contractual terms. The Company does not typically offer extended payment terms to customers.
Contract assets are included in prepaid expenses and other current assets and other assets on the consolidated balance sheet at March 31, 2020 in the amounts of $52 million and $162 million, respectively. The comparable amounts included in prepaid expenses and other current assets and other assets at December 31, 2019 were $48 million and $152 million, respectively.
Deferred revenue is included in other current liabilities and other liabilities on the consolidated balance sheet at March 31, 2020 in the amounts of $384 million and $161 million, respectively. The comparable amounts included in other current liabilities and other liabilities at December 31, 2019 were $238 million and $106 million, respectively. Revenue recognized from performance obligations satisfied during the three months ended March 31, 2020 and 2019 was $189 million and $185 million, respectively.
v3.20.1
Earnings Per Share
3 Months Ended
Mar. 31, 2020
Earnings Per Share [Abstract]  
Earnings Per Share Earnings Per Share
The components of basic and diluted earnings per share (“EPS”) for common shares were as follows:
 
 
Three Months Ended March 31,
 
 
2020
 
2019
 
 
(in millions, except per share data)
Numerator
 
 
 
 
Net income
 
$
1,693

 
$
1,862

Denominator
 
 
 
 
Basic weighted-average shares outstanding
 
1,005

 
1,026

Dilutive stock options and stock units
 
5

 
6

Diluted weighted-average shares outstanding 1
 
1,010

 
1,032

Earnings per Share
 
 
 
 
Basic
 
$
1.68

 
$
1.81

Diluted
 
$
1.68

 
$
1.80


1 
For the periods presented, the calculation of diluted EPS excluded a minimal amount of anti-dilutive share-based payment awards.
v3.20.1
Cash, Cash Equivalents, Restricted Cash and Restricted Cash Equivalents
3 Months Ended
Mar. 31, 2020
Cash and Cash Equivalents [Abstract]  
Cash, Cash Equivalents, Restricted Cash and Restricted Cash Equivalents Cash, Cash Equivalents, Restricted Cash and Restricted Cash Equivalents
The following table provides a reconciliation of cash, cash equivalents, restricted cash and restricted cash equivalents reported on the consolidated balance sheet that total to the amounts shown on the consolidated statement of cash flows.
 
 
December 31,
 
 
2019
 
2018
 
 
(in millions)
Cash and cash equivalents
 
$
6,988

 
$
6,682

Restricted cash and restricted cash equivalents
 
 
 
 
Restricted cash for litigation settlement
 
584

 
553

Restricted security deposits held for customers
 
1,370

 
1,080

Prepaid expenses and other current assets
 
27

 
22

Cash, cash equivalents, restricted cash and restricted cash equivalents - beginning of period
 
$
8,969

 
$
8,337

 
 
 
 
 
 
 
March 31,
 
 
2020
 
2019
 
 
(in millions)
Cash and cash equivalents
 
$
10,207

 
$
5,857

Restricted cash and restricted cash equivalents
 
 
 
 
Restricted cash for litigation settlement
 
587

 
662

Restricted security deposits held for customers
 
1,518

 
1,044

Prepaid expenses and other current assets
 
21

 
22

Cash, cash equivalents, restricted cash and restricted cash equivalents - end of period
 
$
12,333

 
$
7,585


v3.20.1
Investments
3 Months Ended
Mar. 31, 2020
Investments, Debt and Equity Securities [Abstract]  
Investments Investments
The Company’s investments on the consolidated balance sheet include both available-for-sale and held-to-maturity securities (see Investments section below). The Company classifies its investments in equity securities of publicly traded and privately held companies within other assets on the consolidated balance sheet (see Equity Investments section below).
Investments
Investments on the consolidated balance sheet consisted of the following:
 
 
March 31,
2020
 
December 31,
2019
 
 
(in millions)
Available-for-sale securities
 
$
414

 
$
591

Held-to-maturity securities
 
63

 
97

Total investments
 
$
477

 
$
688


Available-for-Sale-Securities
The major classes of the Company’s available-for-sale investment securities and their respective amortized cost basis and fair values were as follows:
 
 
March 31, 2020
 
December 31, 2019
 
 
Amortized
Cost
 
Gross
Unrealized
Gain
 
Gross
Unrealized
Loss
 
Fair
Value
 
Amortized
Cost
 
Gross
Unrealized
Gain
 
Gross
Unrealized
Loss
 
Fair
Value
 
 
(in millions)
Municipal securities
 
$
18

 
$

 
$

 
$
18

 
$
15

 
$

 
$

 
$
15

Government and agency securities
 
18

 

 

 
18

 
108

 

 

 
108

Corporate securities
 
315

 

 
(5
)
 
310

 
381

 
1

 

 
382

Asset-backed securities
 
68

 

 

 
68

 
85

 
1

 

 
86

Total
 
$
419

 
$

 
$
(5
)
 
$
414

 
$
589

 
$
2

 
$

 
$
591


The Company’s available-for-sale investment securities held at March 31, 2020 and December 31, 2019 primarily carried a credit rating of A- or better with unrealized gains and losses recorded as a separate component of other comprehensive income (loss) on the consolidated statement of comprehensive income. The municipal securities are comprised of state tax-exempt bonds and are diversified across states and sectors. Government and agency securities include U.S. government bonds, U.S. government sponsored agency bonds and foreign government bonds with similar credit quality to that of the U.S. government bonds. Corporate securities are comprised of commercial paper and corporate bonds. The asset-backed securities are investments in bonds which are collateralized primarily by automobile loan receivables.
The maturity distribution based on the contractual terms of the Company’s investment securities at March 31, 2020 was as follows:
 
 
Available-For-Sale
 
 
Amortized Cost
 
Fair Value
 
 
(in millions)
Due within 1 year
 
$
105

 
$
105

Due after 1 year through 5 years
 
314

 
309

Total
 
$
419

 
$
414


Investment income on the consolidated statement of operations primarily consists of interest income generated from cash, cash equivalents, time deposits, and realized gains and losses on the Company’s debt securities. The realized gains and losses from the sales of available-for-sale securities for the three months ended March 31, 2020 and 2019 were not significant.
Held-to-Maturity Securities
The Company classifies time deposits with maturities greater than three months but less than one year as held-to-maturity. Time deposits are carried at amortized cost on the consolidated balance sheet and are intended to be held until maturity. The cost of these securities approximates fair value.
Equity Investments
Included in other assets on the consolidated balance sheet are equity investments with readily determinable fair values (“Marketable securities”) and equity investments without readily determinable fair values (“Nonmarketable securities”). Marketable securities are publicly traded companies and are measured using unadjusted quoted prices in their respective active markets. Nonmarketable securities that do not qualify for equity method accounting are measured at cost, less any impairment and adjusted for changes resulting from observable price changes in orderly transactions for the identical or similar investments of the same issuer (“measurement alternative”).
The following table is a summary of the activity related to the Company’s equity investments:
 
 
Balance at December 31, 2019
 
Purchases (Sales), net
 
Changes in Fair Value 1
 
Other 2
 
Balance at March 31, 2020
 
 
(in millions)
Marketable securities
 
$
479

 
$

 
$
(177
)
 
$
(20
)
 
$
282

Nonmarketable securities
 
435

 
137

 
3

 
13

 
588

Total equity investments
 
$
914

 
$
137

 
$
(174
)
 
$
(7
)
 
$
870

1 
Recorded in gains (losses) on equity investments, net on the consolidated statement of operations
2 
Includes the translational impact of currency
At March 31, 2020, the total carrying value of Nonmarketable securities included $464 million of measurement alternative investments and $124 million of equity method investments. At December 31, 2019, the total carrying value of Nonmarketable securities included $317 million of measurement alternative investments and $118 million of equity method investments. Cumulative impairments and downward fair value adjustments on measurement alternative investments were $11 million and cumulative upward fair value adjustments were $68 million as of March 31, 2020.
v3.20.1
Fair Value Measurements
3 Months Ended
Mar. 31, 2020
Financial Instruments, Financial Liabilities, Balance Sheet Groupings [Abstract]  
Fair Value Measurements Fair Value Measurements
The Company classifies its fair value measurements of financial instruments into a three-level hierarchy (the “Valuation Hierarchy”). Financial instruments are categorized for fair value measurement purposes as recurring or non-recurring in nature. There were no transfers made among the three levels in the Valuation Hierarchy for the three months ended March 31, 2020.
Financial Instruments - Recurring Measurements
The distribution of the Company’s financial instruments measured at fair value on a recurring basis within the Valuation Hierarchy were as follows:
 
 
March 31, 2020
 
December 31, 2019
 
 
Quoted Prices
in Active
Markets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Total
 
Quoted Prices
in Active
Markets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Total
 
 
(in millions)
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Investment securities available for sale 1:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Municipal securities
 
$

 
$
18

 
$

 
$
18

 
$

 
$
15

 
$

 
$
15

Government and agency securities
 

 
18

 

 
18

 
66

 
42

 

 
108

Corporate securities
 

 
310

 

 
310

 

 
382

 

 
382

Asset-backed securities
 

 
68

 

 
68

 

 
86

 

 
86

Derivative instruments 2:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
 

 
87

 

 
87

 

 
12

 

 
12

Interest rate contracts
 

 

 

 

 

 
14

 

 
14

Marketable securities 3:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equity securities
 
282

 

 

 
282

 
479

 

 

 
479

Deferred compensation plan 4:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Deferred compensation assets
 
53

 

 

 
53

 
67

 

 

 
67

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivative instruments 2:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange derivative liabilities
 
$

 
$
(20
)
 
$

 
$
(20
)
 
$

 
$
(32
)
 
$

 
$
(32
)
Deferred compensation plan 5:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Deferred compensation liabilities
 
(60
)
 

 

 
(60
)
 
(67
)
 

 

 
(67
)
1 
The Company’s U.S. government securities are classified within Level 1 of the Valuation Hierarchy as the fair values are based on unadjusted quoted prices for identical assets in active markets. The fair value of the Company’s available-for-sale municipal securities, government and agency securities, corporate securities and asset-backed securities are based on observable inputs such as quoted prices, benchmark yields and issuer spreads for similar assets in active markets and are therefore included in Level 2 of the Valuation Hierarchy.
2 
The Company’s foreign exchange and interest rate derivative asset and liability contracts have been classified within Level 2 of the Valuation Hierarchy as the fair value is based on observable inputs such as broker quotes relating to foreign exchange and interest rates for similar derivative instruments. See Note 17 (Derivative and Hedging Instruments) for further details.
3 
The Company’s Marketable securities are publicly held and classified within Level 1 of the Valuation Hierarchy as the fair values are based on unadjusted quoted prices in their respective active markets.
4 
The Company has a nonqualified deferred compensation plan where assets are invested primarily in mutual funds held in a rabbi trust, which is restricted for payments to participants of the plan. The Company has elected to use the fair value option for these mutual funds, which are measured using quoted prices of identical instruments in active markets and are included in prepaid expenses and other current assets on the consolidated balance sheet.
5 
The deferred compensation liabilities are measured at fair value based on the quoted prices of identical instruments to the investment vehicles selected by the participants. These are included in other liabilities on the consolidated balance sheet.
Financial Instruments - Non-Recurring Measurements
Nonmarketable Securities
The Company’s Nonmarketable securities are recorded at fair value on a non-recurring basis in periods after initial recognition under the equity method or measurement alternative method. Nonmarketable securities are classified within Level 3 of the Valuation Hierarchy due to the absence of quoted market prices, the inherent lack of liquidity and unobservable inputs used to measure fair value that require management’s judgment. The Company uses discounted cash flows and market assumptions to estimate the fair value of its Nonmarketable securities when certain events or circumstances indicate that impairment may exist. See Note 6 (Investments) for further details.
Debt
The Company estimates the fair value of its long-term debt based on quoted market prices. These debt securities are classified as Level 2 of the Valuation Hierarchy as they are not traded in active markets. At March 31, 2020, the carrying value and fair value of total long-term debt was $12.5 billion and $13.9 billion, respectively. At December 31, 2019, the carrying value and fair value of long-term debt was $8.5 billion and $9.2 billion, respectively.
Other Financial Instruments
Certain other financial instruments are carried on the consolidated balance sheet at cost or amortized cost basis, which approximates fair value due to their short-term, highly liquid nature. These instruments include cash and cash equivalents, restricted cash, time deposits, accounts receivable, settlement due from customers, restricted security deposits held for customers, accounts payable, settlement due to customers and other accrued liabilities.
v3.20.1
Prepaid Expenses and Other Assets
3 Months Ended
Mar. 31, 2020
Prepaid Expense and Other Assets [Abstract]  
Prepaid Expenses and Other Assets Prepaid Expenses and Other Assets
Prepaid expenses and other current assets consisted of the following:
 
 
March 31,
2020
 
December 31,
2019
 
 
(in millions)
Customer and merchant incentives
 
$
886

 
$
872

Prepaid income taxes
 
50

 
105

Other
 
793

 
786

Total prepaid expenses and other current assets
 
$
1,729

 
$
1,763


Other assets consisted of the following:
 
 
March 31,
2020
 
December 31,
2019
 
 
(in millions)
Customer and merchant incentives
 
$
2,892

 
$
2,838

Equity investments
 
870

 
914

Income taxes receivable
 
477

 
460

Other
 
318

 
313

Total other assets
 
$
4,557

 
$
4,525


Customer and merchant incentives represent payments made to customers and merchants under business agreements. Costs directly related to entering into such an agreement are generally deferred and amortized over the life of the agreement.
v3.20.1
Accrued Expenses
3 Months Ended
Mar. 31, 2020
Accrued Liabilities, Current [Abstract]  
Accrued Expenses and Accrued Litigation Accrued Expenses and Accrued Litigation
Accrued expenses consisted of the following:
 
 
March 31,
2020
 
December 31,
2019
 
 
(in millions)
Customer and merchant incentives
 
$
3,674

 
$
3,892

Personnel costs
 
323

 
713

Income and other taxes
 
205

 
332

Other
 
474

 
552

Total accrued expenses
 
$
4,676

 
$
5,489


Customer and merchant incentives represent amounts to be paid to customers under business agreements. As of March 31, 2020 and December 31, 2019, the Company’s provision for litigation was $852 million and $914 million, respectively. These amounts are not included in the accrued expenses table above and are separately reported as accrued litigation on the consolidated balance sheet. See Note 15 (Legal and Regulatory Proceedings) for additional information regarding the Company’s accrued litigation.
v3.20.1
Debt (Notes)
3 Months Ended
Mar. 31, 2020
Debt [Abstract]  
Debt Debt
Long-term debt consisted of the following:
 
 
 
 
 
March 31,
2020
 
December 31,
2019
 
Effective
Interest Rate
 
 
 
 
 
(in millions)
 
 
2020 USD Notes
 
3.300
%
Senior Notes due March 2027
 
$
1,000

 
$

 
3.420
%
 
 
3.350
%
Senior Notes due March 2030
 
1,500

 

 
3.390
%
 
 
3.850
%
Senior Notes due March 2050
 
1,500

 

 
3.896
%
 
 
 
 
 
 
 
 
 
 
2019 USD Notes
 
2.950
%
Senior Notes due June 2029
 
1,000

 
1,000

 
3.030
%
 
 
3.650
%
Senior Notes due June 2049
 
1,000

 
1,000

 
3.689
%
 
 
2.000
%
Senior Notes due March 2025
 
750

 
750

 
2.147
%
 
 
 
 
 
 
 
 
 
 
2018 USD Notes
 
3.500
%
Senior Notes due February 2028
 
500

 
500

 
3.598
%
 
 
3.950
%
Senior Notes due February 2048
 
500

 
500

 
3.990
%
 
 
 
 
 
 
 
 
 
 
2016 USD Notes
 
2.000
%
Senior Notes due November 2021
 
650

 
650

 
2.236
%
 
 
2.950
%
Senior Notes due November 2026
 
750

 
750

 
3.044
%
 
 
3.800
%
Senior Notes due November 2046
 
600

 
600

 
3.893
%
 
 
 
 
 
 
 
 
 
 
2015 Euro Notes 1
 
1.100
%
Senior Notes due December 2022
 
776

 
785

 
1.265
%
 
 
2.100
%
Senior Notes due December 2027
 
886

 
896

 
2.189
%
 
 
2.500
%
Senior Notes due December 2030
 
166

 
169

 
2.562
%
 
 
 
 
 
 
 
 
 
 
2014 USD Notes
 
3.375
%
Senior Notes due April 2024
 
1,000

 
1,000

 
3.484
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
12,578

 
8,600

 
 
Less: Unamortized discount and debt issuance costs
(112
)
 
(73
)
 
 
Long-term debt
$
12,466

 
$
8,527

 
 
1 
Relates to euro-denominated debt issuance of €1.650 billion in December 2015
In March 2020, the Company issued $1 billion principal amount of notes due March 2027, $1.5 billion principal amount of notes due March 2030 and $1.5 billion principal amount notes due March 2050 (collectively the “2020 USD Notes”). The net proceeds from the issuance of the 2020 USD Notes, after deducting the original issue discount, underwriting discount and offering expenses, were $3.959 billion.
The outstanding debt described above is not subject to any financial covenants and it may be redeemed in whole, or in part, at the Company’s option at any time for a specified make-whole amount. These notes are senior unsecured obligations and would rank equally with any future unsecured and unsubordinated indebtedness. The proceeds of the notes are to be used for general corporate purposes.
v3.20.1
Stockholders' Equity
3 Months Ended
Mar. 31, 2020
Equity [Abstract]  
Stockholders' Equity Stockholders' Equity
The Company declared a quarterly cash dividend on its Class A and Class B Common Stock during the three months ended March 31, 2020 and 2019. For the three months ended March 31, 2020 and 2019, the Company declared total per share dividends of $0.40 and $0.33, respectively, resulting in total quarterly dividends of $402 million and $337 million, respectively.
The Company’s Board of Directors have approved share repurchase programs authorizing the Company to repurchase shares of its Class A Common Stock. These programs become effective after the completion of the previously authorized share repurchase program. During the first quarter of 2020, the Company temporarily suspended its 2020 share repurchase activity. The share repurchase program remains authorized by the Company’s Board of Directors and it may resume share repurchases in the future at any time.
The following table summarizes the Company’s share repurchase authorizations of its Class A common stock through March 31, 2020, as well as historical purchases:
Board authorization dates
 
December 2019
 
December
2018
 
December
2017
 
 
Date program became effective
 
January 2020
 
January
2019
 
March
2018
 
Total
 
 
(in millions, except average price data)
Board authorization
 
$
8,000

 
$
6,500

 
$
4,000

 
$
18,500

Dollar value of shares repurchased during the three months ended March 31, 2019
 
$

 
$
1,523

 
$
301

 
$
1,824

Remaining authorization at December 31, 2019
 
$
8,000

 
$
304

 
$

 
$
8,304

Dollar value of shares repurchased during the three months ended March 31, 2020
 
$
1,079

 
$
304

 
$

 
$
1,383

Remaining authorization at March 31, 2020
 
$
6,921

 
$

 
$

 
$
6,921

Shares repurchased during the three months ended March 31, 2019
 

 
7.1

 
1.6

 
8.7

Average price paid per share during the three months ended March 31, 2019
 
$

 
$
213.68

 
$
188.38

 
$
209.05

Shares repurchased during the three months ended March 31, 2020
 
3.7

 
1.0

 

 
4.7

Average price paid per share during the three months ended March 31, 2020
 
$
290.86

 
$
304.89

 
$

 
$
293.83

Cumulative shares repurchased through March 31, 2020
 
3.7

 
25.8

 
20.6

 
50.1

Cumulative average price paid per share
 
$
290.86

 
$
251.72

 
$
194.27

 
$
231.02


The following table presents the changes in the Company’s outstanding Class A and Class B common stock for the three months ended March 31, 2020:
 
 
Outstanding Shares
 
 
Class A
 
Class B
 
 
(in millions)
Balance at December 31, 2019
 
996.0

 
11.2

Purchases of treasury stock
 
(4.7
)
 

Share-based payments
 
1.3

 

Conversion of Class B to Class A common stock
 
0.4

 
(0.4
)
Balance at March 31, 2020
 
993.0

 
10.8


v3.20.1
Accumulated Other Comprehensive Income (Loss)
3 Months Ended
Mar. 31, 2020
Accumulated Other Comprehensive Income (Loss), Net of Tax [Abstract]  
Accumulated Other Comprehensive Income (Loss) Accumulated Other Comprehensive Income (Loss)
The changes in the balances of each component of accumulated other comprehensive income (loss), net of tax, for the three months ended March 31, 2020 and 2019 were as follows:
 
 
Foreign Currency Translation Adjustments 1
 
Translation Adjustments on Net Investment Hedge 2
 
Cash Flow Hedges 3
 
Defined Benefit Pension and Other Postretirement Plans
 
Investment Securities Available-for-Sale 4
 
Accumulated Other Comprehensive Income (Loss)
 
 
(in millions)
Balance at December 31, 2019
 
$
(638
)
 
$
(38
)
 
$
11

 
$
(9
)
 
$
1

 
$
(673
)
Other comprehensive income (loss)
 
(267
)
 
16

 
(150
)
 

 
(5
)
 
(406
)
Balance at March 31, 2020
 
$
(905
)
 
$
(22
)
 
$
(139
)
 
$
(9
)
 
$
(4
)
 
$
(1,079
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2018
 
$
(661
)
 
$
(66
)
 
$

 
$
10

 
$
(1
)
 
$
(718
)
Other comprehensive income (loss)
 
14

 
28

 

 

 
3

 
45

Balance at March 31, 2019
 
$
(647
)
 
$
(38
)
 
$

 
$
10

 
$
2


$
(673
)

1 
During the three months ended March 31, 2020, the increase in the accumulated other comprehensive loss related to foreign currency translation adjustments was driven primarily by the depreciation of the euro, British pound and Brazilian real. During the three months ended March 31, 2019, the decrease in the accumulated other comprehensive loss related to foreign currency translation adjustments was driven primarily by the appreciation of the British pound.
2 
The Company uses foreign currency denominated debt to hedge a portion of its net investment in foreign operations against adverse movements in exchange rates. Changes in the value of the debt are recorded in accumulated other comprehensive income (loss). During the three months ended March 31, 2020 and 2019, the decreases in the accumulated other comprehensive loss related to the net investment hedge were driven by the depreciation of the euro. See Note 17 (Derivative and Hedging Instruments) for additional information.
3 
In the fourth quarter of 2019, the Company entered into treasury rate locks which are accounted for as cash flow hedges. During the three months ended March 31, 2020, in connection with the issuance of the 2020 USD Notes, these contracts were settled and the Company recorded a loss, net of tax, of $150 million in accumulated other comprehensive income (loss). The cumulative loss of $139 million will be reclassified as an adjustment to interest expense over the respective terms of the 2020 USD Notes. During the three months ended March 31, 2020, reclassifications to interest expense were not material. See Note 17 (Derivative and Hedging Instruments) for additional information.
4 
During the three months ended March 31, 2020 and 2019, gains and losses on available-for-sale investment securities, reclassified from accumulated other comprehensive income (loss) to investment income, were not material. See Note 6 (Investments) for additional information.
v3.20.1
Share-Based Payments
3 Months Ended
Mar. 31, 2020
Share-based Payment Arrangement, Additional Disclosure [Abstract]  
Share-Based Payments Share-Based Payments
During the three months ended March 31, 2020, the Company granted the following awards under the Mastercard Incorporated 2006 Long Term Incentive Plan, as amended and restated as of June 5, 2012 (the “LTIP”). The LTIP is a stockholder-approved plan that permits the grant of various types of equity awards to employees.
 
 
Grants in 2020
 
Weighted-Average
Grant-Date
Fair Value
 
 
(in millions)
 
(per option/unit)
Non-qualified stock options
 
0.4
 
$55
Restricted stock units
 
0.8
 
$287
Performance stock units
 
0.2
 
$291

The Company used the Black-Scholes option pricing model to determine the grant-date fair value of stock options and calculated the expected life and the expected volatility based on historical Mastercard information. The expected life of stock options granted in 2020 was estimated to be six years, while the expected volatility was determined to be 19.3%. Stock options generally vest in four equal annual installments beginning one year after the date of grant and expire ten years from the date of grant.
The fair value of restricted stock units (“RSUs”) is determined and fixed on the grant date based on the Company’s Class A common stock price, adjusted for the exclusion of dividend equivalents. For awards granted on or after March 1, 2020, shares underlying the RSUs will generally vest in four equal annual installments beginning one year after the date of grant. For awards issued prior to March 1, 2020, shares underlying the RSUs will generally vest three years from the date of grant.
The Company used the Monte Carlo simulation valuation model to determine the grant-date fair value of performance stock units (“PSUs”) granted. Shares underlying the PSUs will vest after three years from the date of grant. For all PSUs granted on or after March 1, 2019, shares issuable upon vesting are subject to a mandatory one-year deferral period, during which vested PSUs are eligible for dividend equivalents.
Compensation expense is recorded net of estimated forfeitures over the shorter of the vesting period or the date the individual becomes eligible to retire under the LTIP. The Company uses the straight-line method of attribution over the requisite service period for expensing equity awards.
v3.20.1
Income Taxes
3 Months Ended
Mar. 31, 2020
Income Tax Disclosure [Abstract]  
Income Taxes Income Taxes
The effective income tax rate was 14.8% and 15.5% for the three months ended March 31, 2020 and 2019, respectively. The lower effective income tax rate for the three months ended March 31, 2020, versus the comparable period in 2019, was primarily due to a more favorable geographic mix of earnings and discrete benefits related to share-based payments, partially offset by a prior year discrete benefit related to a reduction to the Company’s transition tax liability.
The Company is subject to tax in the United States, Belgium, Singapore, the United Kingdom and various other foreign jurisdictions, as well as state and local jurisdictions. Uncertain tax positions are reviewed on an ongoing basis and are adjusted after considering facts and circumstances, including progress of tax audits, developments in case law and closing of statutes of limitation. Within the next twelve months, the Company believes that the resolution of certain federal, foreign and state and local examinations is reasonably possible and that a change in estimate, reducing unrecognized tax benefits, may occur. While such a change may be significant, it is not possible to provide a range of the potential change until the examinations progress further or the related statutes of limitation expire. The Company has effectively settled its U.S. federal income tax obligations through 2011. With limited exception, the Company is no longer subject to state and local or foreign examinations by tax authorities for years before 2010.
v3.20.1
Legal and Regulatory Proceedings
3 Months Ended
Mar. 31, 2020
Legal and Regulatory Proceedings [Abstract]  
Legal and Regulatory Proceedings Legal and Regulatory Proceedings
Mastercard is a party to legal and regulatory proceedings with respect to a variety of matters in the ordinary course of business.  Some of these proceedings are based on complex claims involving substantial uncertainties and unascertainable damages.  Accordingly, except as discussed below, it is not possible to determine the probability of loss or estimate damages, and therefore, Mastercard has not established reserves for any of these proceedings. When the Company determines that a loss is both probable and reasonably estimable, Mastercard records a liability and discloses the amount of the liability if it is material. When a material loss contingency is only reasonably possible, Mastercard does not record a liability, but instead discloses the nature and the amount of the claim, and an estimate of the loss or range of loss, if such an estimate can be made. Unless otherwise stated below with respect to these matters, Mastercard cannot provide an estimate of the possible loss or range of loss based on one or more of the following reasons: (1) actual or potential plaintiffs have not claimed an amount of monetary damages or the amounts are unsupportable or exaggerated, (2) the matters are in early stages, (3) there is uncertainty as to the outcome of pending appeals or motions, (4) there are significant factual issues to be resolved, (5) the existence in many such proceedings of multiple defendants or potential defendants whose share of any potential financial responsibility has yet to be determined and/or (6) there are novel legal issues presented. Furthermore, except as identified with respect to the matters below, Mastercard does not believe that the outcome of any individual existing legal or regulatory proceeding to which it is a party will have a material adverse effect on its results of operations, financial condition or overall business. However, an adverse judgment or other outcome or settlement with respect to any proceedings discussed below could result in fines or payments by Mastercard and/or could require Mastercard to change its business practices. In addition, an adverse outcome in a regulatory proceeding could lead to the filing of civil damage claims and possibly result in significant damage awards. Any of these events could have a material adverse effect on Mastercard’s results of operations, financial condition and overall business.
Interchange Litigation and Regulatory Proceedings
Mastercard’s interchange fees and other practices are subject to regulatory, legal review and/or challenges in a number of jurisdictions, including the proceedings described below. When taken as a whole, the resulting decisions, regulations and legislation with respect to interchange fees and acceptance practices may have a material adverse effect on the Company’s prospects for future growth and its overall results of operations, financial position and cash flows.
United States. In June 2005, the first of a series of complaints were filed on behalf of merchants (the majority of the complaints were styled as class actions, although a few complaints were filed on behalf of individual merchant plaintiffs) against Mastercard International, Visa U.S.A., Inc., Visa International Service Association and a number of financial institutions. Taken together, the claims in the complaints were generally brought under both Sections 1 and 2 of the Sherman Act, which prohibit monopolization and attempts or conspiracies to monopolize a particular industry, and some of these complaints contain unfair competition law claims under state law. The complaints allege, among other things, that Mastercard, Visa, and certain financial institutions conspired to set the price of interchange fees, enacted point of sale acceptance rules (including the no surcharge rule) in violation of antitrust laws and engaged in unlawful tying and bundling of certain products and services. The cases were consolidated for pre-trial proceedings in the U.S. District Court for the Eastern District of New York in MDL No. 1720. The plaintiffs filed a consolidated class action complaint that seeks treble damages.
In July 2006, the group of purported merchant class plaintiffs filed a supplemental complaint alleging that Mastercard’s initial public offering of its Class A Common Stock in May 2006 (the “IPO”) and certain purported agreements entered into between Mastercard and financial institutions in connection with the IPO: (1) violate U.S. antitrust laws and (2) constituted a fraudulent conveyance because the financial institutions allegedly attempted to release, without adequate consideration, Mastercard’s right to assess them for Mastercard’s litigation liabilities. The class plaintiffs sought treble damages and injunctive relief including, but not limited to, an order reversing and unwinding the IPO.
In February 2011, Mastercard and Mastercard International entered into each of: (1) an omnibus judgment sharing and settlement sharing agreement with Visa Inc., Visa U.S.A. Inc. and Visa International Service Association and a number of financial institutions; and (2) a Mastercard settlement and judgment sharing agreement with a number of financial institutions.  The agreements provide for the apportionment of certain costs and liabilities which Mastercard, the Visa parties and the financial institutions may incur, jointly and/or severally, in the event of an adverse judgment or settlement of one or all of the cases in the merchant litigations. Among a number of scenarios addressed by the agreements, in the event of a global settlement involving the Visa parties, the financial institutions and Mastercard, Mastercard would pay 12% of the monetary portion of the settlement. In the event of a settlement involving only Mastercard and the financial institutions with respect to their issuance of Mastercard cards, Mastercard would pay 36% of the monetary portion of such settlement. 
In October 2012, the parties entered into a definitive settlement agreement with respect to the merchant class litigation (including with respect to the claims related to the IPO) and the defendants separately entered into a settlement agreement with the individual merchant plaintiffs. The settlements included cash payments that were apportioned among the defendants pursuant to the omnibus judgment sharing and settlement sharing agreement described above. Mastercard also agreed to provide class members with a short-term reduction in default credit interchange rates and to modify certain of its business practices, including its “no surcharge” rule. The court granted final approval of the settlement in December 2013, and objectors to the settlement appealed that decision to the U.S. Court of Appeals for the Second Circuit. In June 2016, the court of appeals vacated the class action certification, reversed the settlement approval and sent the case back to the district court for further proceedings. The court of appeals’ ruling was based primarily on whether the merchants were adequately represented by counsel in the settlement. As a result of the appellate court ruling, the district court divided the merchants’ claims into two separate classes - monetary damages claims (the “Damages Class”) and claims seeking changes to business practices (the “Rules Relief Class”). The court appointed separate counsel for each class.
In September 2018, the parties to the Damages Class litigation entered into a class settlement agreement to resolve the Damages Class claims. Mastercard increased its reserve by $237 million during 2018 to reflect both its expected financial obligation under the Damages Class settlement agreement and the filed and anticipated opt-out merchant cases. The time period during which Damages Class members were permitted to opt out of the class settlement agreement ended in July 2019 with merchants representing slightly more than 25% of the Damages Class interchange volume choosing to opt out of the settlement. The district court granted final approval of the settlement in December 2019. The district court’s settlement approval order has been appealed. Mastercard has commenced settlement negotiations with a number of the opt-out merchants and has reached settlements and/or agreements in principle to settle a number of these claims. The Damages Class settlement agreement does not relate to the Rules Relief Class claims. Separate settlement negotiations with the Rules Relief Class are ongoing.
As of March 31, 2020 and December 31, 2019, Mastercard had accrued a liability of $852 million and $914 million, respectively, as a reserve for both the Damages Class litigation and the opt-out merchant cases. As of March 31, 2020 and December 31, 2019, Mastercard had $587 million and $584 million, respectively, in a qualified cash settlement fund related to the Damages Class litigation and classified as restricted cash on its consolidated balance sheet.
The reserve as of March 31, 2020 for both the Damages Class litigation and the opt-out merchants represents Mastercard’s best estimate of its probable liabilities in these matters. The portion of the accrued liability relating to both the opt-out merchants and the Damages Class litigation settlement does not represent an estimate of a loss, if any, if the matters were litigated to a final outcome. Mastercard cannot estimate the potential liability if that were to occur.
Canada. In December 2010, a proposed class action complaint was commenced against Mastercard in Quebec on behalf of Canadian merchants. The suit essentially repeated the allegations and arguments of a previously filed application by the Canadian Competition Bureau to the Canadian Competition Tribunal (dismissed in Mastercard’s favor) concerning certain Mastercard rules related to point-of-sale acceptance, including the “honor all cards” and “no surcharge” rules. The Quebec suit sought compensatory and punitive damages in unspecified amounts, as well as injunctive relief. In the first half of 2011, additional purported class action lawsuits were commenced in British Columbia and Ontario against Mastercard, Visa and a number of large Canadian financial institutions. The British Columbia suit sought compensatory damages in unspecified amounts, and the Ontario suit sought compensatory damages of $5 billion on the basis of alleged conspiracy and various alleged breaches of the Canadian Competition Act. Additional purported class action complaints were commenced in Saskatchewan and Alberta with claims that largely mirror those in the other suits. In June 2017, Mastercard entered into a class settlement agreement to resolve all of the Canadian class action litigation. The settlement, which requires Mastercard to make a cash payment and modify its “no surcharge” rule, has received court approval in each Canadian province. Objectors to the settlement have sought to appeal the approval orders. Certain appellate courts have rejected the objectors’ appeals, while outstanding appeals remain in a few provinces.
Europe. Since May 2012, a number of United Kingdom (“U.K.”) retailers filed claims or threatened litigation against Mastercard seeking damages for alleged anti-competitive conduct with respect to Mastercard’s cross-border interchange fees and its U.K. and Ireland domestic interchange fees (the “U.K. Merchant claimants”). In addition, Mastercard, has faced similar filed or threatened litigation by merchants with respect to interchange rates in other countries in Europe (the “Pan-European Merchant claimants”). In aggregate, the alleged damages claims from the U.K. and Pan-European Merchant claimants were in the amount of approximately £3 billion (approximately $4 billion as of March 31, 2020). Mastercard has resolved over £2 billion (approximately $3 billion as of March 31, 2020) of these damages claims through settlement or judgment. As detailed below, Mastercard continues to litigate with the remaining U.K. and Pan-European Merchant claimants and it has submitted statements of defense disputing liability and damages claims.
In January 2017, Mastercard received a liability judgment in its favor on all significant matters in a separate action brought by ten of the U.K. Merchant claimants. Three of the U.K. Merchant claimants appealed the judgment, and these appeals were combined with Mastercard’s appeal of a 2016 judgment in favor of one U.K. merchant. In July 2018, the U.K. appellate court ruled against both Mastercard and Visa on two of the three legal issues being considered, concluding that U.K. interchange rates restricted competition and that they were not objectively necessary for the payment networks. The appellate court sent the cases back to trial for reconsideration on the remaining issue concerning the “lawful” level of interchange. The U.K. Supreme Court granted the parties permission to appeal the appellate court’s rulings and oral argument on the appeals was heard in January 2020. Mastercard expects the litigation process to be delayed pending the decision of the U.K. Supreme Court on the appeals.
In September 2016, a proposed collective action was filed in the United Kingdom on behalf of U.K. consumers seeking damages for intra-EEA and domestic U.K. interchange fees that were allegedly passed on to consumers by merchants between 1992 and 2008. The complaint, which seeks to leverage the European Commission’s 2007 decision on intra-EEA interchange fees, claims damages in an amount that exceeds £14 billion (approximately $17 billion as of March 31, 2020). In July 2017, the trial court denied the plaintiffs’ application for the case to proceed as a collective action. In April 2019, the U.K. appellate court granted the plaintiffs’ appeal of the trial court’s decision and sent the case back to the trial court for a re-hearing on the plaintiffs’ collective action application. Mastercard has been granted permission to appeal the appellate court ruling to the U.K. Supreme Court and oral argument on that appeal is scheduled to occur in May 2020.
ATM Non-Discrimination Rule Surcharge Complaints
In October 2011, a trade association of independent Automated Teller Machine (“ATM”) operators and 13 independent ATM operators filed a complaint styled as a class action lawsuit in the U.S. District Court for the District of Columbia against both Mastercard and Visa (the “ATM Operators Complaint”).  Plaintiffs seek to represent a class of non-bank operators of ATM terminals that operate in the United States with the discretion to determine the price of the ATM access fee for the terminals they operate. Plaintiffs allege that Mastercard and Visa have violated Section 1 of the Sherman Act by imposing rules that require ATM operators to charge non-discriminatory ATM surcharges for transactions processed over Mastercard’s and Visa’s respective networks that are not greater than the surcharge for transactions over other networks accepted at the same ATM.  Plaintiffs seek both injunctive and monetary relief equal to treble the damages they claim to have sustained as a result of the alleged violations and their costs of suit, including attorneys’ fees. 
Subsequently, multiple related complaints were filed in the U.S. District Court for the District of Columbia alleging both federal antitrust and multiple state unfair competition, consumer protection and common law claims against Mastercard and Visa on behalf of putative classes of users of ATM services (the “ATM Consumer Complaints”).  The claims in these actions largely mirror the allegations made in the ATM Operators Complaint, although these complaints seek damages on behalf of consumers of ATM services who pay allegedly inflated ATM fees at both bank and non-bank ATM operators as a result of the defendants’ ATM rules.  Plaintiffs seek both injunctive and monetary relief equal to treble the damages they claim to have sustained as a result of the alleged violations and their costs of suit, including attorneys’ fees. 
In January 2012, the plaintiffs in the ATM Operators Complaint and the ATM Consumer Complaints filed amended class action complaints that largely mirror their prior complaints. In February 2013, the district court granted Mastercard’s motion to dismiss the complaints for failure to state a claim. On appeal, the Court of Appeals reversed the district court’s order in August 2015 and sent the case back for further proceedings. In September 2019, the plaintiffs filed their motions for class certification in which the plaintiffs, in aggregate, allege over $1 billion in damages against all of the defendants. Mastercard intends to vigorously defend against both the plaintiffs’ liability and damages claims and to oppose class certification. Mastercard expects briefing on class certification to be completed in the second quarter of 2020.
U.S. Liability Shift Litigation
In March 2016, a proposed U.S. merchant class action complaint was filed in federal court in California alleging that Mastercard, Visa, American Express and Discover (the “Network Defendants”), EMVCo, and a number of issuing banks (the “Bank Defendants”) engaged in a conspiracy to shift fraud liability for card present transactions from issuing banks to merchants not yet in compliance with the standards for EMV chip cards in the United States (the “EMV Liability Shift”), in violation of the Sherman Act and California law.  Plaintiffs allege damages equal to the value of all chargebacks for which class members became liable as a result of the EMV Liability Shift on October 1, 2015. The plaintiffs seek treble damages, attorney’s fees and costs and an injunction against future violations of governing law, and the defendants have filed a motion to dismiss. In September 2016, the court denied the Network Defendants’ motion to dismiss the complaint, but granted such a motion for EMVCo and the Bank Defendants. In May 2017, the court transferred the case to New York so that discovery could be coordinated with the U.S. merchant class interchange litigation described above. The plaintiffs have filed a renewed motion for class certification, following the district court’s denial of their initial motion.
Telephone Consumer Protection Class Action
Mastercard is a defendant in a Telephone Consumer Protection Act (“TCPA”) class action pending in Florida. The plaintiffs are individuals and businesses who allege that approximately 381,000 unsolicited faxes were sent to them advertising a Mastercard co-brand card issued by First Arkansas Bank (“FAB”). The TCPA provides for uncapped statutory damages of $500 per fax. Mastercard has asserted various defenses to the claims, and has notified FAB of an indemnity claim that it has (which FAB has disputed). In June 2018, the court granted Mastercard’s motion to stay the proceedings until the Federal Communications Commission makes a decision on the application of the TCPA to online fax services. In December 2019, the FCC issued a declaratory ruling clarifying that the TCPA does not apply to faxes sent to online fax services that are received via e-mail. As a result of the ruling, the stay of the litigation was lifted in January 2020.
v3.20.1
Settlement and Other Risk Management
3 Months Ended
Mar. 31, 2020
Settlement and Other Risk Management [Abstract]  
Settlement and Other Risk Management Settlement and Other Risk Management
Mastercard’s rules guarantee the settlement of many of the transactions between its customers (“settlement risk”). Settlement exposure is the settlement risk to customers under Mastercard’s rules due to the difference in timing between the payment transaction date and subsequent settlement. While the term and amount of the guarantee are unlimited, the duration of settlement exposure is short term and typically limited to a few days.
Gross settlement exposure is estimated using the average daily payment volume during the three months prior to period end multiplied by the estimated number of days of exposure. The Company has global risk management policies and procedures, which include risk standards, to provide a framework for managing the Company’s settlement risk and exposure. In the event of a failed customer, Mastercard may pursue one or more remedies available under the Company’s rules to recover potential losses. Historically, the Company has experienced a low level of losses from customer failures.
As part of its policies, Mastercard requires certain customers that are not in compliance with the Company’s risk standards to post collateral, such as cash, letters of credit, or guarantees. This requirement is based on a review of the individual risk circumstances for each customer. Mastercard monitors its credit risk portfolio on a regular basis and the adequacy of collateral on hand. Additionally, from time to time, the Company reviews its risk management methodology and standards and revises the estimated settlement exposure as necessary.
The Company’s estimated settlement exposure was as follows:
 
 
March 31,
2020
 
December 31,
2019