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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good morning. My name is Tasha, and I will be your conference operator today. At this time, I would like to welcome everyone to the Mastercard Q1 2019 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session [Operator instructions]. Thank you.
I’d now like to turn the call over to your host, Warren Kneeshaw, Head of Investor Relations, Please go ahead.
Thank you, Tasha. Good morning, everyone. And thank you for joining us for our first quarter 2019 earnings call. With me today are Ajay Banga, our President and Chief Executive Officer and Sachin Mehra, our Chief Financial Officer. Following comments from Ajay and Sachin, the operator will announce your opportunity to get into the queue for the Q&A session. It is only then that the queue will open for questions.
You can access our earnings release, supplemental performance data and the slide deck that accompany this call in the Investor Relations section of our Web site, mastercard.com. Additionally, the release was furnished with the SEC earlier this morning.
Our comments today regarding our financial results will be on a currency-neutral basis and exclude special items unless otherwise noted. But the release and the slide deck include reconciliations of non-GAAP measures to their GAAP equivalents. Please note that the growth rates we provide for switched volume, switched transactions and cross ordered volume have been adjusted to normalize for the effects of different switching days between periods. These adjustments have been made in current and prior quarters. This information is being provided so that you can better understand the underlying growth rates of these operating metrics. Our comments on the call today will be on the basis of these adjusted growth rates. We do not normalize GDP growth rates.
Finally, as set forth in more detail in our earnings release, I would like to remind everyone that today's call will include forward-looking statements regarding Mastercard's future performance. Actual performance could differ materially from these forward-looking statements. Information about the factors that could affect future performance, are summarized at the end of our earnings release and in our recent SEC filings. A replay of this call will be posted on our website for 30 days.
With that, I will now turn the call over to our President and Chief Executive Officer, Ajay Banga.
Thank you, Warren and good morning everybody. We’re off to a solid start this year; revenues up 13%, EPS up 24% versus the year-ago, as Warren said, on a currency neutral basis, and excluding special items. I think these results reflect our strong operation focus and our continued growth across each of our regions. And at the same time, we are continuing to invest in the business for the long term as you probably noticed with some of our recent product and acquisition related announcements.
Let me start with the macroeconomic environment as usual. You may recall that last quarter we said that we expected solid overall growth to continue in 2019 with some moderation, and our view has not changed from that. That said, we're still monitoring a number of items as long going trade negotiations and other economic and political factors that could affect growth over the medium to longer term. U.S. economic growth remains strong. Low unemployment, healthy consumer confidence, retail sales grew 3.5% versus a year ago ex-auto, ex-gas according to our spending cost estimates. And that reflects some moderation as expected, as well as some impact from the shift in the timing of Easter this year.
Now in Europe, we continue to see moderate growth. Consumer confidence remains mixed with declines in places like the UK, Ireland and the Netherlands. But despite the uncertainty surrounding Brexit, UK retail spending remains healthy again according to what we see in SpendingPulse. Asia Pacific has been impacted by trade policy uncertainty. We continue to monitor the strength of the Chinese economy. But having said that, we've seen modest GDP growth in region overall and that's underpinned by favorable monetary policies and generally stable labor market conditions.
In Latin America, the outlook is mixed with positive signs in Brazil and Chile as they're tempered by some weakness in Mexico. Similarly, in the Middle East and Africa region, we've seen healthy growth in countries such as Egypt, but some softness in the oil producing markets. Meanwhile, our business continues to drive healthy double digit volume and transaction growth across most of our markets by successfully executing against our strategy.
What I'm going to do is give you a few examples of how we are growing our co-products, diversifying our customer base and building new areas for our business. Let me start with growing our co-products, where I believe we continue to make good progress in providing people with simple and safe ways to pay with credit, debit, prepaid and commercial products. And it's not a card. The physical card is just one form factor as you've heard me say in the past. We are equally focused on seamlessly delivering our products digitally. Earlier this month, Apple announced the Apple card with MasterCard and Goldman Sachs, available this summer. This is a credit product that's designed for the iPhone that leverages MasterCard's tokenization technology our fraud tool and our charge back APIs. Customers can immediately access the digital version of the card in their Apple wallet. They can also get a physical companion card. With attractive rewards and extensive security features, the user experience is frictionless.
In addition, we look forward to collaborating further with Goldman's consumer business markers to bring new products and services to market over time. Also, pleased to be the favored vendor for T-Mobile's new mobile-first checking account, T-Mobile Money, which consumers can open and manage online all with an app on their smartphones, and they can withdraw funds using a MasterCard debit card. Coming to markets outside of the U.S., again, we continue to make significant progress. We're pleased to announce the expansion of our partnership with Santander in Brazil to expand our share of the credit, debit and commercial portfolios of the fast growing customer.
We also extended our long term agreement with Rogers Bank, which is a key strategic partner for us in Canada, further expanding the services we provide on their card portfolios. And we are advancing our efforts to increase market share in Europe with BNP Paribas in France, clipping more than 4 million credit cards in a long-term deal that will be accompanied by a full suite of services, including spending controls and alerts, as well as identity check mobile security features.
In addition, we have some good examples in customers with closed loop systems who continue to see value in open loop MasterCard cards, because of broader acceptance of digital capabilities. One of these an example is credit system in Brazil, which is converting 7 million private cards to MasterCard contactless co-branded cards to open up international acceptance to their card holders.
Now the commercial side, we're pleased to be Citibank's exclusive network for its cross-border B2B virtual card program in China. And the initial focus there has been enabling Chinese online travel agencies to make payments to hotels, hotel aggregators and airlines outside of China. And that same vein to help our customers provide greater transparency and security in cross border payments. As you know, we have announced an agreement t acquire Transfast, a global cross-border account-to-account money transfer network. We look forward to complementing and enhancing our solutions with their network reach, with their strong compliance capabilities, flexible technology and some very robust foreign exchange tools. By the way, we currently work with Transfast in support of our P2P and B2B capabilities through MasterCard Send.
And while on MasterCard Send, just to give you a quick update. We continue to see healthy growth and we're continuing to develop a number of different use cases. Send’s currently powered seven of the major mobile P2P programs in the United States, and we are working to grow our customer base. On the cross-border front, a number of our issuers are leveraging Send to provide faster and more cost effective and transparent cross-border payments to their customers. Bank of Montreal is the latest to announce that it will implement Send for its Canadian business and commercial banking clients, and the initial focus there is in bank account transfers. And there are additional plans for payments from mobile wallets and cards internationally.
So now from growing the code, turning to the second pillar of our strategy, the work we're doing on diversifying our customer base and strengthening our footprint in some of these new geographies. We are building relationships with merchants, processors, digital players and a number of other partners to help drive their businesses forward.
So I'm going to highlight a few specific examples on the co-brand area, including our renewal with Target in the U.S., a new program with Japan Airlines and with Falabella, which is the largest retailer in Chile. We also entered into an agreement with Mercadolibre, the largest e-commerce marketplace in Latin America to make their platform safer and more convenient with tokenization, seamless authentication tools and contactless prepaid card programs across Brazil, Argentina and Mexico.
And while doing all this, we try to find ways all the time to look for methods to improve our local presence, particularly in areas where there is no electronic payment penetration. That's why our partnerships with and the investments in Network International, which is a preeminent local processor in the Middle East and Africa region, and also Jumia, an e-commerce platform spanning 14 countries in Africa. We think these will accelerate our efforts to deliver a sustained shift from cash and check to electronic payments in these markets. MasterCard will be Network International's preferred partner for processing, acceptance and value added services with the safety and security and data analytics. And our relationship with Jumia will include program card issuance for consumers, as well as commercial payments on their platform and also the use of our payment gateway.
And finally, the third pillar of our strategy is building new areas of our business. And we do this in a way that leverages the core and differentiates our offerings, in particular with services and new payment flows, so a few examples for you. Safety and security products remain a key area of focus. We recently announced the acquisition of Ethoca, a global e-commerce fraud and dispute management network. What this does is to enable the sharing of intelligence between merchants and issuers in over 40 countries.
Whenever a fraudulent or disputed transaction is identified, near real time information is sent to the merchants so they can stop delivery and refund the cardholder and avoid the chargeback process. And as a result, both merchants and issuers benefit from reduced costs. With more than 5,000 merchants, including top e-commerce brands, such as Google and Walmart and over 4,000 issuers already participating, we look forward to continuing to scale Ethoca's network.
We're also looking for ways to help our partners improve their customers' user experiences, that’s why we acquired Vyze, a platform that connects merchants with multiple lenders, opens up a wide range of financing options, including installments to consumers online and in-store and complements MasterCard's existing card and ACH base solutions. Vyze's merchant customers like
Home Depot, Microsoft, Samsung for them, multiple lenders help to increase customer financing approval rates, decrease card abandonment and ultimately, therefore, increase sales. At the same time, they benefit lenders by providing access to new customers through these channels. And just to be clear, we're not changing our model and taking credit risk. We are merely the platform provider here connecting retailers and multiple lenders.
Now with respect to our processing services, pleased that Citibank will be using our payments gateway to support digital commerce enablement for their existing institutional clients. And our gateways connection to numerous acquirers and digital wallets will provide a single consolidated payments view for these large merchants who have a relationship with Citibank and make it simpler for them to accept payments on a global scale.
And moving on to the work we are doing to capture new payment flows beyond traditional card-rails, we have this quarter reached a number of significant milestones in expanding our real time account-to-account capabilities with our VocaLink assets. First, you must have heard recently that we have been chosen to enhance the InstaPay real-time retail payment system in the Philippines. And this includes operating the infrastructure for and providing anti-money laundering tools to an institution called BancNet, which is the national clearing switch in the Philippines. We will do this through a regional payments hub in Asia Pacific, using leading edge ISO 222 messaging, which streamlines communications and provides enhanced transaction data.
Second, we are licensing our real time payment software to the Saudi Arabian Monetary Authority, SAMA, to upgrade their system, providing similar capabilities to what we already have in place in the United States, Thailand and Singapore. These wins build upon the announcement we made late last year about our partnership in Peru to modernize and operate the Peruvian electronic payments infrastructure. And we remain involved in a number of similar RFPs around the globe. So as you can see, we're making real progress in expanding our geographic footprint for real time payments in Asia, in the Middle East and Latin America, while adding value to governments and central banks to help their citizens and their economies.
So before I turn the call over to Sachin, I'd like to thank Martina who's not on this call, who's probably on a beach somewhere, for both her years of dedication to MasterCard's growth but also for ensuring we were left in good hands upon her retirement with a very well prepared and chosen successor. And now it's my pleasure to introduce Sachin Mehra, our Chief Financial Officer. Sachin?
Thanks Ajay, and good morning, everyone. First, I would like to say that I am very excited about the opportunity ahead. And I look forward to working with each of you and to meeting those of you I have not met yet.
Turning to Page 3, we had a solid start to the year. There are a few highlights on a currency neutral basis and excluding special items related to certain tax and legal matters. Net revenue grew 13%, driven by solid momentum in our core and was slightly ahead of our expectations due to services growth. Operating income grew by 20% and net income was up 21%, reflecting our strong operating performance. EPS was a $1.78 up 24% year-over-year with share repurchases purchases contributing $0.04 per share. During the quarter, we repurchase $1.8 billion worth of stock and an additional $467 million through April 25, 2019.
So now let's turn to Page 4, where you can see the operational metrics for the first quarter. Just as a reminder, as Warren said, we don't normalize GDP growth rates. Worldwide gross dollar volume or GDV growth was 12% on a local currency basis, down 2 ppt from last quarter, in part due to the impact of the differing number of processing days between periods, as well as some other factors such as the delay and the timing of Easter this year. This was much as expected. U.S. GDV grew 8%, down approximately 2 ppt from last quarter with credit and debit growth of 9% and 6% respectively. Outside of the U.S., volume growth was 13%, down 3 ppt from last quarter. Cross border volume grew at 13% on a local currency basis, in line with expectations and driven by double digit growth in several regions. This Q1 growth was down sequentially due primarily to difficult year ago comps.
Turning to Page 5, switch transactions continue to show strong growth at 17% globally. We saw healthy growth in switch transactions across all regions led by Europe and the U.S. In addition, card group was 7%. Globally, there are 2.5 billion MasterCard and Maestro branded cards issued.
Now, let's turn to Page 6 for highlights on a few of the revenue line items, again, described on a currency neutral basis unless otherwise noted. The 13% net revenue increase was primarily driven by strong transaction and volume growth, as well as growth in our services offerings, partially offset by rebates and incentives.
Looking quickly at the individual line items, domestic assessments grew 16%, while worldwide GDV grew 12%. The difference is mainly due to pricing and the differing number of processing days between, partially offset by mix. Cross border volume fees grew 15%, while cross border grew 13%. The two ppt difference is mainly driven by pricing, partly offset by mix. Transaction processing fees grew 16% in line with the 17% growth in switch transactions. Finally, other revenues were up 14%, driven by growth in our cyber and intelligence and data and services solutions.
Moving to Page 7, you can see that on a currency neutral basis and excluding special items, total operating expenses increased 5%, primarily related to the company's continued investments and strategic initiatives. This was lower than expected due to the timing on certain marketing initiatives, which we now expect will mostly occur in the second quarter.
Turning to Slide 8, let's discuss what we've seen through the first three weeks of April where all of our drivers are up versus what we saw in Q1. Please remember that year-over-year comparisons across all drivers in April are aided by the timing of when Easter fell this year, and that three-weeks does not make a quarter. The numbers through April 21st are as follows. Starting with switch volume, we saw global growth of 18%, an increase of 4 ppt to the first quarter. In the U.S., our switch volume grew 15%, a sequential increase of 5 ppt with strengths in both credit and debit. Switch volume outside the U.S. grew 21%, up four ppt from the first quarter, primarily driven by Europe. Globally, switch transaction growth was 20%, a sequential increase of 3 ppt, primarily driven by Europe and the U.S.
With respect to cross-border, our volumes grew 17% globally, a sequential increase of 4 ppt in part due to the timing of Easter, as well as the tougher year-ago comps we saw in Q1. This was consistent with our expectations. For the year, we continue to expect cross-border volume growth to be about mid-teens and this is what is contemplated in our thoughts for revenue growth for the year.
Turning to our thoughts for the year that I will describe on a currency neutral basis, excluding special items and acquisitions, I will separately comment on acquisitions in a moment. Overall, not much has changed. We had a solid first quarter and our view on the economy is broadly similar with continued overall growth, albeit with some moderation versus 2018. In terms of net revenue, we continue to expect growth at a low-teens rate for the year with second quarter growth consistent with or slightly better than what we saw in Q1. We expect FX to be a 2 ppt headwind to revenue for the year and about a 3 ppt headwind for the quarter.
On operating expenses, we're still planning to grow at a high end of high single digits rates for the year. We expect Q2 operating expenses to grow at approximately twice the annual growth rate due to the lapping of a significant hedging gain a year ago and increased marketing spend. Year-over-year, FX will be a tailwind to OpEx of about 1 ppt for both the year and Q2. In terms of the tax rate, we now expect to be closer to the bottom end of the 19 to 20% range for the year due to the higher than anticipated discrete tax benefits we saw in Q1.
Now, moving on to the impact of acquisitions. As Ajay mentioned, we announced a number of acquisitions that either have closed or are expected to close this year. We estimate there will be about $0.06 to $0.08 dilutive for the year with the impact starting in Q2 and building progressively throughout the year, driven primarily by purchase accounting and integration related costs. One further item, as a reminder as of January 2018, certain equity investments are required to be mark-to-market based on observable price movements. We have been following this new standard and it has had a relatively minor impact on our results since inception.
In April, we made investments in two companies as Ajay mentioned that have since become public, valuation volatility will therefore increase as a result of the unpredictable nature of public equity markets. Accordingly, starting in Q2, we will be updating our non-GAAP methodology to exclude the impact of fair market value gains and losses on our equity investments. We are excluding these items as we believe this will facilitate a better understanding of our operating performance and provide a more meaningful comparison of our results between periods.
Please note that our long-term performance objectives and our thoughts for 2019 exclude such gains or losses. We will provide you full visibility to the impact of fair market value gains and losses on our equity investments as we do with the impact of special items and foreign currency, which we will continue to exclude from our non-GAAP measures.
With that, let me turn the call back to Warren to begin the Q&A session.
Thanks, Sachin. Tasha, we're ready for the question-and-answer session.
Thank you [Operator instructions]. And our first question comes from the line of Sanjay Sakhrani from KBW. Your line is open.
I guess I had a question on related to some of the stuff you talked about, which was TSB banks decision to stick with Visa after committing to you guys. Could you just talk about the observations there? Thanks.
TSB is staying with us on credit and it currently in Visa and Debit and the reason is very simple. As you know, they have had to focus their attention on their technology circumstances when they were doing their migration of their technology platform. And the bank is very focused on getting that done right. And they're looking after their customer and meeting them responsibilities on that front. In the midst of that to add the migration of a debit book would have added unnecessary risk as well as customer reputational issues to them. And therefore, they thought about is, hold on and we'll see later. And I think that's the right thing to do if I was in their place and I actually respect their decision.
Our next question comes from the line of Tien-Tsin Huang from JP Morgan. Your line is open.
Just maybe couple quick ones just on the modernizing payment systems in the Philippines and Peru, and et cetera. Just curious, once you're beyond the build period. What's the run opportunity for MasterCard? Do you become an intermediary or you're an advantage position to power these intermediaries? Just trying to understand what happens beyond the build phase? And then maybe for Sachin, just incentives line with some of these Fintech deals like Apple coming in and then TSB as Sanjay asked. Any considerations throughout the next two, three quarters?
So Sachin will answer that incentive and I’ll give you the answer later on the Philippines. Go ahead.
So on your question as it relates to incentives, our incentives continue to be very much in line with our expectations. We expect for deal activity to pick up in Q2. But other than that not much in the nature of changes as it relates to our expectations on incentives.
And Sachin on the ACH platforms. So what we're trying to do it depends on what kind of RSP and what kind of deal is constructed. Even that in the Philippines and Peru, the deal is a bit more complete in the form of having infrastructure operations also included in it. In others, it could be only the software as it is in Saudi, or in the Clearing House in the United States, or in Singapore. If it's only software then it becomes a different ability to intervene in the payment flow. So if it's only software, what we're trying to do is to build apps, which was off that software but also to build value added data analytics tools like the anti-money laundering tools so on, which we've built in other markets and so we can bring them to these countries that have software. Also, we provide skilled related thinking around charge backs, disputes, fraud management that kind of stuff. So that's a software idea.
Whereas infrastructure, it's a little different. It'll be a little bit more like the UK in some ways where we actually run the basic infrastructure. And then we can build products and scheme rules on top of that as well. So these are two slightly divergent parts. And it depends on what each country wants for their local instant from past ACH payment system as these RFPs open up over the next two years. What I was trying to say today was that if this has been sometimes coming, because these RFP processes are slower than the usual but they get done. And this quarter there were two, there is others as well and there's more RFPs in the process that we're deeply in negotiation with.
Our next question comes from the line of David Togut from Evercore ISI. Your line is open.
What impact do you see from the two big mergers just recently announced, Fiserv and First Data and then FIS Worldpay, on MasterCard growth opportunities. And then as a related question, both companies or in both merger situations it called out growth opportunities in B2B. I'm curious how you can work with them in addressing B2B?
We've looked very closely of issue of processes in many markets and especially in the United States, which has a more fragmented payments ecosystem than a number of other markets. And I fully expect to continue to partner with these folks. We've talked to all of them, as you can imagine, including me personally. The M&A doesn't change where we've got teams working with them to determine how best to collaborate to make them win while also getting our work done.
Remember they play a really important part in the ecosystem for banks and credit unions of all sizes. And mostly they have to distribute our products and services. And so I feel like there's lots of opportunity that both came, the consumer payment side but also in the B2B side, but it's just too early to cement any of them down. They're both very busy with their own transactions, as you can imagine. And they need to get that done well, because that's their first preference. And then we can really get deeply involved in what else we could do together with the merged entity. Meanwhile, the independent partnerships with separate entities continue, to be clear. The merged entities will have a whole new game and the mergers got to finish before you can do that.
Our next question comes from the line of Bob Napoli from William Blair. Your line is open.
MasterCard has been very active on the M&A front. And I was just hoping, Ajay, to get a little more clarity on additional potential areas that you're looking to build up through the M&A. And is there still a very healthy pipeline, maybe an update on the strategy, the M&A strategy and the pipeline?
I think Sachin's baptism by fire on this is the fact that in this first quarter, we delivered a couple of extra M&A deals to him, just to keep him happy and make him realize that he needs to do a little bit of work. It won't be an easy thing to follow in Martina's somewhat large shoes. So I hope she's not listening to that. But your question is a much deeper one, here's the deal. We have not changed our revenue strategy for the years that I've been talking about this. We're trying to use both organic and inorganic ways to grow in the spaces that we think give us possible growth areas to the next decade or two; hence safety and security; hence data analytics and information systems; hence digital identity systems; hence B2B and cross border payments. All of these AI, all of these are intertwined in the idea of building out new capabilities and new services, more or less pretty neatly placed in the third block of our strategy, which is in the grow, diversify, build. Most of these are in the build space.
And that's how we've built these services organically and inorganically to now 26%, 27% of our revenue, that's the objective. At the same time, I'm also trying to build the capability to be available and present across all rails of payment, not just cards but also non-card rails. And hence the VocaLink acquisitions and the acquisition that are going on in B2B spaces to deliver usage results against those, so that's what's going on. Nothing's changed in that. You will find us active participants in these spaces in loyalty and rewards, and those spaces over the next few periods as well. We have a relatively active pipeline, and Sachin could tell you that his team has -- I don’t know, Sachin doing a year 20 to 30 such deals.
That'll be correct, 20 to 30 such deals we could be actively due diligence. The list of deals we would actually scope out would be much broader than that. And just to reiterate what Ajay said, it all starts with the strategy and then we figure out from thereon what's the best way to achieve the strategy between build, buy and partner, as with the M&A component is one big piece of that but not the only one.
Some of these deals -- actually a numbers of them M&A from us partnering with these people on a commercial deal for us, Transfast as an example of that recently. But this has been the case in the past as well with a number of the transactions we have done. We end up -- like Brighterion, we ended up being a constructive partner of theirs, having a commercial relationship and then it changes over time into the possibility of an acquisition. So we're trying to use a mix of these outside acquisitions, as well as minority stakes. As well as in the case of fintechs and start ups a series of early investments as the way of making the company have a layer of its business exposed to all that's new and exciting, which we don't believe we have a full always a 100% right to be the only ones thinking of new ideas.
And so this is a good way to get external thinking, external quality of people, get external and maybe some product quality or some distribution strength that we may not have. So Ethoca, for example has both products software but also distribution through 4,000, 5,000 merchants and 4,000 issuers whom we're tied up with. Transfast has compliance capabilities, FX capabilities but also distribution in a number of countries and licenses to operate in a number of those countries. So different things come together in how we make the transaction, but the pipeline is robust. And if we can do one or two transactions a year out of the 20 or 30 we look at that will be a good year. It just happen that in this quarter a couple of extra ones came through.
Our next question comes from the line of Tom McCrohan from Mizuho. Your line is open.
Can you remind us how much of your cross border volume occurs in the first quarter? I think there’s some seasonality. Just want to confirm that. Thanks.
Tom, I just want to make sure I heard that question correctly. How much of our cross border volume?
Yes, occurs in the first quarter. I think you -- I think that’s one of the weaker quarters. Just want to confirm the seasonality.
Yes, from a seasonality standpoint what I'd tell you is it used to be typically a little bit more in the nature of volume on cross border, but for the most part in the remaining quarters it's pretty stable.
Our next question comes from the line of Ramsey El-Assal from Barclays. Your line is open.
I had a two part question on some regulatory items. First is on the secure customer authentication rules coming out later in Europe this year, whether you think that will be any type of -- constitute any type of pressure on European volumes later on in the year. And then second is a more broader question about data localization requirements and having to build out redundant processing capabilities in different national jurisdictions. Overtime whether that had also constitutes anything like a headwind to operating leverage, or any type of incremental pressure? If you can comment on those two things I'd appreciate it.
So the secure authentication rules, as you can imagine, we've been looking at the entire PSD2 implications for both us, merchants and banks in the system, as well as the new entrant PSDs and the ISDs entering into the European payment system. I actually think that secure customer authentication is an opportunity for a company like ours that has the capabilities, skills and toolset to provide this to all the players there, merchants will need it, banks will need it, these new PSCs and AISPs will need to connect properly into the system to ensure that the entire payments ecosystem is kept safe and secure. So for us I see this actually as an opportunity to deliver new value added services. And in past meetings, we've talked about how that’s one of the plans for what we're building out as part of our PSD2 strategy. I'm sure other networks are too. This is not about trying to be competitively advantaged. This is about trying to do the right thing for the payments ecosystem.
The second part, the part of our data localization, that's an interesting question. It came up a couple of earnings calls before as well. And mostly that tend to do with India in that case. And I'd say around the world in some cases, data localization like in India has got real policy ramifications. In other countries that they engaged with us realized that data localization may not be to their benefit. And let me explain that for a second first. The challenge with data localization is actually not the expense, which is what your question comes from. It's not just the question putting up some more servers and storing the data on soil. And to be honest with you in an expense base of our type, putting a few more servers on spot in a country, even as large of India with the volumes over India, is interesting but not really a big deal.
The bigger deal is the fact that by doing so, you end up with data that loses its predictive power compared to the wealth of data that generates much higher predictive power when it's combined across many more countries, many more types of transactions, many more types of consumers, many more types of customers. If you talk to anybody in the space of AI, or machine learning, or good old fashioned data analysts, you'll find that they will tell you that the more the data the more variety of data, the more widespread and ubiquitous the data you get, the better the predictive power. The moment countries balkanize that data, they may say they are doing it for security reasons, is not completely clear to me that in actual fact that gives them better security on predicting for fraud and anti-money laundering and capabilities on that front than data, which is more widely shared.
Now, we will comply and we are compliant in India. And we will comply elsewhere but whatever rules a country finally chooses, because we operate there because that's what the rules are. But it's our job to try to educate them to what we think and their job to decide what's right for them. And then we do what we've got to do after that. So that's what we've done in India, we comply it. In other countries, we've managed to turn back that thinking way from this logic that I just gave.
Our next question comes from the line of Bryan Keane from Deutsche Bank. Your line is open.
Just wanted to ask about the higher expenses expected in Q2. Sounds like most of that is going to be marketing spend, maybe some of that is from acquisitions. Just trying to understand maybe where the higher expenses are going, especially on the marketing side, anything in particular? And then secondly, just on the strong data so far through April 21st. Is there a way to think about how much of that is from Easter versus easier comps versus better economy, share gains, et cetera? Thanks.
Bryan, let me make sure I'm clarifying the Q2 comment out here, which is we're expecting double the growth rate relative to our fully year thoughts on OpEx in Q2. And that growth rate differential is being driven, as I mentioned in my prepared remarks, by the fact that last year in our operating expenses we had the benefit of a very sizable FX hedging gain. So I think if you take that into consideration as you think about the marketing expenses or rather the operating expenses for Q2. In addition to that, we also expect we'll increase marketing spend in Q2. As I mentioned in Q1, our marketing expenses came in lower than expected. This is just part of what goes on. And as we run our business, we make evaluations as it relates to when's the optimal time for us to put marketing out in relation to various sponsorship assets and other initiatives, which we've got going on. And this is just part of course as part of that process, so nothing unusual that it would flag.
On your second question on April 21 data, I will tell you look, I mean, April 21, data is impacted by the timing of Easter. And I think you need to take that into consideration just especially given the fact that there's 21 days worth of data, which we're presenting to you and three weeks are not going to make the quarter. So I will tell you that by enlarge the growth trends look solid as we've mentioned for Q1 and we continue to see that going forward as well. But timing of Easter plays a big part in terms of what we're seeing in our April 21 metrics.
Our next question comes from the line of Craig Moore from Autonomous Research. Your line is open.
Two questions. One, have you seen any uptick in local network competition anywhere around the world? And secondly the settlement with the European Commission that was seemingly announced yesterday on interregional cross-border, obviously, that will have an effect on the fee income of banks issuing cards that are being used in Europe. So thinking Citi for you guys. Do you -- can you foresee an impact on the rewards that those banks are offering on those cards cross-border business if you're going to see a significant reduction in net fee income? Thanks.
First, the second one. That settlement with the European Commission, as you know, we discussed it in the fourth quarter earnings call. I have Tim Murphy, my GC sitting here. He's dying to answer the question. But maybe you could -- was it in Q4, Tim?
Yes, so we briefed the investors in December of last year, and really no change following what we shared in December. It's just a process update. So that's you've seen since December, nothing new.
A big part about whether it impacts the rewards that different banks offer, not just Citi but this if for all banks that would have peoples travelling into European Union territory in fact anybody, Australians, and Chinese, and Americans and everybody else and perhaps -- soon. So the fact there is it's a relatively small proportion of the total interchange revenue that most of these banks generate. It's also a relatively small proportion of the total revenue, which comes out of not just interchange but revolving and other fees. And therefore, it is not my assessment that there will be that big an impact on their P&L. Now, remember that the reduced rates of 20 and 30 apply to physical card present, whereas for card not present e-commerce transactions, the rate for debit are a 115 basis points and the rate for credit is a 150 basis points. And so that's factored into the commentary I am giving you about the impact for banking institutions.
It's not that it's not relevant, it is relevant. It’s just that it's not enough to, I think, change their marketing practices directly in this form. Your question about local networks I haven't seen an uptick or downtick in any relevant strong way over the last six months to a year. Local networks have been strong across the world in different forms over the years. I mean, the EU in every country in the EU has had a local network since well before, I mean, this is 20-25 years ago; Mexico's had them; Canada's had them; Brazil and Columbia and Argentina used to have them; China's had it since a long time; Korea's had them. There's not one example here.
In fact, if you look at the number of our transactions that we actually pass through our own rails of the total, today it's 56% of our transactions. 10 years back when I joined, it was 40 something percent. So even 10 years ago, the majority of our transactions were being taken by local networks in some form for the actual processing of that transaction. We had other ways to raise revenue from the activity around that transaction. So the processing was going through local rails very often. Now, actually the number has reduced over the years as we’ve made inroads in a number of marketplaces.
Our next question comes from the line of Lisa Ellis with MoffettNathanson. Your line is open.
Couple from me, first Ajay, can you comment on China and specifically the news reports about potential joint venture announcement with Nets Union there? And then second one is related to the Vyze acquisition and around doing enabling extension of credit transactionly at the point of sale. Just from a vision perspective, can you comment as you look out building this out, this capability out with MasterCard over the next few years? What that's going to look like or how should we be thinking about it? Is it almost like another rail and what's MasterCard's role and differentiation exactly there? Thank you.
So China, I'm not going to comment on a newspaper article. I mean I wish I was asked for comments in the newspaper articles that give me blood pressure, but nobody does. This one doesn't really give me blood pressures. It's just what somebody who wrote there based on what they've picked up locally. We are -- this much I will tell you. I'm very committed to finding an appropriate and sensible way to enter the domestic Chinese market. And I'm making every effort possible across the company to get to the right place and getting the requisite licenses to be able to do that. And I think soon as we've got something substantial or real to tell you, we will, trust me. We just don't have anything real or substantial today, because this movie hasn't played out yet. So it will take some time to play out. And even after it plays out in terms of, let's say we do get some form of an approval, even after that there's a year-long process of national security clearances before you can actually start operating domestically on the ground in China. So this is like a couple of years away at least before we can give you something that's more interesting than just desires, that's the first.
On Vyze, Vyze to me is interesting. I don't know yet know how well to answer for that question for you, because I don't yet know how big this could be. Installment lending to me is a really interesting aspect. Installment lending at the point of sale. Installment lending through a bank has been going on for a long time. But the idea of allowing the consumer as a point of sale to opt into an installment loan, in some ways it's been going on for a long time in sales finance businesses in places like Brazil, where for instance by years and years back at Citibank, we used to see this happening where the transaction at the point of sale had a automatic installment plan built into what was the card payment that was being used by a consumer.
That's kind of -- it didn’t spread everywhere, it spread in different ways into the U.S., in the consumer finance business mostly. It didn't really spread to the middle class or the upper class there. But it's spreading around the world in some ways. In Australia, there are a couple of players who have launched installment lending. In the U.S., those players, one or two of them are coming here, other locally are doing this. It's banks, it's fintechs, it's merchants, everyone seems to be interested in the space. But I don't know yet how to tell you how big it could be or where it could go, because I don't clearly know yet how well it will catch on with the consumer.
We are certainly putting our foot in the water with this acquisition. Remember it's not us that’s extending the credit, we're just creating the platform between the merchant and the institution, the bank or the Finfech, which may in turn pass the loan on to a bank, that's what we're really doing. I think I can add a lot of differentiated value in the form of AI, in the form of better tools to identify consumers and help to help people underwrite. There'is a lot of things we could do with our data analytics and our information services business. Remember that we could also do a lot of things with loyalty and rewards, which could be connected overtime into the installment loan system.
So I don't yet know where this will go. It's interesting. I've got my foot in the water and you'll see, it's not different from the way we entered other services four, five years ago, put our foot in the water before we took the full plunge.
Our next question comes from the line of Eric Wasserstrom from UBS. Your line is open.
I was wondering, maybe Sachin. Could you help remind us about all of the components that attribute to your strength in cross border? I think you have some portfolio wins that should be helping year-over-year or some Maestro conversions. Can you just remind us of all the factors that support that figure?
As a company, we're incredibly focused on cross border drivers. And as we said in previous earnings calls, MasterCard has setup the Center of Excellence within MasterCard where basically there's just tremendous focus on how we can do good knowledge sharing across the company on what can drive cross border volumes for this company. Really, it all starts with making sure that we have actually truly identified one of the right portfolios to go after from a cross-border standpoint. So as we sit back and we think about it, we leverage our services business with their data analytics capabilities to identify what are the right portfolios to go after. And those are the ones where there's a larger propensity of cross border.
Thereafter, we go after Frank to optimize those portfolios in the best way possible. So to the extent we identify portfolios of our customers, which might be underperforming, we work with them through our consulting practice and our managed services practice in our advisors business, you try and actually drive more better and more optimized cross-border focus there. But even beyond that, it's about focusing on the right vertical. So for example, in the wholesale travel space, this is an area where MasterCard has been historically very much focused and has been actually leader, and that contributes to cross border.
And then finally I would say on a similar basis. If you think about digital banks and things of that sort, these would be areas where we would focus. Again, going back to the theme of what are the right portfolios to go after and how do you optimize those. That's really what we're doing and it's sounds like basic blocking and tackling. But sometimes you actually really have to go down that path to actually make it come through and that's what we're doing.
I think I said last time that I'm sure that other networks do some of the stuff, so it's not rocket science. So it's in the execution and it's in getting it done. And yes the Maestro to MasterCard convergence to give us some tailwind, because clearly Maestro utilization and e-commerce is challenging. MasterCard debit allows a better utilization. And that will continue for a while, because you haven't completed those migrations in every location that we'd like to.
And if I can just follow-up, Ajay, any update on the B2B hub? I know that you launched it in Australia I think a quarter ago. And any update on its international or domestic advancement?
No, not really. In fact, we discussed it in the last quarter's call, you're right. Its physical launch is actually happening as we speak. And it's very early days. But that's the one we're focused on. The whole B2B space has opportunities. The hub is one way of getting to it. As you know the directory and track and enabling that directory to be fully built out the right way across the world is another one. Payments optimization engines are getting built into it. We're just doing a series of things. And hopefully, Transfast will enable and help us even more. Meanwhile, Sense continues to chug along, that's why I talked about Bank of Montreal and what it’s trying to do with Send. It's doing it for its commercial and business banking clients as well. So there's a series of tools that are being played in the B2B space.
Our next question comes from the line of Don Fandetti from Wells Fargo. Your line is open.
Ajay, so a two part question. I guess in the U.S., MasterCard's had a pretty good track record on these co-brand wins. But it's been a while since we've seen any major bank portfolio flip. Do you expect to see any market share change over the next year or two there? And then separately any update on the common pay button from e-commerce that the industry had some time to digest it? How are you guys feeling about the penetration opportunity?
So, on the first, on big bank portfolios. There've been some over the last year or two that we've talked about, and we've won on from parts of Capital One to parts of Bank of America and the like. And those are still helping us grow share. In fact, if you look at the way our credit numbers are growing in the U.S., part of that is co-brand, that's Cabela's and Kroger and the like, but part of it is also these bank portfolios that have been switching over to us. I don't see any huge swings in bank books moving around right now. But we're actively in every transition and every transaction that happens. But I don't see huge ones moving around as we speak as of now.
On the SRC progress, we're looking as we said the industries have launched us in second half of 2019. It’s probably going to end up first in the U.S. and then get to additional markets over the next six to 18 months. And I think that you'll find that the feedback we're getting from issuers and merchants is very constructive to the EMVCo. We're trying to adapt through that feedback and get it rolled out, all the technology build and branding work is happening, as we speak. I still remain pretty optimistic about what SRC could do for the industry, and for the consumer, and for the merchant and the issuer, simpler connect to one connection for all brands, easier to manage for a consumer, trying to replicate the physical experience of one terminal to convert that to a physical -- to a digital experience of one button idea, that's what we're trying to get to.
Our next question comes from the line of Darrin Peller from Wolfe Research. Your line is open.
You had -- I think you had a 200 basis points tough compare in the quarter and the FX. It looks like you clearly outperformed this quarter, growing around 13% constant currency. So first just what drove the surprise to the outside versus what it -- I think you initially thought when you talked about your guidance from last quarter for the first quarter trends. And then do you think that the soft spot we saw in cross-border, whether it's fourth quarter or perhaps early first quarter was more of an anomaly at this point, you feel better about the trends you're seeing? Thanks guys.
So Darren, I'll take that question. So as it relates to the first quarter, like I mentioned in my prepared remarks, we've slightly exceeded what our expectations were as it relates to our performance from a revenue standpoint, driven by the strength in our services business. So we also saw, from an FX standpoint, slightly lower impact on FX in the first quarter relative to what we originally thought. So those were a couple of factors, which you might want to take into consideration as you're thinking about it.
On your other question for cross-border, you’ve got to remember that cross-border last year in Q1 we had a 20% growth rate in cross-border. And those tough comps are a large part of what we're seeing in terms of the results in Q1 of this year. You remember when we talked about cross-border performance last year. We actually were fairly explicit about saying that we don't expect our normal run rates to be like what we saw in the first half of last year. So as you think about our business, we continue to believe that our cross-border is trending and performing as we would normally see it, actually performing. So I wouldn't make too much of swings between quarters, because you're always doing comparisons between year-over-year tough comps.
Our business continues to go grow well. We like what we see in terms of our portfolio. Just a little bit more color if it's helpful from a cross-border standpoint. The U.S. outbound volumes continue to hold up pretty nicely. And our China business from a cross-border standpoint continues to grow also in the high single digits, much like we've seen historically. So all-in-all, business carries on as we have expected to be.
Thanks Sachin. Ajay, do you have any final comments?
Gentlemen, thank you all for your questions. And I'm going to wrap up with a few closing thoughts. First, we had solid start to the year, reflecting this strong operational focus and executional focus and continued growth across each of our regions. And we are executing against our strategy with a couple of potentially noteworthy milestones this quarter. The first one being the progress in expanding our real time payments capabilities in Asia, in Latin America and in the Middle East. And secondly, we announced these strategic acquisitions in partnerships we think will complement our existing products and services and position the company well for the next decade or two of growth as well.
So with that, I'd like to thank you for your continued support for the company and for joining us today.
This concludes today’s conference. You may now disconnect.