Overview
MasterCard is a global payments and technology company that connects billions of consumers, thousands of financial institutions, millions of merchants, governments and businesses worldwide, enabling them to use electronic forms of payment instead of cash and checks. We envision an environment where electronic payment is the predominant means of payment. We use our technology and expertise to make payments more convenient, secure and efficient to enable consumers to meet their needs and to provide value to all stakeholders in the payments system.
We offer a wide range of payment solutions that enable our customers and partners to develop and implement credit, debit, prepaid and related payment programs and solutions to deliver value to consumers. Our customers and partners include financial institutions and other entities that act as "issuers" and "acquirers", merchants, government entities, telecommunications companies and other businesses. We manage a family of well-known, widely-accepted payment brands, including MasterCard, Maestro and Cirrus, which we license to our customers for use in their payment programs and solutions. We process payment transactions over the MasterCard Worldwide Network and provide support services to our customers and other partners. As part of managing our brands, we establish and enforce a common set of standards for adherence by our customers for the efficient and secure use of our payments network.
We generate revenues from the fees that we charge our customers for providing transaction processing and other payment-related services and by assessing our customers based primarily on the dollar volume of activity on the cards and other devices that carry our brands. As cardholder and merchant relationships are managed principally by our customers, we do not issue cards, extend credit to cardholders, determine the interest rates (if applicable) or other fees charged to cardholders by issuers, or establish the merchant discount charged by acquirers in connection with the acceptance of cards and other devices that carry our brands.
We analyze our ability to grow based on three drivers:
• we track trends in personal consumption expenditures;

•            we focus on the trend within the global payments industry from
             paper-based forms of payment, such as cash and checks, toward
             electronic forms of payment (such as payment card transactions); and


•            we seek to grow our share in electronic payments, including with
             innovative solutions and new technology.

We support our focus on these drivers by continuing to:

•            grow our core businesses globally, including credit, debit, prepaid,
             commercial and processing payment transactions over the MasterCard
             Worldwide Network;


•            diversify our business by seeking new areas of growth in markets
             around the world, expanding points of acceptance for our brands
             throughout the world, seeking to maintain unsurpassed acceptance,
             and working with new partners such as merchants, government agencies
             and telecommunications companies; and


•            build new businesses through technology and continued strategic
             efforts and alliances with respect to innovative payment methods,
             such as electronic commerce (e-Commerce) and mobile capabilities.

See "-Business Environment" for a discussion of considerations related to our long-term strategic objectives.
We recorded net income of $772 million, or $6.17 per diluted share, and $2.2 billion, or $17.07 per diluted share, for the three and nine months ended September 30, 2012, respectively, versus net income of $717 million, or $5.63 per diluted share, and net income of $1.9 billion, or $14.66 per diluted share for the three and nine months ended September 30, 2011, respectively. In addition, for the nine months ended September 30, 2012, we generated cash flows from operations of $2.1 billion.
Our net revenues increased 5% and 10% for the three and nine months ended September 30, 2012, respectively, versus the comparable periods in 2011, primarily due to the increased dollar volume of activity on cards carrying our brands and increased

transactions, partially offset by the impact of foreign currency translation. The net effects of pricing actions contributed approximately 2 and 3 percentage points to our net revenue growth for the three and nine months ended September 30, 2012, respectively. The net impact of foreign currency relating to the translation of revenues from our functional currencies to U.S. dollars reduced net revenues by approximately 5 and 4 percentage points for the three and nine months ended September 30, 2012, respectively. Rebates and incentives as a percentage of gross revenues were 26% for each of the three and nine months ended September 30, 2012, versus 24% for each of the comparable periods in 2011. Our revenues depend heavily upon the overall level of consumer, business and government spending. Changes in cardholder spending behavior, influenced by economic conditions, impact our ability to grow our revenues. Our revenues are primarily impacted by the dollar volume of activity on cards and other devices that carry our brands, and the number of transactions. For the three and nine months ended September 30, 2012, volume-based revenues (domestic assessments and cross-border volume fees) and transaction-based revenues (transaction processing fees) increased from the comparable periods in 2011. For the three and nine months ended September 30, 2012, our processed transactions increased 24% and 27%, respectively, and our volumes increased 14% and 16%, respectively, on a local currency basis compared to the three and nine months ended September 30, 2011. This compares to increased processed transactions of 21% and 17% and increased volumes of 18% and 16% on a local currency basis for the three and nine months ended September 30, 2011, respectively, compared to the three and nine months ended September 30, 2010.
Our operating expenses increased 5% and 9% for the three and nine months ended September 30, 2012, respectively, versus the comparable periods in 2011, primarily due to greater general and administrative expenses. The net impact of foreign currency relating to the translation of expenses from our functional currencies to U.S. dollars reduced operating expenses by approximately 3 and 2 percentage points for the three and nine months ended September 30, 2012, respectively.
Our ratios of operating income as a percentage of net revenues, or operating margins, were 55.5% and 55.3% for the three and nine months ended September 30, 2012, respectively, versus operating margins of 55.1% and 54.6% in the comparable periods of 2011. The effective income tax rates were 27.6% and 29.1% for the three and nine months ended September 30, 2012, respectively, versus effective income tax rates of 30.5% and 31.6% for the comparable periods of 2011.
Business Environment
We process transactions from more than 210 countries and territories and in more than 150 currencies. Net revenue generated in the United States was approximately 40% of total revenue for each of the three and nine months ended September 30, 2012 and 2011. No individual country, other than the United States, generated more than 10% of total revenues in either period, but differences in market growth, economic health, and foreign exchange fluctuations in certain countries have increased the proportion of revenues generated outside the United States over time. While the global nature of our business helps protect our operating results from adverse economic conditions in a single or a few countries, the significant concentration of our revenues generated in the United States makes our business particularly susceptible to adverse economic conditions in the United States.
The competitive and evolving nature of the global payments industry provides both challenges to and opportunities for the continued growth of our business. Unprecedented events which began during 2008 continue to impact the financial markets around the world, including continued distress in the credit environment, continued equity market volatility and additional government intervention. The economies of the United States and numerous countries around the world have been significantly impacted by this economic turmoil. Countries have experienced credit ratings actions by ratings agencies, including several in Europe as well as the United States. In addition, some existing customers have been placed in receivership or administration or have a significant amount of their stock owned by their governments. Many financial institutions are facing increased regulatory and governmental influence, including potential further changes in laws and regulations. Many of our financial institution customers, merchants that accept our brands and cardholders who use our brands have been directly and adversely impacted.
MasterCard's financial results may be adversely impacted by actions taken by individual financial institutions or by governmental or regulatory bodies. The condition of the economic environments may accelerate the timing of or increase the impact of risks to our financial performance. As a result, our revenue may be impacted, or the Company may be impacted in several ways. For a full discussion see "Risk Factors - Business Risks - Unprecedented global economic events in financial markets around the world have directly and adversely affected, and may continue to affect, many of our customers, merchants that accept our brands and cardholders who use our brands, which could result in a material and adverse impact on our prospects, growth, profitability, revenue and overall business" in Part I, Item 1A of the Company's Annual Report on Form 10-K for the year ended December 31, 2011 and Part II, Item 1A, (Risk Factors) of the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2012 for further discussion.

In addition, our business and our customers' businesses are subject to regulation in many countries. Regulatory bodies may seek to impose rules and price controls on certain aspects of our business and the payments industry. See Note 11 (Legal and Regulatory Proceedings) to the consolidated financial statements included in Part I, Item 1 of this Report for further discussion. MasterCard continues to monitor the extent and pace of economic recovery around the world to identify opportunities for the continued growth of our business and to evaluate the evolution of the global payments industry. Despite mixed economic indicators, we continue to see growth in all of our regions. Notwithstanding recent trends, the extent and pace of economic recovery in various regions remains uncertain and the overall business environment may present challenges for MasterCard to grow its business. Financial Results
Our operating results for the three and nine months ended September 30, 2012 and 2011 were as follows:

                                    Three Months Ended       Percent      Nine Months Ended September     Percent
                                      September 30,          Increase                 30,                 Increase
                                     2012         2011      (Decrease)       2012             2011       (Decrease)
                                         (in millions, except per share data, percentages and GDV amounts)
Revenues, net                    $   1,918      $ 1,818         5%       $   5,496         $   4,986        10%
Total operating expenses               854          816         5%           2,458             2,263         9%
Operating income                     1,064        1,002         6%           3,038             2,723        12%

Total other income (expense)             2           28         *                -                35         *
Income before income taxes           1,066        1,030         3%           3,038             2,758        10%
Income tax expense                     294          314        (6)%            885               872         1%
Net income                             772          716         8%           2,153             1,886        14%

Loss attributable to
non-controlling interests                -            1         *                1                 1         *
Net Income Attributable to
MasterCard                       $     772      $   717         8%       $   2,154         $   1,887        14%

Basic Earnings per Share         $    6.19      $  5.65        10%       $   17.13         $   14.71        16%
Basic Weighted Average Shares
Outstanding                            125          127        (2)%            126               128        (2)%
Diluted Earnings per Share       $    6.17      $  5.63        10%       $   17.07         $   14.66        16%
Diluted Weighted Average Shares
Outstanding                            125          127        (2)%            126               129        (2)%

Effective Income Tax Rate             27.6 %       30.5 %       *             29.1 %            31.6 %       *

Gross Dollar Volume ("GDV") on a
U.S. dollar Converted Basis (in
billions) 1                      $     918      $   845         9%       $   2,658         $   2,387        11%
Processed transactions 2             8,679        7,016        24%          24,934            19,588        27%

* Not Meaningful

1 The data for GDV is provided by MasterCard customers and includes information with respect to MasterCard-branded transactions that are not processed by MasterCard and for which MasterCard in some instances does not earn significant revenues. GDV may be revised by MasterCard's customers after its original submission and these revisions may be material. GDV generated by Maestro and Cirrus cards is not included.

2 Represents total number of transactions processed by MasterCard and growth from the comparable periods.
Impact of Foreign Currency Rates
Our overall operating results are impacted by changes in foreign currency exchange rates, especially the strengthening or weakening of the U.S. dollar versus the euro and Brazilian real. The functional currency of MasterCard Europe, our principal European operating subsidiary, is the euro, and the functional currency of our Brazilian subsidiary is the Brazilian real. Accordingly, the strengthening or weakening of the U.S. dollar versus the euro and Brazilian real impacts the translation of our European and Brazilian subsidiaries' operating results into the U.S. dollar. For the three and nine months ended September 30, 2012, as compared to the same periods in 2011, the U.S. dollar strengthened against both the euro and the Brazilian real. Accordingly, the net foreign currency impact of changes in the U.S. dollar average exchange rates against the euro and Brazilian real reduced net revenues by approximately 5 and 4 percentage points and operating expenses by approximately 3 and 2 percentage points for the three and nine months ended September 30, 2012, respectively.

In addition, changes in foreign currency exchange rates directly impact the calculation of gross dollar volume ("GDV") and gross euro volume ("GEV"), which are used in the calculation of our domestic assessments, cross-border volume fees and volume related rebates and incentives. In most non-European regions, GDV is calculated based on local currency spending volume converted to U.S. dollars using average exchange rates for the period. In Europe, GEV is calculated based on local currency spending volume converted to euros using average exchange rates for the period. As a result, our domestic assessments, cross-border volume fees and volume related rebates and incentives are impacted by the strengthening or weakening of the U.S. dollar and euro. The strengthening or weakening of the U.S. dollar is evident when GDV growth on a U.S. dollar converted basis is compared to GDV growth on a local currency basis. For the three and nine months ended September 30, 2012, as compared to the same periods in 2011, GDV on a U.S. dollar converted basis increased 9% and 11%, respectively, versus GDV growth on a local currency basis of 14% and 16%. During 2011 and the first nine months of 2012, approximately 60% of our revenue was generated from activities outside the United States. Some of the revenue we generate outside the United States is subject to unpredictable currency fluctuations (including devaluations of currencies). Our hedging activities attempt to protect against adverse changes in the value of only a limited number of currencies and are based on estimates of exposures to these currencies. Furthermore, we may become subject to exchange control regulations that might restrict or prohibit the conversion of currencies into U.S. dollars. The occurrence of any of these factors could impact the value of revenues we receive from our international operations and could have a material adverse impact on our business. We manage these foreign currency risks by entering into foreign currency derivative contracts. To manage our anticipated cash flow exposures for certain currencies, we utilize a rolling hedge program to reduce the anticipated foreign exchange risk. Our foreign currency risk management program reduces, but does not entirely eliminate, the impact of foreign currency exchange rate movements over time. Changes in foreign exchange rates affect the fair value of foreign currency derivatives entered into pursuant to our hedging activities. Since the Company does not designate foreign currency derivatives as hedging instruments pursuant to the accounting standards for derivative instruments and hedging activity, any changes in the fair value of the foreign currency derivatives could result in gains or losses as the Company records these derivatives at fair value on a current basis. Foreign exchange gains and losses are included within our net income. See Note 13 (Foreign Exchange Risk Management) to the consolidated financial statements included in Part I, Item 1 of this Report for further discussion.
Revenues
Revenue Descriptions
MasterCard's business model involves four participants in addition to us:
cardholders, merchants, issuers (the cardholders' financial institutions) and acquirers (the merchants' financial institutions). Our gross revenues are typically based on the volume of activity on cards and other devices that carry our brands, the number of transactions we process for our customers or the nature of other payment-related services we provide to our customers. Our revenues are based upon transactional information accumulated by our systems or reported by our customers. Our primary revenue billing currencies are the U.S. dollar, euro and Brazilian real.
We process transactions denominated in more than 150 currencies through our global system, providing cardholders with the ability to utilize, and merchants to accept, MasterCard cards across multiple country borders. We process most of the cross-border transactions using MasterCard, Maestro and Cirrus-branded cards and process the majority of MasterCard-branded domestic transactions in the United States, United Kingdom, Canada, Brazil and a select number of other smaller countries.
Our pricing is complex and is dependent on the nature of the volumes, types of transactions and other products and services we offer to our customers. A combination of the following factors determines the pricing:
• Domestic or cross-border

•            Signature-based (credit and debit) or PIN-based (debit, including
             automated teller machine ("ATM") cash withdrawals and retail
             purchases)


•            Tiered pricing, with rates decreasing as customers meet incremental
             volume/transaction hurdles

• Geographic region or country

• Retail purchase or cash withdrawal

• Processed or not processed by MasterCard

In general, a cross-border transaction generates higher revenue than a domestic transaction since cross-border fees are higher than domestic fees, and in most cases also include fees for currency conversion.
We review our pricing and implement pricing changes on an ongoing basis. In addition, standard pricing varies among our regional businesses, and such pricing can be modified for our customers through incentive and rebate agreements.

The Company classifies its net revenues into the following five categories:
1. Domestic assessments: Domestic assessments are fees charged to issuers and acquirers based primarily on the volume of activity on cards that carry our brands where the acquirer country and the issuer country are the same. A portion of these assessments is estimated based on aggregate transaction information collected from our systems and projected customer performance and is calculated by converting the aggregate volume of usage (purchases, cash disbursements, balance transfers and convenience checks) from local currency to the billing currency and then multiplying by the specific price. In addition, domestic assessments include items such as card assessments, which are fees charged on the number of cards issued or assessments for specific purposes, such as acceptance development or market development programs. Acceptance development fees are charged primarily to U.S. issuers based on components of volume, and support our focus on developing merchant relationships and promoting acceptance at the point of sale. Market development fees are charged primarily to issuers and acquirers based on components of volume, and support our focus on building brand awareness and card activation, increasing purchase volumes, cross-border card usage, and other general marketing purposes.

2. Cross-border volume fees: Cross-border volume fees are charged to issuers and acquirers based on the volume of activity on cards that carry our brands where the merchant country and the issuer country are different. Cross-border volume fees are calculated by converting the aggregate volume of usage (purchases and cash disbursements) from local currency to the billing currency and then multiplying by the specific price. Cross-border volume fees also include fees charged to issuers for performing currency conversion services.

3. Transaction processing fees: Transaction processing fees are charged for both domestic and cross-border transactions and are primarily based on the number of transactions. These fees are calculated by multiplying the number and type of transactions by the specific price for each service. Transaction processing fees include charges for the following:

• Transaction Switching - Authorization, Clearing and Settlement.

a. Authorization refers to the process by which a transaction is routed to the issuer for approval and then a decision whether or not to approve the transaction is made by the issuer or, in certain circumstances such as when the issuer's systems are unavailable or cannot be contacted, by MasterCard or others on behalf of the issuer in accordance with either the issuer's instructions or applicable rules (also known as "stand-in"). Our standards, which may vary across regions, establish the circumstances under which merchants and acquirers must seek authorization of transactions. Fees for authorization are primarily paid by issuers.

b. Clearing refers to the exchange of financial transaction information between issuers and acquirers after a transaction has been successfully conducted at the point of interaction. MasterCard clears transactions among customers through our central and regional processing systems. MasterCard clearing solutions can be managed with minimal system development, which has enabled us to accelerate our customers' ability to develop customized programs and services. Fees for clearing are primarily paid by issuers.

c. Settlement. Once transactions have been authorized and cleared, MasterCard helps to settle the transactions by facilitating the exchange of funds between parties. Once clearing is completed, a daily reconciliation is provided to each customer involved in settlement, detailing the net amounts by clearing cycle and a final settlement position. Fees for settlement are primarily paid by issuers.

•               Connectivity fees are charged to issuers and acquirers for
                network access, equipment and the transmission of authorization
                and settlement messages. These fees are based on the size of the
                data being transmitted through and the number of connections to
                the Company's network.


4.        Other revenues: Other revenues for other payment-related services are
          primarily dependent on the nature of the products or services provided
          to our customers but are also impacted by other factors, such as
          contractual agreements. Examples of other revenues are fees associated
          with the following:


•               Fraud products and services used to prevent or detect fraudulent
                transactions. This includes warning bulletin fees which are
                charged to issuers and acquirers for listing invalid or
                fraudulent accounts either electronically or in paper form and
                for distributing this listing to merchants.


•               Cardholder services fees are for benefits provided with
                MasterCard-branded cards, such as insurance, telecommunications
                assistance for lost cards and locating automated teller machines.

•               Consulting and research fees are primarily generated by
                MasterCard Advisors, the Company's professional advisory services
                group.


•               Program management services provided to prepaid card issuers.
                This primarily includes foreign exchange margin, commissions,
                load fees, and ATM withdrawal fees charged to cardholders on the
                sale and encashment of prepaid cards.


•               The Company also charges for a variety of other payment-related
                services, including rules compliance, account and transaction
                enhancement services, holograms and publications.


5.        Rebates and incentives (contra-revenue): Rebates and incentives are
          provided to certain MasterCard customers and are recorded as
          contra-revenue in the same period that performance occurs. Performance
          periods vary depending on the type of rebate or incentive, including
          commitments to the agreement term, hurdles for volumes, transactions or
. . .