Fiserv (FISV) is a company that processes checking, credit card, mobile and person-to-person transactions. Its services allow third-party transactions to be more efficient. For many companies including banks, Fiserv is a necessary part of their business, as the cost of doing these services themselves would be far too prohibitive. Fiserv contracts its services to companies for an average of seven to 10 years per contract.
Fiserv was incorporated in 1984, where it grew alongside credit cards expansion and entered the hospital processing of Health Care Accounts. It eventually sold that segment to UnitedHealth Group (UNH – Free UnitedHealth Stock Report) for $775 Million, and used that cash to pay for CheckFree, a $4.4 billion acquisition. The CheckFree acquisition has been a huge success and is partially responsible for its growing cash flows because some customers still use the legacy Checkfree software. The acquisition also reduced competition by taking a rival from the market. The combined size has allowed for synergies to be achieved, which strengthened Fiserv’s value proposition.
Superior company management has allowed it to increase net income for 26 years in a row. The company has remained strong through downturns in the economy making it look recession proof. Most of this resiliency is due to the necessity of payment processing in commerce. The company makes money through recurring service fees, which make up almost 90% of total sales. Meanwhile, Fiserv consistently returns shareholder capital through share buybacks, having purchased over 50 million shares in the past eight years. Due to its expanding cash flow, the return of capital will likely be stronger going forward.
Fiserv's strengths come from its diversified customer base, its economies of scale, and a strong financial position. The company has over 16,000 customers worldwide. Financial institutions, such as banks, thrifts, and investment managers make up 70% of Fiserv's total sales, while merchants, retailers, and government agencies account for the rest. The company is not very reliant on any particular customer or segment. Being the largest player in processing has allowed the company to build up some economies of scale, which add to the value proposition that it maintains. Its cost of development tend to be spread over a vast number of customers, and its large customer base, requiring different features allows Fiserv to create a library of solutions. Lastly, the financial makeup of the company remains strong and is a major selling point to customers.
Fiserv has many opportunities. Its Acumen product can give an individual thrift some of the processing functionality of a big bank. As there are many more thrifts than big banks, there is some opportunity to convert their processes and the company seems to have lesser penetration in this market.
Person-to-person processing is also a potential area of growth. Fiserv’s PopMoney solution currently has 1,700 clients including 14 of the 30 largest banks, increasing the feasibility of sending money to anyone. It has lesser penetration in the smaller banks and their value proposition could allow them to penetrate those markets.
The largest opportunity for the company, though, is most likely mobile processing. The company currently has 1,300 clients and large companies, such as Groupon (GRPN), that are testing the functionality of its Mobiliti platform. The acquisition of Mobile Commerce in 2011 was important, as it added to the products’ functionality. This market has the potential to grow to $1 billion per year by 2016 with Fiserv in a position to succeed. Given its reach, Fiserv seems well organized to add the Mobiliti platform to many of its existing customers, which has the potential of being a large part of future revenues. Lastly, the company has the opportunity to expand abroad. Although the company has a small footprint in more than 85 countries, the vast majority of its revenues are domestically generated. More penetration into foreign markets would probably add a sizable boost to earnings.
There are a few threats to Fiserv’s business model. Other competitors are entering the mobile and person-to-person markets, such as Barclay’s Pingit. eBay’s (EBAY) Paypal is a strong competitor in the online payments processing market and many smaller firms are starting to increase competition in the mobile market. Regulatory threats, such as Dodd Frank, have the potential to harm Fiserv; however any effect is currently unknown. Too, the U.S. financial industry is consolidating, losing approximately 1% of firms per year to bankruptcy and acquisitions. This shrinks the total potential customer base. Finally, Fiserv lacks geographic diversification. Roughly 95% of revenues come from the United States, so any downturn in the economy here could reduce its customer base significantly.
Overall, Fiserv is a well-run company, which is dominating the niche of credit card processing. It has the ability to become a lead player in the developing markets of mobile and person-to-person payment processing. Overall, its opportunities outweigh the risks, we believe Fiserv is primed to continue its multiyear earnings expansion into the foreseeable future and with the share repurchases, earnings per share could grow at an even faster rate.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.