Fiserv Vs. Fidelity National Information Services: Better Fintech Stock In Banking And Payment Processing

Khaveen Investments profile picture
Khaveen Investments
5.4K Followers

Summary

  • Fiserv and Fidelity National Information Services are both leading financial service technology providers in the core banking and payment processing industry with broad product and service portfolios and highly recurring revenues with financial institutions.
  • FISV and FIS are seeking to capitalize on the digital transformation in the financial industry and are building end-to-end solutions through the acquisitions of First Data and Worldpay.
  • Fiserv’s advantage stems from its wider portfolio breadth and deeper relationships with smaller banks and credit unions driving solid growth.
  • FIS has a relatively larger exposure to bigger banks which are expected to ramp up their modernization initiatives to counter emerging competition from new fintech entrants.
  • Revenues of both companies are expected to grow by more than 10% annually.

Fiserv vs Fidelity

Source: Fiserv, FIS

Fiserv Inc. (NASDAQ:FISV) and Fidelity National Information Services (NYSE:FIS) are leading financial service technology providers. At the of heart of it, both companies' business models specialize in providing core banking processing solutions to financial institutions to conduct their day-to-day operations. Due to high switching costs and multiyear contracts, it provides steady cash flows and highly recurring revenue streams.

Boasting decades of market experience, both companies have their unique reasons to own their stock. Fiserv has the widest product breadth allowing it to attain a massive client base. Its clients mix is relatively more geared towards smaller-size banks and credit unions. These firms choose Fiserv as their one-stop technology provider, while FIS has a bigger exposure to larger banks that choose it for its flexibility and strong product family integration capabilities. As incumbent banks ramp up their modernization initiatives to fend off competition from emerging fintech players. Besides that, both companies have also expanded into rapidly growing payments solutions to build up an end-to-end solution for clients in the wake of a digital transformation of financial services.

Bank Core Processing Market

A core banking system is utilized by financial institutions to process daily banking transactions and post updates to accounts and financial records. These typically include deposit, loan and credit processing solutions integrated to general ledger systems. They also include other value-added customer relationship management solutions which are essential for maintaining bank to client relationships.

The core banking market is highly competitive and is led by Fiserv, Fidelity National Information Services and Jack Henry & Associates (JKHY). These firms have decades of experience and cumulatively account for over 70% of market share. Their long-term stability has been attributable to their core banking solutions forming the legacy systems in most financial institutions today. The importance to prevent disruption to daily operations means that switching costs are very high, providing additional stability to these firms.

US Core Banking Procesor Market Share

Source: FedFis

Nevertheless, the core banking systems market is transforming as banks digitalize. The emerging developments of open banking from new fintech entrants mean that the incumbent financial institutions must ramp up their technology initiatives despite legacy barriers. According to eMarketer, the US bank IT budget has grown to $64 bln in 2019. We forecast the strength to continue and expect banks' IT expenditures to reach over $100bln by 2025, representing a CAGR of 8.85%. Several factors supporting this estimate are:

  1. Digital transformation in the global banking industry increasing demand for digital banking systems to cater to increasing customer needs and enhancing experiences
  2. Advancements of core banking technologies around AI, blockchain, big data and machine learning to boost operational efficiency and reduce costs
  3. Evolving regulatory and cybersecurity landscape driving financial institutions to adopt solutions to comply with regulations and mitigate cybersecurity risks

US Banks IT Budget

2017

2018

2019

2020F

2021F

2022F

2023F

2024F

2025F

Annual IT spend ($bln)

54.1

58.9

64.1

69.8

75.9

82.7

90.0

98.0

106.6

Growth rate %

8.87%

8.83%

8.85%

8.85%

8.85%

8.85%

8.85%

8.85%

Source: eMarketer, Khaveen Investments

To implement this transformation, banks which traditionally relied on in-house capabilities may consider migrating to third-party providers which offers cost benefits due to scale. These institutions are expected to implement targeted modernization initiatives to capitalize on new opportunities, motivated by the need for business agility, compliance and channel enablement. Therefore, this would benefit core banking vendors including FISV and FIS.

Fiserv

As a core banking provider, Fiserv is the best in class with over 4,000 financial institutions including credit unions and banks of all sizes implementing Fiserv's core technology. Compared to FIS, its client mix has a larger exposure to credit unions, making up about 40% of total clients. About one third of US credit unions depend on Fiserv for their core account processing needs. Two primary reasons explain Fiserv's market leadership, its superior number of core deployments and the breadth of its product portfolio. The completeness of its core offerings allows it to meet the needs of any financial institution, which is especially important for smaller firms that look to Fiserv to be their primary technology partner.

Fiserv leads the market in the number of core offerings which is the highest amongst competitors. Under its Financial segment, Fiserv provides a range of highly functional and scalable accounts processing and item processing services. Its primary offerings are DNA, Premier, Cleartouch, Portico, Precision and Signature. These solutions enable financial institutions to handle customer deposits and loan accounts, general ledger and other financial information.

Overall, we believe its competitive advantage among credit unions and smaller banks lies in its product portfolio breadth. This drives most financial institutions to choose Fiserv as its technology partner, especially the smaller institutions, allowing the firm to achieve a massive client base. Its strategy is to maintain its base through cross-selling and upselling; for example, selling account processing to clients who are on its credit processing solutions. This allows the firm to deepen its client relationships, and it signs multiyear contracts which will result in high switching costs and deter substitution to competitors. Thus, we are optimistic on Fiserv's core banking prospects as its clients will likely choose the firm for their digitalization initiatives and estimate growth to be line with the market at 8.85%.

FIS

Compared to FISV, FIS is second in the core banking solutions market. It serves a smaller client base; over 1,000 financial institutions are using its core banking platforms. Although it serves all financial institutions including banks of all sizes and credit unions, its specialization is with larger banks. More than 70 of its clients have assets over $10 bln, while Fiserv has less than half than that.

Fiserv vs Fidelity Client Mix by Assets

Source: Aite Group

The firm's advantage with larger banks stems from its higher level of customization and integration capabilities of its core offerings. Its primary core offerings are IBS, Profile, Systematics and Horizon. These solutions offer a range of configuration suites while enabling timely product to market by banks. In terms of architecture, FIS has been credited for its open architecture allowing for greater integration as well as the ability to incorporate value-added solutions such as data analytics capabilities providing cross-selling and upselling opportunities.

Thus, although both FISV and FIS products similarly cater to all types and sizes of financial institutions, FIS has developed an advantage over Fiserv with its core integration strength allowing it to achieve larger exposure to banking segments. Moreover, FIS has deployed a Modern Banking Platform comprising an integrated core platform delivering an omnichannel banking experience. The platform is designed to leverage the emerging open banking trend and may provide a boost to the firm's growth.

We believe FIS's larger exposure to bigger banks relative to Fiserv is positive. Despite higher bargaining power from customers, modernization initiatives by larger banks could be a key driver for the firm. Traditionally, large incumbent banks face barriers to digitalization initiatives because of strong reliance on proven solutions. However, the rising competition from emerging fintech entrants may push a modernization drive. Larger banks such as JPMorgan (JPM) and BofA (BAC) are likely to increase technology spend in the coming years according to a survey from UBS Evidence Lab. Thus, we expect FIS's Financial segment to outpace Fiserv at 9.22% due to its larger bank exposure, assuming a ramp-up of tech spend of 0.5% of assets.

Payment processing market

Both Fiserv and FIS have expanded into the payments processing market with the acquisition of First Data by Fiserv and Worldpay by FIS. Merchant acquiring or payment processing enables payment acceptance on behalf of merchants with credit, debit cards and mobile wallets. The market was valued at $33.45 bln in 2019. We project it to grow at CAGR of 14%, which is in line with non-cash transaction growth estimates by Capgemini. This is driven by evolving customer preferences for cashless payments and e-commerce. Processors are also leveraging cloud-based technologies for seamless integration as well as machine learning and AI in fraud detection and data analytics. The market consists of several large institutions with FIS (Worldpay), Chase and Fiserv (First Data) leading the market handling over $1 tln in transactions annually each.

Share of Top US Card Acquirers

Source: Nilson Report

Fiserv

The acquisition of First Data, a leader in merchant acquiring, provides Fiserv integration opportunities with its payments segment for card-based processing while opening a new market for it in rapidly growing payments acceptance space.

Source: Fiserv

The combined company provides several benefits by enabling value creation for account processing clients and deepening relationships. The firm is seeking to link their respective merchant and cash capabilities and develop new offerings. This creates a differentiated, end-to-end payments platform from issuance to acceptances, also enabling additional payment methods. Highly complementary products and distribution channels allow for cross-selling opportunities. For example, First data's Clover POS system for commercial clients and biller solutions from Fiserv.

First Data has already made a huge impact on Fiserv, contributing 40% of revenues. In the long term, the firm expects to achieve revenue synergies of $500 mln and cost savings of $900mln from an enriched value proposition through integration of technology infrastructure, expanded payment offerings and integrated sales.

The combination of both companies could effectively create a payments powerhouse in the long term. We expect its segments to grow in line with payment processing market growth of 14%, as the integration solidifies Fiserv's existing payment services including electronic bill payments, account-to-account transfers, P2P payments, debit and credit card processing services, thereby allowing the firm to capitalize on the increasing trends towards digital, real-time and secure payments.

FIS

Similar to Fiserv, the acquisition of Worldpay provides product integration opportunities. It is reported under its Merchant segment and accounts for nearly 20% of revenues, enabling merchants to accept electronic payments at the physical POS as well as online and mobile payments. We believe the key advantage of the FIS-Worldpay acquisition could be derived from its relationships with banks and a strong focus on open development tools in the open banking era. As open banking and faster payments grow, there is an increasing importance of the ability to offer end-to-end solutions.

Source: FIS

By taking advantage of its highly configurable portfolio with strong product family integration capabilities, we believe FIS can combine financial services, processing and risk management powered by a robust network. Moreover, the emergence of open banking would also result in the need for secure data sharing. Regulations such as Europe's PSD2 could be a major catalyst for FIS for its security solutions, which it could use to leverage its relationships with banks and Worldpay with its familiarity with European markets.

Overall, the merger of Worldpay with FIS provides size and scale to accelerate growth, and we expect this segment to grow in line with our market estimates of 14%. Compared with Fiserv, FIS has deep relationships with large banks on top of a highly differentiated product portfolio in the wake of open banking. The combination enables an end-to-end payment solution and multiple cross-selling opportunities. For example, executing both transaction and ledger settlement. In the long term, FIS expects to achieve revenue synergies of $500 mln and cost savings of $400 mln from operational synergies and technology integration.

Financial Analysis & Valuation

Net Debt

In terms of debt, the acquisitions by Fiserv and FIS are one of their largest deals ever, resulting in elevated debt levels in both companies since the past year. Fiserv has a higher net debt of $42 bln compared to FIS at $30 bln, suggesting a higher financial risk for the company.

Fiserv vs Fidelity Net Debt

Source: Fiserv, FIS

However, both Fiserv and FIS maintain healthy EBITDA interest coverage ratios. Fiserv's EBITDA interest coverage ratio stood at 5.3x in 2019, while FIS had a slightly better ratio at 5.8x, indicating strong abilities to service debt for both companies. In addition, both companies have strong earnings and cash flow generation abilities.

Margins

Fiserv's earnings and margins have generally outperformed FIS. Its revenue has grown steadily at an average rate of 12.2% in the past nine years with a gross and net margin of 48.36% and 5.77% respectively in 2019. Excluding its acquisition of First Data, it has an average free cash flow margin of 15.84%, which is slightly higher than FIS.

Fiserv Earnings & Margins

Source: Fiserv

FIS's revenues have grown 8.61% in the past nine years with a gross margin and net margin of 36.03% and 2.66% respectively in 2019. Excluding its acquisition of Worldpay, it has an average free cash flow margin of 11.47%.

Fidelity Earnings & Margins

Source: FIS

Revenue

Fiserv vs Fidelity Revenue

Source: Fiserv, FIS

To value both companies, we use a DCF analysis by projecting both companies' revenue growth. Revenue growth in 2019 for both firms were significantly higher due to the recognition of revenues of the combined entities. We expect Fiserv's revenue to grow at a slightly higher rate than FIS at 10.6% due mainly to its relatively larger exposure to payments with First Data segment accounting for a higher share of revenues compared to FIS. Though we expect FIS's core banking segment to outperform Fiserv.

Projected Revenues

2019

2020F

2021F

2022F

2023F

2024F

2025F

Fiserv Revenues ($ mln)

10,187

14,468

16,007

17,709

19,593

21,676

23,982

Growth Rate %

74.9%

42.0%

10.6%

10.6%

10.6%

10.6%

10.6%

FIS revenues ($ mln)

10,333

12,080

13,304

14,653

16,138

17,773

19,575

Growth Rate %

22.7%

16.9%

10.1%

10.1%

10.1%

10.1%

10.1%

Source: Khaveen Investments

Relative Valuation

Company

P/E

P/S

P/CF

Fiserv

25.61x

4.73x

16.88x

FIS

27.05x

7.13x

28.41x

Jack Henry

42.37x

7.40x

24.55x

Global Payments (GPN)

28.86x

1.96x

24.5x

EVO Payments (EVOP)

38.14x

2.1x

8.07x

Industry Average

32.41x

4.66x

20.48x

Source: Seeking Alpha

DCF

Based on a DCF analysis, with an EV/EBITDA multiple of 23.71x (Core and Payment Processing Industry average) and a discount rate of 6.9% (company WACC), while assuming revenue growth of 10.6% before tapering off at a long-term growth assumption of 6% due to its highly recurring nature of revenues, our model shows an upside of 31.36% for Fiserv.

Fiserv Valuation

Source: Khaveen Investments

For FIS, based on an EV/EBITDA of 23.71x, we applied a discount rate of 8% (company WACC) and a revenue growth rate of 10.64% before tapering out at a long-term growth rate of 6%, our model shows a smaller upside of 6.39% compared to Fiserv.

Fidelity Valuation

Source: Khaveen Investments

Verdict

As market leaders, both companies have solid portfolio breadth and deep relationships with clients built on decades of expertise and are two top picks to ride out the digitalization of banking. However, we believe Fiserv edges out FIS slightly. This stems from its wider product portfolio, enabling it to attain a larger client base compared to FIS. Its deeper relationships with smaller institutions and credit unions should provide steady growth ahead as they would continue choosing Fiserv as their main technology partner. Thus, its larger and diversified client base minimizes the risks to the company. On the other hand, despite its smaller base, FIS has been credited for its strong integration capabilities and product customization, which makes it a favored provider by banks. As larger banks undergo modernization initiatives, FIS should benefit from its larger exposure to this segment. Though, the higher bargaining power of larger clients could negatively affect the company, while Fiserv's smaller client base has a lower bargaining power.

To conclude, notwithstanding the risk of declining financial institutions because of mergers and acquisitions and strong competition from other vendors, rapid digitalization and emergence of open banking are creating a need for end-to-end solutions.

Stock Rating Price Target
FISV Buy $113.03
FIS Buy $155.88

Both Fiserv and FIS are seeking to capitalize on this by leveraging their existing capabilities and acquisitions such as payments. Despite Fiserv's slight advantage, we rate both Fiserv and FIS as a Buy with a target price of $113.03 (FISV) and $155.88 (FIS).

Note: For more research and analysis of high-quality companies within the global fintech industry, please click the "Follow" icon at the top of this page.

This article was written by

Khaveen Investments profile picture
5.4K Followers
Khaveen Investments is a Global Macro Quantamental Hedge Fund managing a tactical asset-allocated portfolio of globally diversified investments. We have interests in 100+ investments across multiple asset classes, countries, sectors and industries. Our investment approach takes both a top-down and bottom-up approach encompassing macro-economic, fundamental, quantitative and technical analysis. We serve accredited investors throughout the globe, which include HNW individuals, SMEs, associations, and institutions. Our investment managers have decades of investment experience between them, with research expertise in emerging technologies such as Artificial Intelligence, Cloud Computing, 5G, Autonomous & ElectricVehicles, FinTech, Augmented & Virtual Reality and the Internet of Things.www.khaveen.com

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in FISV, FIS over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: No information in this publication is intended as investment, tax, accounting, or legal advice, or as an offer/solicitation to sell or buy. Material provided in this publication is for educational purposes only, and was prepared from sources and data believed to be reliable, but we do not guarantee its accuracy or completeness.

Recommended For You

Comments (21)

To ensure this doesn’t happen in the future, please enable Javascript and cookies in your browser.
Is this happening to you frequently? Please report it on our feedback forum.
If you have an ad-blocker enabled you may be blocked from proceeding. Please disable your ad-blocker and refresh.