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Morningstar | As Banking Profitability Rises, Fiserv Should See Benefits of Higher Customer Demand

We believe wide-moat-rated Fiserv will continue to prosper as a result of its embedded relationship with community banks and credit unions. Increased profitability from small and midsize banks is likely to provide additional cross-selling opportunities for core processing providers. Furthermore, we believe it’s possible that new banks will be granted charters, resulting in an additional market for Fiserv and its competitors. In recent years, Fiserv and its peers have greatly benefited from the technological innovation occurring in banks. As banking functions become increasingly automated and consumers adopt new services online and through their phone, Fiserv has prospered from providing these ancillary functions to its customer base of more than 13,000 financial institutions. In addition, we believe payments will slowly increase its share of Fiserv’s total revenue. Whether it’s person-to-person payments or a mobile wallet, we expect consumers will increasingly make transactions through their phones. We believe technological capabilities will be of increasing importance to bank customers. Banks cannot afford to lag rivals in technology and in doing so risk the future of their business. This increasing urgency among banks should create new services that Fiserv can offer, deepening its client relationships and increasing revenue organically. We are impressed by Fiserv’s 2013 billion-dollar acquisition of Open Solutions. We believe CEO Jeff Yabuki was highly opportunistic and able to get the overleveraged company for a bargain. Throughout the history of domestic banks, core processing systems have handled transactions in batches, causing a time delay between the transaction and actual cash payment. Through its acquisition of Open Solutions’ DNA product, Fiserv will offer a real-time core processing platform that will conduct transactions almost instantaneously. However, we are concerned DNA may not be retaining customers migrating off the company's older platforms.