Fiserv, Inc. (FISV) Earnings Call Transcript & Summary

So thank you, everyone. We're going to get started here on our next session. Very pleased to have Frank Bisignano, CEO of Fiserv, here with us today. Frank needs no introduction. Frank, we're very excited to have you, and thank you for joining us.

Thank you. I get introduction. [indiscernible] Matt Harris has about 10 minutes.

So maybe I'll start with getting a few macro-related questions out of the way before. So any updates from a consumer spending standpoint versus the trends you shared for January?

No, I think we saw -- it's not unusual to see weather effects kind of -- for this period of time. I think you see a little slowing in maybe restaurants also, somewhat correlated. But spending seems to still be occurring. We have this board in our office that have pattern recognition from -- because we've had it there for -- since we built 8 years ago, which shows how many transactions per second and where they're happening. So I mean it looks -- the consumer's health, the consumer's health in spending. Obviously, we have some large nondiscretionary categories in our portfolio, which kind of brings stability to our spending patterns.

That's helpful color. And then I guess on the banking industry, it seems the industry is facing a bit of a crisis with rising real estate losses. And I know you have a big client, NYCB, which is one of the names that's been in the headlines. How should we think about any potential ramifications? Is there a fear of a broader contagion? What are you hearing from your bank clients?

Well, if you went back almost a year ago, we were inundated with this concept of a crisis going on. And yes, we had 3 names. I'd like to think of them as it was a bicoastal problem, with just a very small handful deviated. We have a portfolio of banks that are very, very well run. I talk to CEO of banks all the time, multiple times a day. And I think they feel good about their balance sheet, their portfolio, their positions. Historically, you're always going to have a little something going on every year. NYCB is a good client of ours. SVB was a good client of ours. Signature was a good client of ours. And then fundamentally, their successors became good clients of ours. I don't mean to take the other side of this, but I don't really see a banking crisis going on.

That's helpful color. So let's dive into the business, maybe starting with Clover. Clover has been a tremendous growth story for Fiserv. In fact, you're expecting an acceleration in revenues there based on the trends you shared at your Investor Day. I think you're calling for basically 30% compounded annual growth rate going forward in the next 3 years versus maybe it's been running in the high 20s. Can you talk about the drivers for that few points of acceleration we'll get from here? And what's giving you sort of the confidence in the sustainability of these really strong growth rates?

Yes. I mean look at -- I think it's important to go back, go back to when we created Clover, how we created Clover. Because we talk about it in a manner of its maturation. But the reality is we didn't get the first Clover into market probably until '15 really. So if you think about the maturation of it, it's super early innings. And I'd love to remind us that we have bought Clover, it was a few engineers and a few patents. And today, we have thousands of engineers driving outcomes across the globe. And so I think we're continuing to innovate. We figured out early on, we thought it was going to be an iPhone for small business, and I was mistaken in that, and we recognized that we needed to canisterize the product. We need to have value-added services, not only that we had, but their clients wanted. We needed to think about verticals. We needed to think about, in fact, how different client sets would use and buy the product. And that's the journey we're on. So we're in the young, young stages of verticalization. We're still in the young stages of that. You continue to watch how penetration rate increase, and we've approached it in a manner that we have more channels to attack, we have more geographies to attack. And our job is to grow more merchants and bring more products to them and allow them -- we're a purpose-driven company that want to help our clients to grow their business. And the best way we could do it is bringing more software to their stack and have them consume it, run their business more efficiently and be able to grow. As our clients grow, it's a tremendous benefit for us, too. Grow more merchants, in more geographies, more vertical expertise, more distribution and direct distribution.

And I know the back book penetration is another growth driver that you've talked about. What's the plan of attack on that? And how aggressively are you planning to pursue it?

Yes, I mean we've been very clear that when we laid out our '25 target, it had contemplated no greater back book penetration. And we've been very consistent for going back to 2020 that, yes, there is some back book that naturally churns into our Clover portfolio, and that's about 10% versus 90% net new. There -- it's really about software. It's not about hardware, it's about software. And as we've built the new dashboards, we've built the new proms, we've built the new intelligence for our client base, the ability to roll that out and then follow up with the greater software total stack is really the strategy we employ. And you wouldn't see that until -- I don't see that as a big driver of anything we're talking about for '24, '25. I think about that more as in '26. If there's some reason that should vary, you'll probably be the second person to know.

That's good.

You would be the second person to know.

That's great. I know you talked about new geographies, new channels, sort of any one that stands out as a bigger growth driver as we think about the next 3 years?

I mean, look, we have the best distribution in the industry. We are the partner of choice in multiple areas. And I would talk about banks. I would talk about ISVs. I would talk about agents. So there's -- and I think about that outside the U.S. So -- I mean I know everybody as long is looking for the one driver, that's not this company. This company has lots of channels, lots of distribution, tons of capability and tons of geography. We built the business in Brazil out of nothing. And yes, I think Cashi will probably be a good distribution partner for us, given the fact they're in 99% of the cities in Brazil. But that's not what's going to drive the number, it's Argentina, it's Poland, it's across the globe, it's the U.K., but it's also a greater penetration in the U.S.

Great. Can we touch a little bit on the pricing environment? I mean typically, the merchant acquiring is always very competitive and pricing tends to be a headwind. But where we're sitting right now, it's actually been a tailwind for you guys. You've been able to take some pricing. So how do you see pricing as a growth lever going forward from here? Any thoughts on that?

Well, I mean, I think what we've really done is add value, right? We're in the business of delivering capability to our clients and get paid for it. So I think software has a tremendous benefit. That capability allows us to actually capture more TAM for our client and actually pricing at points in time. But I don't think of it as anything other than getting paid for value that we've create that allows our clients to stay with us and grow with us.

And if the Fed goes through with the lowering of the debit interchange, which is kind of in the works at this point, is that -- should we think about that as being nice sort of tailwind to Clover?

I don't know if it's a tailwind to Clover. I wouldn't really think about it as a tailwind to Clover. The way I might think about it is look at -- we have a very large merchant constituents. And anything that helps our merchants be able to have a strategic advantage in pricing and gaining more clients and selling more business is good for our merchant business. I won't make it a Clover item. I'd make it -- if it's lowering the cost of acceptance for our clients, we want to help them grow.

Got it. Switching to Carat. You've positioned that as sort of an omnichannel operating system for large enterprises. And it's a very competitive end market with the modern players like Adyens and Stripes of the world competing aggressively. So how does Fiserv win against these players in the market?

Well, I think, look -- first of all, technology is a great enabler. Technology is a great equalizer. We like to -- the #1 job in our company, the #1 job, there's 13,000 software engineers. So if you want to think what we are, I think we're a company that builds software. Half of the people in the company are technologists. So I think at the end of the day, we went down this Carat and Commerce Hub path. We believe it brings tremendous capability. We believe it brings vast to it. We like playing in the what we call enterprise space. We like playing in the multinational space. And I think ultimately, we're going to continue to build product that our clients are asking us for and that new markets want us to accept. There are fabulous competitors in this business. I kind of love that, right? I mean, why not? Let's challenge each other all day. Let's compete all day. There's plenty of TAM to expand in these markets because ultimately, what we're doing is helping our clients gain more market share. So I think we're going to continue to drive down that path.

And what are the sort of differentiations that Fiserv brings when you win a deal versus an Adyen or Stripe? What are those sort of few features or technology that enables you to do that?

Well, look, every -- all of these are -- it's not -- these are large institutional clients, right? Many times, our advantage is our omni-commerce capability, right? I mean that is a large strategic advantage. And I don't think it's that replicable in an hour or even much longer, right? But on top of that, we brought in new technology. Now I think it's quite forgotten that we were always a great e-com processor, right? We didn't compete in the front end of the business because we had JVs that actually were the front ends and we were the best processor in the industry. So when that changed, we then veered to our ability to build capability that we thought about for a long time. How we're going to have a single front door, how we're going to have a Commerce Hub behind Carat, how we're going to integrate VAS in a manner that we have capability, whether it's our debit networks, whether it's our lower cost of acceptance products. And so when you put that all together, I think we have the best hand in the industry. Now it depends on who the client is and what they're looking for.

And when we think about the 2026 targets that you've laid out, can Carat sustain sort of the mid-teens type growth that you've been seeing? And are there any pockets where you expect to see most of that growth come from? Is it mostly -- like you said, omnichannel is a big thing for -- that you can bring to the table. Is it more selling omnichannel to maybe clients, enterprise clients that have historically not done omni-commerce? Or are there other levers that you're seeing for growth?

Yes. Yes. Remember, we are going to report an enterprise number. right? So remember, that's like what we've talked about. SMB, enterprise processing. We've been very clear about that. And so when you think about this Carat conversation, it's a subset of the enterprise conversation. Now that's a much bigger base, and that will not be a mid-teens grower sustainably. But yes, Carat will be. And I understand the desire to have this like give me the item, right? But we have a multibillion-dollar business that has a few items, right? Those items would be, yes, our ability to bring more VAS and more capability both inside the U.S. and outside the U.S. Is the capability? Yes, it's -- I'm not -- I'm pretty darn proud of our omni-commerce capability and the ability to package it and deliver it to the client in a manner that allows them to easily settle in a manner that's good for them. And then I do think that our entry point through Commerce Hub in those value-added and an orchestration layer that we can use in any manner we want all are long-term differentiates. By the way, I think 3 years from now, we're going to be having a conversation about a whole new set of software and technology, right? This is the here and now. We're building stuff for '26 and '27 and beyond, too.

Got it. Great. So maybe switching gears a little bit to the financial solutions business. Can we talk a little bit about the Finxact acquisition? And that -- how that helped modernize the experience for your bank customers? Because a lot of them were on legacy core systems. Maybe you can help us bring that to light with an example of how you've been able to use Finxact to give them a more modern experience.

Yes. I think there's like multiple examples. We used one on Investor Day, Primis Bank, which I think was very strong. And remember, here we are coming in with a really a software stack that allows an institution to be able to decide, do I want a sidecar? Do I want it as a takeout? Is it going to serve a different set of clients? How do we bridge it as a sidecar? So our job was to create optionality for our client base and for attracting new clients. I think another incredible example, in my opinion, is the fact that One finance is a JV sub -- part of a JV sub of Walmart. And we've proved the case in building that out and having millions of accounts on Finxact. And so what does that say? That say we could fight at any weight. We could be in every heavyweight ballot, and we can also bring it down to a small fintech that needs just capability to move. We can make it a sidecar for a bank. We can attract a new client into one of our world-class products, like DNA, but have them have a path to build a digital bank with Finxact, and we have all those things going on right now.

And you've also talked about how Finxact can help you serve the larger end of the market than you have historically. Maybe...

Well, I think that's the base case I make with Walmart. I mean we've demonstrated size and scale beyond anything we've ever seen before. So I think look at -- I think at the end of the day, we think it's a large market project. It's a ledger for many types of fintechs. It can be used in a multipurpose core capability. It is sports generational, and I think it gives our clients tremendous optionality. Obviously, you don't wake up in the morning and have -- we had signed 1,000 merchants in a day. We're not going to sign 1,000 Finxact clients in a day. I think they're two completely different things. But the demand is high. I think we're in battles we would have never been in before. We got use cases going on that we never did before, and we have use cases of tremendous size and scale. And to me, the biggest item was demonstrating ourselves in a market and our client base that this thing can be the industrial strength heavyweight leader.

That's awesome. On the card issuing side, at the Investor Day, you highlighted a revenue pipeline of $125 million that you've signed over the past year. When you compete for these deals, are you seeing the modern card issuers like Marqetas and Galileo show up more in the RFP process?

I don't look -- we go in to win, right? I don't really think about who else is in the fight. I think we're the industry leader. As such, I think we have taken a boat load of market share here, and it's been built with our technology platform. There are great competitors in all different aspects of the space. But if you look at the wins, right, whether it's Target, whether it's Desjardins, whether it's before that brand, these are very large enterprises that want the full stack capability, and we've invested hundreds of millions of dollars in our technology stack over the past 5 years to build it out, and we'll continue to do that. I think it's not about who is in the process, it's who comes out at the end of the process with the win.

And I know you just mentioned Target. That was a win that you highlighted at the Investor Day. Was that a competitive takeaway? And maybe you could talk a little bit about the attributes that really sort of attracted Target to work with Fiserv?

I didn't look at -- Target was somewhere another. I mean, so with -- I don't really like that competitive takeaway. I made a point about the industry. And my point about the industry is there's tens of good competitors. Everybody does a really good job. We deploy our capital in multiple ways, and we do it in a manner to help grow our business and to return it to our shareholders. I mean we win these deals because of our modern technology, because of our surrounds, because of our long-term capability, and the fact that we continue to invest in the next generation of the stack. So this is a constant evolution of deployment of capital to get a great return for a long-term recurring revenue business.

And I think you talked about investments that you're making in the issuing platform to deliver a more cloud-native platform. Sort of where are we in that investment journey for Fiserv?

We're in that journey. We continue to move clients in a different manner. We continue to move up functionality. I think it's in the next couple of year journey, and that was after we built up this modernized optimism made at the industry-leading platform.

Great. So maybe I also wanted to talk about the Melio partnership that Fiserv signed recently, and that's sort of an expansion into almost a new TAM for you with AP/AR. How significant is that opportunity?

Well, I think it's significant. I mean -- remember the size of this company. So if you say significant, it's -- it has opportunity to move things. I think the biggest issue here is our client base wants it. Like it's always great to go -- like I find that our strategy is we got to fit within our client strategy. And we believe we have lots of opportunity to help our clients bring more -- financial services clients and also our Clover clients in different distribution networks, well, let's call it, financial services clients to be able to bring this AR/AP solution to their client base. And we think that it's going to help them grow their business and help us grow our business. And I would say, I sit in on every other week, review of this with the business head leading it and the CEO of Melio. And I mean, we're flat out on the demand side. And our capability will be there, and you should expect this in market as we say in the summer.

Great. I know you've already signed a couple of bank partners on that front. So maybe once you sign a bank partner, what's sort of the time line as to how quickly we start to see some revenue generation? And then just on the revenue model, if you could help us with the revenue model for a product like this would look like?

Well, I'll leave Julie for modeling, okay? I'll deal with what it takes to get it done and how long it takes and what it does.

Fair enough. Fair enough.

But when I'm talking about it, you should assume -- I'm not talking about it because it's a rounding error over time. So maybe that will help you in modeling, right?

Absolutely. Absolutely.

But I think at the end of the day, if we sign somebody up, I don't expect to get them up and running in 6 months.

Right. I have a few more questions, but I do want to ask and see if the audience has any. No one has a question for Frank. Don't be shy. Well, I'll keep going here then. So one of the interesting things Fiserv applied for bank charter in Georgia recently. What was the thought process behind that? And what benefits would it bring to Fiserv?

Yes. I think it's a very, very, very, specific item. I think anybody who could research it will see it clearly. In Georgia, there's a single-purpose license, and it's for sponsorship from merchant acquiring. And as the landscape continues to change, we thought it was important that we also had the capability to sponsor ourselves with the networks. Today, we use all bank sponsors, and we have great relationships. But as we grow the business and new landscape evolves, we thought it was logical to have our own charter for that single purpose vehicle. It is designed to compete with not one of our banks in any manner, shape or form, and in fact, help us continue to drive through our banking network and merchant acquiring business.

And does it have any impact on the P&L because now you have your own license and in some situations might not...

I think it's a -- this is nothing that's going to affect the P&L. It's more ensuring that we have the opportunity to control our own destiny if we need to.

And does this become a unique advantage that you have as we think about embedded financing because that's definitely something that everyone wants to have? It's a hot topic. And does that give you a competitive differentiation as you go to winning those deals?

Well, I'd say it differently. I think we have a tremendous competitive differentiation in embedded finance. I would not have this as the item, but I would have the fact that I think when we talk to companies, and we're in very, very robust discussions about the capability that people want. Remember, we have the ability to bring to banks products that would be different than they would usually see, and a bunch of -- to our nonbank clients a plethora of everything from merchant acquiring to Finxact to a value-added service products, everything from prepaid products to bring a debit network. And so when the phrase embedded finance, I don't know which year, somebody could Google and tell me which year embedded finance became a hot phrase. We were working on these things way before it was called embedded finance. We had distributed multi-products through a technical integration, delivering ledger capability, delivering card capability, and the ability to allow a retailer to be able to create more consumer finance capability. And for us, it was one of the things we highlighted at Investor Day because we think we have this unique position, availability to distribute those in an integrated fashion to help our clients win in a different way.

Maybe moving to capital allocation. How are you thinking about potential for M&A? I think you've been focused more on tuck-in type deals more lately, but is there appetite to do larger deals as well?

Well, I think we did -- I'm not sure, but I say we did the First Data Fiserv deal. So I think that will qualify as an appetite, maybe even the main course. I think it turned out pretty darn good. I think those things don't happen every kind of 1.5 years. I think we're a good acquirer. I think we're a good integrator. I think we know how to distribute product in a manner that crosses our distribution networks. I mean, we try to work on everything humanly possible all the time and think through them. So I can't really have a crystal ball about, are we going to do some big or are we going to do something small, or are we going to -- there's got to be a motivated seller at the right price for us to be able to transact. We will always take these small investment bets like you saw us on an Ondot or on a Bentobox because we get to know it, we get to understand it. We sit in the boardroom and then we acquire it. We feel really, really good about those type things. Historically, we did everything from acquisitions that got us our DNA product that put us in the ISV business. So I think we're active in thought.

And as you think across your portfolio, are there any specific areas where you think M&A could really help add capabilities? Any sort of examples of here are the areas where we might be looking to do something?

I think I like look at I think -- I personally believe we have the always best hand in the industry. It's our job to capitalize on that hand. It's our job to execute on that hand. We get up every morning maniacally focused on doing a better job for both our clients and our shareholders. I feel -- when you could have Clover, you could have an issuing business, you could have a debit network, you could have geographic diversity that we have and the ability to distribute. You have a bank franchise that's unparalleled, both in what you would classically call deposit and loan systems, and then a front-end, probably the largest digital user base in the industry. I kind of feel like it's pretty full hand. Having said that, there's always new entrants. There's always more digital capability. And we're always looking at it. Is there opportunity to do this better, faster than we can? Given the fact that we can build product well, I believe, organically, that's always part of the decision making sure there. But if we could put things through our system like we did on that, like we did Clover, like we do Bento. We think we have a strategic advantage in getting more VAS, more TAM and better growth rates. I mean, everything is really about our growth rate and margin expansion.

Just 2 high-level questions, Frank, when you guys did the Fiserv, First Data deal, I think, for a long time, the market didn't appreciate the distribution that the 2 assets bought together and the capabilities you have, and I think the market sort of realized that now. And sort of appreciated what they missed. As you sit here today, do you think there are certain things about the asset that the market still underappreciates?

I've never been the person who walks around and talks about what other people underappreciate because -- like I don't really know what that means actually. I mean there's a big market out there. Everybody is making their own decisions about what to do. We have pretty good track record in performance. I think it's 38 years of double-digit EPS growth. I think it's 3 years of double-digit revenue growth. I think we took a company that used to grow 2% to 4% and a company that went from 0 to 5%. We guided 7 to 9, and we outperformed that. We probably didn't get everything right. Nobody ever does. I think we try to not have mistakes that are costly. We obviously deployed capital well, I believe. So I don't really want to -- nobody understands this about us. That's like whining. I don't whine, I don't accept it. I don't listen to it. I don't believe in it.

Great. So then one last one for me. I think if we look back at the last 2.5 years since the deal was done, I think, in my view, Clover is the one that's really surprised us with the upside, it surprised investors. As we look to the next 5, where do you think the surprise will come from? And there should be upside...

China to surprise people that much kind of -- I mean I walked around in a Clover van and said you were going to see Clover all over, but people just booed me out of the stadium. So -- but I think now they're in stadiums. So it's not about the surprise, it's about the next level of operational excellence. It's about the utilization of AI and our capability not to do anything other than help our clients grow their business. Our ability to bring intelligence to our banks and help them because we are their infrastructure, understand their market, their end market better, our ability to bring down merchants more intelligence. The fact that you can walk past the screen in only one of our businesses, we could be doing 4,500 transactions a second, on a weak moment in the morning, W-E-A-K, weak moment in the morning is a testimony to what we can do. We lead the league in data. And if you lead the league in data, then you've got a better AI capability and our ability to use that AI to run our business better and help our clients run their business better. And that's kind of my dream. My dream is to just delight our client base that we are the strategic partner of choice every time they make a decision.

And since you brought up AI, I have to ask the question on AI.

Sure.

Do you see that as more of a cost opportunity for Fiserv? Or is that also a revenue opportunity? And if you could help put a time frame around how quickly that will start to move things.

Yes. I think you got to take it in the context, I talked about it, right? I think our job is to help our clients grow their business. So we have way more information than our clients have. And we can tell them way more about how they use our systems, how their clients use their systems and our ability to bring that together, synthesize it across the whole client base and then help them run their business better, will ultimately be a top line benefit for us. Of course, I said this the other day somewhere, and I got a lot of pings from people about what I said, but it's really true. We were using AI before it was called AI, right? I mean just like we had embedded finance before it was called embedded finance. I'm way better at getting stuff done than leave it, right? And so my point of view is we will always use it to be more efficient like we've always used technology to improve how we do our process. But I think the big thing is delivering value to our clients in a manner that we continue to help them grow. And that's an expanding TAM for us.

Great. So with that, we'll just end it right here. Thank you very much, Frank. This is very insightful.

Happy to be here.

Thank you for joining us.