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

We're reminiscing about the past here. So thank you, everyone, for joining. This is the Fiserv session. I'm going to do a fireside chat. My name is Tien-Tsin Huang, I cover the payment sector at JPM. And grateful to have Frank Bisignano here, President and CEO, to give us an update on Fiserv. I'll go through some questions, and we'll have a chance to ask questions, good questions from the audience here at the end, but thank you for joining us.

My pleasure.

Frank, it's always great to see you and catch up with you. So I know you've given some updates on the macro. I wouldn't be doing my job if I ask you here. You have a great view on the consumer and SMBs and even bank IT spending. Just quickly, just to get it out of the way, if you wouldn't mind giving us just a macro report.

Hopefully, everybody follows the First Data Small Business Index. We're pretty proud of producing that, and you saw the April numbers, and they were strong. Same, May is, May is not tracking at that strength, but completely in a good space for us, completely within our expectation range. I think you see the consumer changing. I think you're seeing volume but maybe a smaller ticket in cases, them taking down a hair in their spending, both at retail and at restaurant. For us, we got this diverse portfolio. So we feel very, very hedged in that portfolio in terms of spending. But the consumer is out, the consumer is out. There's always this question about bank spending. I don't know if you remember that. I'm familiar with working inside banks for a while.

Just a little bit.

And I just oversee a lot of the spending. And I always said like...

We interviewed you about it.

Yes. Yes. And I mean my view is that the services we provide are of essential nature, and banks are continuing to invest in those. So when people talk about bank IT spending up or down, I've always felt the things we do, there's strong demand for and continued strong demand both for our small businesses and our banks. We approach an attitude that we're here to help them grow their business. So their desire to invest and what we're doing is pretty large.

Okay. Good. So let's talk about the business, and a lot has changed in the industry over the last 2, 3 years and whether it's best of breed, modern, legacy, traditional, you name it. But Fiserv has been interesting, right? You've been able to thread this needle of being a scale processor, invest there but also build out software. You call them operating systems as well. So what worked? How do you properly invest on both sides, both on the scale processing front as well as on the emerging software area like Clover?

Yes. I think the construction of the company really matters. And the fact that we have a merchant business with fabulous distribution has allowed us to be able to continue to reinvest. So we have this reinvestment cycle that allows us to build software. I love telling people, the largest job classification in the company were software engineers. About 41,000 people, half of them are technologists, and 13,000 are software engineers. And from the start of the transformation of First Data, it was going to be a software story. And I do have a deep belief that scale matters. And yes, there are going to be legacy players. I kind of feel like you're a legacy player once you start making money. And then you got to decide are you investing in your franchise. And when you take what we do on the merchant side and then look at what we do on the bank side, I think that construction gives us a strategic advantage. And you'll hear people talk about embedded finance. I believe our capability in embedded finance is unparalleled, when you got Finxact on one side, you got Clover on the other, and you got all the value-added services we have in the middle. I think it's about investing in software. I think it's about building it out. We have a business that throws off really good free cash flow that allows us to make decisions. And I think we have unparalleled distribution, both in the U.S. and outside the U.S. And distribution, you can't wake up in the morning and just create it. So I'll get this company in a lot of ways that you couldn't. It's a 40-year-old company, having its fifth anniversary of the merger. And in some ways, we're 5 years old, but we have 40 years of the construction that made it what it is. So I think it's a one-of-a-kind asset.

Yes. No, I think something that always stood out to me is I think you said it a year ago, you talked about a unified company delivering more than sum of the parts. And that was happening at a time when other firms were struggling with keeping everything together and cross-selling. So you're in a good place now, but you did resegment the business to merchant and bank or financial solutions. Why the change? Can you maintain the cross-selling? What should we expect that may be different or not?

Yes. I think the resegmentation was about simplification. We have 2 client sets. We have business owners all the way to the biggest in the world, and we have banks all the way to the biggest. And if you want to run a client-centric business, focus on that. And that's what the resegmentation was about. I think the issue on top of that is that we're capable of bringing two really revenue-generating assets to our FI clients. One, be a merchant. And with Clover at the front and scale and size, our ability to bring to financial institutions something that brings them revenue in merchant acquiring is very, very attractive. And then you heard us talk about CashFlow Central, which is ARAP product that we think also heavy demand is not even in the market, and we have tremendous financial institutions signing up to it. So there's an example of going across the company, bringing capabilities, helping our clients grow. And I think those are probably ability -- those have the ability to have much greater penetration and growth. And it allows us to distribute software, distribute software, build software that's desired and distribute software.

Okay. Good. So if you took the -- [ under that ], I was going to ask about STAR under 5 questions, you'll win this bet. So I'm going to ask around STAR if that's okay. Too early?

You can do whatever you want.

Okay. I just want to make sure.

I came to your party, and you invited me.

This is true. I'm grateful you came, and I want to make sure you come back.

Be nice to me then.

I'm trying. That's why I'm asking if it's okay to ask it upfront.

Anything you want.

So STAR and Accel, the third largest debit network, you own that. Of course, Visa, Mastercard being the largest. It sits nicely in the center between the banks and merchants, of course, it connects it to. So with Reg II and all the changes there that allows you to be more competitive, what -- do you have the platform in place? Have you made the investments today in STAR that allows you to be competitive here? And it feels like there's a lot of strategic value in it as well. What do you see ahead for STAR?

Well, I'll take liberty here. When I got to First Data, Henry Kravis said to me, "Oh, we got to do something. We got this melting ice cube called STAR. And like we should sell it." I was like, "Gosh, man, it's a debit network. Like you can't create a debit network like a debit network is really cool." And he was thinking like, "What's wrong with you?" And ultimately, Scott and Henry and everybody bought into the concept that it's a strategic asset that can sit within the construction of this company. So I keep coming back to the construction of the company. And so our ability to use it to help -- and maybe at that time, it was the #9 debit network and the ability to use it to help financial institutions and help merchants became quite obvious. Then we did a merger, and we have STAR and Accel and continue. And then like Reg II was really just about competing for more transactions, right? I always said like, well, I don't know why those e-comm transactions aren't allowed to be competed for probably because people didn't think they were that big when Durbin came in. So early on, you had always asked me like, "How much more money you're going to make?" And I'd say, "Well, there's formidable competitors, and they're very good at what they do, but we're going to be able to compete for something we couldn't compete for before." And I think we've done a good job at that. I think it's got tons of runway and tons of opportunity. And so I think we always dreamed the opportunity, and I think it was appropriate that it occurred. And we're competing for transactions we can't compete before. So that's driving some growth, and we feel good about it.

Okay. Yes, because look, network economics, incremental margins are high. You see Capital One, Discover come together and all of a sudden, there's a lot of focus on that network. And you own one that's bigger than that, which is why I asked the question. Okay. So like I said, it's -- for now it's...

I don't like saying it like that, but thank you.

But I guess for now, it's really just measuring the growth in transactions. Is that the near immediate opportunity?

I think so. I mean yes. I mean it's -- well, the opportunity is it's transactions and maybe some clients that only had those transactions, so we would have never had any business from them. And then remember, we have a very simple philosophy, which is get more clients and sell more stuff. Much like the corner store, get more clients and sell them more stuff. So we now can get clients that we win and got through Reg II and then expand all the way through our stack even to merchant.

Okay. Makes sense. Okay, good. So let's do it -- let's start with merchant again. So the growth algo of 12% to 15%, I think that includes pricing is in the walk that you described in the past in your Investor Day. How is the current pricing environment today?

Yes. I'd say we -- I think about pricing more on value than like, hey, how are we going to get a bigger number because if you're not fairly priced, you're going to have higher attrition, which I think actually gets your [ whole ] economics. So there's pricing, but I treat pricing like a smidgen of growth. Our growth is really from growing merchants and selling more products.

Right, right. So attach the software and some of the higher price that comes with it. So I think with the merchant settlement, I know I've asked you about this before, but with surcharging and the changes around surcharging, is that meaningful to Fiserv?

I mean we had a $9 billion merchant business that operates throughout the world. We have leading positions in Latin America and Europe. So I won't put it at all in the meaningful category.

Okay. Good. I figured I'd ask anyway. So on the Clover front, 20% penetration of value-added services. I know you're trying to get more software attached. Do you have the software and the tools in place today to move that higher? Or is there more investment or maybe inorganic work that needs to come to get that number higher?

Well, I would say the following. First of all, yes, we have what we need, but we're never going to stop because it's a constant software journey. You go back to what's the #1 job type in the company, software engineers. So for us, we're going to continue bringing product. We always had a great gift product for large institutions who we built it to drop it down and the ability to bring a gift to every Clover merchant. We also built software -- I need to go back, everybody asks about back book. Back book, well, the reality is there's a Clover back book that we had built in 2017 that now we're back selling them more software also. So we'll build more software. We feel good about the suite we have. You see how continued growth in it. I think it's been a nice sequential walk, and you should expect us to continue that.

Okay. And I know international is important. You're launching in Brazil. I believe you have Mexico in the second half. I know there's competition there as well. You're coming through in Asia Pac. What's your right to win in these markets?

Well, I think our right to win in these markets are, first, about like if you take Brazil or look around that we have strategic positioning. We're not coming into the market as a new entrant. We have great relationships. I saw a CEO the other day that was talking about their mortgage share outside the U.S. Institutions run outside the U.S. It sounds like if we had Clover, we could grow it even 10% more. So I think our partners, which our distribution partners matter a lot, all want it. And so for that, we have embedded distribution already. And then software adoption will continue to grow around the world and Clover demand beyond the countries we've been talking about.

Okay. Good. Because it feels like competitively, you know this. I know you expect all of your competitors, we heard from Square and Global right before you, they're rolling out next-gen and verticalizing as well, trying to sell through different distribution. But what would you summarize is your differentiation when all's said and done on Clover versus that peer group?

Well, you know where I am on my competitors. I respect them tremendously, and I'll never underestimate them.

No doubt.

I think we all have different strategies really, right? We, for a very long time, always said we wanted to be the partner of choice. I think we proved that both in the ISV channel and in the bank channel. Distribution matters. I think also bringing value-added services is a big deal. And I think we've done that in a way that SMBs like it and the largest retailers in the world like our value-added services. So I think it's about an integrated offering. I think it's about having good partners and having them be able to have great economics also. I'm the worst negotiator in the company. Everybody says it because I'd rather do a deal and have a partner do well than try to have the best deal in the world. And for that, I think we have better growth.

Good. Okay. Same question for enterprise then. A lot of us here in the room and everywhere else studies enterprise. There's a lot of great players there. I think you're promoting value-added services, and then you talked about adding modularity there. Are those changes enough to accelerate?

Well, I think we've invested a lot in Commerce Hub, which was sitting under the Carat banner. We were always great in-store. And we built out e-comm post the BAMS split because it gave us the opportunity to be e-comm ourself. And I think with that, we got to build a modern stack. We always had processing. We're always a great processor, but how do you build a modern stack? And we're always great in-store. So in some way, what we've built in Commerce Hub and Carat give us with an orchestration layer and VAS on top of it, I think, give us a very modern capability that we feel we kind of right to win wherever we compete.

Okay. So future-wise, you're right there, you feel like?

Yes.

Okay. And then just lastly, on the traditional processing business. I know there's a lot of JV partnerships. There's questions on that. I know there's a term fee and a change there as well. You don't have to talk about that, but just talk about the health and the outlook on the base processing business.

Yes. I mean I always relate it -- this is -- I'm dating myself because I'm old. But when you're in a securities firm, you always felt like, well, I have a bunch of great services I can offer. I will sell them to -- I have all these fabulous financial advisers, but I also have this infrastructure that can do corresponding clearing for someone. So for us, it's like we have processing capability. We don't necessarily see it as a growth engine, but it provides a base ability. And lots of people at times want to convert to a different model and where they're capable of processing them for them. And obviously, in some of those processors, then they'll end up distributing more of our product over time.

And we've seen that with some of the changes.

Yes.

Okay. I'll pay attention to that. Last one on merchant. I think I have to ask you around the whole factoring, the cash advance business and the opportunities in Lat Am. I don't want to -- my head always spins when I hear about inflation and FX and everything else, but just why is this a good business for Fiserv? Why is it a good business for you? Is there still a lot of room to penetrate? I know there's a reason to go after it.

I would -- I'd use Brazil as the way to think about it.

Sure.

Like we were not in Brazil. We built a business in Brazil. We built a business that was about merchant acquiring and services, and anticipation was part of it. And it was a mechanism that actually was the mechanism to operate in merchant acquiring. I think when you cull through it all and get to the bottom of it, our ability to grow in good times and bad has proven, right, our ability to navigate. Yes, I know like I don't want my walk-up song to be Don't Cry for Me Argentina. But at the end of the day, we have a great Argentina business. And we had it before inflation, and we're powered through it, and we'll get to the other side in very good ways. So it's a good business for us because it creates economic value, and our cost of capital gets paid back in a very strong way. So it's market convention and we're a market leader.

Yes. And it's high-return business. What would your walk-up song be? Put you on the spot.