2Q Earnings for FIS and Fiserv - Sluggish, But a Few Bright Spots

The two largest bank technology vendors reported their 2Q 2010 earnings since my last column 10 days ago. Jack Henry is scheduled to report its fiscal quarter and year-end results on August 17th. FIS and Fiserv both recorded sequential revenue growth of 2.4% (1.7% in constant currency) and 2% respectively. Within these sluggish growth rates, there were bright spots that reflect each vendor's diversified mix of products and services. Both vendors have recurring contract revenue streams that tend to moderate sequential revenue comparisons unless there is a significant client change that adds or subtracts a big chunk of revenue.FIS provided a sequential comparison that allows the reader to analyze the effect of the Metavante acquisition. Total revenue amounted to $1.29 billion, placing FIS as the largest bank technology vendor based on revenue for 2010. Its core processing revenue was basically flat. Encouraging revenue growth is due to payments products and international contracts, primarily its Brazilian card processing venture. The net takeaway is that FIS needs to remain competitive to attract new core processing contracts as the number of institutions continues to shrink and hope that its largest contract clients remain buyers and not sellers to avoid a revenue compression in core processing. FIS' organic revenue growth is primarily due to cross selling new services to all clients, accounting for 70% to 75% of sales activity. Pockets of organic revenue growth from new products and services are concentrated in the payments group, such as bill pay and debit card processing.

Fiserv's quarterly revenue totaled $970 million and it is now the number two vendor. Core processing revenue was essentially flat as account processing volumes and termination fees increased while license revenue declined. Fiserv's core processing revenue challenge is similar to FIS. Like FIS, Fiserv has success in adding bill payments to its account processing customer base. Fiserv reported that well over 1,000 core processing clients have added bill payments since the CheckFree acquisition. Thus, its sequential revenue growth was also driven by its payments group as both bill payment services and card processing were bright spots for growth. Fiserv reported a "majority of our bill payment clients experienced mid-teens average transaction growth rates versus the prior year. And importantly, each of our 10 largest bill payment clients showed sequential bill payment improvement in the quarter." On the card processing front, Fiserv's "revenue growth was driven primarily by a 22% increase in transaction volumes from our core debit products. We continue to benefit from both the consumer adoption of debit and adding new debit clients." For these two solutions, Fiserv has gained over 350 new bill payment and debit clients in the first six months of 2010, many of which are core processing cross sell wins. Bank bill pay customers have also expanded their bill payment volumes. Fiserv's new products are also gaining traction (e.g., Acumen - credit union core processing; ZashPay person-to-person payments).

Both vendors reported that their check processing business revenues continue to decline, representing a head wind that hinders revenue growth. While the check processing revenues are replaced with higher margin products and services, the fact remains that some legacy products and services will reach their tipping point and decline. Vendors that are not as diversified as FIS and Fiserv face a more difficult future since they don't have the cross selling opportunities. On a positive note, the preference for outsourcing over license/in-house for core processing, bill payments, and card processing is a positive factor for both vendors. The ongoing challenge for both vendors, and their surviving competitors, is to win more business from the shrinking marketplace of banks and credit unions. Losing clients, particularly larger clients, adds to the headwind that must be overcome as revenue growth due to termination fees is obviously not sustainable.

Bill Bradway, founder and managing director of Bradway Research LLC, analyzes the business strategies and IT investments of US banks and credit unions.