Banking BPO Insight

Fiserv is continuing the trend that most services and product vendors in the financial services industry have shown for the past two years, namely declining product revenues and (modestly) increasing service revenues.

Towards mid-2009 BPO and ITO contract awards started increasing. However, by Q2 2010 even those contract awards have stopped growing, as the U.S. and EU economies have slowed, and more importantly consumer and business sentiment has turned decidedly negative.

Most increases in service revenues in this current period have come from increased billings under existing contracts. Fiserv has experienced the same conditions in its operations this quarter, and is likely to continue to do so for the remainder of 2010.

At the time of the Q1 earnings announcement (see separate article) we posed a number of issues that will impact whether FIS can grow its business as planned. Those issues are:

• Financial solutions:
  - Q: Can FIS convert its consulting revenues into ongoing transaction and fee based revenues once clients adopt changes to operations indicated by consulting and professional services?
  - A: FIS did start to convert its consulting into software sales. A good start, but it will need to accelerate this trend to make this a successful growth business
• Payment solutions:
  - Q: Will the growth in new payment modes (esp. debit processing) continue to outpace the decline in traditional payment types (esp. check processing)?
  - A: So far this has not happened. The decline in traditional payment forms (which are more costly) has overwhelmed the growth in electronic forms of payment. FIS will need to accelerate consulting of marketing support to help dirve up revenues from this line of business
• International:
  - Q: Exchange rate volatility should make international revenues volatile over - time. However, more important, FIS needs to increase the growth rates in international business faster than 0.6% per year (in same currency terms). In the next 5 years, this is the most important area for FIS to increase its growth rates
  - A: FIS has grown business in Brazil fast enough to drive up revenues rapidly. It will now need to do so in multiple international markets to maintain this pace.

Q1 2010 y-o-y revenue growth continues the growth begun in Q4 2009. Revenue growth was primarily due to growth in loyalty services (primarily the Canadian Airmiles program) and private label credit services.

Restructuring reporting segments to combine private label processing services and private label credit services is a bit troubling where the primary cause of revenue declines in 2008 and 2009 was due to credit losses. Alliance Data has improved performance of the credit portfolio, but it should maintain on-going transparency into this recent source of operational problems.

Finally the growth in revenues reflects generally improving economies in the U.S. and Canada, which can be expected to continue over at least the next year.

TSYS has faced significant revenue headwinds from client losses in the past year. That seems to have ended outside North America, and the company has started acquiring clients in emerging markets.

TSYS downsized its workforce in February 2010 by c.5%. This has brought its expenses in line with its reduced volumes and allowed the company to post a 10.3% increase in profits to $51.3m. However, TSYS will still have to stop its decline in North American revenues if it is to continue to improve its performance.

TSYS is pinning much of its hopes for turning around its North American performance on its newly created joint venture First National Merchant Solutions (FNMS) which focuses on merchant processing services. TSYS is right to focus on this fast growing segment of the marketplace, but it will need to grow this JV faster than it has grown its own in-house merchant services operation if it wants to out-perform the competition.