Leslie Muma is all smiles. The data processing services company he co-founded in 1984, Fiserv Inc., charted its 100th acquisition in early March, following record earnings in 2000. Then, at the end of March, the Brookfield, WI, company became the latest addition to the S&P 500 stock index of major industrial firms.
Fiserv, which has been listed on Nasdaq since 1986, took the S&P 500 spot that had been held by Old Kent, a Michigan-based banking company that was acquired by Fifth Third Bancorp, based in Cincinnati. (Fifth Third was already in the S&P 500, and, coincidentally, is a Fiserv customer.)
"It's been quite a month," says Muma, Fiserv's president and chief executive officer, in a recent interview with Bank Technology News.
Created from the merger of two regional data processing shops (Muma ran a bank data processing company in Tampa, FL, and George Dalton, his co-founder, had a processing company in Milwaukee) Fiserv today employs more than 15,500 people. It has offices and processing centers in nearly every state in America and several overseas markets.Addressing Fiserv's annual shareholders meeting on March 29, Muma was in an enviable position for the CEO of a technology company. While the wild gyrations of the Nasdaq this past year have sent many tech company executives running for cover, as anxious investors pummeled market valuations, Fiserv's share price increased about 25% over the previous March. During the first three months of this year, alone, when many technology companies were closing up shop, Fiserv's share price rose 3%, Muma said.
Fiserv's revenues in 2000, at $1.6 billion, were up 18% over 1999 revenues. Earnings per share and cash flow increased at double-digit percentage rates, too. "We did this in a year when not everybody can say the same," Muma told shareholders.
The irony to some is that Fiserv owes much of its success to checks, those little pieces of paper that pundits were telling us back in the 1960s would be an obsolete form of payment by the 21st century, but which have continued to grow nonetheless. Last year, Fiserv processed 4.5 billion checks and share drafts (the credit union equivalents of checks); by comparison, its total EFT processing workload (POS and ATM transactions) was 795 million.
Now Fiserv wants to extend its paper-handling expertise to support currency handling and processing for U.S. banks. It's not a stretch; Fiserv already claims a share of the Canadian market for bank currency handling. Intria Items Inc., its joint venture with Canadian bank CIBC, provides assorted currency services, including cash deliveries to bank branches and ATMs across Canada, as well as ATM deposit processing.
"This has been an area of strong business growth for us," says Ken Acheson, president of Fiserv's item processing unit. "We're really looking to expand this business into the United States."
Acheson, a former banker who joined Fiserv from Intria, hopes to convince a large U.S. bank to enter into a joint venture the way CIBC did with Intria. Alternatively, he says, Fiserv could take on the currency handling operations of a large U.S. bank through an outsourcing agreement. "We're quite confident that we will find some brave banker out there who can see this as a vision," Acheson says. "This has been a strong business for us in Canada. We've acquired quite a bit of expertise."
Dick Poje, president of R.J. Poje and Co., a Barrington, IL, consulting firm, says it's not a stretch to imagine a large U.S. bank outsourcing its currency handling to a company like Fiserv. "For a bank, cash piled up in a vault is a dead asset, whereas it's just inventory to a non-bank," says Poje. "Banks should have an enormous motivation to shake the money out of their vaults."
Today, the main providers of currency processing services are the Federal Reserve and a handful of large correspondent banks. Armored car servicesthe familiar Brinks and Wells Fargo trucks regularly seen at bank branchesare delivery services contracted by the banks. Acheson says that Fiserv isn't interested in competing with armored car companies; indeed, he leaves open the possibility of close cooperation. "We feel we could cooperate with armored car organizations. They might even partner with us," he says.
Currency processing, like check processing, is an economies-of-scale business. Both business lines also have similar technology requirements, such as high-speed reader-sorters and tools that can ferret out counterfeits. While some large banks have invested in currency sorters and related technologies, most (if not all) are running the equipment one shift per day, experts say.
Fiserv operates more than 40 check-processing centers, three shifts a day. Adding currency sorters to the mix would be simple, Acheson insists. "Because of our check expertise, we tend to see it not so much as bills but as pieces of paper, and we apply the same high-speed processing technologies to those pieces of paper."
And because Fiserv can spread the processing across multiple shifts and the cost of labor and equipment across multiple clients, Acheson believes Fiserv will help banks free-up working capital. "There are some really big savings available," he says.
"The amount of cash that's around will only continue to grow," Acheson adds. "And banks need to be able to process cash in a more efficient fashion as long as it continues to be there."
Lee Houser, an analyst with Raymond James and Associates, a brokerage based in St. Petersburg, FL, thinks it's a good bet that those banks that are already processing checks and other transactions through Fiserv, will, in time, outsource cash processing to the company, too.
"What's attractive about Fiserv's business is that once you become an outsource provider, it's a revenue-generating relationship, and you're generally not going to do anything to jeopardize that relationship," says Houser.
The more areas of its core processing operations a bank turns over to an outsourcing partner, the stronger the relationship grows, Houser adds. "If you're happy with your core vendor, you'll stay with them, and grow with them."
Says Franco Turinelli, senior analyst with the Chicago investment firm William Blair and Co., "Fiserv, strategically, has to be a single-source provider to banks. It has to be able to support any and all parts of a bank's operations."
Turinelli is keen on the idea of Fiserv entering the U.S. cash processing business. "It shows Fiserv is thinking about what its clients need," he says.
According to Turinelli, most banks in recent years have turned to outsourcing companies to help bring products to market more quicklyproducts like Internet banking and insurance. Looking ahead, he expects more banks will embrace outsourcing as a way to reduce costs. Check and cash processing, he says, are prime candidates for the cost savings offered through outsourcing. "I would expect to see more of a focus on strategic partnerships."
Fiserv already counts several large U.S. banks as customers and partners. Both J.P. Morgan Chase & Co. and Chicago-based Northern Trust Co. outsource check processing to Fiserv. In total, 21% to 22% of U.S. financial institutions today are Fiserv customers, according to Muma.
In February, Fiserv purchased four item processing centers from Marshall & Ilsley Corp., the Milwaukee-based banking company that last year spun off its technology operations (sans item processing) into a separate subsidiary, called Metavante, then pulled the plug on a planned initial public offering of the unit's stock. The four centers, which provide check and document processing to some 90 financial institutions across three Midwestern states, will add an estimated 200 million checks to Fiserv's annual processing load.
"The check business is a great business, once you figure out how to make money on it. And we're getting to that point," says Muma. He figures nearly 7,000 employees, or almost half the company's domestic staff, are employed today at Fiserv's 44 check processing centers.
While Fiserv's check processing workload, which should top 4.7 billion items this year, is large, it's only about 5% of the number written each year in the U.S.; 15% to 20% of the total that clear between banks (non-on-us items). To put this into perspective, consider that the New York Clearing House (the nation's oldest and largest private sector check clearing house), during the month of December 2000, oversaw exchang-es of 23.4 million checks between the eight largest banks in New York. Only the Federal Reserve, which processes an estimated 20 billion checks a year,and Bank of America, which processes about a billion checks a month, are be-lieved to be handling larger check processing workloads. The rest of the business is split among scores of data processing and banking companies.
It isn't easy sizing up the check processing market. Even the Federal Reserve says it's not sure how many checks are processed through the banking system each year, and has commissioned a high-profile research project to ascertain a number. The last time the Fed tried to size the check market was in 1979, and most current market estimates are based upon extrapolations from the data in that study.
Fiserv's take is that at least 70 billion checks will change hands in the U.S. this year, Muma says. "Check volumes are still growing, year to year, and probably will continue so for the next several years."
Even if that growth stops, it will take years for electronic payments to outstrip paper, he observes. Besides, "as check volumes begin to decline, we think people will be more likely to outsource check processing," Muma says.
And currency processing.
"I think it's a great idea," says consultant Poje, who estimates that three-quarters of all payments in the U.S. today are transacted using currency and checks.
"The amount of cash that's around continues to grow, and the need to process that cash in the most efficient way continues to be there," says Acheson.
That is not to suggest, of course, that Fiserv won't be pursuing outsourcing opportunities in the electronic payments arena. "We've embraced electronic commerce as a business," Acheson says. "But at the same time, we know that paper isn't going away, so we do both. That's what makes us a strong organization."
Asked if he fears losing check processing volume to emerging electronic payment options, Acheson replies: "The reality of life is that somebody will do it, so you might as well cannibalize it [check volume] yourself."
Houser, the investment analyst, describes Fiserv by saying, "Their business is to be the core processor for banks. This is more about the technology and software piece, rather than the pushing of the paper."
Fiserv certainly seems to have an eye for technology and software. Several years ago the company purchased BankLink, a popular suite of electronic corporate treasury management services created by Chemical Bank, which was absorbed into what is now J.P. Morgan Chase. ImageSoft Technologies, which specializes in image-based document and check imaging solutions for financial services, was purchased from Cincinnati Bell Information Systems (CBIS), which had dabbled briefly in banking systems.
Fiserv also supports bank ATM and debit card services, Internet banking applications, credit processing, insurance administration and claims processing, trust, investment and trading services, among other related services.
As of March, Fiserv had $32 billion assets under management in its trust operations. In addition to its check and electronic payments processing, Fiserv systems last year processed 225 million deposit, loan and lease accounts, 1.9 million active securities accounts, and 24 million insurance policies on behalf of client financial institutions. Securities and insurance are two areas of the business Fiserv entered only recently, through acquisitions.
Muma says that finding best-of-breed acquisitions is key to Fiserv's growth strategy. "We find good companies, and we don't take them apart," he says. By the end of March, Fiserv had already exceeded its 2000 acquisition total of three. In addition to the M&I processing centers, Fiserv acquired companies specializing in insurance rating software, lease vehicle remarketing services and a service bureau specializing in employee benefit programs.
When it comes to cash handling, Fiserv is banking on the fact that paper payments will continue to dominate the U.S. payment system for another several generations, and that banks have grown keen on the idea of outsourcing data processing workloads.
"Somebody has got to do that [processing]," analyst Turinelli says, "and Fiserv has shown that it can do so profitably and get good growth out of it."