Investors pressure FIS and Fiserv to split businesses to boost profits

Three years ago, payment processing giants FIS and Fiserv each completed multi-billion-dollar acquisitions, promising that scale would drive profit growth. However, entering 2023, both companies face profitability challenges in their two core service areas—merchants and banks—and investors are pressuring them to consider breaking up their businesses.

In 2019, FIS (formally Fidelity National Information Services) acquired Cincinnati-based merchant payment processor Worldpay for $35 billion, with a total transaction value of $43 billion. Then-Chairman and CEO Gary Norcross said at the time: "Scale matters in our rapidly changing industry." He said the merger would combine "modern" software services for banks with e-commerce payment innovation. In January of the same year, Fiserv agreed to acquire New York-based First Data in a $22 billion stock deal, with a final transaction value of $46.5 billion.

However, three years later, the global pandemic and a wave of digital competition have changed the landscape. FIS and Fiserv have fallen behind venture-backed fintech upstarts like Square, Toast, and Stripe due to their bets on legacy technology. The pandemic accelerated e-commerce growth, and the upstarts gained market share, intensifying competition. Now, the two giants are restructuring operations through cost cuts, divesting business units, and potentially laying off thousands of employees globally.

High inflation, rising interest rates, and a potential recession will test their 2019 promise that "scale equals higher profits." Peter Sanchez, Executive Vice President at Northern Trust in Chicago, said: "It's worth watching whether these legacy payment processors can regain some lost market share, or whether the gap with more agile fintech companies has become unbridgeable." Sanchez, who oversees Northern Trust's banking and treasury services, believes large processors are constrained by regulation and market changes and cannot adapt as quickly as younger rivals.

The list of digital payment competitors is long: Block's Square (a pioneer in enabling small merchants to accept credit card payments), Toast (capturing the restaurant payment market), Stripe—a "super unicorn" valued at $95 billion—and Dutch newcomer Adyen, which is breaking into the U.S. market. Sanchez noted: "Fintech companies have had a huge advantage in recent years amid regulatory and industry changes because their platforms were designed to standards from the start, rather than having to adjust after systems were built."

Although payment giants have absorbed entrepreneurial knowledge and technological innovation by acquiring smaller companies, not all deals have succeeded. For example, Monitise, acquired by Fiserv, has gradually faded away. Robert Keil, Chief Payments Officer at Sutton Bank in Attica, Ohio (a former Fiserv vice president responsible for fintech and emerging payments), said: "FIS and Fiserv are 'where good technology goes to die.' I joked with colleagues, 'They buy the technology, and then it slowly dies.'"

The integration challenges of large-scale acquisitions

The two companies have become technology holding companies with numerous independent business units, noted Mark Flamme, Managing Director at AlixPartners. Some businesses operate under their own brands and sell through independent software vendors, making cross-selling difficult. "The integration challenges are enormous," Flamme said. "There needs to be deep thought about the business models of these players."

The similarities between the two U.S. companies go beyond their names: both sell payment, processing, and technology services to banks and merchants; employ tens of thousands of people, a significant proportion outside the U.S.; and generate annual revenue exceeding $10 billion. Recently, Fiserv announced it will move its headquarters from the Milwaukee suburbs to downtown next year, while FIS established a larger new headquarters in Jacksonville, Florida this year.

Both companies' current leaders came from the 2019 acquisitions. Frank Bisignano previously led First Data and became Fiserv's President and COO after the acquisition, rising to CEO in 2020 and Chairman this year. Stephanie Ferris served as CFO at Worldpay, joined FIS as COO after the acquisition, was promoted to President in February this year, and became CEO this month.

Both leaders face a dramatic shift in the payment landscape: the pandemic accelerated payment digitalization, businesses followed consumers toward online payments, contactless processes rapidly became widespread, and open banking and cryptocurrency payment channels also gained momentum. Young, cost-efficient fintech companies seized opportunities with new services (such as earned wage access and buy now, pay later), sometimes avoiding regulatory scrutiny.

Flamme said: "If you're not a big player, you can incubate products at lower cost." New entrants are forcing costs down, "and the entire industry is under enormous margin compression pressure because of this disruption."

Facing the siege of new fintech companies, Fiserv and FIS are cutting jobs and expenses while investing in new initiatives such as small business services and fraud prevention. Competition in the merchant services space is particularly fierce. UBS analyst Rayna Kumar said: "Competition in merchant acquiring has intensified, and FIS and Fiserv continue to invest to counter new entrants."

Currently, Fiserv is outperforming FIS. This is reflected in stock prices: FIS shares are down about 40% this year, while Fiserv is down only 6%, below the S&P 500's 19% decline. Mizuho Securities analyst Dan Dolev wrote in a December 15 note to investors: "FIS has been operationally disappointing, especially in merchant acquiring, underperforming peers like FISV, and share losses in key verticals (such as losing to TOST in the restaurant market) have weighed on the stock."

FIS becomes a target for activist investors

The larger FIS became a target for two activist investors this year. This month, it reached an agreement with one of the hedge funds, D.E. Shaw, requiring FIS to improve financial performance by early 2024. Third-quarter results dissatisfied senior management, with Norcross saying he was "not satisfied" weeks before his departure. FIS CFO Erik Hoag mentioned earlier this month that bank division sales were weak and demand from small and medium-sized enterprise customers in the merchant division had decreased.

In the SME market, FIS lacked services to compete with Fiserv's Clover software, Toast's restaurant products, and Block's Square system, so it acquired Payrix this year. The company is investing in the new division but is still catching up. "FIS has been missing this piece for a long time," Kumar said. In the banking division, Hoag said discussions with "cautious buyers" have "lengthened sales cycles," which applies to large contracts exceeding $50 million, noted BofA Global Research analysts in a December 13 report.

Last month, FIS launched a cost-cutting program of at least $500 million, including potentially laying off thousands of employees. As of the end of last year, the company had 65,000 employees, with more than 40,000 outside the U.S. This month, the company also committed to a comprehensive operational review under the new CEO. FIS declined to make Ferris available for an interview. BofA analysts wrote: "FIS's outgoing management team has often struggled with quarterly execution and expectation setting over the past two years."

Fiserv adapts and adjusts, says CEO

Fiserv nearly doubled in size after acquiring First Data, combining banking technology services with merchant acquiring capabilities, with approximately 44,000 employees, 18,000 of whom are outside the U.S. To pay for the acquisition debt, Fiserv committed to cutting $900 million in expenses within five years, achieved by eliminating duplicate functions, streamlining technology, improving operational efficiency, and optimizing real estate (according to a March 2019 proxy filing). Ultimately, the company said it had cut $1.2 billion in costs by the end of last year, in half the time.

In an interview last week, Bisignano said Fiserv has been able to adjust quickly and downplayed similarities with FIS. "One way to think about this company is that if you count the issuing business, the merchant business, the debit network, and the fintech business, we serve every American household," Bisignano said. "We compete in multiple areas. I think our results demonstrate the power of the franchise."

Fiserv has continued to acquire since 2019, including Ondot Systems, Pineapple Payments, BentoBox, and Finxact. However, Fiserv is still integrating new systems with decades-old technology. Cliff Gray, head of Gray Consulting, said some of Fiserv's processing technology is 40 to 50 years old, "and although these systems work well, they don't speak the language of modern developers."

Stripe (formerly a Fiserv customer) and rival Adyen pose intense competition to FIS and Fiserv in the enterprise and commercial processing space. In the small merchant segment, Block's Square is a "formidable rival" to Fiserv's Clover point-of-sale system, Bisignano acknowledged in an interview this month. Fiserv is not standing still: this year it continued to restructure its corporate structure, divesting business units in South Korea and Costa Rica and its IT business, and further cutting jobs to improve profit margins.

Fiserv is focused on strengthening its balance sheet in the current economic environment and reviewing costs. David Robertson, publisher of industry publication Nilson Report, said: "Some companies make catastrophic mistakes, but in most cases, large companies like Fiserv with that revenue scale can survive even if they make mistakes." Jon Friar, portfolio manager at T. Rowe Price Associates, believes established companies like Fiserv may be better suited to today's economic environment than some high-flying disruptors with rapid expansion but negative margins. The firm holds a 7% stake in Fiserv.

Although Friar is satisfied with the direction of Fiserv's merchant acceptance and fintech divisions, shareholders want the payments division to perform similarly. That division holds a mixed bag of assets—card networks, bill payments, and card printing—lacking the natural connection or growth trajectory of the Carat and Clover units. He suggested more divestitures might be the answer: "We certainly encourage them to continue streamlining the portfolio." Bisignano disagrees: "Our merchant business and banking business complement each other, and I think these assets should be together."

Is divestiture the answer?

If industry consolidation occurs, a difficult economic environment could favor large, established companies. FIS and Fiserv are profitable, well-capitalized enterprises, unlike smaller fintech competitors that rely on external financing. FIS reported net income of $655 million on revenue of $10.8 billion for the first nine months of this year; Fiserv reported net income of $1.78 billion on revenue of $13.1 billion for the same period.

Flamme noted: "The valuations of many so-called disruptive fintech companies have been hit hard this year." FIS and Fiserv "may see this as a good opportunity to fill gaps and acquire some fintech companies that were previously nipping at their heels, because valuations are now more attractive, so I wouldn't rule out them making moves."

Like Fiserv, FIS has historically strengthened its competitiveness through acquisitions, but its executives recently indicated that the company's current financial position does not support such investments. Instead, FIS faces pressure to sell parts of its business (or even its entire merchant business). Kumar said: "I see increasing investor demand for FIS to divest its merchant business." BofA analysts hold a similar view: "FIS could unlock significant shareholder value through portfolio reshaping, most notably by divesting the merchant division, which remains FIS's most controversial business. Unless activist investors intervene, any major reshaping seems unlikely."

Activist investors have already intervened, although D.E. Shaw and Jana Partners have not made public statements about divestitures. A D.E. Shaw spokesperson declined to comment, and Jana did not respond to a request for comment.