Fiserv Looks to Hit Square in the Middle of Mobile Payments

NEW YORK ( TheStreet) -- Payments provider Fiserv ( FISV) is gearing up to help thousands of banks follow in the footsteps of Discover Financial Services ( DFS) and eBay ( EBAY) unit PayPal, while also going up against the Square payment service.

With its new SpotPay mobile card reader service -- announced on Monday -- Fiserv looks to partner with banks to exclusively distribute a service to small businesses, "that enables merchants to accept card and check payments anywhere, anytime."

One key element differentiating SpotPay from Discover and PayPal, is that the merchant will be able to use a smart phone or tablet to swipe any credit card.

Discover and eBay in August agreed to a partnership allowing PayPal's customers to be able to use the service to make purchases at the 7 million retail locations that currently accept Discover, beginning in the second quarter of 2013. In hindsight, this was an obvious step for PayPal, allowing the service to move beyond facilitating web-based transactions.

This is similar to the Square Card Reader, but SpotPay has the advantage of also allowing merchants to "deposit checks using the mobile remote deposit capture feature from Fiserv that allows users to securely take a picture of the front and back of a check and deposit the item electronically."

Fiserv general manager for network solutions David Keenan, says "there is a proliferation of mobile devices and now that everyone has one in their hand, it is going to make sense to bring about a revolution in 'anytime anywhere' commerce," and that "financial institutions need to be in the center of this."

"We have all grown very comfortable with card-based payments add check-based systems," he says, "but the financial institutions community brings trust and security and is in a unique position to protect that payment system so that you and I don't get ripped-off."

"SpotPay helps financial institutions return to the center" of payment processing, Keenan says, adding that "we have created a solution that has better features than anything on the market, better pricing and is delivered through that trusted FI relationship."

"We are thrilled by the initial response here," at Fiserv's annual conference in Las Vegas.

Banks that focus on small businesses are always looking to increase the scope of their customer relationships, typically tying checking account services to credit services. SpotPay provides an additional fee-generating element to existing customer relationships, while also facilitating deposit gathering, through the check processing service.

Fiserv has a long history as one of the largest providers of core and subsidiary processing systems to banks and other financial companies, providing a ready set of current customers for SpotPay. The company said that SpotPay was already available to financial institutions that are part of the company's ACCEL/Exchange network, which integrates ATM services in the U.S. and Canada.

Fiserve has over 5,000 core processing customers among banks, thrifts and credit unions, and offers various other electronic payment services, including Mobiliti, through which consumers can access their checking accounts to review balances and transaction history, pay bills, and make person-to-person payments, through their mobile devices. Fiserv says that Mobiliti "enables financial institutions to reach more consumers than via other mobile technologies because it supports all three mobile access modes: browser, application and text."

Fiserv also offers the PopMoney service, which is a person-to-person payment service that counts Citigroup ( C) as its biggest customer, and negotiations are underway to link PopMoney with clearXchange, which counts JPMorgan Chase ( JPM), Bank of America ( BAC), and Wells Fargo ( WFC) as members.

So what does all this mean to investors?

Fiserv is often considered a defensive technology stock, because of its recurring revenue stream from long-term contracts with financial companies for various core and secondary processing services.

The company reported second-quarter earnings from continuing operations of $163 million, or $1.18 a share, increasing from $97 million, or 67 cents a share, during the second quarter of 2011. Total second-quarter revenue was $1.100 billion, increasing from $1.065 billion a year earlier.

The company's Payments and Industry Products division saw second-quarter revenue of $609 million, growing from $579 million in the second quarter of 2011, while its Financial Institutions Services institution's revenue increased only slightly, to $502 million in the second quarter, from $497 million, a year earlier.

Fiserv bought back 2.1 million common shares during the second quarter for $143 million, and had about $9 million remaining in its existing buyback program.

Fiserv's shares closed at $71.95 Wednesday, returning 22% year-to-date, following a flat return during 2011. The shares trade for 12.5 times the consensus 2013 earnings estimate of $5.77 a share, among analysts polled by Thomson Reuters.

Sterne Agee analyst Greg Smith in August called Fiserv one of his firm's "top picks" among financial technology companies, saying that "Fiserv has the highest percentage of recurring revenue within our coverage universe at roughly 85% so visibility always tends to be relatively higher at the company compared to others."

Smith said that during the second quarter, Fiserv's "internal revenue growth was a little disappointing at 1% as license sales were light and some revenue was pushed out due to increasing scope on some large deals that delayed revenue generation," but that "fortunately, visibility is good for a second half rebound" and for Fiserv's management to achieve its "internal revenue growth guidance for the year of 3%-4.5%."

When discussing SpotPay, Smith says that "it's nice to see them roll this out for their customer base but this isn't anything that's going to move the dial significantly for Fiserv.

On the other hand, Smith says "Fiserv has significant P-to-P services using your bank account, and is big in bill-payment," and that "you add that all up and it has to have significant presence in mobile, which moves the dial for me."

The analyst estimates that Fiserv will earn $5.84 a share during 2013 and said his price target for the shares of $82 is "based on a 14x multiple on our 2013 EPS."

While pushing to innovate in mobile payments, "Fiserv is a very stable company," Smith says, because "if a bank is using Fiserv for core processing, it is very sticky. If you have this key position at the bank, you then want to cross sell more and more services around that."

"The story here is this core position they have with the banks and then layering products and services," he says, adding that "this isn't a fast growing company because they are large with so much market share, but on the margin, there are still are new products and services that banks are buying, which is driving some revenue growth. "We think the second half of this year is shaping well and next year's uptick in their revenue growth rate should drive the shares higher."

Interested in more on Fiserv? See TheStreet Ratings' report card for this stock.

-- Written by Philip van Doorn in Jupiter, Fla.

>Contact by Email.

Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.

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