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Processors Feel Customers' Pain Only Indirectly

Core processors will feel only limited pain from the financial crisis.

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The term data processor encompasses a fairly wide range of companies, from payroll processors such as  Paychex (PAYX) to prescription drug sales tracker  IMS Health (RX). In this article, however, we will focus on two types of processors tied to the financial industry: core processors (or bank technology companies) and credit card processors.

Core processors serve the banking industry, and the market has found them guilty by association. While struggling customers are not a recipe for success for any company, we think the negative effect of the financial crisis on core processors will be limited and that three core processors we cover ( Fiserv (FISV),  Jack Henry (JKHY), and  Metavante (MV)) look attractively priced. Core processing refers to the day-to-day systems banks use to track customer transactions and balances. Given the mission-critical nature of these systems, banks almost never switch vendors. Excluding cases where customers are acquired by banks, customer retention rates are typically on the order of 99%. Core processors take advantage of these essentially captive relationships to cross-sell other products such as Internet banking and electronic bill payments, which is why the term bank technology company applies as well.

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Brett Horn, CFA has a position in the following securities mentioned above: COF. Find out about Morningstar’s editorial policies.