An Island of Safety in the Financial Sector
Cautious investors could see a lot to like in the bank technology industry.
Investors looking for relatively safe holdings with economic moats would do well to investigate the leading bank technology providers: Fidelity National Information Services (FIS), Fiserv (FISV), and Jack Henry (JKHY). Sticky customers and recurring revenue provide stability at the top line, and these factors proved their worth during the crisis. But while we believe downside risk is limited for this group, we see no compelling bargains currently, and we think Jack Henry is materially overvalued. Holders attracted to the company's stability are taking a meaningful risk when it comes to valuation, in our view, and might want to consider Fiserv as an alternative.
Wide Moat Surrounds the Core Processing Business
We think a wide moat surrounds the bank technology providers' primary product, core processing, as a result of high switching costs. Core processing is the nuts-and-bolts system that banks need to maintain customer accounts and post daily transactions. Given the mission-critical nature of core processing to their operations, banks rarely switch systems. Besides the potential for operational interruptions, converting to a new system would require the banks to retrain employees.
Brett Horn does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.