Warren Buffett recently purchased a roughly $200 million stake in Information-technology provider Fiserv Inc.m a provider of information technology to the financial industries. With a share price of $51.01, Fiserv stock trades at just over 15 times earnings, and has underperformed the S&P 500 over the past year.

Brave warrior advisors, the firm run by value investor Glenn Greenberg also added Fiserv to its holdings.
Fiserv is a leading provider of IT services to banks and financial institutions and helps them process transactions, and has been providing core account processing services to financial institutions for more than two decades. Major portion of revenues comes from account processing and electronic banking services and is a market leader on both fronts.

It has nearly 37% market share in account processing, and nearly 70% share of U.S internet banking transactions.
Competitve moat
Core processing is very important part of the company because it allows accounts to be managed,  it forms the backbone of the client’s back-office systems, and its mission is critical for day-to-day bank operations. Changing systems can most likely cause disruptions in the operations, and therefore there are high switching costs for core processing. This results in the company having captive customers which is a large competitive advantage. This forces clients to stick with the company which is  evident from the renewal rates of 90%+. Therefore,  90% of the company’s revenue is recurring in nature.

Risks
-Market wide consolidation in the U.S banking industry poses a threat to Fiservs prospects.
– Also its competitors have high switching costs because of the nature of operations and therefore it will be a big challenge for Fiserv to grab market share from other players in the industry. This allows less room for organic growth.

Disclosure: None