All right, welcome back, everybody. Very pleased to have Bob Hau, CFO, and Takis Gerogokopoulos, Chief Operating Officer, both from Fiserv. Thank you so much for being here, gentlemen.
Absolutely. Thank you for having us.
Bob's going to give some brief prepared remarks before we jump into our fireside chat.
Yeah, so thanks, Ramsey. Appreciate the opportunity, and thanks for hosting us. I wanted to kick off a little bit. Obviously, there's been a lot of questions around Clover volume recently. Clearly, it's been a difficult stretch for all of us investors, all the shareholders. One of the most important things I want to convey to everybody is I and the management team remain absolutely convicted, strong conviction about our ability to deliver on our four-year commitments. That's the Clover $3.5 billion of revenue. That's the organic revenue growth for the merchant and financial services sector. It's the total company organic growth, the margin expansion, EPS, everything that we reaffirmed in first quarter. There's absolutely been no change to that. Now, if you look at Clover's performance in the first quarter, we reported 27% revenue growth. That's on top of a 30% growth Q1 of last year.
Strong growth puts us right on track for that $3.5 billion. I certainly recognize that the reported GPV for the first quarter and our outlook for the second quarter, 8%, was a surprise or a disappointment. Particularly if you factor in the impact of the gateway that we have talked about extensively in the last three weeks, it is right in line with our expectations as we entered this year, right in line with where we believe the year is going. We have talked a lot about gateway, low double digits in the first quarter and in the second quarter. That is our expectation to deliver that $3.5 billion. We feel good about our ability to do that. Just a little bit of background on that gateway, because I think there has been some misunderstanding about what that is and why we did it.
This is a third-party gateway that we resold over the last several years. We found ourselves a couple of years ago being a very large part of a third party from a revenue standpoint. We started to see some significant price impact and operational impact. We made the decision a couple of years ago or so to exit that gateway. When you make that decision, you want to move all of those merchants to a new gateway. Obviously, the right choice for us is our go-forward gateway, Clover. We went through that process. It was not about driving additional volume or revenue to Clover. It was about operational efficiency, cost savings, and getting folks to the appropriate gateway. We did that. We started it late 2023, really accelerated. The peak amount of movement was in the first quarter of 2024.
You see that impact now as that business kind of lapsed itself, so to speak. The primary focus of the company on Clover in particular is revenue. Certainly, volume plays a part of that, but so does hardware, software, capital. We are building an operating system for small businesses. We're certainly focused on adding more merchants with quality volume. What I mean by that is merchants that will buy it, that can benefit from that full operating system capability. We could get lots more volume, but that would not be the quality volume. We have a bunch of micro merchants that necessarily do not bring all of the opportunity around the surrounds, the value-added services. We continue to be focused on that. If you kind of pull up from the quarterly dynamics, we are building an operating system. We continue to bring new hardware.
We brought five new pieces of hardware to market last year. We continue to build out software capabilities, both horizontally and vertically. What I mean by that is capabilities that all merchants will use and benefit from, as well as things that might be specific to a restaurant or a retailer or a service. We did a lot of that new software last year. We are seeing the benefits of that. That is how you get that spread between volume and revenue, because we are selling lots of additional capabilities and additional services that we bring to the Clover client base. We continue to focus on that. We have a long runway ahead of us. We are still kind of single-digit penetration market share, whether you measure that by volume or merchants or revenue. Significant opportunity. We continue to be quite focused on that.
The last thing we've got is generally, we've got great progress on Clover. We've got a great merchant business, which is bigger than Clover. We've got a great financial solutions business. All three of those on track to deliver on our commitments this year. We're focused on doing that. Yes, we'll continue to drive volume, because you need merchants, you need volume. It is a broader focus than just volume. We're comfortable that we're going to deliver on that. There is a benefit of having volume. There is a benefit of having that full operating system. There is significant benefit of having the merchant solutions business and the financial solutions business. You've heard us talk a lot about the small business integrated suite that brings the best of both parts of the company to bear for our small business clients. We continue to expand our distribution channel.
We got lots of different growth vectors in Clover. International expansion for new countries in the first quarter. We launched this past weekend Clover Hospitality. We continue to build out that small business suite to include ADP, now fully integrated. The run solution for ADP, now integrated as of the beginning of this month into Clover. The continuation of other verticals and horizontal capabilities. Lots of exciting growth factors for Clover, lots of exciting growth for verticals or capabilities for all of Merchant and for Financial Solutions. My good friend Takis here to my right is here to talk about all those great things we got going on.
Fantastic. Let me ask you one quick follow-up, and then I'm going to jump right in with Takis, which is, has anything changed in terms of the Clover growth algorithm, the volume growth algorithm? We've had a couple of quarters that obviously the street read in particular ways. Has there been any changes in terms of the drivers of that volume growth?
No, no, absolutely not. Like I said, we continue to see kind of that low double-digit volume we saw on a gateway-adjusted basis in Q1. We will see that in Q2. That is what we have got factored into that $3.5 billion that we actually provided the first outlook back in March of 2022 now.
Fantastic. Great. Thank you, Bob.
Absolutely.
Appreciate that. Takis, it's a pleasure to meet you today. Thank you for coming to the conference.
Thank you.
You are a modestly new addition to the management team at Fiserv. Why don't you give us a bit about your background? Tell us a little bit about what you've been doing before Fiserv.
Sure, sure. As you can tell from my name and my accent, I'm from Greece, a background in computer science, PhD in mathematical economics. I was a partner at McKinsey here in New York. Then I went to JPMorgan, where I spent the last 17 years in a bunch of different roles. For the last seven years, I was running the payments business of JPMorgan, which in some ways mirrors a little bit what Fiserv does. There is a processing business and then a digital payments business. Joined Fiserv six months ago and took on my job about a month ago, which is why I still have notes to make sure I don't say anything stupid.
Fantastic. Maybe we can start, and this could be a question for either of you, but maybe we can start with some high-level thoughts on the broader consumer spending environment, sort of what you guys are seeing out there. It seems to be it's very topical. What are you seeing?
Yeah, I would say, I mean, we all see the same reports around consumer sentiment. When you look at the actual spending data, you see a modest slowdown, not a decline. You also see a shift between discretionary and non-discretionary spending. You see some decline in average ticket size in some areas like restaurants. I would say slower growth, but still growth.
I think important, Ramsey, for us, given the breadth of our merchant acquiring business, and this is true of Clover and more broadly across merchant, we have a pretty good spread or variance between discretionary and non-discretionary. For merchant overall, we're about 50/50. 50% of our revenue is around discretionary spending, 50% is non-discretionary. If you look at Clover specifically, it's a little bit more discretionary because there's a bigger restaurant business inside of Clover. Broadly, good dispersion, good exposure across lots of different verticals. We tend to weather any economic softness or downturn better than most. We have demonstrated that over the last many years at this point in time.
Maybe even decades.
Yeah.
Back on Clover, and this is a question relevant to Clover revenue. One of the key drivers is software there and software penetration. You have a goal to get to 27% attach rate by 2026, I think. You are already in the mid-20s. I guess, how should we think about that journey? Do you pause once you have reached it? Or what are we looking at?
I think there is no pause to innovation and to the new services that we want to bring to our clients. I think already what we see this year is bringing a bunch of new capabilities to our clients. I would highlight Cash Flow Central, which is invoicing and bill payments, which allows us to go after the services vertical in a much more focused way. The partnership with ADP that Bob already mentioned around payroll. We have another one coming up around employee time tracking. We have new SaaS plans that we're going to launch shortly with kind of a more attractive and simpler pricing, Clover Hospitality. We have identified a few areas where we have opportunities like health care, where you should expect us to see more. We are very optimistic about that trajectory.
I also want to talk about Clover Capital for a minute, where at least the way we approach it is it's kind of a low credit risk, low risk, low duration exposure. We are, I would say, several times smaller in terms of exposure than what we see from our main competitors. Our sale box is relatively limited into larger merchants. Even within that sale box, our penetration is still in the single digits. In my view, and I think our collective view, there is still much more upside before we think about or before we start worrying about the risk we are taking. I think there is a lot more we can do. Now, the other thing to think about when it comes to us is all of the new terms that we are not addressing today, right?
Today, we are mostly going after two major verticals, sorry, retail and restaurants. Our market share, as Bob said, is about 10%. There is no reason why that number cannot significantly increase over time. With invoicing and bill payments, and then with expanding what we do in health care, we can take that market share, which is in the kind of mid-single digits, and continue to grow that. That is before we think about e-com. I think you have seen us talk about embedded finance and what we do with DoorDash. DoorDash is just one example of what we can do with marketplaces. Once you start thinking about marketplaces and the many, many buyers and sellers that interact with those, many of them are small businesses.
As we bring together embedded finance and our merchant business and our Clover business, that will give us access to a customer base that we do not have today at all. It is not hardware, but all of the VAS that Clover has around fraud, around invoicing, around bill payments, and so on and so forth, all of that will be relevant in that space. We see a lot more upside compared to where we are.
Now, in terms of software, just to give a really current example, we have a great position in restaurants with the launch of Clover Hospitality, which is our new software suite targeted at high-end restaurants. Think about white tablecloth, kind of $1 million a year or larger restaurants. We just doubled the TAM that is addressable for us in the restaurant space. We have had a great restaurant business, but now as we bring our product to market that really is targeted at that high end, we just doubled the TAM with some additional software.
Seems like a tremendous amount of opportunity. Maybe we can talk a little bit about Cash Flow Central. That seems to be a real differentiation in terms of the competition as you're tapping into kind of the different aspect of your clients' financial lives, as it were. Maybe talk a little bit more about that. What has the initial reaction been with your client base? What is your perception of what the demand will be for that product and whether your bank clients see that as differentiated maybe I'm describing it?
Yeah. I think it was one of our banking clients that described it, the best product he has seen in the last 25 years. I think if you look at banks, right, one of the big issues that banks have is how to cover small businesses and how to service small businesses. They are very good at opening bank accounts. Some of them are pretty good about giving loans. That is kind of where they stop. All of the other issues that small businesses have, which is how to accept payments, how do we pay our bills, right, how do we do our taxes, all of those are things where the wallet goes outside of the banks. As some of the fintechs started expanding their value proposition and encroaching into the banking space, the banks start looking and say, how do we compete in that space?
I would say that is probably one of the top two or three conversations that every bank in this country is having. Cash Flow Central is part of the answer. Cash Flow Central, together with Clover, is a large part of the answer, especially because it is embedded within the bank ecosystem. If you think about the bank.com front end, that is where Cash Flow is embedded so that you can look at, as a small business, you can look at your balances, you can look at your sales through Clover, and then you can look at all of your accounts receivable and accounts payable over a period of time. You can see that all in one place without the need to go to a bunch of different providers, pay a bunch of different fees, and manage a bunch of different spreadsheets.
The value proposition, in my view, is amazing. It is very complementary to Clover, but it is also very complementary to our FIG business. That is part of what I love about our business model, which is we are in the middle of both of those streams. Our first client on CFC went live, and we expect to have many more coming live over the next few months. Clover and, sorry, CFC is also being embedded into Clover. As a bank, you can choose whether you want Clover and CFC, which is what we hope, or you can get either one of those. As an SMB, when you are on Clover, now you will start being able to do invoicing if you are a professional services small business, and you can start seeing your bill payment.
The other thing it allows you to do as a bank is much more accurately target the right products to the right clients, right? Before you see balances, now you also see sales, and you know future balances by seeing the cash flow. That means when you think about your small business credit card, when you think about term loans, when you think about Clover Capital, all of those things you will be able to target much better with much more information than you could in the past. I would say this is a gap for every bank. Even if you look at the mega banks, including my former employer, this is something that does not exist anywhere. We think we are bringing something really cool to the market.
You also mentioned the recent ADP partnership. What I think is interesting about how these threads all kind of connect is that it feels to me like Cash Flow Central sort of reframes the services you can provide in the mind of the end client. ADP, the relevance of your two businesses and your two distribution, your products sort of together are enhanced by the client thinking, okay, Cash Flow Central, this is not just about payment processing, it's about a bigger breadth of offerings. Talk about the ADP partnership. What will that look like?
Yeah. Both CEOs have spoken about it publicly in their earnings and otherwise about it. We are very excited. The early signs that we see in terms of cross referrals are very good. I would say the theory behind two companies with very large SMB books offering complementary services and making sure that ADP is embedded into Clover, making sure Cash Flow Central is embedded into ADP is something that intuitively makes sense. Given the very large customer base of the two companies, we expect that it is going to deliver quite a lot. To go back to the first part of your question, I think it is worth just taking a step back for a minute and talking about what is Clover and how does ADP fit into that. Clover is an open small business operating system, right? It comes in a few different components.
The first component is a dashboard that a small business owner can use to interact with us, look at their transactions, their reporting, their recommendations, their service issues, et cetera. The proprietary hardware, you know, the very nice Clover terminals that all of you guys know. The integrated set of horizontal value-added services. Think about fraud, working capital, payroll, accounting, tax, invoicing, bill payments, all of those things, some of which we deliver on our own and some of which we will deliver with best-in-class partners, ADP being the prime example, but will not be the only example. As small businesses become bigger and more specialized, you go into the industry-specific software. In some cases, like restaurants, we have a fully owned solution with Clover Hospitality all the way from like the cart outside, all the way to larger restaurant chains.
With Cash Flow Central, now we are able to go after the services sector. We work with about 2,000 ISOs and ISVs. They obviously have their own very kind of detailed value proposition for each industry. We are able to offer processing hardware where it makes sense and some of the horizontal VAS where it makes sense. You add to that customer management, loyalty, the ability to build and manage their own website, and insights into their clients' clients because we have not talked about data, but data is a big differentiator of Fiserv. We have this open API environment, which allows us to do two things. Take that whole experience and embed it within a bank and take that whole experience or components of that experience and embed it into partners like ADP. We think what we have is unique. It goes well beyond payments.
We need to continue to deliver it, and we will be looking for many more of those kind of ADP partnerships with people that understand SMBs from different dimensions from which we do.
That was my follow-on question in terms of whether the ADP relationship opens up your aperture for a more similar type.
It's a great partnership, and there are many things that small businesses need. As we find the right partners, we will continue to do that. Our infrastructure is such that it makes it very easy to do that.
Despite the temptation to talk about Clover the entire time, I'm going to actually ask you something else.
What else is there?
Yeah, ask you about something else. Carrot.
Yeah.
Carrot is something I think is a little bit less well understood by the street. Maybe you can talk about what is Carrot? What's the value proposition of Carrot?
Yeah. Carrot is our suite of enterprise services, services for enterprise clients. You should think about it in kind of three components. Component number one is the front end, which we call Commerce Hub, which is a modern API layer that our clients use to connect to us. Today, that is for enterprise clients. In the future, it will be our front end for every client of the merchant business, including Clover. There is a set of software value-added services, which are not dissimilar from what we talked about. It is about fraud. It is about auth optimization. It is about payment, least cost routing. It is about FX, et cetera, et cetera. Embedded finance is another component of that.
On the back end are the data and analytics, which allow enterprise clients to operate more efficiently, the ability to benchmark them against others, to compare their cost of payment acceptance against others, to provide alternative methods of payments. We've talked about BNPL, and we've talked about wallets and pay by bank and all of those things. That in a nutshell is Carrot.
What about the revenue model for Carrot? Is it similar to the way we think about Clover, where there's payment processing revenue and then there's ancillary revenue? Does it work that way as well, or is it more?
It's exactly the same. The clients may be e-com, omni, or card presence. Depending on the client, there is hardware revenue. There is software revenue. There is data revenue, and there is processing. The software and data revenue is becoming an increasing part of the business. We like that because it moves us away from the kind of commoditized per transaction fee more into the places where we add value to the clients, and then we get paid in proportion or in a relative basis to the value that we provide. We think that's the future. We think that's what some of the leading fintechs are doing, and that's where we're going.
Another product that we hear about is Commerce Hub. The way that it's sort of an orchestration layer that brings together a lot of your different processing value-added capabilities, where does Commerce Hub sit in the sort of technology stack in relation to something like a Clover or like a Carrot? Where is Commerce Hub?
Commerce Hub sits exactly at the front, right? It is what the clients interact with. It is what the clients see their transactions with. I mentioned the Clover dashboard. Over time, the Clover dashboard will also be connected to Commerce Hub. Commerce Hub is how clients connect. Why is that important? What differentiates best-in-class fintechs from everyone else is the simplicity of interaction, the simplicity of the APIs, and the simplicity that anytime you want to add something new, it's a new country, it's a new payment method, it's a new set of VAS, it's a configuration, it's not an implementation. Commerce Hub is our way to do that. It's already live in the U.S. I think actually by the end of the year, it's going to be processing the largest volume within the merchant business compared to all of the other legacy gateways that we have.
The next thing is making it into a global front end. The first region in which we're going to do that is Latin America. You may ask, why Latin America? Because we think that there is a big market gap. The breadth of the offering that we have there, we think, is much better than anything else that we've seen, and therefore we'll be able to give to global merchants America's value proposition that we think is the best. Obviously, after that, we have Asia and Europe coming through.
Another buzzword that gets kicked around the industry that I'm curious to get your take on, because I candidly have not decided whether there's a there there, but it is agentic commerce. That's something that we hear quite a bit about. Is that something that you think about? Is there a new way?
That reminds me a couple of years ago, a couple of years ago in a different conference, someone asked me about Web 3.0. At the time, that was the best thing. I think agentic AI is actually real for the same reason that AI is real, right? The way I think about it conceptually is we've had, let's call it, three commerce revolutions in the last, let's call it, 15-20 years. The first one is kind of the consumption/recommendation engine, which is think of the Amazons of the world. You have an inventory, an infinite inventory of stuff, and then based on your history, you get relevant recommendations. You go to revolution number two, which is more like the influencer or platform-based one. I think there of Instagram, I think of TikTok, I think of Xiaohongshu, right?
What you have there is you have a bunch of people that show you the content, and you can make the purchase of multiple brands within that. You can get your fashion trends from that. It's kind of an evolution of that, and we can see many of the first wave companies trying to pivot to the second wave. The third wave is how do you automate all of that? How do you actually have someone who can, or a model that can recommend to you what is the next fashion trend that you should be thinking about? What is the next cool brand that you should be thinking about? What is the way to kind of replenish your inventory without you having to do the work? That's what agentic AI is.
It's a bunch of LLM models that are going to look at your preferences, that are going to look at your data, that are going to look at your history, will make those decisions for you and bring it to you as the CEO to hit, yes, approve, make the payments. I would say, in my view, the LLM is almost the commodity in all of that because we see kind of a lot of LLM models, and I expect to see much more democratization around the models. I think the value will be much more around the customer experience, the knowledge of the customer, the ability to tokenize, subledger, protect, understand the consumer ID, and make all of that happen in a way that's seamless and at scale. The reason why I'm excited is because these are exactly the things that we know that we do well.
There is much more to come here, but I don't believe this is Web 3.0. I think this is much more real. I think we see use cases in retail. We see use cases in small businesses, as I mentioned, inventory management. We see use cases in travel where you can give the AI your itinerary and they can find the cheapest flights. That's kind of almost there. It's up to us to create, partner with the right clients and kind of deliver on that. Sorry, long answer.
No, no, that's fantastic. I think we're all trying to figure this out. You obviously have a very nuanced and sort of privileged view of it. Changing channels completely, there's been some large-scale consolidation. Maybe there's a question for both of you guys. There's been some large-scale consolidation in the industry. Some of your competitors are, it feels like it's 2018 again, combining. What does that say about the competitive environment? Are you perceiving that there will be any changes in the competitive environment? What does the M&A backdrop really look like?
Let me start with the narrow, and then Paul can give the broad one. The narrow one is it really doesn't change anything for us. We have a roadmap. We have our investments. We have our software development pipeline. We have our clients, and we have our prospects. We have a very clear plan of what we need to deliver, whether it is Clover, whether it is enterprise, whether it is issuing, or whether it is FIG. I would say it does reinforce one thing, which is with those changes that we saw, we are now the only company that sits at the intersection between banking and commerce. In my view, that creates two very big competitive differentiators that we believe are kind of real and sustainable.
The first one, which I mentioned, SMB and the ability to connect the dots between what a small business needs and what a bank needs and can deliver, that I believe is unique. Our market share, again, is single digits. I think that's part of what's going to drive it. The second thing is data. Everyone talks about data. There is no company that has the breadth and the depth of issuing, merchant, and banking data as we do. That means the ability to understand a consumer, the ability to understand a small business, the ability to reduce fraud, the ability to provide insights to our customers about their customers, the ability to benchmark by combining that information, in my view, is unique, and it's a competitive differentiator.
Not much to add to that. We are focused on delivering for our clients with our roadmap and our capabilities. We think we are in a great position, as Takis says, to have both that merchant and that banking capability, the Financial Solutions. We think that adds to our product capabilities. It adds to our distribution capabilities. These are companies we have been competing with for a while. They are going to morph. They are going to adjust. They are going to change. We think we are in a great spot and looking forward to continue to compete.
Fantastic. Great conversation. Thank you so much for being here, Takis.
Thank you very much.
Appreciate it.
Good.