Fintech Companies Are Catnip For Investors

By David Ranii The News & Observer (Raleigh, N.C.) WWR Article Summary (tl;dr) Fintech startups are hot right now. Companies like PayPal and Square, initially made their mark by processing payments or making loans -- that directly competed with banks. Newer fintech startups are moving beyond payments and loans to include everything from digital person-to-person money transfer services to paperless billing for medical practices and hospitals.

The News & Observer (Raleigh, N.C.)

The financial technology sector, or fintech for short, has become a magnet for money.

Since 2010, nearly 2,500 fintech startups across the globe have attracted more than $50 billion in investments by venture capitalists, private equity firms and others, according to management consulting firm Accenture. In 2015 alone, $22.3 billion was invested in fintech startups, up 75 percent from 2014.

Fintech companies, a group that includes companies such as PayPal and Square, initially made their mark introducing disruptive new ways of doing things -- such as processing payments or making loans -- that directly competed with banks and other traditional financial institutions.

"The large institutions no longer have a stranglehold on everything that happens," said Jay Bigelow, director of entrepreneurship at CED, a Triangle support group for entrepreneurs. "That sort of disruption has opened the door for a lot of (startups) to come along."

"The driving force is the breakthrough of different technologies, mobile being one of them," he added. "The idea that I'm going to securely be able to pay things with my phone is really brand-new territory and has changed the landscape of banking and credit cards and credit processing."

In recent years, however, a second category of fintech company has emerged -- those that are working with banks and other established players.

Michael Lyons, an executive vice president at PNC Bank who is in charge of the company's fintech efforts, said that major banks have awakened to the challenge of fintech and are ramping up their response.

"That challenge has morphed into opportunity," he said. PNC has invested in two fintech companies, instituted pilot programs with fintech startups and has teamed up with other large banks to develop a digital person-to-person money transfer service.

CED classifies more than 30 entrepreneurial companies across North Carolina as fintech, with two-thirds of those businesses headquartered in the Triangle.

Dhruv Patel, CED's director of investor relations, describes the Triangle's fintech community as nascent.

"These are very early days," he said.

Here's a look at three local fintech companies.

SPREEDLY The sales pitch for Spreedly's online payment software is that it allows e-commerce merchants and marketplaces that feature multiple merchants to easily and securely process payments from consumers. It also securely stores credit card data in a virtual vault that makes future purchases by those same consumers faster and easier.

Spreedly's business customers "don't want to be in the business of storing credit card data," said Justin Benson, CEO of the Durham company. "They can outsource the risk."

Spreedly's software also is integrated with more than 100 payment gateways worldwide that facilitate transferring credit card payments to the merchant's bank.

The alternative is for an online business to build its own integration infrastructure or lock into a single payment gateway. The latter can be problematic for some businesses, such as those that need to process purchases in different countries, and prevents them from taking advantage of lower rates charged by many local gateways.

Spreedly, which was founded in 2008 and was re-booted in 2011 when Benson joined as CEO, has about 350 customers. To date Spreedly has raised a total of $5.5 million from investors.

The privately held company doesn't disclose revenue, but Benson said it doubled last year and he expects it to double again this year.

Today the company has more than 25 employees, all but two of whom are based in Durham.

"We're still hiring," Benson said. "Our goal would be 30 to 35 employees at the end of this year, 50 to 55 at the end of next year."

PATIENTPAY Durham-based PatientPay provides paperless billing for medical practices and hospitals.

It's not only a cheaper alternative, providing savings of up to $4 per collected payment for medical practices, but it also triggers significantly faster payment by patients, said co-founder and CEO Tom Furr.

The reason: With PatientPay's patented technology, the bill issued by the healthcare provider is in synch with what the patients' health insurer says that the patient owes in out-of-pocket costs, which often isn't the case with traditional bills. That eliminates the confusion that prompts patients to delay paying their bill while they try to reconcile what they really owe.

"If I can't understand it, I'm not going to pay it," said E. Miles Kilburn, founding partner of Mosaik Partners, a San Francisco venture capital firm that has invested in PatientPay.

"What PatientPay has done," Kilburn added, "is simple and yet is a very, very large advancement in the ability to get people to understand their bills and then pay them."

Prompt patient payments are more important than ever because of the growing popularity of high-deductible insurance plans under which consumers pay a greater share of medical costs.

"High-deductible plans are the future of healthcare," Furr said.

PatientPay, which was incorporated in 2008 and released its first product in 2010, has about 100 customers. In addition to working directly with healthcare providers it recently started signing up recovery cycle management companies that handle billing for hospitals, including one that works with about 60 hospitals.

PatientPay, which has 15 full-time employees supplemented by 10 contractors, has raised about $9 million from investors to date. Furr anticipates that the company will seek to raise another round of funding amounting to $5 million or more in the fall.

VERTICAL IQ Raleigh-based Vertical IQ's business is focused on making bankers more effective by boosting their knowledge of the industries their clients and prospects operate in.

"We are a one-of-a-kind support tool for bankers as they call on businesses," said Kevin McNamara, president of the 15-employee company.

Vertical IQ has developed more than 300 profiles of industries and industry segments, from advertising agencies to window manufacturers. That includes 14 different types of physician practices.

Bankers are typically generalists, calling on a dentist one day and a book store the next day, said McNamara. That makes if difficult for them to know the ins and outs of all the businesses they call on.

Bill Bunn, director of retail and mortgage banking at Charlotte-based Park Sterling Bank, which uses Vertical IQ, called it "a very helpful, intuitive tool."

Company executives feel more comfortable working with a banker who really understands their business, said Bobby Martin, Vertical IQ's co-founder and chairman. Martin previously was co-founder and president of First Research, a Raleigh company that was acquired by Dun & Bradstreet for up to $26.5 million.

The Vertical IQ profiles, available online to Vertical IQ subscribers, offer detailed descriptions tailored for bankers, including an analysis of trends and the working capital needs of each industry. It also offers "Call Prep Sheets," accessible by mobile phone or tablet, that provide much more concise information; and industry alerts that provide information on major new developments.

"It gives the banker the ability to quickly and easily get up to speed ... and become knowledgeable about the industry," said Martin. "It prevents them from wasting the business owner's time."

Brad Neigel, director of commercial channel strategy at Raleigh-based Yadkin Bank, a Vertical IQ customer, said he's been "very impressed and pleased with the ability of Vertical IQ to keep their data current" so that their bankers know what's happening in different industries.

"It's been a great tool for us," he said.

Founded in 2011, Vertical IQ's industry profiles are used by roughly 27,000 bankers at more than 130 banks. Revenue at the company, which hasn't needed to raise outside capital, has been growing between 20 and 30 percent annually and is projected to hit $1.8 million this year.

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