One of Canada’s most valuable private technology companies, Clio, has become the latest small business software vendor to venture into financial services, joining Shopify Inc. , Lightspeed Commerce Inc. and others in trying to increase revenues from their existing customers.
Clio, which sells practice management software to small and medium-sized law firms, said Tuesday it would offer an in-house payment processing service to its 200,000 customers. It’s a key milestone for Clio, officially called Themis Solutions Inc., on its way to an expected initial public offering within 18 months.
Chief executive officer Jack Newton said in an interview that sector-focused software vendors – especially publicly traded ones – are expected “to control their payments and own payments … we see payments and financial services expanding to a significant share of our revenue.”
The 13-year-old B.C. company sells subscription access to its online platform, which law firms use to track time and appointments, manage cases, generate and share documents, bill and bring in new clients. Clio, which raised US$110-million this year in an equity financing, valuing it at US$1.6-billion, has also started acquiring companies, fuelling its strategy to offer a comprehensive platform for legal firms to manage their operations.
A key part of that plan is to layer on financial services. ”We had seen other portfolio companies … that had executed around that same type of strategy and we saw the opportunity for Clio to do the same,” said Amol Helekar, a principal with U.S. investment giant TCV, explaining why his firm led a US$250-million investment in Clio in 2019.
Clio already offered payment processing but it was done through an outside vendor, AffiniPay, LLC. Clio’s cut from that arrangement amounted to less than 10 per cent of its US$100-million-plus in annual revenues, Mr. Newton said. The company also had middling luck getting clients to sign on for payments before the pandemic – partly due to the fact that the collection of legal fees is more complicated, requiring the placement of sums into trust accounts and involving larger amounts than typical e-commerce transactions.
But the shift to online commerce during the pandemic accelerated the adoption of electronic payments for legal fees. Mr. Newton said one-third of Clio customers now process electronic payments, up from 20 per cent in early 2020. He expects that to exceed 70 per cent within three years.
Based on that shift – and Clio’s move to provide an in-house service – he estimates Clio could generate half its revenues from payments and other financial services “in the next few years.”
It’s part of a broader trend among online software vendors to small and medium-sized customers such as retailers, restaurants, home service providers and online course teachers. Starting with payments processing, companies such as Shopify, Lightspeed and Thinkific Labs Inc. have started to layer on other “embedded” financial services. Those include, or could eventually include, cash advances, instalment payment plans, card issuance and treasury services, instant payouts, accounts payable automation, payroll services and tax services.
“Beyond financial services, commerce platforms have been providing solutions for an increasing portion of merchants’ operating activities, with further upside from other emerging revenue streams as their ecosystems scale,” Credit Suisse analyst Timothy Chiodo said in a July report highlighting the potential for embedded financial services at Shopify and Lightspeed.
Richard Tse, a technology equities analyst with National Bank Financial, said adding payments “represents some additive economics” for these software companies. “Payments is the beachhead to other offerings that arguably create economic value … and in turn translates into bigger uptake in the product platforms.”
For law firms, “there’s such a large flow of payments shifting from manual and paper-based, which were slow and hard to track and could lead to delayed payments and working capital issues for the business,” Mr. Helekar said. Capturing some of the associated revenue “means that the total addressable market expands in terms of the amount of value and revenue Clio can provide and generate.”
Mr. Newton said existing clients who use AffiniPay’s LawPay platform will be grandfathered on that system, but new payments customers will use Clio’s in-house offering. He says the Clio platform will “eliminate friction” that users go through dealing with two different vendors, with a “simpler, more streamlined and effortless” offering that syncs payment information with their accounting platforms and can send out automated payment reminders and billing messages.
Clio also said Tuesday it was starting a corporate venture capital arm that would make US$1-million worth of direct equity investments in early-stage legal technology startups. It becomes the fourth Canadian company in the past two weeks to add or expand commitments to fund early-stage ventures, following Canadian Imperial Bank of Commerce, Thomson Reuters Corp. and Spin Master Corp. They join a small group of Canadian companies that invest in startups, including Telus Corp., Shopify Inc., Power Corp. and several financial services companies.
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