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Online payments company Vindicia has raised $20 million in a fifth round of funding as it tries to match the rapid growth of online merchants in the age of digital distribution.

Online merchants want to widen their reach to as many consumers as possible, and Vindicia supports them with worldwide online billing, fraud prevention, and chargeback management. It deals with merchants who sell virtual goods in online services such as games or social networks.

Virtual goods once seemed fanciful but are now a critical part of the ecosystem for online games and social networks. They are expected to generate $1.6 billion in revenue in 2010 in the U.S. alone, according to market analyst Inside Network. U.S. consumers have loosened up and are now willing to pay real money for virtual goods.

If there are more ways to pay, then there will presumably be more purchases and more profits for the whole social apps industry. Vindicia recently added the ability to pay for items via prepaid gift cards in a deal with InComm.

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Investors in the new round included Bertelsmann Digital Media Investments, DCM, FTV Capital and Onset Ventures. Eric Byunn, a partner at FTV Capital, has joined Vindicia’s board.

Vindicia’s clients include Symantec, Activision Blizzard, Intuit and Atari/Cryptic. Vindicia was founded in 2003 by chief executive Gene Hoffman, who along with other members of the Vindicia team founded eMusic and sold it to Vivendi Universal. Vindicia’s billing system protects merchants from fraud, widens their reach, and makes sure that users complete their transactions without technical failures. Vindicia says that in the past year, its clients saw increases in customer retention of 10 – 25 percent a year. That resulted in the generation of $40 million in extra revenue for clients. Vindicia’s number of transactions handled rose 45 percent in the past year.

Vindicia has 60 employees. Its rivals include Zuora, Aria Systems (which we wrote about last week), and Digital River. Vindicia tries to differentiate itself with a scalable automatic payment infrastructure. It handles more than 180 million transactions. For merchants to integrate Vindicia’s CashBox payment service into the payment options they offer on their sites, they connect the Vindicia applications programming interface into their web site and can then customize the configuration as they like.

The company previously raised $21 million from DCM, Bertelsmann Digital Media Investments, Leader Ventures, and Onset Ventures.

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