For many years, payroll tech barely modified. Now, upstarts and incumbents alike try to overtake how companies pay their individuals by placing finance within the apps they use day by day.
Being a primary mover hinges on timing. Introducing a brand new services or products earlier than everybody else, leveraging that head begin to entrench your self out there earlier than others observe swimsuit, requires being first, positive — however timing will also be a double-edged sword. There’s such a factor as being too first, too quick: launching a product earlier than demand for it exists in any respect, like AT&T’s “Picturephone,” a Seventies predecessor to present video-calling programs.
The payroll area is a market setting at present ensnared in such a temporal bind. At its coronary heart lies a disbursement follow as outdated as historic Greece: Whereas cost types (cash, not salt), strategies (ACH, not human fingers), and compliance (tax codes, not imperial decrees) have developed, payroll has been slower than different fintech sectors — like banking and peer-to-peer funds — in turning technological advances into actual enhancements.
Put bluntly: Payroll nonetheless appears to be like rather a lot prefer it did when its market chief, ADP (NSDQ:ADP), acquired its begin within the mid-20th century.
Payroll platforms typically battle to kind an adequately simplifying layer between
(1) messy, onerous tax frameworks and
(2) the necessity, tout court docket, to pay staff legally and usually.
Their interfaces may be clunky and require specialists to operate correctly. The backends may be inflexible, failing to serve area of interest industries the place employees are paid by the pound, or mile, or another non-hourly denominator. And their self-service assets may be troublesome to navigate, including additional incentive to pay HR professionals or payroll middlemen within the hopes of avoiding IRS ire.
Given the sector’s torpid price of change and the multibillion-dollar companies dominating it, it’s excusable to assume all of the first-mover benefits available within the payroll area are lengthy gone.
However on the tail finish of the 2010s, serial entrepreneur Andrew Brown, CEO and co-founder of Test, determined the benefits have been nonetheless ripe for the choosing — and seized a well timed alternative that didn’t actually exist even a couple of years prior. As Brown noticed it, the benefit lay in overhauling how payroll options are distributed and the place they’re used, somewhat than instantly competing with incumbents’ merchandise via branded, platform-level enhancements.
This coincided with the proliferation of Software program-as-a-Service (SaaS) corporations and their hyperpersonalized choices for companies of all stripes — from vet clinics to regulation corporations to freight corporations. The launch of the iPhone and rise of mobile-first computing had accelerated the shift towards industry-specific software program, enabling companies to maneuver away from clunky, one-size-fits-all options in favor of instruments designed for his or her precise workflows. Buyers and founders alike noticed potential in software program purpose-built for particular sectors, and launched a litany of vertical SaaS ventures.
As these platforms matured, they expanded past their preliminary software program choices and embedded monetary instruments into their interfaces. Funds, appointment reserving, lending, and different monetary providers turned baked into the software program itself, turning platforms like Mindbody into the monetary spine of health studios, or Procare right into a administration and billing system for childcare facilities. But, regardless of this evolution, payroll remained a niche — nonetheless tethered to the identical legacy suppliers.
For Brown, it begged the query of why working programs that addressed the distinctive wants of every {industry} struggled to furnish equally tailor-made payroll options. Dependable payroll, amongst different variables, retains employees exhibiting up.)
“What we noticed was the chance that nobody else did, which was that there wanted to be numerous precise new payroll corporations getting created to energy all kinds of various areas, and that the extra one-size-fits-all generic payroll mannequin simply wasn’t going to work anymore,” he instructed Fintech Nexus.
Brown’s query — why hadn’t payroll developed the best way different embedded fintech elements had? — was, in hindsight, formidable but additionally naïve. Payroll doesn’t simply transfer cash; it sits on the intersection of among the most advanced programs in our monetary infrastructure. In contrast to funds, which largely observe a standardized stream, payroll is deeply entangled with tax codes, employment legal guidelines, advantages administration, and regulatory filings — all of which range not simply by state however throughout 13,000 totally different U.S. tax jurisdictions.
So when Test launched in 2019, it launched embedded payroll to the world, a sector whereby Test has been the primary mover and largest participant. Over the previous six years, Test has signed on SaaS options like small enterprise platform Wave, residence service administration answer Housecall Professional, and greater than 60 different platforms. Additional downstream — that third B in B2B2B — Test processes payroll for tens of hundreds of companies, and, downstream from there, a whole bunch of hundreds of employees’ wages.
Test’s enterprise mannequin rests upon two core assumptions. The primary is that SaaS platforms will develop in measurement and type. Market analysis estimates development within the vertical SaaS market at a compound annual development price (CAGR) between 12.3% and 23.9% via 2034. If these figures maintain true, Test’s platform purchasers — who’re clients, but additionally middleware and middlemen to finish customers — could open Test up to an enormous complete addressable market with out gross sales and assist groups commensurate with that scale, bringing down buyer acquisition prices and bettering unit economics. This allows Test to bundle itself economically right into a SaaS firm’s bigger providing (as a $20+ per 30 days add-on, for instance), thus enabling its companions to undercut incumbents considerably on worth.
The opposite core assumption is that, by investing singularly in an embedded mannequin, Test has arrange an innovator’s dilemma. Brown likened this dynamic to the showdown between streaming providers and cable corporations, whereby incumbents needed to determine between “killing” their current enterprise and making much less cash or avoiding competitors with tech-driven challengers. Based on this view, direct-distribution platforms both must eat into their current income streams via oblique gross sales, or successfully hand over the embedded-payroll subsector to Test.
Brown is aware of his firm holds a small piece of the whole payroll pie, even when embedded gross sales enhance its relative development price. A Sequence C firm with funding from Stripe, Index Ventures, Thrive Capital, and Bedrock at a $725 million valuation, Test processed $4.1 billion in payroll final yr. For scale: That’s about the identical as ADP’s internet revenue in 2024, and nonetheless only a drop within the bucket relative to the $10 trillion in wages flowing round america yearly.
“Absolute magnitude is an honest measurement and rising in a short time,” Brown mentioned. “Relative to the general pie: nonetheless tiny.”
However the goliaths at the moment are coming into Test’s territory, suggesting that they, like Brown, see a future for embedded payroll that eclipses its present proportions — innovator’s dilemma be damned. ADP, Paychex (NSDQ:PAYX) subsidiary Paycor (deal pending), and Silicon Valley-based challenger Gusto, amongst others, have launched their very own embedded payroll options. Startup-y readers could have been particularly more likely to see Gusto’s public push into embedded payroll, which has included high-profile tie-ups with main monetary establishments. Most notably, as of September 2023, it provides payroll options to Chase Fee Options’s enterprise clients, of which there are greater than 6 million.
In an e mail interview with Fintech Nexus, Yi Liu, Basic Supervisor of Gusto Embedded, mentioned Gusto’s embedded companions serve greater than 1 million small and midsize companies (SMBs), which supplies Gusto “the chance to speed up the variety of small companies we will serve at scale.”
“We consider providing embedded payroll options to our companions — and their SMB clients — is a win-win-win throughout the board for everybody,” Liu mentioned. “Right now, our direct enterprise serves greater than 400,000 SMBs, however we acknowledge there are tens of millions extra that may profit from quick, correct, and compliant payroll and HR options.”
Although Brown claims Test “acknowledged that development [i.e., a need for embedded payroll] … three or 4 years earlier than anybody else did,” that’s up for debate. Different payroll-focused entrepreneurs likewise declare to have seen the eventual promise in an embedded play earlier than Test was even based.
Gusto founders Joshua Reeves, Tomer London, and Edward Kim, for instance, not too long ago mentioned they really steered away from embedded payroll within the early 2010s. They as an alternative noticed extra market promise in a direct gross sales and distribution mannequin. Tomer London, Gusto’s Chief Product Officer, instructed angel investor Rex Salisbury in 2024 that the founding crew initially thought their “principal thought [was] going to be [an] API for payroll,” however they finally centered on small companies, the place the founders had extra expertise and noticed a market hole.
On the time of its founding, Gusto had few potential conduits for deploying an embedded technique, as there have been only a handful of embedded-compatible platforms round (names like Uber, Instacart, Sq., and Toast). There weren’t sufficient second Bs within the B2B2B playbook to make it work within the early 2010s. “The shopper base beforehand simply didn’t exist or a minimum of was too small,” Brown famous. Test had the good thing about being a later first mover; it had a whole bunch, after which hundreds, of software program suppliers and SaaS corporations to which it may supply its payroll answer.
Based on Liu of Gusto Embedded, two “main shifts amongst SMBs” have made embedded payroll extra viable than it was. Most significantly, Gusto thinks “SMBs more and more need and anticipate their workflows to be in a single place,” resulting in extra all-in-one options from banks, fintechs, and vertical SaaS suppliers. On the engineering aspect, Liu added, “We’re seeing extra builders get comfy with constructing with APIs, part SDKs, and so forth.” Consequently, builders can customise consumer experiences with out being consultants in that area, such because the intricacies of payroll.
Test’s well timed execution on the embedded payroll thought has supplied it the posh of time to construct moats and solidify its product — teeing it up, it hopes, to transmute its first-mover benefits into long-term dominance.
Gusto has processed some $1 billion in embedded payroll funds since launching its embedded offshoot 4 years in the past. Test touts that it processed over $4 billion in 2024 alone. (Paycor and ADP haven’t launched embedded payroll statistics and didn’t reply to a number of requests for remark.)
Brown thinks his challengers have struggled to grasp the opposite double-edged sword dynamic at play in embedded payroll: In a platform-of-platforms ploy, your platform purchasers — the second Bs in B2B2B — have to achieve order so that you can succeed. Once they fail, you fail.
“I believe they form of assume, ‘Oh, we all know do payroll, we’ll create an API, and folks can run payroll from our APIs.’ I believe that’s simply not the enterprise, full cease,” Brown mentioned. “Actually, we’re within the enterprise of serving to people arise a brand new payroll enterprise from scratch. And that’s a refined however actually essential distinction.”
Embedded payroll requires with the ability to promote the API, assist it, and enhance it over time from an HR and advantages perspective outdoors of payroll. It additionally requires go-to-market (GTM) maturity — that outdated notion that an infrastructure participant is simply as profitable as its clients. The unit economics differ dramatically from these the legacy payroll corporations are used to, Brown asserts. With the innovator’s dilemma at play, legacy corporations largely confront three decisions: to decide to an embedded mannequin which will eat into its current enterprise at a decrease value level, double down on its direct-sales establishment, or straddle the 2.
Gusto doesn’t share a long time of gathered overhead like older gamers do, but it surely has selections of its personal to make. It’s tied up with two of the 5 largest banks within the US; Rex Salisbury, the angel investor, dubbed Gusto’s Chase partnership as “arguably … the biggest-ever embedded fintech deal.” Gusto additionally appears to border its (comparatively) longstanding presence within the direct payroll market as a aggressive benefit.
“We’ve been constructing relationships and fixing difficult course of questions for a decade. And we’ve distilled all the classes we’ve discovered over the previous decade-plus into Gusto Embedded — so our companions can supply embedded payroll merchandise with out worrying about navigating the nuances of payroll compliance,” Liu mentioned.
Brown sees higher promise in-depth and specialization via SaaS partnerships over breadth via enterprise banking clients. In different phrases, the proportion of companies’ purchasers that join your product issues greater than the whole addressable market an embedded tie-up doubtlessly represents.
“Frankly, payroll and HR simply go so tightly collectively that, whereas they’re most likely not the sexiest corporations to put in writing about, they’re tremendously highly effective ones within the payroll area,” he mentioned. “There are many subsets, whether or not it’s hourly employees or particular industries … the place our clients have been in a position to be actually profitable and in order that group of HR suppliers and vertical suppliers have been the first focus for us.”
In fact, investing in a patchwork of vertical SaaS corporations as your purchasers over broader enterprise platforms carries its personal dangers. The sudden shutdown of a vertical SaaS platform can depart finish customers stranded and with no specialised different, whereas tying up with generalized companies like neobanks — digital-first banking service corporations with out bodily branches — lets an embedded payroll goal subsectors via a diversified portfolio of purchasers, subsequently minimizing end-client churn if a platform consumer shuts down. (Gusto companions with banks in addition to SaaS corporations.)
The embedded route requires relinquishing some management whatever the associate kind. Platform purchasers can model a white-labeled payroll providing of their picture and additional tweak options and different scaffolding in keeping with their targets. Brown famous that this implies embedded payroll suppliers must do greater than arrange an API; it additionally implies that poor execution or risky partnerships can thwart entry to finish customers in any other case accessible via a extra managed direct-sales ploy. Test additionally loses out on a big chunk of conventional companies bored with SaaS or different choices past a meat-and-potatoes payroll answer.
Precedent additional means that the deflationary results of the “innovator’s dilemma” may be decidedly ephemeral, particularly if enterprise traders change from prioritizing development (learn: subsidizing enterprise fashions) to anticipating profitability. Along with deleterious supply- and labor-side penalties, Uber’s profitable seize of market share towards taxi corporations didn’t finish with decrease prices for shoppers, for instance, however with costs hovering increased than these incumbents beforehand supplied and with higher worth volatility because of tech-enabled surge pricing and different mechanisms. The showdown between streaming providers and cable corporations didn’t finish with cheaper client choices both. If it efficiently holds its floor in embedded payroll, there’s little holding Test again from ratcheting up its costs to these supplied by direct-sales opponents — at which level Test has merely reworked how payroll is distributed with out substantively bettering its technologized essence.
For now, whereas the embedded payroll area is a blip alongside payroll’s millennia-long timeline, it’s rising. Along with his eyes on encroaching opponents, Brown sees payroll’s enduring complexity as a decisive double-edged sword that Test can wield to its benefit.
“Payroll is an advanced, exhausting enterprise, and I believe the a lot, a lot greater threat to the entire area shouldn’t be competitors, it’s truly who can do it effectively,” he concluded.
