Two announcements caught my eye last week:
Revolut, a neobank announced a payroll service. Revolut provides “all things money” to individuals and businesses, and position themselves as a one-stop-shop for financial services. The payroll is priced at £3 per employee per month and only available in the UK. Last year, they also introduced earned wage access functionality.
- And Stripe led a $75M investment in Check. Check provides a payroll infrastructure that you can include in any business solution via an API. While Stripe offers a financial services platform but doesn’t include payroll (yet). In other words, a fintech invests in a payroll tech (but maybe the Check team considers themselves a fintech already?).
I predicted that fintech would have payroll for breakfast and it’s finally happening.
Why is this remarkable?
There has always been a hard line between payroll vendors and banks. You could say they both participate in a somewhat inefficient process. Shortly before pay day, an employer moves funding to the payroll vendor, who calculates payroll and then distributes that money back to the bank accounts of employees. Or via checks that employees deposit in the bank. In the eyes of a fintech, that’s a lot of unnecessary steps. It’s called “friction” - and they excel in eliminating unnecessary friction.
Because when everything is digital, and money moves via direct deposit, that middle man, the payroll vendor, can be erased. The big game changer? APIs
(Application Programming Interfaces) let anyone create a business ecosystem by connecting and streaming data directly. An API removes friction.
APIs take data from one source and make it available somewhere else. An example of how an API can be used is Google Maps. I am sure you have come across a company web page with an embedded Google map to show its location. Behind the scenes, that company has connected the Google Map API to its website. When you ask for directions, the API sends a request to Google to show you the best route, and the company pays a small fee for that service.
APIs allow different applications to talk to each other. They are intermediaries that move data back and forth. APIs are becoming a staple in HR and payroll as well, as companies opt for best of breed application strategies, and want to assure data integrity and correctness (“single source of truth”).
Now you could argue that payroll vendors do a lot more than move data to distribute money, and you are correct. They also ensure that salary calculations are handled with care and precision, including deductions for taxes, social security and other contributions and benefits. Payroll can be very complex, especially because of collective labor agreements or legacy rules. That’s not easy to handle yourself and most companies outsource it to a specialized provider.
But with the rise of young, high-growth companies and remote workers come different pay arrangements, without the burden of these legacy rules and complexities. Many companies only provide monetary rewards, like a salary and a benefits contribution. More workers are independents and send an invoice. Suddenly, paying people is a lot less complex, and a business can run the process themselves, particularly when interfaces with institutions are automated through APIs.
When it comes to payments, the fintechs offer another advantage over traditional payroll providers: the option to send your payment directly to a cryptocurrency wallet. Don’t associate crypto with bitcoin only - stablecoins are connected to an official currency and a lot less volatile. The advantage of digital money is that it can be send and received quickly to anyone in the world, without incurring fees for cross border transactions. And that’s a big advantage for remote workers.
What does Fintech want with payroll?
Fintechs have been eying payroll
, and especially the data inside that payroll for a while now. It’s easy to see why fintechs want to keep all that money in-house and move it from employer to worker: it allows them understand and predict the financial status of their clients.
Instead of being the recipient of the outcome of payroll, a nett deposit, the bank can build a much better profile of the customer when they know what the gross payment is, and what other assets the employee has, like savings and pensions. And if they also service the employer, the source of that payment, they have a complete view.
Just imagine what they could do:
- optimize an employers’ cash flow
- use earned wage access to phase your outgoing payments
- gain full insights in money streams (data)
Did I mention they can also sell you stuff the moment a little extra, like a bonus, arrives in your account? Like offer you an investment plan? You didn’t think this was philanthropy, did you?
That is a lot easier when the money never leaves the bank and they can profit from keeping all the deposits and payments in house. This increases a fintech company’s share of spend and the so-called life time value (LTV) of their clients, and it helps them with monetization. It also allows them to eliminate the middle man, the payroll vendor, some of which use those same employer funds to draw interest on, paid by the bank.
Payroll disruption is just getting started
A few examples of pay-related investments that completed this month:
Paywallet, a payroll-linked verification and remittance ecosystem attracted $8.8M
Highline, a payroll-linked bill payment company raised $4.5M in Seed funding.
Check raised $75M for payroll infrastructure solution that lets platforms embed payroll into their products
Earnipay raised $4M for on-demand salary solution
Tartan raised an undisclosed sum for payroll and connectivity API.
These companies are building the tools to completely disrupt the payroll infrastructure. If payroll vendors don’t pay attention, they will be stuck with the most complex cases. Which are usually the least profitable payrolls to handle. I don’t think that will happen soon, but the trend is clear. And I’ll be watching it closely.
Have a great day, Anita
PS: I have been asked to share my knowledge in a course: “Everything you need to know before buying payroll”. It will be released in March and I’m super excited! Let me know if you’d like a sneak preview.