Fintech is coming after Payroll

Feb 23, 2022

Hello! I predicted that fintech would disrupt payroll and it's finally happening. So I had to share it with you! And VCs are ramping up investments in pay related companies. Who knew that payroll could be this exciting?

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").

Perfect timing

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.

What's next?

Future of Work

The four-day work week was in the spotlights, because Belgium "approved the four day work week". Several companies jumped on the bandwagon to benefit from the PR wave and attract new people. But adopting a four-day work week requires more than an announcement, writes WorkLife, and the devil is in the detail. Read this for advice from employers who have already established the four-day week.

And now that the pandemic seems to be over the top (barring new strains) companies are working hard to get people back into the office. Because it's good for creativity: "brainstorming sessions" are one of the often cited reasons employees must return. But the science behind brainstorming tells us one thing: it's only logical to "Stop Brainstorming."

As companies struggle to attract new workers, these staffing shortages accelerate automation efforts, and robots and cobots are back on the investment agenda. And that prompted HR Brew to revisit some employers that introduced robots a few years ago, to evaluate their experience and find out how they are doing today: have the robots been productive or discarded? And what do their clients think?

CXC Global surveyed 1200, C-Suite executives, HR professionals and staffing experts across 5 continents to gain insights into the labor trends around labor demand, talent platforms, remote work & hybrid work models. Watch the outcomes in this webinar.

HR/Tech

Andrew Brown, the founder and CEO of Check, went on the Paypod podcast to talk about payroll-as-a-service and why he came up with the idea of vertical payroll integration as the missing link. Listen to him explain why embedded fintech solutions are gaining momentum.

PWC's latest HR Tech Survey revealed that "Most technology investments meet or exceed expectations for HR leaders, with the move to the cloud especially valuable". At the same time, digital adoption needs more attention, and dissatisfaction with cloud vendors happens but is largely avoidable.

The Open Talent Report invited me to their podcast to discuss my recent publications on HR Tech investments, and asked me if we are in a bubble? We also discussed if talent platforms can help large enterprises win the war for talent and how to use technology to prepare tomorrrow's workplace.

Metaverse at Work

I'm sure you know the hype cycles, that show how new technology is perceived in a particular moment in time. I wanted to share this Metaverse Hype cycle version with you because it adds some much needed perspective to the whole Metaverse hype. And because it's funny.

The metaverse is a new word for an old idea. It's being rephramed as an immersive, future, shiny experience. But people have always tried to create better futures, starting with the Great Exhibition of the Works of Industry of All Nations in 1851. The article provides an interesting narrative to put the metaverse in the historic context of our desire to know and shape the future.

Get in Touch

I offer workshops, keynotes and coaching sessions. Want to see more of my work? Click below: