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Most consumers come to know payroll companies through their physical paychecks or as the brand names that facilitate direct deposit. For employers, payroll providers are vendors that help with employee disbursements. In today’s landscape, these companies are doing much more than processing paychecks — they are becoming full HR & benefits platforms, capable of embedded banking through FinTech.

Let’s explore the state of the payroll industry, evolution towards an all-inclusive benefits platform, how banking capabilities are being added, and the future state fueled by FinTech.

Payroll industry and functionality

While the general function of payroll seems simple on the surface, the actual calculation and execution is complex. Beyond disbursing payments to employees, payroll companies provide guidance on withholdings, adherence on tax documentation, and ongoing compliance with local and federal payroll laws. As a result, HR software firms represent a $27B market need in the U.S. Many of the top brands (such as ADP & PayChex) have over 40 years in business.

As an industry, payroll has experienced limited innovation. Direct deposit is the latest upgrade (from back in the 70s). The 90s did see the emergence of general benefits platforms with modern software (such as Paycom launched in 1998) which bundle HR, compliance, and payroll needs.

Despite minimal progress as an industry, payroll firms still maintain a critical role in the economy and carry a wealth of data on businesses and consumers — hourly wages, total salary, deductions, income history, employee headcount, etc. They have direct line of sight (of days or weeks) ahead on a consumer’s next paycheck. For employees with fixed income, the calculation stays consistent with every paycycle. For workers with fluctuating shifts, their next check is calculated in advance — up to a week before being paid out.

Part of why these companies and their role tends to be underrated is that not all workers qualify for direct deposit. Without access to a bank account (due strict guidelines from traditional banks), employees wait for a physical check. This check is taken to a check cashing company for negotiation with a flat fee attached.

The banking landscape has improved with digital banking options that have less stringent requirements. FinTech companies, specifically neobanks like Chime, N26, and Revolut, created a path for the unbanked & underbanked. Now that banking and direct deposit are commonplace, payroll providers are experiencing a surge in demand to expand beyond core offerings.

FROM PAYROLL to BENEFITS PLATFORM

For payroll companies expanding past core offerings, providing complementary services as a bundle for employers and employees is the next step towards becoming an all-inclusive platform.

Human resources (HR) tools and advice gets overlooked in resolving workplace disputes, or for employees to voice concerns and feedback anonymously. Workers compensation insurance and claims fulfillment is an activity that was previously outsourced.

Combining these and other services is an option for businesses in need of a full program provider. Early stage, late stage, and enterprise-level companies are all carving their place in the industry as a platform for employers of every size.

When it comes to the employee experience, workers would appreciate centralized access to all work-related activities — payroll, paid time-off requests, benefits enrollment, expense reimbursement requests, quarterly/annual performance reviews, etc. Employees are able to have such access today via a payroll provider’s mobile app to switch direct deposit, split pay between multiple accounts, and change tax withholdings.

Emerging payroll startups are establishing themselves as employee benefits platforms, partnering with employers to be a one-stop destination. Not only do they quickly onboard employers for payroll processing, but they now offer additional service modules that can be added as a bundle or ‘a la carte.’ As these companies continue to innovate and extend their reach, the impact in the financial lives of consumers deepens.

ADDING FINTECH into the PAYROLL mix

Historically, banking is considered a core component for payroll organizations. An employer submits their totals (by employee) of the most recent paycycle. The provider calculates how much each employee is owed AND the amount of payroll taxes to set aside. The employer then transfers these funds to the payroll company’s bank account. Paychecks would be issued from this account and sent to the employee. Once direct deposit became an option, the paper checks were replaced by electronic transfers.

With the current level of innovation in FinTech, deepening bank infrastructure is possible for all payroll and benefits platforms. The employer can fund their own deposit account in these providers and proactively fund this account based on projected payroll. Tax withholdings set aside quarterly can earn interest before being paid out at the state and federal level. This interest revenue can offset monthly service costs. These deposits can also serve as reserves for lending. Without the need of multiple ACH transfers, there’s an overall cost and time savings with funds being kept in this closed-loop framework.

Similarly, employees can have their own deposit account to receive pay by banking through their employer’s partnership with a payroll platform. Wages can be deposited into this account faster than standard payroll processing & transfer timeframes, since the disbursement is done internally (and not through the ACH network). A debit card can be issued on top of these employee deposit accounts for immediate spend access. The interchange revenue generated from card purchases can also be used by the employer to pay monthly service fees from the payroll provider.

Adding banking access for employees at “point of paycheck” enables improved budgeting, better savings habits, and long-term financial health for workers. As consumers become smarter about their financial life, they would also become open to financial advising and goal setting. New partnerships are already emerging with financial advisors for coaching on investments, retirement, and estate planning within FinTech and multiple verticals — payroll can follow suit.

SAME DAY WAGE ACCESS THROUGH embedded banking

The payroll shift to full banking may still on the away, but there is an immediate opportunity to explore and solve for: same day wage access. For gig workers and contractors working for companies like Uber or Lyft, receiving payment for a shift right away is already possible. There’s typically some a percentage or flat fee for the immediate access and the funds are then pushed to an external debit card. Employees are willing to pay this additional cost to spend right away.

Similarly, some payroll providers issue “paycards” instead of checks or direct deposit transfers (for regular pay periods). These are prepaid debit cards that are reloaded every paycycle and allow for purchases (anywhere card payments are accepted) and ATM withdrawals. These cards are connected to a master account held by the employer and can be issued in bulk quickly.

If a card gets lost, it can be shut down and replaced — no need to close a user’s account. For certain businesses, these cards cost less than issuing paychecks.

The employee downside of these payroll cards are the fees for cashing out or replacing the card, which can be $5 per withdrawal and $10 for a new card. Some programs also carry a monthly maintenance cost. Despite these expenses, this product is still in high demand — the number of active payroll cards in the U.S. will reach 8.4M with a total card load of $60B by 2022.

The low-income workforce that struggles paycheck to paycheck is fueling the market for paycards and asking for same day wage access. By banking these employees through the employer and payroll provider, access to pay can be improved without additional fees. Besides the benefits mentioned in the previous section, employers can have the payroll company process wages and withholding at end of day — then make net pay available in an employees account, accessible via their true debit card (at the ATM or for purchases).

THE FUTURE OF banking through PAYROLL is DATA

Despite a lack of business model or proven market fit, payroll companies stand to be the next influential force in banking based on their access to data. Comparisons can easily be made to Plaid, a fintech that established itself by connecting a user’s bank data to other companies via APIs. With payroll data available as an API, lenders can benefit from income verification and salary history to make better decisions on extending credit. FinTechs can help consumers switch direct deposit accounts within a paycycle (instead of 2-3 periods). Employers can offer banking benefits as part of their program with new savings plans created through an API, during the new hire phase.

Beyond redefining the early wage access that neobanks advertise, payroll providers are in a place to be the true leaders in the next wave of digital banking adoption and innovation. By being part of a consumer’s income, they can quickly embed FinTech to offer deposit accounts, cards, and loans based on wages. As leading payroll companies add partnerships to become an all-in-one destination for employers and employees, anticipate banking through payroll to make substantial progress in 2021.

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