What is embedded payroll and what does it mean for the industry?

Welcome back to another episode of Payrollin'. On today's episode, we're going to cover a very unique new trend in the payroll space, the embeddable payroll platforms. This is something that's really gaining a ton of steam. There's a lot of capital flowing into these companies over the last few years, and it's something that we're all going to have to get familiar with over the coming years so that we know how to play in the new era of technology in the payroll space. Today I'm going to cover what are embeddable payroll platforms, who are the major players today, who are their target audiences of who they're selling to, what is the current state of the maturity level of this technology, and where is it going. I'm excited to talk a little bit further with you about this and more in today's episode of Payroll It. All right, so embeddable payroll. So this is an interesting market that's starting to gain a lot of steam. Uh, so embeddable payroll systems are really backend APIs that are made to help vertical software companies to embed payroll directly into their platform. So you think about maybe like a construction management software or a timekeeping system with no payroll module. These companies have created the backend APIs that do the tax filing, the money movement, the backend work of a payroll system so that you as the software provider could just create the frontend or the user interface of a payroll system and not have to build in all that complicated backend, which is what makes payroll system development so complicated. So it's a really interesting market and one that we've been looking into quite heavily over the last year or so, and I'll explain a little bit of our, uh, tech stack for those of you that aren't familiar so that you understand why we've been so interested in this market. So when we first started what was formerly known as ERG Payroll and HR, now currently Guru, we started out using a platform called Payroll Relief. Uh, we used it for, I don't know, a year, year and a half. Without any real HR technology. We started using a timekeeping system, a white label timekeeping system, probably the same one many of you use that are listening in, but eventually realized we needed more if we were going to serve our HR clients than just the payroll and timekeeping. So we went out to one of the major players in this space, one of the top 5, uh, white label platforms out there, and we signed up for their system because we wanted applicant tracking, we wanted benefits administration, we wanted paperless onboarding, we wanted timekeeping, we wanted payroll. We wanted it all in one system. And this is what they promised. And they had a lot of large payroll providers on their system that gave us a false sense of trust. And in reality, once we went through and implemented this system, and after a week of in-person training, which should have been red flag number one, is what kind of system needs a week of in-person training just to learn how to operate? We found about a year later that, you know, it would require a couple of people in headcount just to manage this system, let alone serve our clients properly. Our clients were really struggling to use the system. Our people were struggling to support the system. And so finally we decided, hey, look, we just need something a little bit easier for our clients. They didn't quite have their platform completely figured out yet. It was, one of these ones that was born 15, 20 years ago, has tried to navigate from a mainframe system to a cloud system, has not successfully still to this day made that navigation as far as I can tell. And you know, it's really just, it's kind of surprising how cumbersome some of these platforms are. But anyhow, what we did is we said, hey, look, what are our clients actually using in this system? So we, I'll never forget it. It was a pretty simple process. We, we literally took a Google Sheet and we, uh, in the columns across the top, we put the different major feature functions that our clients would use. Timekeeping, paperless onboarding, benefits administration, applicant tracking, just like I just ran through. And then we put, you know, a checkbox next to it. We put our clients' names down the left side of the, uh, sheet and the rows. And then we said, all right, what are our people actually using inside this system? An overwhelming majority of the usage was coming from paperless onboarding and timekeeping. And so we said, well, geez, we don't need all this just to manage that. There were only a handful of folks that were actually using benefits administration. We serve predominantly small businesses, so not a huge need there on the ben admin side. Quite frankly, it just becomes very cumbersome to our team to set up and manage ben admin. By the time they get it all set up, start using it, they're on to getting close to the next renewal, and then it just becomes another excuse for the broker to try to push more things over to us, which wasn't what we were looking for. So anyway, that's when we made the decision to start developing our own software. And what we did was we just built initially for those, those couple of boxes that we needed to check. Timekeeping and paperless onboarding were the two major things. We started with onboarding. We've now since moved into timekeeping and we continue to expand the HR side out into things like performance reviews, assessments, you know, core HR functionality of rather advanced PTO management section. But what we have not built and may never build is the payroll component. We integrate with a payroll software, which we like the software, we don't like necessarily the company. They're, they're a little bit challenging to work with. And so we've been looking at these embeddable systems to determine if they're right for our platform, because that description I gave earlier of the type of company that they're trying to serve is a company that has an existing piece of software that's serving a need for a client base but is missing payroll and would like to have that native to their system. So this is beyond integrating with systems. So, so some of the examples, you know, when I go to, uh, one of the major players in this space right now, or at least they're trying to be one of the major players, I mean, they've got, you know, listed on their, their, um, logos on here Bambi. So some of you are familiar with Bambi. Bambi was kind of in HR on demand mineral competitor. They've been really growing quickly, pumping a ton of money into ads, and obviously they want to offer payroll in their system too. I'm sure a ton of their clients are asking them for payroll. They're developing a huge user base, so they're embedding payroll with one of these systems. Another one would be a system called ServiceTitan, which it appears is a service-based system for home repair or something along those lines, and You know, that's serving home repair providers who also are going to have payroll needs with their clients. So the thing is they're positioning it as, hey, you can easily sell and start offering payroll and you can unlock this payroll revenue faster by embedding it directly in your platform and not having to build this thing from scratch. And so some of that's truth, some of that's fiction. We've been getting into to looking at each of these a good bit. And it was interesting in preparation for this podcast, I Googled, what was it, embedded payroll, and I'm seeing new players popping up in the space. But these ones that are kind of first to market, there's a handful of them. So first there's CheckHQ. So CheckHQ is pretty quick to tell you, and they've told me multiple times when I talk to them about how much money they raised, they're very proud of how much money they've raised. Uh, I think it's somewhere in the ballpark of $150 million now, if I'm not mistaken. So, um, Stripe led the most recent round of $75 million. So I think that in and of itself tells you where the market thinks this is going. Um, and it's interesting because they're, they're pretty immature in their, their tech stack in and of itself for this amount of money. And, and one of the things I found even further digging deeper into the check Check's product is that they're actually using Symmetry and MasterTax on the backend. So I thought this was kind of ironic that, you know, these systems that have been used to build the backends of payroll platforms forever are now the backend of these embeddable APIs. So I'm, you know, in some respects just curious of what more they're building on top of that that makes it so much easier to embed. And in a most recent conversation with them, it looks like they're starting to realize how much more challenging it actually is. To embed their system into another platform because they were proposing a pretty substantial professional services component to what they're offering. So it wasn't just, hey, get your developers on this, they can embed our payroll system very easily. Uh, it was also, by the way, you're going to need to pay our development team for X number of months for these tens of thousands of dollars per month just to make sure it gets done correctly. So no small investment, you know, there's no cutting corners when adding a payroll module to your system. So CheckHQ is one. Gusto is quickly becoming a major player here. So Gusto, obviously nice tech stack. They've started to offer it as an embeddable platform. They've got some clients running live with this now, and this is a huge commitment to that from their side. Once again, and having conversation with them, And, you know, it's kind of the same challenge that you look at when you look at CheckHQ, and that's that, okay, now we're getting some of these folks. I laugh because, you know, so Gusto, obviously, if you embed Gusto in your system and you're in the payroll space, you're effectively saying, all right, cool, we're in bed with Gusto, which is just a decision you've got to make if you look at this space. And if it's something where you're like us, where you've got a piece of software that's missing the payroll component, or you just want to take control of the tech stack in and of itself. And so, you know, very unique to partner with Gusto because there is definitely that element of, you know, where are they going with this in the future? How does this fit with your future business plans? But I can see them making tremendous progress here just because they already have such strong market position. And when I go to their site, I mean, I'm seeing You know, a dozen or so logos scroll across the bottom here, some of which, you know, you're familiar with, like timesheets.com and 1-800-Accountant and Bookkeeper360. And so we're, we're going to see these folks continue to make more progress, which I think it's important to understand the competitive landscape, especially if you go out to pitch a deal and you're up against 1-800-Accountant out of nowhere. This is not somebody we're traditionally used to pitching against. And so understanding, you know, what they're using and how they built their tech stack is important. So we've got Check, Gusto, we've got another company called Zeal. Uh, Zeal has raised, you know, last check about $11 million. They've got money. Uh, we talked to them, they did not really seem to understand this space very well. They were touting some things and showing some things that kind of showed that they're very immature in the payroll space. Um, definitely have some strong, you know, ideas and concept about where they're going, but, but seem to be lagging pretty well behind, at least from my perspective and my conversations with them. And then I'm starting to see some other folks. So Worklio, if you go to Worklio's homepage now, if you're not familiar with Worklio, they used to sell PEO and ASO software direct, uh, for, for white label for folks like us to, to go out and provide services to our clients. And now when you go to their homepage, it's completely pivoted to embeddable products. And in conversation with them, it sounds like they're still going to offer the PEO and ASO software, but they really want to focus on the embeddable market, which is a huge pivot when you start to think about who your customer base is. You go from trying to serve a payroll and HR company like a guru to trying to serve a, you know, client that wants it embedded like a Bambi or a Buddy Punch or somebody like that. Definitely a very different market because they think about it much differently than we do. That's the one thing that you'll start to find out is that the pricing is not in line with the traditional stuff that we're used to in the payroll space. When we look at a white label platform, you know, we're expecting to pay $1, $2, $3 pepem, whatever it might be, depending on feature functionality, depending on whether or not tax is involved, depending on what the ACH situation is. They're looking at it more from the base per company plus a peppermint each month. So the costs are going to rack up pretty substantially versus your traditional white label players, but you're going to have ownership of the tech stack, at least the front end of the tech stack if you go down this route. So it's going to maybe not make sense for a lot of people listening to this, but once again, it's important to understand and it's just to me quite fascinating development in the space and in and of itself. So I stumbled across a couple more players as well. When I, when I searched this out, I searched out embeddable payroll. I've got Goco. Oh, and for the record, Worklio, I tried to talk to them. I wanted to talk to them. I've got a bunch of clients I could, you know, we're going to quickly roll this out to. If we, if we roll out an embeddable payroll platform, they would not talk to me without me sharing a whole bunch of information with them prior to even, even talked to the CEO, told them, hey, look, we're, we're hot to trot, we're in this market, we're looking for the right provider. And he, he stood his ground without me telling him exactly how many clients we have, exactly how many we're going to add, and, you know, what our use case is, and a couple other basically SDR checkboxes that they needed to get. Wouldn't have a conversation with me. It was one of the most laughable things I've ever been a part of. I, I I couldn't even understand why they were digging their heels in so much on the SDR qualification prior to having the conversation. But let that be a message to you. If you really want to offend one of your target customers, ask them for way too much information before you'll give them any information in return. It was maybe one of the single worst sales experiences I've had. Hopefully that CEO of Worklio listens to this. Maybe I'll drop him this in his chat. So, all right, so we've got some players. I stumbled across another company called Goco when I was doing the search. Never heard of them. Looks like they got a decent client base. They're out of Houston, I want to say, maybe. Um, but yeah, they, they seem to have a decent little client base based on their About Us page. I've never stumbled into them before. Not sure if they're rebranded. Didn't do a whole bunch of digging into them, but they seem to be going the embeddable route. And so where there's smoke, there's fire, right? We're starting to see a bunch of different folks come into this space. We're starting to see a bunch of capital come into this space. And once again, the reason being, I mean, we know that payroll is needed by every small business in America. And if you're already there at an access point, if you're the, you know, Bambi, we're already providing HR guidance. If you're ServiceTitan, where you're already providing them with a, you know, a CRM and a tech stack around managing their service business, then why not make payroll just a nice easy add-on to that and a nice additional revenue stream? But is it ever that easy, my friends, is the question. And the answer is, is it is, it is not. Uh, so, so one of the things that you'll find is this is a quick growing, a lot of money, as I mentioned, a lot of players starting to flood into the space. But what I found is that these products are very immature. And so they're rolling out even Gusto in and of itself. I mean, they're rolling out bits and pieces of their functionality over time. They're definitely one of the ones that are the furthest along, obviously have the biggest budget and the most existing clients to continue to try to leverage this with. And they've been at it for a couple of years now. I want— I'm guessing they started in— I know they started in 2021. It looks like June 2021, they launched it. Which means that they are effectively, you know, they've been at that for a good little while. So, you know, we're starting to see some more traction from them. We're starting to see some of their folks go live on it. But in each of my conversations with players in this space, I've realized that they definitely are not getting people up to speed as quickly as they thought. We're still in that minimum viable product phase where they're creating, you know, hey, what can we do to get just bare necessities out, a couple of pages, and, and oops, you need to buy, uh, you know, payroll in more than one state. Uh, we can't do that at this particular time. And oh, you need this part, or oh, you need that part. There's a lot of things missing when you go to roll this out. And it's interesting because if you're not a payroll company, you're not asking those questions. I could tell some of the questions I was asking, they were going, oh geez, like this this is not the question I'm prepared to answer because I'm used to answering a call from ServiceTitan or somebody who really does not have an existing payroll base or payroll knowledge for that matter. And so I don't necessarily have the answers to give them. And that was one of the challenges that I think we, you know, struggled with. And some of these got exposed pretty quickly on just their lack of depth of knowledge in the payroll space that will ultimately bite them in the bottom, the bollocks, in the behind. So where do I think this whole thing is going and where does it even start to more obviously go? Well, I think if you go to Check's homepage right now, Check HQ, I think they're a good example. They already went from embeddable payroll to offer benefits is kind of tab number 2 that's in there now. So offer employee benefits to your customers. So, this means if I'm, you know, once again, if I'm that service titan and I want to keep giving them props, I don't know who some of their other clients are here on their page. If whoever it may be, now, I can also offer my small business clients healthcare benefits. I probably get a little spiff and Chek is getting a little spiff. And ultimately, this whole thing's through an integration with a third party called Simply Insured. So, Simply Insured is the one making the real money. But they're, they're, they're showing that it's going to be the traditional land and expand play here. Uh, so I think Gusto has executed this better than anybody in recent years where I'm going to go out, I'm going to get 5, 10, 15, 20,000 users on my platform. I'm going to do it with a, with a low cost or easy to access system or product. And then I'm going to start layering in workers' comp, healthcare, you know, FSA, HSA, whatever those little, you know, shavings make a pile add-on services are going to be. That's where you're going to see all of these folks continue to go. And so it's not necessarily anything new compared to what we're used to in this market. It's just a new approach in how they're getting it there. And in some respects, like I mentioned earlier, when you start to bring in Symmetry and MasterTags, it's not even that new. It's just, you know, I'm putting some lipstick on a pig and pitching this to some Silicon Valley investors and trying to make it like it's something new because they're just not familiar with the space. And so I think this, this bears watching and is definitely going to be interesting to see kind of who survives over the next 24 months. Because once again, the thing that the challenge that I'm already seeing is, hey, we can't get people live as quickly as we thought we could. And then they're going to hit the second challenge that we all have. And that's that once they get those people live, they're not going to add accounts as quickly as everybody thought they were going to add accounts. So the beauty of the model is if I go out and I sell a, you know, Stripe is one of the examples here. If I go out and I sell Stripe, which Stripe is actually an investor in CheckHQ, which is a very interesting thing to watch. I'm not sure if they built the backend of Stripe's payroll module or Stripe just recognized what a challenge that was and decided to invest in them so that they can continue to build out the infrastructure. Not 100% sure on that. Might be able to figure that out after a little digging around. But what they're going to see is that, you know, the attachment rate is not quite as, uh, big as people hope. So they, you know, they're looking at these staffing softwares— is another good example. So if I, if I'm a staffing software like, uh, um, what's the big one? Bullhorn. Bullhorn. And I've got tens of thousands of staffing companies on there, and then I start offering payroll to them, which I think Bullhorn may already offer, so bad example. I— they don't get— they don't all just start flooding and opening the door and change their payroll systems tomorrow. One of the things that they're going to underestimate in here is what a pain in the neck it is for the end user to change payroll, and that they don't just change just because you started offering it inside your system. So I think they're going to bump into a handful of problems getting those folks set up to actually sell it. Once they get it set up, starting to realize where the deficiencies are in the payroll system versus, you know, a more fully built-out system like the one most of us use, or the ones that most of us use that are, you know, built by payroll professionals. And then, you know, finally that kind of attachment rate of like how many of them are actually opting in once they do get things up and rolling. So it'll be interesting to see how it goes. I'm looking at a couple of the stats on here on CheckSite, particularly 2x platform usage by adding payroll and pay stubs. So interesting pitch there. They're going to the, you know, the staffing software company and saying, hey, Are you not getting the, you know, one of the things that we all struggle with that builds software is the adoption, the usage, the reliance on the platform. I want, I want my, my software to be an integral part of your work life so that you can't live without it. And if you can log into it once a week or once a month or once a year, then it's, you know, you could change very easily. So they're, they're positioning themselves to drive platform usage by adding payroll and pay stubs. And a 50% reduction in support tickets related to payroll, which I think is interesting in and of itself, that, that I guess maybe they're replacing some payroll systems in these staffing softwares. And a 20% increase in payroll onboarding speed. You know, that is one thing I did like it so far in looking at these systems is that most of them do have client self-onboarding, uh, pre-built components. So that's one thing that you, you know, that they're offering is they're saying, hey, Matt, for, for your clients on Guru, we've already built out a new client onboarding. We're going to capture state tax information, we're going to capture company information, we're going to capture employee information, and it might still show our logo on it, but you can easily roll it out. And that's a little bit of the, the rub in here too, is that there's almost always going to be parts of this system that still show Check, Gusto, Zeal, whomever's logo. Uh, they want folks to know who they are, but also more importantly, they're on the 8655. So that's the blessing and the curse of these things, is that they are the tax filer remitter, um, and they're responsible for that. And so then there becomes this weird thing with communications. Started to see communications, some of which are going to come from this third party embedded platform, most of which obviously you want from you. You want to control the client experience, but it is nice to be able to shift that liability, right? So it's definitely a unique play and something that I think they're, you know, once again, going to be trouble getting into the actual payroll space to work with folks like— I think we're probably at Guru a little bit unique compared to most of the folks listening to this and how our tech stack looks. But for others, I think, you know, it's, this is equally just about understanding the industry and understanding about where it's going. So I'm excited to watch it. I love to see any innovation in the space. I did, you know, once again, after digging more into this, I don't know, it's particularly innovative. I think that there's, you know, I'll use the, some of you have heard me talk about on the pod before that we're currently out raising money. And it's just funny how much pushback we get being in the payroll and HR space. And I'm like, look, Justworks has just raised $150 million. They're a PEO that is literally doing nothing innovative in this space other than the fact that they own their own software and they're pushing a concept that they're trying to purport as a new thing when in reality they're just another PEO. And so at some point, those valuations are going to come back to what a normal PEO valuation is. Because they're going to need somebody to acquire them at some point for all these folks to get a liquidity event out of it. And so I, I don't suppose anybody's going to pay a massive premium just to have Justworks when they could go out and acquire— I mean, you saw the Oasis acquisition by Paychex. They weren't paying tech stack multiples on that, but they got what they wanted. They got the client base, and, and, you know, they could keep whatever technology. I'm familiar with Oasis's tech stack or what they were using. But, uh, yeah, so, so I think that we're seeing it in the market right now. We're sitting here in October of '22, things are shifting a good bit. So I think we're going to continue to see more shift in this market. And the embedded payroll one is going to be one that is going to be interesting to follow because these companies are getting these high, high, high valuations, raising a ton of money. They definitely have a well-defined sort of interesting possible user base that they can go after. But the question is, will they get the adoption that they hope for on the front end? If they can get the stickiness with the companies that can embed it and they can then sell it, and then they can start attaching these bolt-on things, it's going to be awesome for them. If any one of those three things doesn't happen, then it's going to be a real struggle. So I thought it would be interesting today just to expand on something that I've been doing a lot of research into, spending a lot of time on. Drop me a note if you listen this far. Let me know what you think. I like to do more of these kind of industry technology breakdown type of episodes more going forward. I just want to do my best to learn more about the industry and share what I'm learning with the folks out there. And if there are other topics that you'd love to hear me cover, then please don't hesitate to drop me a note. Matt@Guru.co, that's M-A-T-T at G-U-H-R-O-O. Co. And thank you for joining me on another episode of Payroll.