Payroll Is Big Business
In our previous post, we discussed our thoughts on vertical fintech, and in this post, we will dive deeper into one specific model within vertical fintech: verticalized payroll. In that previous post, we discussed the challenges of leading with fintech rather than workflow because of the commoditized nature of many fintech products. Payroll, often seen as a commodity offering in a horizontal sense, becomes a unique and indispensable service when tailored to the specific needs of individual verticals. This transformation from a commoditized offering to a unique solution set occurs because payroll, deeply embedded within the HR workflow stack when targeted to a single market, must account for the nuanced demands of any given market.
A vertically integrated payroll offering offers industry-specific features and is superior compared to horizontal players while also providing a strategic entry point for additional monetization offerings. With that said most markets are adequately served by horizontal payroll providers like ADP, Paychex, Paylocity, etc. So, what traits does a market need to make it a good fit for a verticalized payroll opportunity? Let’s look at the entertainment industry as a case study.
Case Study: Entertainment Industry
The entertainment industry relies heavily on a transient workforce, including actors, makeup artists, and other on-set professionals. In addition, this is an industry that is project-based, which means that large swaths of workers are hired, onboarded, insured, and terminated routinely on a daily, weekly, and monthly basis. Additionally, each project often necessitates the creation of new corporate entities, each of which requires its own insurance policies, further increasing the complexity of providing payroll for the industry. Finally, this workforce is largely unionized, which creates very esoteric wage rules.
Historically, most of this work has been handled manually via paper and pen. Workers manually fill out paper timecards that are reviewed and scanned by production managers, and finally sent to a payroll provider for processing. A portfolio company of mine, Wrapbook, addresses the challenges of manual and laborious payroll processing by digitizing the entire payroll experience for the entertainment industry while also serving as the Employer of Record (EoR) for the industry. An Employer of Record (EoR) is an organization that serves as the employer for tax purposes while the employee performs work at a different company. Being an EoR can be a critical component of building a vertical payroll provider.
The EoR takes on the responsibility of traditional employment tasks and liabilities by offering a slew of services including, but not limited to:
Beyond Entertainment: Real Estate and Insurance
Another take on vertical payroll could be around businesses that manage the lion’s share of a worker’s earnings for a given market. These could be industries where employees make most of their income on commissions. Two sectors, in particular, come to mind that could be potential fits for this approach: real estate and insurance.
In both real estate and insurance brokerages, the primary employee within the industry is an agent/broker. In both markets, the agent/broker receives the bulk of their compensation via commissions rather than traditional W2 or 1099 income streams. Within real estate, brokerages hire real estate agents as their employees. Each real estate office has a designated broker, and all commissions are paid directly to the brokerage, who splits the commission with agents that were involved in the transaction.
Like the real estate industry, insurance agents also earn the majority of their income via commissions. However, unlike real estate agents, insurance agents can also earn residual commissions over the policy’s life. They receive a commission at the time a policy is binded and continue to receive (lower) commissions annually as long as their client keeps the policy in place or renews with them. Commission overrides can make tracking the payout even more complex, as producers may be paid on behalf of other agents. Residual commissions and overrides create additional complexity when thinking about payroll-adjacent businesses, and we believe that increased complexity makes a market more attractive for a vertical payroll opportunity.
There isn’t a single definitive checklist of traits that make a market ripe for a vertical payroll business because of the nuances of each given market. However, we do think that there are a few traits that could make a market ripe for this kind of opportunity. This is not a comprehensive list, nor are all of these traits required for a vertical payroll opportunity. Instead, we think any one of these traits being present to be attractive enough to explore vertical payroll.
Vertical Payroll Market Traits
Conclusion
Vertical payroll solutions do more than just handle payroll; they embed themselves deeply into the operational workflows of their target industries. This deep integration allows for the creation of additional value-added services, such as health benefits, earned wage access, and banking services, which can further enhance customer loyalty and generate new revenue streams.
We believe there are several markets (many more than we have discussed in this post) where a vertical payroll and/or vertical commission-like model make sense, and we are excited to continue spending time with founders, operators, and investors who are working along these lines. Whether you are working on building a vertical payroll provider or building a “payroll” like business focused on commission-like revenue, we would love to hear from you.