We started Gusto to create a better way for small businesses to pay their employees compliantly. That’s because small businesses and accountants told us that payroll was too complicated, too time-consuming, too stressful. We built Gusto in response, to simplify payroll and significantly reduce the emotional and time-related burdens that often come with it.
Now, customers are also looking for a seamlessly integrated and customised payroll without sacrificing compliance, reliability, or a delightful user experience. To address this customer need, we’ve taken Gusto’s 13 years of experience and channeled those learnings into Gusto Embedded, our embedded payroll platform that enables other software platforms to provide a comprehensive payroll solution, tailored to their customers, and get it to market in record time. Today we serve dozens of partners who in turn serve more than a million small businesses.
First and foremost, customers simply want and now expect their workflows to be in one place. They do not want to leave the confines of one application for another in order to get their needs met, and we’ve seen this play out in digital payments, ecommerce, social media, etc. (why go to a new website when you can buy those shoes within Instagram?). This has led to the rise of all-in-one software solutions where everything is just seamlessly integrated — customer expectations continue to advance towards this future, and digital platforms continue to innovate to meet those expectations.
Second, the underlying technologies have advanced in ways that enable a truly seamless user experience, and developers are now comfortable building with multiple embedded tools. Building software has moved from writing code from scratch to leveraging open-source resources to building on complex abstraction layers like APIs, component SDKs, and so much more. By taking advantage of these tools, developers do not need to be the experts of the entire infrastructure but can still control the user experience.
From Twilio for SMS to Stripe for payments to Checkr for background checks, these days most complex services have been ‘unbundled’ and offered as an API — including most financial services. This doesn’t mean taking the core infrastructure for payroll and offering it as a developer platform for other digital services is easy. But, it shows the demand from developers and provides examples to learn from (both good and bad).
Third is revenue potential. Many next-generation Software-as-a-Service (SaaS) companies and vertical-specific SaaS platforms expect to make as much revenue (or more) from embedded fintech products as from the core product subscription licenses since to my first point, it’s addressing critical customer needs. SMBs are willing to spend from USD 1,000 to USD 3,000 annually for additional embedded services.
Vertical-specific SaaS platforms, serving nearly every industry from fitness to home services, are already seeing a lot of success. These industry-specific, ‘business-in-a-box’ solutions cover all of a customer’s critical workflow and cashflow needs in one platform.
Embedded fintech and the revenue opportunity have changed investor math, enabling entrepreneurs to build software tools for niche markets easily and efficiently. There’s a large opportunity in catering to the specific requirements of a niche set of SMBs, companies that have been underserved by the tech and software industry for many years. By doing so, SaaS companies can customise payments, payroll, or loan products in ways that horizontal platforms can’t.
The payroll market is projected to be USD 60+ billion by 2030. This includes core payroll, benefits, and related people-management features.
According to BCG, Embedded Finance as a whole is currently a USD 185 billion market and will be a USD 320 billion market by 2030. The SMB segment will account for about half of that market. This makes sense given that more than 60 percent of SMBs want embedded financial services to help them smooth their payments processes, while 50 percent believe embedded solutions can offer enhanced payment data to drive actionable insights into their operations.
SaaS platforms offering embedded financial services have the potential for three to four times the revenue growth. This is reflected in ServiceTitan’s recent S-1 filing, and their leadership is confident they can continue to grow not just by adding new home services customers, but also by adding more and more financial services to grow revenue within the existing customer base.
It’s less a question of which verticals hold the greatest potential and more a question of which verticals are actively including embedded fintech into their offerings.
Point-of-sale, both for restaurants with Toast and retail with Square, demonstrate how payment-adjacent embedded financial services can both increase revenue and make their platforms stickier. Same with personal services scheduling software like Vagaro, Mindbody, and Squire.
Gusto Embedded is working with major banks, like Chase Payment Solutions, and top five accounting platforms like Xero and Freshbooks. Our Embedded team sees interest from companies in almost all verticals.
One specific use case that impacts a wide variety of industries is embedded payroll. It’s complicated for companies to build the service on their own while also ensuring that they’re complying with hundreds of federal, state, and local laws across the US, so going the embedded route makes a lot of sense.
With embedded payroll, Gusto Embedded’s partners are building a new line of business, not just launching a new product. We work closely with partners to launch a payroll product that is compliant and something that their customers will want to buy, based on our years of data and experience.
CleanCloud is a great example of this. CleanCloud is a Point of Sale and Pickup & Delivery software that serves dry cleaners and laundries. It also deals with unique wage calculations per that industry, such as employees being paid by the pounds of laundry they fold. This is something horizontal HR and payroll companies (including Gusto.com) haven’t built specifically for. With embedded payroll, CleanCloud uses its existing data (i.e. customer info, laundry orders, and employee schedules) to allow its customers (business owners) to easily run payroll and calculate gross & net wages from within CleanCloud without having to go to an additional payroll provider’s portal.
On the consumer side, Embedded Finance has been transformative too - with financial services being seamlessly integrated into non-financial platforms. Take Doordash, which leverages Stripe Connect to embed payments into their products. The consumer can pay within the online delivery company’s digital platform without ever leaving the app. The impact of this is less friction in the transaction, leading to faster payments and a better user experience.
Embedded financial products allow vertical SaaS platforms to quickly create an all-in-one offering and solve end-to-end financial workflow problems for their industry-specific end customers without having to become the expert in banking, payments, payroll, lending, etc themselves. This enables vSaaS (vertical SaaS) players to build and get to market quickly with a holistic offering. There are many Embedded Finance products purpose-built for these categories (e.g. embedded lending, embedded bill pay). However, where many vSaaS players get tripped up is that they expect an out-of-the-box, seamless experience right off the bat. Instead, they need to evaluate each embedded partner and make sure they can customise the experience to fit into their greater vSaaS offering. For example, payroll should be closely tied to time and attendance, as well as accounting workflows. Without that, the vSaaS product will look like a Frankenstein product with random iframes and pop-outs, leading to a disjointed customer experience.
For Gusto Embedded, we work closely with our partners to ensure customised, seamless experiences that are tied to the greater vSaaS offering. For example, our partner Vagaro (a vSaaS offering for spas/salons) understood embedded payroll is a natural fit since their customers have incredibly complex wage calculations (tips, commissions, and hourly wages that vary by service). Vagaro already has everyone’s schedules, services provided, tips, and add-on sales. By tying payroll to those other workflows, the company has achieved a 4x increase in adoption.
Ensuring compliance is a large challenge when you implement embedded fintech products. That’s in part because workforces are increasingly distributed. Since the pandemic, businesses are more likely to hire remote employees and contractors than ever before. That means a lot more rules and regulations to manage through.
For payroll, every city, county, and state have their own nuances in addition to federal requirements. And there are tens of thousands of tax agencies in the US, from large agencies down to a small school district. You need to know who to call with a question about the latest tax rates and tax calculations, and when.
For SaaS platforms looking to embed fintech products, it’s important to recognise how critical it is to get compliance right and how much your embedded partner plans to take on on your behalf. For complex industries such as payroll, experience matters. Choose a partner that is proven and battle-tested.
The consensus among leading investors from a16z to Redpoint to Tidemark and more is that vertical SaaS platforms need to first own a “control point” in a customer’s daily operations. This means identifying the core workflow that is essential to customise and get right for that vertical (e.g. solutions for spas/salons need to make sure they can manage appointments and schedule bookings first). Once your core products are running smoothly, then you can add and sell additional Embedded Finance products.
Before starting, companies should also confirm that their customers want the embedded fintech service. Embedded Finance should be a value-added service that addresses customer pain. We recommend doing a variety of user research from surveys to interviews to fake door tests to validate demand.
Of course, there are newer vertical SaaS startups that want to offer a full suite of embedded financial products, including payroll, from day one. So far, we’ve seen partners have less success with this approach given the sheer amount of work required (which makes the overall experience lacking polish and quality), but that’s not to say savvy tech founders won’t want to roll out the full suite of features over time.
Unsurprisingly, we expect Generative AI to be increasingly integrated into Embedded Finance solutions.
Vertical SaaS companies have industry-specific proprietary data that AI can use to improve Embedded Finance offerings.
They can use AI for predictive analyses, workflow automation, tailored user experiences, and natural language processing to process user queries and explain information to customers in easy to understand language.
For example, Gusto recently introduced Gus, our AI assistant. Gus can answer questions, provide personalised business insights, and complete tasks like running payroll.
Another innovation is the connection of multiple financial workflows with employee and employer data. Embedded Finance allows all money movement to be under one umbrella application from a customer POV. When you connect all your sources of cash inflow (payments, capital) to cash outflow (payroll, bill pay, expense management, taxes) and overlay user data, you are able to offer better financial solutions for your customers, ranging from short term loans for merchants to on-demand pay for employees to future cashflow analysis and predictions.
About Yi Liu
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