Payroll is Big Business
By Richard Kerby, GP & Co-Founder at Equal Ventures
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A few weeks ago, I put out a post on vertical fintech, and in this post, I will be diving deeper into one specific model within vertical fintech: verticalized payroll. In that previous post, I mentioned the difficulty in leading with fintech rather than workflow because of the commoditized nature of many fintech products. Payroll, in a horizontal sense, could also be seen as a commodity offering, but it is a product offering that is embedded within the HR workflow stack and, when applied in a single vertical, is not a commodity given the nuances that must be taken into account for specific markets.
A vertically integrated payroll offering can provide industry-specific features and better service than horizontal players, while also being a great wedge to additional monetizable offerings. With that said, most markets would do just fine with a horizontal payroll provider like an ADP, Paychex, 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.
The entertainment industry almost exclusively relies on a temporary/transient workforce, from the actors/actresses to the makeup artist on set. 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 creates new corporate entities that require their own insurance policies, further increasing the complexity of providing payroll for the industry. And finally, this workforce is largely unionized, which creates very esoteric wage rules.
Historically, most of this work is done manually and via paper and pen. Workers would manually fill out paper timecards, then those timecards would be reviewed by a production manager, scanned, and then sent off to a payroll provider for processing. Our portfolio company, Wrapbook, solves the challenges of manual and laborious payroll processing by digitizing the entire payroll experience for the entertainment industry while also being the Employer of Record 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:
- Processing and funding payroll
- Processing time sheets
- Generating and filing tax documents
- New employee onboarding
- Offering and administering benefits
- Handling workers’ compensation
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, and 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, brokers hire real estate agents as their employees. Each real estate office has a designated broker, and all commissions are paid directly to the broker, 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.
We believe there are several verticals (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 that 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.
