For decades, payroll tech barely changed. Now, upstarts and incumbents alike are trying to overhaul how businesses pay their people by putting finance in the apps they use every day.
Being a first mover hinges on timing. Introducing a new product or service before everyone else, leveraging that head start to entrench yourself in the market before others follow suit, requires being first, sure — but timing can also be a double-edged sword. There’s such a thing as being too first, too fast: launching a product before demand for it exists at all, like AT&T’s “Picturephone,” a 1970s predecessor to current video-calling systems.
The payroll space is a market environment currently ensnared in such a temporal bind. At its heart lies a disbursement practice as old as ancient Greece: While payment forms (money, not salt), methods (ACH, not human hands), and compliance (tax codes, not imperial decrees) have evolved, payroll has been slower than other fintech sectors — like banking and peer-to-peer payments — in turning technological advances into real improvements.
Put bluntly: Payroll still looks a lot like it did when its market leader, ADP (NSDQ:ADP), got its start in the mid-20th century.
Payroll platforms often struggle to form an adequately simplifying layer between
(1) messy, onerous tax frameworks and
(2) the need, tout court, to pay employees legally and regularly.
Their interfaces can be clunky and require specialists to function properly. The backends can be rigid, failing to serve niche industries where workers are paid by the pound, or mile, or some other non-hourly denominator. And their self-service resources can be difficult to navigate, adding further incentive to pay HR professionals or payroll middlemen in the hopes of avoiding IRS ire.
Given the sector’s lethargic rate of change and the multibillion-dollar corporations dominating it, it’s excusable to think all the first-mover advantages to be had in the payroll space are long gone.
But at the tail end of the 2010s, serial entrepreneur Andrew Brown, CEO and co-founder of Check, decided the advantages were still ripe for the picking — and seized a timely opportunity that didn’t really exist even a few years prior. As Brown saw it, the advantage lay in overhauling how payroll solutions are distributed and where they’re used, rather than directly competing with incumbents’ products through branded, platform-level improvements.
This coincided with the proliferation of Software-as-a-Service (SaaS) companies and their hyperpersonalized offerings for businesses of all stripes — from vet clinics to law firms to freight companies. The launch of the iPhone and rise of mobile-first computing had accelerated the shift toward industry-specific software, enabling businesses to move away from clunky, one-size-fits-all solutions in favor of tools designed for their exact workflows. Investors and founders alike saw potential in software purpose-built for specific sectors, and launched a litany of vertical SaaS ventures.
As these platforms matured, they expanded beyond their initial software offerings and embedded financial tools into their interfaces. Payments, appointment booking, lending, and other financial services became baked into the software itself, turning platforms like Mindbody into the financial backbone of fitness studios, or Procare into a management and billing system for childcare centers. Yet, despite this evolution, payroll remained a gap — still tethered to the same legacy providers.
For Brown, it begged the question of why operating systems that addressed the unique needs of each industry struggled to furnish similarly tailored payroll solutions. Reliable payroll, among other variables, keeps workers showing up.)
“What we saw was the opportunity that no one else did, which was that there needed to be a large number of actual new payroll companies getting created to power all sorts of different spaces, and that the more one-size-fits-all generic payroll model just wasn’t going to work anymore,” he told Fintech Nexus.
Brown’s question — why hadn’t payroll evolved the way other embedded fintech components had? — was, in hindsight, ambitious but also naïve. Payroll doesn’t just move money; it sits at the intersection of some of the most complex systems in our financial infrastructure. Unlike payments, which largely follow a standardized flow, payroll is deeply entangled with tax codes, employment laws, benefits administration, and regulatory filings — all of which vary not just by state but across 13,000 different U.S. tax jurisdictions.
So when Check launched in 2019, it introduced embedded payroll to the world, a sector wherein Check has been the first mover and largest player. Over the past six years, Check has signed on SaaS solutions like small business platform Wave, home service management solution Housecall Pro, and more than 60 other platforms. Further downstream — that third B in B2B2B — Check processes payroll for tens of thousands of businesses, and, downstream from there, hundreds of thousands of workers’ wages.
Check’s business model rests upon two core assumptions. The first is that SaaS platforms will grow in size and kind. Market research estimates growth in the vertical SaaS market at a compound annual growth rate (CAGR) between 12.3% and 23.9% through 2034. If those figures hold true, Check’s platform clients — who are customers, but also middleware and middlemen to end users — may open Check up to a massive total addressable market without sales and support teams commensurate with that scale, bringing down customer acquisition costs and improving unit economics. This enables Check to bundle itself economically into a SaaS company’s larger offering (as a $20+ per month add-on, for example), thus enabling its partners to undercut incumbents significantly on price.
The other core assumption is that, by investing singularly in an embedded model, Check has set up an innovator’s dilemma. Brown likened this dynamic to the showdown between streaming services and cable companies, wherein incumbents had to decide between “killing” their existing business and making less money or avoiding competition with tech-driven challengers. According to this view, direct-distribution platforms either have to eat into their existing revenue streams through indirect sales, or effectively hand over the embedded-payroll subsector to Check.
Brown knows his company holds a small piece of the total payroll pie, even if embedded sales boost its relative growth rate. A Series C company with funding from Stripe, Index Ventures, Thrive Capital, and Bedrock at a $725 million valuation, Check processed $4.1 billion in payroll last year. For scale: That’s about the same as ADP’s net income in 2024, and still just a drop in the bucket relative to the $10 trillion in wages flowing around the United States annually.
“Absolute magnitude is a decent size and growing very quickly,” Brown said. “Relative to the overall pie: still tiny.”
But the goliaths are now entering Check’s territory, suggesting that they, like Brown, see a future for embedded payroll that eclipses its current proportions — innovator’s dilemma be damned. ADP, Paychex (NSDQ:PAYX) subsidiary Paycor (deal pending), and Silicon Valley-based challenger Gusto, among others, have launched their own embedded payroll solutions. Startup-y readers may have been especially likely to see Gusto’s public push into embedded payroll, which has included high-profile tie-ups with major financial institutions. Most notably, as of September 2023, it offers payroll solutions to Chase Payment Solutions’s business customers, of which there are more than 6 million.
In an email interview with Fintech Nexus, Yi Liu, General Manager of Gusto Embedded, said Gusto’s embedded partners serve more than 1 million small and midsize businesses (SMBs), which gives Gusto “the opportunity to accelerate the number of small businesses we can serve at scale.”
“We believe offering embedded payroll solutions to our partners — and their SMB customers — is a win-win-win across the board for everyone,” Liu said. “Today, our direct business serves more than 400,000 SMBs, but we recognize there are millions more that would benefit from fast, accurate, and compliant payroll and HR solutions.”
Though Brown claims Check “recognized that trend [i.e., a need for embedded payroll] … three or four years before anyone else did,” that’s up for debate. Other payroll-focused entrepreneurs likewise claim to have seen the eventual promise in an embedded play before Check was even founded.
Gusto founders Joshua Reeves, Tomer London, and Edward Kim, for example, recently said they actually steered away from embedded payroll in the early 2010s. They instead saw more market promise in a direct sales and distribution model. Tomer London, Gusto’s Chief Product Officer, told angel investor Rex Salisbury in 2024 that the founding team initially thought their “main idea [was] going to be [an] API for payroll,” but they eventually focused on small businesses, where the founders had more experience and saw a market gap.
At the time of its founding, Gusto had few potential conduits for deploying an embedded strategy, as there were just a handful of embedded-compatible platforms around (names like Uber, Instacart, Square, and Toast). There weren’t enough second Bs in the B2B2B playbook to make it work in the early 2010s. “The customer base previously just didn’t exist or at least was too small,” Brown noted. Check had the benefit of being a later first mover; it had hundreds, and then thousands, of software providers and SaaS companies to which it could offer its payroll solution.
According to Liu of Gusto Embedded, two “major shifts among SMBs” have made embedded payroll more viable than it used to be. Most importantly, Gusto thinks “SMBs increasingly want and expect their workflows to be in one place,” leading to more all-in-one solutions from banks, fintechs, and vertical SaaS providers. On the engineering side, Liu added, “We’re seeing more developers get comfortable with building with APIs, component SDKs, and so on.” As a result, developers can customize user experiences without being experts in that domain, such as the intricacies of payroll.
Check’s timely execution on the embedded payroll idea has offered it the luxury of time to build moats and solidify its product — teeing it up, it hopes, to transmute its first-mover advantages into long-term dominance.
Gusto has processed some $1 billion in embedded payroll payments since launching its embedded offshoot four years ago. Check touts that it processed over $4 billion in 2024 alone. (Paycor and ADP have not released embedded payroll statistics and did not respond to multiple requests for comment.)
Brown thinks his challengers have struggled to understand the other double-edged sword dynamic at play in embedded payroll: In a platform-of-platforms ploy, your platform clients — the second Bs in B2B2B — have to succeed in order for you to succeed. When they fail, you fail.
“I think they sort of think, ‘Oh, we know how to do payroll, we’ll create an API, and people can run payroll from our APIs.’ I think that’s just not the business, full stop,” Brown said. “Really, we’re in the business of helping folks stand up a new payroll business from scratch. And that’s a subtle but really important difference.”
Embedded payroll requires being able to sell the API, support it, and improve it over time from an HR and benefits perspective outside of payroll. It also requires go-to-market (GTM) maturity — that old notion that an infrastructure player is only as successful as its customers. The unit economics differ dramatically from those the legacy payroll companies are used to, Brown asserts. With the innovator’s dilemma at play, legacy companies largely confront three choices: to commit to an embedded model that may eat into its existing business at a lower cost point, double down on its direct-sales status quo, or straddle the two.
Gusto doesn’t share decades of accumulated overhead like older players do, but it has decisions of its own to make. It’s tied up with two of the five largest banks in the US; Rex Salisbury, the angel investor, dubbed Gusto’s Chase partnership as “arguably … the biggest-ever embedded fintech deal.” Gusto also seems to frame its (relatively) longstanding presence in the direct payroll market as a competitive advantage.
“We’ve been building relationships and solving tricky process questions for a decade. And we’ve distilled all of the lessons we’ve learned over the past decade-plus into Gusto Embedded — so our partners can offer embedded payroll products without worrying about navigating the nuances of payroll compliance,” Liu said.
Brown sees greater promise in-depth and specialization through SaaS partnerships over breadth through business banking customers. In other words, the proportion of businesses’ clients that sign up for your product matters more than the total addressable market an embedded tie-up potentially represents.
“Frankly, payroll and HR just go so tightly together that, while they’re probably not the sexiest companies to write about, they are tremendously powerful ones in the payroll space,” he said. “There are plenty of subsets, whether it’s hourly workers or specific industries … where our customers have been able to be really successful and so that group of HR providers and vertical providers have been the primary focus for us.”
Of course, investing in a patchwork of vertical SaaS companies as your clients over broader business platforms carries its own risks. The sudden shutdown of a vertical SaaS platform can leave end users stranded and without a specialized alternative, whereas tying up with generalized businesses like neobanks — digital-first banking service companies without physical branches — lets an embedded payroll target subsectors through a diversified portfolio of clients, therefore minimizing end-client churn if a platform client shuts down. (Gusto partners with banks as well as SaaS companies.)
The embedded route requires relinquishing some control regardless of the partner type. Platform clients can brand a white-labeled payroll offering in their image and further tweak features and other scaffolding in line with their goals. Brown noted that this means embedded payroll providers have to do more than set up an API; it also means that poor execution or volatile partnerships can thwart access to end users otherwise available through a more controlled direct-sales ploy. Check also loses out on a large chunk of traditional businesses uninterested in SaaS or other offerings beyond a meat-and-potatoes payroll solution.
Precedent further suggests that the deflationary effects of the “innovator’s dilemma” can be decidedly ephemeral, especially if venture investors switch from prioritizing growth (read: subsidizing business models) to expecting profitability. In addition to deleterious supply- and labor-side consequences, Uber’s successful capture of market share against taxi companies didn’t end with lower costs for consumers, for example, but with prices hovering higher than those incumbents previously offered and with greater price volatility due to tech-enabled surge pricing and other mechanisms. The showdown between streaming services and cable companies didn’t end with cheaper consumer offerings either. If it successfully holds its ground in embedded payroll, there’s little holding Check back from ratcheting up its prices to those offered by direct-sales competitors — at which point Check has merely transformed how payroll is distributed without substantively improving its technologized essence.
For now, while the embedded payroll space is a blip along payroll’s millennia-long timeline, it is growing. With his eyes on encroaching competitors, Brown sees payroll’s enduring complexity as a decisive double-edged sword that Check can wield to its advantage.
“Payroll is a complicated, hard business, and I think the much, much bigger risk to the whole space is not competition, it’s actually who can do it well,” he concluded.
