Making sense of Payroll APIs

There are over $10 trillion in wages paid annually in the U.S. alone. For most businesses, payroll is the single biggest line item they pay each year. It sounds obvious or even cliche, but these payments are a cornerstone of our financial lives. That’s not just because of the payments themselves, which keep our economy humming, but the activity around them that has major implications for everything from credit decisioning to financial management for both consumers and businesses. Yet for far too long, payroll has been a difficult category for developers to access. The last few months have seemed like an inflection point: In January alone, payroll startups announced half a billion in funding. The payroll landscape is adapting rapidly as payroll infrastructure becomes programmatically accessible.

So it’s probably no surprise, then, that one of the most common questions we get is how to make sense of this burgeoning new field. We thought it might help to catalogue the various payroll APIs and explain where Check fits in. For the purposes of this post we are going to focus on two segments of the payroll market.

Payroll-as-a-Service APIs vs. Payroll Data APIs

The most basic distinction to make among payroll-focused API businesses is between Payroll-as-a-Service APIs (sometimes referred to as Embedded Payroll or Payroll Infrastructure APIs) and Payroll Data APIs.

A Payroll-as-a-Service API enables a developer to actually build payroll products that run payroll, i.e., calculate taxes, file with relevant agencies, and move money. This is the category we’re pioneering at Check, enabling platforms to build and offer payroll as a product. In contrast, Payroll Data APIs enable developers to more easily read/write data from existing payroll systems. That means these businesses broker connections between existing payroll systems like ADP and other applications that use that data for things like identity verification or derisking lending money.

Other industries have multiple swimlanes when it comes to infrastructure vs. data. To draw an analogy to the world of payments, for example, Payroll-as-a-Service APIs are more similar to Stripe in that they sit in the flow of funds, while Payroll Data APIs are more similar to Plaid in that they enable the flow of data. Both are valuable and important, and sometimes complementary, but they’re very different services.

Two examples may help drive this distinction home:

Embedding payroll in vertical SaaS

‍Imagine a vertical SaaS company serving restaurants. It essentially acts as the operating system for that restaurant, managing everything from processing orders to employee schedules. Using a Payroll-as-a-Service API, that platform would build a payroll product fully embedded in its application. Previously businesses would have to export employee data out of the vertical SaaS platform - like wage rates, hours worked, etc - into an external payroll system. Now, all of those restaurants can run payroll natively within the vertical SaaS app and it’s already connected to that employee data.

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Verifying income for fintech lenders

‍Consider a fintech lender looking to make consumer loans. Rather than ask the consumer what they make, which is unreliable and cumbersome, they would use a Payroll Data API to get an accurate, real-time understanding of the consumer’s income history. This helps them derisk the loan in a more effective way.

And although both segments have emerged at the same time, they’re enabled by different dynamics. Diving in a bit deeper…

What to know about Payroll-as-a-Service APIs

1. Payroll is now a tool in every platforms’ toolbox. The ability to build a fully embedded payroll product is a relatively new concept, emerging only in the last 2 years. It’s the rise of SMB SaaS that has catalyzed this innovation. Over the last 10 years we have seen an explosion of software companies in Vertical SaaS, Workforce Management (think HR platforms or Time & Attendance), and Financial Technology. This software has become the operating system for many businesses, leading to new demand to embed more services into a one-stop shop. Many of these platforms started by embedding payments or benefits as adjacent product offerings that increase revenue for them. The ability to offer payroll as a product is an extension of that proven model and addresses pervasive customer pain with disconnected payroll.
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2. Building payroll products is complex but Payroll-as-a-Service APIs make it easy. The reason payroll has been historically outsourced is because it is an extremely nuanced and complex process. There are over 13,000 labor, taxation, and withholding jurisdictions, each with rules and regulations that need to be followed and kept up to date. Historically, building a payroll product would take a sizable team several years of work to get it right. Now, Payroll-as-a-Service APIs calculate the taxes, move money, and handle the production and filing of tax documentation. This allows platforms to focus on building a user-friendly front-end for their customers to manage payroll, completely integrated to the system they are used to.
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3. Payroll-as-a-Service API companies are not Payroll companies offering APIs. Some legacy payroll companies offer APIs to ease the inflow of data from other platforms, like vertical SaaS or time tracking apps. In that model the payroll company continues to own the direct customer relationship, and often ends up competing with the referring platform for the customer’s business. On the other hand, Payroll-as-a-Service APIs sell to platforms, not businesses, so there is no strategic conflict. This strategic alignment with our partners has been core to Check’s philosophy since the company was founded.

What to know about Payroll Data APIs

1. The demand for detailed consumer financial data is only increasing. This all started with an increase in access to personal financial data, as the walled garden of the banks began to get trimmed back. Next, came the maturation of the fintech ecosystem over the past few years, leading to hundreds of new, forward-thinking companies looking to provide banking, loans, and other financial products to consumers. And now, as innovation has continued, companies realize that access to new types of data can let them support alternative credit files or even identity checks, where historically they couldn’t get helpful information.
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2. There are two key segments of Payroll Data APIs: Employee and employer data. We've developed our own loose framework for how we think about the Payroll Data API category, which boils down to two distinct areas of focus: Employee Data vs. Employer Data. This matters not just for what the data is, but what it enables. Employee data refers to the information about the person getting paid. This data might include personal information like their name, address; or salary info. Access to this data is typically delegated by the employee who provides their payroll login credentials. And developers are able to use this information to build products that are familiar to many of us as consumers: income verification, direct deposit switching, and the like. Employer data, on the other hand, includes more of the nuts and bolts locked inside benefits and HR tech platforms. For example, an employer might give access to private company data in order to outsource things like filing complex and time consuming tax credits that will save their business money. Innovation meant to make this data programmatically accessible has been slower, and the net result is businesses, especially small ones, are often stuck with financial tools that would have seemed archaic a decade ago.
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3. Both employee data and employer data is becoming more easily accessible. As with most innovation at the infrastructure layer, with greater programmatic access has come more innovation. This category is in the early innings, and we’re just beginning to see what’s possible to power with this data. For the best deep-dive on this part of the space we recommend this post, published by A16Z late last year. It’s informed much of our own thinking, and is essential reading for anyone interested in digging deeper.

Payroll is the next wave of innovation in fintech

Innovation in the payroll space has roared to life over the last year, showing that payroll is the next frontier of innovation in fintech. At Check we’re proud to be pioneering the Payroll-as-a-Service API model, and we’re equally excited to watch the continued evolution of the Payroll Data API landscape.

If you have a topic that you are interested in hearing more about or if you’re interested in seeing a demo of our Payroll-as-a-Service API, email partners@checkhq.com.