HR Technology is one of the fastest-growing business-to-business (B2B) technology segments. Statista predicts annual revenue will grow from USD 62.6 billion in 2022 to USD 91.8 billion by 2026. One major factor contributing to this growth is the rise of payroll APIs, which allow HR Tech companies to build value-added services like payroll and benefits alongside core HR functionality like performance reviews, time-off tracking, and onboarding.
Generally speaking, Human Resources Information Systems (HRIS) have a few options when deciding how to incorporate financial services like payroll or spend management within their applications:
- Build it themselves
- Set up a referral and integration partnership with a trusted brand
- Use APIs to embed the additional functionality directly within their own offering
While this article focuses primarily on embedded finance within HR tech or HRIS tools, the other options are also worth examining. Referral and integration partnerships are generally the easiest to set up but offer a more disjointed experience (including multiple logins), while building the service internally frequently involves a long build time, onerous regulatory compliance measures (like state money transmittal licenses), and ongoing support and development. In the middle of these two options sits embedded finance, the best of both worlds.
The rise of HR Tech Platforms and Payroll APIs
“It’s critical that the systems our customers use all talk together. From insurance billing to bookkeeping to payroll to taxes. It needs to be easy, and customers need to know they are paying themselves correctly, reporting taxes correctly and accurately each quarter.”
Victoria Li, Co-founder and CTO, Heard
Read the full case study here.
SMBs’ preferences drive the shift towards embedded financial services APIs. According to our prior research, 70% of SMBs are likely to switch to payroll software that offers all-in-one vertical SaaS solutions. SMBs favor applications tailored to their industry by experts, seeking to simplify processes with fewer providers and better industry-specific compliance. Likewise, many HR tech platforms focus on specific industries and serve as hybrid HR tech and vertical SaaS solutions.
HR tech platforms can capitalize on this by embedding fintech products like payroll, which improve customer retention and revenue. Companies like Heard have demonstrated significant revenue growth through embedded payroll. By providing financial management tools for therapists, Heard increased revenue by 25% while reducing churn. This strategy positions vertical SaaS providers to meet specific industry needs, offering streamlined, comprehensive solutions that drive customer satisfaction and business growth.
But it’s not just payroll—according to a BCG report on HR Tech, businesses want consolidation across all the HR tools they use, with “a staggering 94% of HR decision makers [struggling] to keep up with the latest technology trends and developments. […] There is significant confusion in the market.”
Integration vs Embedded Payroll APIs: Understanding the Difference
Integration APIs let companies automate payroll tasks and add payroll features to existing HR tools. This means that salary data can be easily accessed on different platforms, giving users more options and up-to-date information in realtime. While employers may need to log in to multiple systems, information is shared between them to, among other things, reduce data entry errors.
Embedded payroll APls, on the other hand, integrate all of the payroll functions right into the Human Resources Information System (HRIS). Unlike integration APIs that share data between different systems, embedded payroll integrates payroll functionalities alongside other tasks like accounting and time tracking together on one platform rather than switching between different systems.
Listen to the full episode here.
Embedded Payroll APIs and Modern HRIS
Embedded fintech services like payroll are not only a growth driver among existing customers of an HRIS application but also a key customer acquisition strategy. According to a study by PwC, 36% of HR leaders surveyed said, “It’s somewhat or very likely that they’ll switch [HRIS] vendors at the end of the subscription term.” And the reason why? 27% cited “integration with other technology solutions.”
Embedded payroll offers an all-in-one solution, reducing the workload for administrators and providing a smooth user experience. This is particularly beneficial for small- to medium-sized businesses. Embedded payroll streamlines the entire process by allowing you to handle everything in one place, including onboarding employees, offering insurance, recording time off and accrued hours, and running payroll.
Notably, HR Tech often overlaps with vertical SaaS when companies build HR tools for specific industries. This overlap is common in highly regulated industries, like healthcare, though many vSaaS products include some form of team management. For instance, Archy, an all-in-one practice management software for dentists, integrated Gusto Embedded Payroll into its software, allowing users to manage their entire operations from a single platform and run payroll with one click. Leveraging this integration, they’re able to:
- Effortlessly calculate salaries, wages, and overtime, file taxes, process direct deposits, and generate W-2s.
- Easily pay providers based on a percentage of billed hours or procedures.
- Let employees log hours seamlessly. Admins can process payroll with a single click, eliminating manual calculations, manual data entry, or separate third-party software.
“Our focus has always been to build time-saving solutions for dental practices. Integrating payroll directly into Archy is not just an innovative move; it makes Archy the only practice management software that offers payroll directly within the software that practices use every day.”
Jonathan Rat CEO, Archy
Read the full press release here.
Understanding Payroll APIs
Integration Payroll APIs (Application Programming Interfaces) are sets of protocols and tools that enable software applications to connect and communicate with payroll processing services. Unlike embedded payroll, a payroll integration allows different tools to share data, but customers still need to login to multiple systems.
Some of the key benefits of integrations include:
Flexibility: Payroll APIs are easily connected to current business tools, accounting software, and HR systems. This integration helps reduce the risk of payroll or data entry errors.
Automation: Payroll APIs greatly lower the amount of work that needs to be done by hand by automating tasks like calculations and data entry. This automation speeds up the process and gives HR staff more time to work on more important tasks.
Accuracy: Payroll APIs automate data synchronization, which reduces human error and makes sure that pay data is correct and up to date – important because inaccurate payrolls hurt employee satisfaction.
According to Jack Altman, CEO and Co-founder of Lattice, the decision between integrating and embedding a financial service like a payroll API doesn’t have to be mutually exclusive. “I see it as in support of better options for customers and more choices. […] trying to give the [largest] number of customers the integrations that matter most to them.”
The Rise of Embedded Payroll APIs
Many small and medium-sized businesses (SMBs) still rely on manual or outdated methods for managing their payroll. Some calculate payroll by hand, while others work with local accountants. However, as these SMBs continue to digitize their business management systems, they are increasingly turning to modern, purpose-built SaaS solutions that cater to their specific needs.
Embedded payroll solutions play a key role in this transition. By integrating comprehensive payroll functionality directly into the business software platforms these SMBs use, embedded payroll enhances the overall user experience.
“Gusto Embedded Payroll gives us full control over the experience our customers see. It allows us to streamline the payroll process for our customers and, importantly, reduce distractions for them.”
Uri Bar-Joseph, Co-founder and COO, Formations
Listen to the full episode here.
Statistics show that more and more people are choosing financial services embedded within the tools they already use. For example, the global embedded finance market, including embedded payroll, was worth USD 82.48 billion in 2023. It’s projected to keep growing at a rate of 32.4% per year until 2032.
Businesses and HR departments can benefit from this increasing popularity. For starters, it makes the user experience smooth. Payroll tasks, like calculating wages, processing tax filings, and managing benefits, can be done by managers without having to switch between systems. This all-in-one approach makes things easier and reduces the risk of payroll errors.
Embedded Payroll APIs are Leading to All-in-One Integrated HR Platforms
The trend in HR technology is moving towards comprehensive, all-in-one solutions. Integrated HR platforms, which combine various HR functions like hiring, payroll, benefits, performance management, and employee engagement, are becoming the new standard.
For software companies, embedded payroll is a great way to offer more services. What’s more, offering embedded payroll is a win-win-win for technology providers, their customers, and their customers’ employees. These solutions offer a comprehensive approach to HR management, providing benefits across various metrics such as:
- Higher annual contract value (ACV) – when embedded financial services are priced as add-ons
- Higher subscription tiers (MRR/ ARR increase) – when payroll is packaged with other ‘premium’ features
- Higher lifetime value (LTV)/ increasing the LTV-to-CAC – when payroll customers continue to subscribe longer than non-payroll customers because embedded financial services help fill a critical need in the organization
- New customer acquisition – when payroll helps differentiate and convince new customers to sign up
Supporting these insights, recent data from a survey of SaaS leaders called SaaS 3.0: Beyond Subscription-based Revenue reveals several key trends;
Adoption: Data indicates that when SaaS applications offer embedded payroll, an average of 71% of their customers utilize in-app payroll, the highest adoption rate among all categories surveyed.
Revenue Realized: SaaS providers with embedded payroll report an average revenue increase of 41% of annual contract value (ACV) from payroll services.
Future Growth: The report highlights that embedded payroll is the top priority roadmap item for SaaS 3.0 companies, surpassing other embedded finance categories for implementation within the next 12 months.
The data suggest that while revenue growth is the primary motivation for SaaS 3.0 companies offering payroll services, reducing churn is a significant driver specifically for embedded payroll compared to other embedded finance products.
Benefits of Consolidation into Integrated HR Platforms
Consolidating HR functions into integrated platforms offers many benefits that traditional, segmented systems cannot match. Put another way, embedded finance “brings these services directly to customers within the context of their existing digital experience with a particular brand or digital platform, reducing friction and enhancing end-user convenience,” says Eugénie Krijnsen, PwC’s Global Financial Services Advisory Leader. Here are some of the key advantages:
Streamlined Operations: Integrating various HR functions into a single platform simplifies administration and saves time. This centralization eliminates the need for multiple logins and interfaces so that HR teams can handle everything from payroll to feedback reviews to compliance all in one place.
Cost Efficiency: Integrated HR systems save money by eliminating the need for multiple software programs. This significantly reduces the costs of subscriptions and training. A simplified system can also save money in the long run by eliminating unnecessary parts and making operations more efficient.
Improved Data Accuracy: Integrated platforms reduce mistakes when people enter data by hand or use different systems by combining data from other HR processes.
Enhanced Data Security: Integrated HR systems use strong security methods to keep private information about employees safe. Data breaches and corporate fraud are less likely to happen when you use advanced encryption and central data management.
Better Compliance Management: Integrated platforms automatically update and manage compliance with local, national, and international regulations. This simplifies compliance and reduces the risks of penalties and legal complications.
For more insights on how embedded payroll and other embedded HR tools transform HR technology, listen to HR Tech Evolution: Creating Platforms that Prioritize Adaptability and User Experience with Jack Altman.
Real-Time Insights and Reporting: These systems provide complete tools for reporting and analytics, which helps make strategic decisions based on real-time data. Industry reports say that 80% of HR workers think investing in HR technology has improved efficiency.
Personalized Employee Experience: Integrated systems let you change how employees interact with the system, which makes them more engaged and happy. It’s easy for employees to access their information, benefits, and job reviews, contributing to a better work experience.
Scalability: Integrated HR platforms easily adapt to a business’s growth, supporting an increasing number of users and more complex organizational structures without significant additional investments.
Enhanced Employee Self-Service: These systems allow workers to manage their personal information, benefits, and other HR-related chores. This self-service feature not only makes things easier for users but also frees up HR staff to work on more important tasks.
Greater Integration with External Tools: Integrated platforms seamlessly connect with other business applications and external systems. Whether it’s accounting software or project management tools, these integrations ensure consistent and uninterrupted workflows.
Conclusion
“Building payroll at a national scale requires deep knowledge and understanding. With Gusto Embedded, we are able to decrease the time to offer a leading payroll service while increasing the value we’re able to deliver to our customers.”
Jessica Young
MD & Head of Product, Chase Payment Solutions
Offering embedded financial services like payroll empowers your SMB customers with streamlined HR and finance workflows, enhanced user experiences, and greater convenience. These services differentiate your software and unlock new revenue streams through larger deal sizes and higher retention. By seamlessly integrating payroll, you position your platform as an essential, all-in-one solution for SMBs.
The opportunity for a seamless, all-in-one HRIS tool is certainly there today and only growing. According to a recent Gartner survey, just 24% of surveyed HR leaders believe that their organization’s HR function is deriving the maximum value from HR tech.
Small and Medium-sized Businesses (SMBs), in particular, are focused on reducing their tech stacks while achieving more from their foundational platforms. Of the over 6 million small businesses in the United States, more than 2.5 million are using vertical SaaS solutions.
Explore how Gusto Embedded Payroll can help you deliver this transformative experience to your clients and drive long-term success for your business and theirs.
