Sizing and Seizing Payroll’s Multi-Billion-Dollar Innovation Opportunity

If you ask Zeal Co-Founder and CEO Kirti Shenoy how her business is going, you’d better have a few minutes as the energetic entrepreneur rattles off a litany of ways that her company is looking to disrupt the world of B2B payroll services.

Specifically, she said the company is filling a desperately needed back-office niche by enabling small- to medium-sized businesses (SMBs) to build application programming interface (API)-driven payroll systems capable of automating high volumes of payment processing while also ensuring compliance with state, local and federal tax regulations.

If that sounds like a monumental task, that’s because it is.

As Shenoy told PYMNTS in an interview, most platforms have very few options and either went at it alone, which is a non-starter for most businesses, or they partnered with a legacy provider that essentially served as a consultant on how to build the system, without delivering any of the pieces itself.

“[Zeal] is here to help platforms build a payroll product,” Shenoy said. “Right now, they either go with a Vertex consultant or they choose an API-first tech alternative in Zeal. That’s all there is.”

Fresh Backing

Shenoy said her company, freshly armed with $13 million from a Series A round of funding, has identified two opportunities in payroll building. The first is what she calls the “new market opportunity,” which is B2Bs like Shopify that have access to thousands of businesses and want to sell a payroll system to those customers.

Read more: Zeal Nets $13M to Build Its Custom Payroll API

“It’s a really competitive standpoint for those platforms to grow their business and expand into other FinTech offerings like insurance and lending,” Shenoy said. “So, our goal is: How can we partner with all of those B2B [Software-as-a-Service (SaaS)] platforms and help them build a great payroll product, control all of the data, and then launch their next five to 10 financial products?”

Then there’s the “old market opportunity,” which is platforms that need to build a payroll product for their own use simply because it’s such a core aspect of their business. She said companies like Instacart, for example, that have tens of thousands of people working for them who are all receiving different types of payments, working in different ZIP codes across the U.S.

“Those platforms want the worker experience to be really customized in-app,” she said. “They want to automate high volumes of payments, and we’re partnering with them to help them build it themselves.”

As far as the new market opportunity goes, Shenoy said Zeal is targeting platforms with at least 5,000 customers on their books.

“If you’re a software provider, that’s the minimum you need to start selling a payroll product because it’s just a percentage thing,” she said.

See also: Credit Karma Integrates QuickBooks Payroll for Employee Options

As for the Instacarts, Shenoy said building your own payroll really starts to make sense when they grow to 500 or more employees.

“That’s when all the existing payroll tools out there start to become painful to use,” she said. “That’s when it starts making sense to build your own payroll product, particularly if you’re a staffing provider or a gig economy company.”

Fighting Friction

While some of those platforms may already have this notion that they’re all set in terms of payroll, Shenoy said many are wary of the laborious nature of popular legacy solutions.

“They’re tired of hiring 500 operations people to go into ADP, manually type in the hours and wages and manually onboard employees,” she said. “They understand that if they take time to develop a product where their custom portal, time, attendance and product all connects to the payroll, they can do some real cool things such as daily payroll processing.”

Read also: Earned Wage Access and the Great Regulatory Debate

The Tax and Compliance Piece

Then there’s tax and compliance, which is a serious pain point for hundreds of thousands of businesses all over the U.S., Shenoy explained.

“The U.S. has this very local-based policymaking ecosystem, which means we have 11,000 tax jurisdictions that can all make their own rules on taxes, reporting and filing,” she explained. “When they change laws, when they add a new clause, some jurisdictions can just post a tax change in a local newspaper, and then all businesses are expected to know these [new] rules.”

That partly explains why 40% of SMBs in the U.S. get hit with a payroll penalty every year, she said. And worse, there’s no real incentive for payroll system providers to fix this because very little of their revenue is derived from the compliance side.

“Compliance is not really a priority for a lot of payroll companies,” Shenoy said. “It’s not something they really innovate upon because they don’t see the ROI from a monetary perspective.”

That’s another way in which Zeal does things differently. Contrary to other payroll firms, Zeal has thrown itself at the compliance issue with much greater “zeal,” taking on tax liabilities on behalf of its customers. It has addressed the problem so well, Shenoy claims that even some other payroll companies are wanting to work with it and rebuild their own platforms using its technology.

See also: Transforming Payroll Into a Business Intelligence Powerhouse

“You won’t believe the extent of work that we do in order to ensure that those penalties don’t exist,” she said. “It’s really empowering for customers because it means they can focus more resources on building a better [user interface (UI)] and expanding their product vertical segment.”

Asked about the market opportunity in building payroll systems, Shenoy said it’s up in the air at present and depends on how the company ultimately decides to monetize its business. At present, it has the option of making money on the treasury management side, helping companies avoid tax expenses and such. The other option is making money helping customers expand into new verticals and launch new FinTech products, and then taking a cut from those.

“Right now, we’re trying to do both,” she said. “That’s the experimentation phase from Series A to Series B. Both are wonderful opportunities to become a multi-billion-dollar business.”