A lot of brain power and money have been poured into FinTech, especially lending and payment areas. These are indeed exciting areas with new business models and technologies. On the other hand, people rarely associate the sexy FinTech with payroll services. Although it may sound boring, payroll is actually an overlooked gold mine for innovators. Traditionally, payroll service companies make money by service fees. New HCM service companies such as Zenefits work as insurance brokers while providing free payroll and HR services. But if we lean under the hood and look at the process, there is an interesting opportunity.

Typically the employers deposit money into payroll service company account and three days later the money will be distributed to employees’ accounts at the end of the payroll process. Within that three days, we can invest the money in the safe money market and earn some accrued interest. The primary formula of accrued interest is

I = T \times P \times R

where I is the accrued interest, T is the fraction of the year, P is the principal, and R is the annualized interest rate. It may not sound exciting by investing in money market for a short period. However, the payroll giant ADP moves $1.7 trillion each year. With that scale, the accrued interest is a notable profit (if the interest rate is not zero or negative. More discussion on this later). And this is literally free money as there is almost no cost.

So far so good. But the question is how we can make more money from this cashflow. Let’s look at the accrued interest formula again. If either T, P, or R is larger, we will make more money. However, the interest rate is out of our control. For leading payroll service companies like ADP, it is also very hard for them to significantly increase the principal P. At least we cannot easily double it in short term (without huge inflation). So the only thing we can do is to increase T, the time we hold the money. Of course, it is a very bad idea to provide slow service. But if the payroll company becomes a bank and enrolls the customers to the banking service, we can effectively hold the money much longer (before they payoff the monthly bills). Estimating by rules of thumb, we may earn 5X interest. In fact, we can have even higher returns by investing beyond money market since we hold the money longer.

Feel excited? Well, we should also look into the major challenges before self–congratulation.

First of all, it is hard to be a bank. There are a lot of legal, compliance, and regulation issues. And it also takes time to build a complete bank business. But if we can copy the idea of MVNO, the life may be easier. A MVNO (mobile virtual network operator) is a wireless communications services provider that does not own the wireless network infrastructure over which the MVNO provides services to its customers. As a virtual bank, we work as a pipe and out source the banking process to established bank while sharing interest, fee, and mortgage output, etc. Because we don’t operate branches & ATMs, our cost is very low. In fact, this business model is possible as neobanks demostrate. Neobanks partner with chartered banks that hold deposits in FDIC-insured products. The banks in the background take care of the money while the neobanks provide a simple, customer-centric mobile and web experience.

The key success factor of this adventure is to enroll employee to use the banking service. A checking account is essentially a free service. We have to be much better than the existing service to convince users to switch. Fortunately, there is an opportunity by employing Big Data. The payroll and HR service providers know exactly how much the employees make and pay dates. With the job history and performance reviews, we can predict their job stability accurately. Being a bank (and credit card issuer), we will also know how they spend. Adding other benchmark information, we should be able to do a much better risk management and thus provide better user experience. With lower risk, for example, we are able to offer mortgage and loans with lower rate. Besides, banks make a lot of money by charging overdraft fee today. But people feel penalized. With the knowledge of pay date and amount, we can treat overdrafts as unsecured loans without significant risks. Instead of overdraft fees, we make money from interest while customers feel happy because we are helping them with small loans. Many similar ideas can be used to improve the user experience. With careful product design, the convenient and friendly banking service from payroll providers should be attractive to many customers.

Last but not least, zero and negative interest rates could be a killer. In this upside-down world, borrowers get paid and savers penalized. Crazy as it sounds, several of Europe’s central banks cut key interest rates below zero in 2014, and now Japan has followed. However, negative interest rates are unsustainable as we see that European banks such as Deutsche Bank struggle. Once investors decide to stop paying for the privilege of holding government debt, a banking crisis could result. Therefore, I expect that negative interest rates won’t be a new normal. Because healthy economy needs some inflation, zero interest cannot stay forever although low interest rates may stay very long. In fact, the U.S. market has been betting an interest hike for a while. No matter if the interest rates hike comes or not, low interest rates is actually one of motivations to this idea.

That said, this is not an easy thing to do. But given the potential huge returns, it is worth that some brave/foolish souls to work it out!