Why Gusto Wants to Connect Your Bank Account to Payroll

For many small business owners, the process of forming a company can be overwhelming. I would know, I’ve done it myself.

There’s the process of applying for an EIN, deciding whether to become an LLC or an S Corp. and why, and which bank you should trust for your deposits and to hold your money. Then once all that is done, you have to set up payroll and pay taxes.

It’s a lot. And often, owners of SMBs have to work with multiple entities to manage different parts of the process.

But now Gusto wants to help streamline it all so that business owners have the option to form a business, decide on its classification, open a bank account and pay employees (and themselves) all in one place.

San Francisco-based Gusto announced business formation and banking services on Oct. 22. A small group of customers is already using the products, according to Dan Loomis, GM and VP at the company. A nationwide availability is planned for December.

The long-term goal is to give Gusto an opening to play a larger role in customers’ finances. Of course it remains to be seen whether businesses that rely on it for payroll will also choose it for banking – and how much that choice could add to Gusto’s business.

By adding banking to payroll, Gusto is betting it can help business owners answer a question neither service can fully address on its own — whether they have enough money to cover what’s coming next.

That could mean making payroll this week or deciding whether to hire another employee, Loomis said.

“If we can see the amount of money coming in, the amount of money that you have, we can understand your money with you, and we can make you confident that you can actually run payroll,” Loomis said in an interview with the Financial News Network.

Gusto is betting that the option to bank through its platform will appeal to business owners who want convenience and don't want to manage different parts of their business in separate places.

“A real-time connected ecosystem is going to win over a disparate point solution ecosystem 10 out of 10 times,” Loomis said.

The move puts Gusto in more direct competition with business banking platforms such as Mercury and Relay, which also help companies manage their money. Adding company formation has it competing with services such as Firstbase, which helps entrepreneurs set up businesses and connect with banking providers.

To deliver these new banking services, Gusto partnered with Increase Bank to provide the new account. (Like many other fintech companies, Gusto itself is not a bank.) Its updated dashboard now displays account balances as well as incoming and outgoing money and upcoming expenses.

Putting that information alongside payroll costs can give owners a clearer picture of what they can afford, noted Loomis.

But he points out that businesses don’t have to move their main bank account to Gusto to get some of those benefits. They can connect an outside account, Loomis said, as businesses with specialized needs may prefer other providers.

Gusto now has the potential to become the place owners go to understand their finances without becoming the place they keep their money. But convincing them to open and use its account is a separate challenge.

When asked whether the banking expansion could lead to more lending products, Loomis said that Gusto already offers a product for businesses whose bank balances fall short of payroll. Through its partnership with Parafin, eligible customers can access Payroll Bridge, a line of credit to pay employees.

For example, Loomis described an owner who might use Parafin to cover $8,000 in payroll when they only have $4,000 in the bank. This can happen, for example, when a customer pays an invoice late.

But he did not outline additional offerings or plans to use data from the new account to make lending decisions.

Gusto has already built a substantial business beyond payroll, which it began offering in 2021. Today, more than half its revenue comes from other financial services products, including benefits and help meeting regulatory requirements. But the company doesn’t provide specific figures.

Overall, Gusto serves more than 500,000 small businesses and it announced in May that it had surpassed $1 billion in revenue over the previous 12 months.

How banking will contribute to that revenue is less clear right now. When asked how Gusto would make money from the account, Loomis pointed to its product packages, including Gusto Solo for very small businesses, and opportunities to sell customers more services as they grow.

Besides banking, helping companies with business formation gives Gusto a way to start relationships earlier – before an owner has employees or needs payroll.

The new services guide entrepreneurs through those early stages, including tasks such as registering for a federal employer identification number and opening a business account. If they later hire, Gusto can offer payroll, too. But Loomis said the company also wants to serve owners who remain self-employed.

Customers have already been forming businesses and opening accounts through Gusto during its beta, he said, although he did not disclose how many formations have been completed or how many accounts have been funded.

The December rollout is timed to reach owners as they reconsider providers around the calendar and tax year, Loomis said.

“We deal with hundreds of billions of dollars of payroll. We file taxes with every agency known to man,” he added. “We deal with benefits providers that are very challenging to help structure something very simple for small businesses. We're just dead focused on making things very, very simple.”