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How the SVB collapse upended payroll for thousands

The Silicon Valley Bank collapse came as a shock to payroll processors, who had to quickly explain what happened to customers and create alternative payment plans.

Michelle Puzzo, president of UR Community Cares Inc., a nonprofit technology startup, had "no idea" that the Silicon Valley Bank collapse would affect her paycheck. She expected her check Friday, but that didn't happen.

The path from a Silicon Valley Bank (SVB) account to a paycheck deposited in an employee's account goes through many steps. In Puzzo's case, a local accounting firm handles her payroll using a payroll software platform provider, Patriot Software LLC, in Canton, Ohio, which relies on SVB.

Patriot Software has 55,000 customers across the country. It had over $100 million of customer payroll and payroll taxes sitting in SVB Friday, the day federal regulators closed it down, according to Mike Kappel, Patriot Software CEO, in a blog post.

Puzzo once worked as a full-time physical therapist who saw many seniors needing help. In 2019 she became an entrepreneur, creating "a technology startup company as a nonprofit," she said. The growing platform connects some 700 volunteers to an equal number of seniors in Connecticut and now part of Massachusetts. The volunteers offer everything from companionship to help around the house and car rides.

The SVB collapse affected many, including payroll-processing professionals on the frontlines of working with businesses. Paychecks were not showing up in direct deposits, and payroll processors had to explain to customers what was happening.

Puzzo has nothing but praise for her processing firm, Accounting Connections in Hartford, Conn., for answering her questions and keeping her up-to-date.

Jolie Swanson, co-owner of Accounting Connections, said she has been working hard to keep her clients informed and develop workarounds so small businesses can still pay their employees.

A shock all around

"This was a shock to the system," Swanson said. "It was a shock to us as well."

This was a shock to the system.
Jolie SwansonCo-owner, Accounting Connections

She said the firm works directly with employers, "making sure we are taking care of them and their teams, their payrolls, tax payments and answering all their questions." But they rely on software -- in this case, Patriot Software -- to process that information. And for the software company to do their job, "they have to have a banking relationship," she said.

It was the banking relationship that broke down.

Kappel formed Patriot Software in 1986. In his blog post, he described the firm's early days in stark terms. It was started in "the basement of a factory, with no heat, no air-conditioning," and "instead of customers, our only visitors consisted of rats, birds, flies, and snakes."

He warned the government that failure to act immediately "will spawn a cataclysmic ripple effect that will shatter an incredible number of real small businesses, their families, and it will spawn an irreversible lack of trust in our entire financial system."

Kappel declined to be interviewed for this story, saying he was tied up. "I'm sure you understand that my top priority is to make sure that all of Patriot's customers and their employees are getting paid and getting their payroll back on track," he said in an email.

Finding alternate banks

Patriot Software has posted regular updates about its efforts to resolve payroll issues. They are working with "two large, well-established banking entities to replace SVB and expect to be up and running soon," the firm wrote Monday afternoon.

On Sunday, U.S. regulators said SVB depositors would be made whole, with no losses borne by taxpayers. But shareholders and unsecured debt holders will not be protected, it said.

Other HR and payroll providers were also affected.

Parker Conrad, CEO of San Francisco-based HR vendor Rippling Inc., apologized in a tweet on Friday "to our clients and their employees who did not get paid today." The firm declined to be interviewed.

But after U.S. regulators announced their effort Sunday to limit the fallout of the bank failure, Conrad tweeted, "Anyone else breathing a sigh of relief and looking forward to a good night's sleep tonight?"

The HR payroll platforms will recover from the bank failure. But the government's decision to contain the damage may dispel the idea that the bank's collapse will have broad implications for HR startups, such as hurting funding.

"It's clear today that the federal government is going to protect these mid-sized banks, so I sense the crisis is over," said Josh Bersin, an independent HR analyst.

Patrick Thibodeau covers HCM and ERP technologies for TechTarget Editorial. He's worked for more than two decades as an enterprise IT reporter.

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