Death of Utility Bill And Collect

October 17 2012


By: Dave Staal

We can't all have the latest technology all the time. Smart phones, 3D televisions, Pinterest, self-parking cars, e-tablets, Google+, Draw Something. Chances are the average person could claim three or four of the seven listed. Adoption of technology will always have its laggards. However, in the case of utility bill and collect, failure to innovate can be costly for multifamily properties.

Every month, 5 million U.S. apartment residents are billed for utilities in addition to rent. Approximately 750,000 to 1 million of those residents get a return envelope enclosed with their utility bill and are required to write a check and mail their payment to a utility billing company. After the resident writes the check and mails it to the utility billing company, the payment is held by the service provider until they transfer the monthly lump sum to the property, once they've deducted their fees. In the old days, this system was a good solution to reduce administrative workload in the leasing office; but it substantially underperforms when compared to modern convergent billing integrated with electronic payment services.

HOW DID THIS HAPPEN?

When first introduced, bill-and-collect services were received as a blessing by property managers. Utility billing companies largely removed the burden of billing, collection, and processing utility bills and payments from the shoulders of management, who were more than happy to be relieved of the responsibility. But in light of advanced billing and payment programs now available, the performance and cost of these programs can no longer be justified.

It's no accident that billing companies continue to sell and support outdated business models, even though there is no cost of switching paying properties to more modern services. Bill-and-collect services generate substantial revenue per bill for the billing company--even though utility collections from residents tends to be lower. With bill-and-collect services, billing providers have no financial incentive to avoid delinquencies--they pay themselves off the top and send the property what's left. In fact, many of these companies reap hefty profits from late fees from delinquent payments. Basically, the billing company wins when the property and the residents lose.

For example, when a property's residents fail to pay their utility bill on time, the billing company distributes late notices to those residents and charges them a late fee--in most cases, about $5 per resident, which goes directly to the billing company. Often, the billing company deducts all resident late charges from the remittance to the property, regardless of how many residents actually pay their delinquent charges and late fees. Billing companies don't have to worry about getting paid, because the system allows them to enjoy the first-fruits; while the property has to get by on leftovers.

Billing companies are happy to have their clients keep antiquated utility bill-and-collect services in place, so they can continue to profit from the current model. Peter Voelkel, owner of Holly Station and longtime investor in the multifamily industry, described his experience with billing companies, "They were largely passive in collections and unresponsive in addressing problems. They never broached the prospect of improving the process or discussed new innovations or systems to increase efficiency."

All the while, many providers claim high recapture rates, based on a false assumption that the property will collect all past due payments and late fees at move out--but in reality, many former residents' delinquent charges are never paid in full. And assuming the former resident does pay, it doesn't repair the damage caused by non-payment during the tenancy. Businesses need to have that working capital available in order to conduct their day to day operations. The delayed cash flow that is built-in to the service is completely unnecessary in a world dominated by e-commerce.

Jon Ford, a former management-level representative for one of the largest utility management and billing companies in the nation, explained, "Bill-and-collect service has often been promoted as providing some perception of separation between the landlord and the resident utility billing function; however, the reality is that the property is the one collecting money from the residents through the third party billing company. Residents aren't fooled. They know this. Residents are also aware that there are more convenient ways to be billed and to pay bills than to get a separate utility bill in the mail and stick a check in a return envelope and haul it to the mail box. In today's economy, it's increasingly difficult to justify bill-and-collect services that sacrifice your cash flow."

In a recent conversation, Adam Moore, currently a resident at a 270-unit community near Salt Lake City, expressed additional issues which are commonly faced by residents, "My wife and I have had a horrible experience with our utility billing because they use bill-and-collect services at our apartment community. All of the bills we pay are online except our utility bill, and this makes it difficult to remember to pay it. When I do remember to pay the utility bill it's usually too late because of the time it takes for a check to arrive through the postal system. Between the late fees and hassle of sending the bill in the mail, my wife and I have developed a negative perception of the property management where we stay."

HOW DOES THIS PERSIST?

Still, utility bill and collect persists as a common business method despite poor performance, for several reasons. First, utility bill and collect thrives on the adage out of sight, out of mind. The leasing office's daily involvement with utility collections is minimal. Voelkel says, "There's definitely a lack of awareness. Oftentimes, property management is too busy to recognize the problems."

Second, when vendor invoicing and billing summary statements arrive at the properties, they are often confusing and complex, making it difficult to clearly see how much they are profiting off the properties' monthly billing cycle. In many cases, enigmatic service charges can keep staff from identifying and investigating questionable fees.

Lastly, operations of utility bill and collect have been largely accepted as a necessary evil. Rather than face the administrative workload that comes with collecting utilities at the property, many clients have accepted the inefficiencies of bill-and-collect service in the absence of better alternatives.

HOW ARE COMPANIES RESPONDING?

But not all bill and collect clients accept these practices. When asked what prompted him to replace his provider, Voelkel simply responded, "I knew there were other alternatives to improve our efficiency across the board."

Many professionals in the multifamily industry have recognized the unnecessary costs and inefficiencies of utility bill and collect. The ultimate solution in today's world of cash-flow management and billing solutions is email-based convergent billing and electronic payment portals.

First hitting the industry around 2003, convergent billing combines all lease and utility charges on one monthly resident invoice, with the utilities articulated separately from the rent. These bills can be delivered electronically, automatically, and instantly via email, linking residents directly to an integrated online payment service. Convergent billing now represents about 1.5 to 2 million resident utility and rent bills per month.

"Electronic convergent billing simplifies the process on all fronts," says Voelkel, "It provides residents with a full breakdown of monthly charges on one, user-friendly monthly statement. It frees up wasted time on the part of the staff and improves collections for the property. Overall, it's a win-win for residents and management."

Because online transactions are fulfilled in seconds, online convergent billing speeds up collection and frees up precious working capital. Conservative estimates predict that electronic convergent billing could increase utility collections by an average of 20 to 30 percent. Other benefits include decreased delinquency, reduced administrative workload, and improved transparency in the billing process. All the while, increasing resident satisfaction.

So will new, innovative solutions like electronic convergent billing spell the death of utility bill and collect? The real question is not if, but when. Considering the numerous advantages of convergent billing and electronic payment, current utility bill and collect clients can't afford to let the future pass them by.

Dave Staal is Regional Vice President at Property Solutions International, Inc with 10 years of multifamily experience including construction development with the Fortune Group and Senior Account Executive for ista North America. In addition, Mr. Staal has served as a frequent guest speaker at various California regional apartment association events, presenting on such topics as sub-metering and utility billing requirements. Mr. Staal is married with three young children; enjoys playing golf and serving at his local church; and has an affinity for pumpkin pie and custom tailored suits.

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