August 1 2004
Just a few years ago when property manager William J. Levy asked an audience of his peers if they offered tenants the option to pay rent online or by credit card, only a few hands went up. This year, he expects the results of his unofficial poll to be significantly different.
"Not to accept credit cards today is like saying, "I'm stuck in the 70s," says Levy, senior vice president of Campus Advantage, which manages campus communities, and manager of properties in Madison, Wis., and Chicago, with a few hundred tenants, as well as a faculty member and former officer of the Chicago-based Institute of Real Estate Management (IREM).
While independent market research firms cannot yet produce hard figures on the penetration rates of alternative rent payment options, plenty of evidence suggests that online and credit card payments have reached the mainstream -- at least for high-end and middle-tier properties where renters possess not only credit cards but also the credit limits to sustain monthly rent payments. Just look at the rising number of multifamily property ads sporting Visa, MasterCard, Amex and Discover logos. "Twice as many owners today [offer alternative payments] as two years ago," confirms David Cardwell, vice president of finance and technology at the National Multi Housing Council (NMHC) in Washington, D.C.
It seems that a confluence of elements has made credit cards and Web payments a more attractive option for multifamily owners and managers. First, technology has improved. Vendors such as Realm Business Solutions, Property Solutions, Inc., and Go Software now offer payment processing solutions and front-end systems that mesh well with commonly used property management software packages.
At the same time, the Web has become a favored financial channel among consumers. Overall, online bill payment rose 37 percent in first quarter 2004 over the same quarter last year, according to market re-search firm ComScore. While checks and money orders are still the preferred methods for paying rent, leading check-maker Deluxe has publicly noted that the company's check production is down a whopping 65 percent. What's more, card issuers such as MasterCard, Visa, and American Express have finally gotten with the program to smooth the transaction process, offer credit card reward points, and keep transaction fees modest -- under 2 percent per transaction.
And technology and credit card companies are finding that their efforts are being welcomed by more tech-savvy property management communities. A growing number are already using some form of property management and accounting software that makes it easier to add alternative rent payment options to the mix. "Automated payment is not going to turn them on their heads because they've already gone through process change," says the NMHC's Cardwell. "That's why you've seen companies at the high end jumping in first because they know how to. It's not as disruptive to their personnel."
The well-documented potential benefits of offering online and credit card payment options make it worthwhile for apartment owners and managers to try to navigate the rough spots on this new, but not totally uncharted, area. With credit card or Web payments, properties generally get paid faster and more consistently. They can also sign up prospects as new renters on the spot, reducing the credit approval process from days to minutes. As a result, the cash flow is steadier, and there is less concern over tenant payment woes. "There are almost no disputes and almost no charge-backs," says Jim Cunningham, executive vice president at Casto, a Columbus, Ohio-based property management firm that handles 7,000 units in 28 communities. And when there is a payment problem, it's generally the credit card issuer, not the apartment owner or manager, that takes the hit. "You don't have to get into the whole thing about collection," says Cunningham, who teamed with American Express to bring the service to Casto and its managed properties. "A financial institution is in a better position to collect and deal with it."
From a purely customer service and marketing perspective, the convenience of credit card and online payments can lure renters from competitors and retain existing tenants, a must-have in today's challenging market. When electronic payment service RentPayment started during the dot-com heyday five years ago, very few multifamily companies accepted credit card rent payments. There was really no need to do so. "Renters were lined up at the doors of buildings," says Matt Golis, the outspoken president and COO, who tags RentPayment as a fund management company. But a faltering economy has left rental companies competing for tenants to fill costly vacancies, and credit cards do offer some marketing leverage.
Indeed, in a survey by JP Morgan Chase, renters ranked an online rent payment option nearly as important as having a swimming pool. It's no wonder: In a recent special promotion at Related Rentals, a property management company with 5,000 luxury apartments in 16 buildings in New York City, renters armed with American Express cards received between 10,000 and 25,000 Membership Rewards points for signing a lease during a certain time period last spring. Given the typical New York rent, those reward points can translate into a very nice vacation for a card-carrying renter.
These days, it's "pretty easy to get started" on an alternative payment track, says Elizabeth Langwith, vice president of establishment services at American Express. The technology has advanced tremendously in the past three years, with payment processing and cash flow management vendors such as Realm Business Solutions and Property Solutions, Inc., heeding the needs of property managers. Card issuers also have jumped into the fray to help management companies set up and train on software -- with little or no cost to properties -- and spread the word to existing and potential tenants, often providing advertising and marketing materials.
According to Cunningham, getting credit card payments up and running at Casto's Midwestern properties was fairly painless. "American Express came in aggressively," he says, and offered the company advertising and software so that Casto "could do it for no cost."
The new generation of software solutions give property management companies the tools to handle alternative forms of payment more easily. They fit readily into existing business systems by establishing corporate rules for handling issues like insufficient funds and eviction accounts.
Increasingly, these systems also integrate into popular property management systems such as those from MRI Real Estate Solutions, Yardi Systems, and RealPage, Inc., which streamline accounting and other operations. Apartment owners and managers, once in the dark about many of their transactions, including traditional lockbox payments, are finding that more progressive payment systems give them more information about transactions, so they can respond more quickly to problems. At Charles H. Greenthal & Co., a large property manager in New York, the lengthy process of dealing with 3,500 rejected payments monthly seriously affected its cash flow. By switching to Realm's Collect system, the company claims to have reduced the transaction cycle to two days or less and reduced processing time by 80 percent.
Of course, there are plenty of third-party companies willing to handle the collection and payment processing for property managers. By going that route, property management companies "don't have to invest in infrastructure," says Golis, who tags RentPayment as more than a third-party firm. "We manage funds."
In the past, a major obstacle to handling credit card rent payments has been the transaction fees imposed on merchants by credit card companies. Not only did these fees gobble up potential profits -- by law, management companies couldn't pass fees directly to renters -- but they also represented a processing headache of major proportions. Now a combination of better technology and the cooperation of credit card issuers not to mention some creative accounting is quickly chipping away at that barrier. Casto's Cunningham points out that American Express won his company over by "being very aggressive on its discount rate," as are both Visa and MasterCard, which keep transaction fees between 1.65 percent and 2 percent.
Many property owners have sidestepped the fee issue by raising rents slightly across the board or using a third-party company like RentPayment or Property Solutions to shepherd the fee process. Much like Ticketmaster does with the entertainment industry, RentPayment charges renters a 2.95 percent fee that covers credit card transaction fees. It then keeps the difference between the renter's fee and the actual transaction fees for its own coffers and transfers the full rent payment to the property manager. Property Solutions accepts rent payment and charges renters an additional "convenience" fee of 1 percent to 2 percent, while the landlord gets the full rent without complicating the accounting process. And at Realm, the full rent is placed in a property management company's operating account, with a 2 percent fee deducted at month's end.
Before committing to an alternative payment process, though, apartment owners and managers should carefully consider just who is monitoring and managing the money. They should ensure that any third party involved complies with banking rules and regulations and that the money collected is protected and accessible. "If a third party is sued or a seize is put on its bank accounts, the funds can be frozen and that can be devastating for a property management company," says David Bateman, co-founder of Property Solutions International Inc. The Provo, Utah-based company creates a unique relationship between the bank and a property. That arrangement guarantees that rent money is always under the guardianship of a financial institution, and therefore federally protected.
Apartment owners and managers must also select a processing solution that accommodates multiple payment forms and reconciles payments with numerous financial institutions. "In a lot of cases, property management companies go through a lot of third parties to get to the ODFI (Originating Depository Financial Institution)," says Jon Lindhjem, vice president, national sales, at First National Merchant Solutions, a payment processor wholly owned by First National Bank of Omaha.
But as consumers shift more of their payment activities to the Web, it is critical that apartment companies do the same. Companies like Realm have steadily moved their offerings to the Web so that as property management companies add Web portals, they can easily add the online direct debit or credit card payment piece to the mix. Instead of "pulling property managers kicking and screaming into the Information Age," as Golis once envisioned, it seems many are going there independently, carefully riding a wave of technological innovation and consumer desire.
1. Ensure that the payment strategy meshes with business objectives and operations. You probably don't want to accept online payment if you're near the end of an eviction process with a tenant or you want to submit "insufficient funds" transactions more than once. Make sure that any online rent payment system you choose follows YOUR rules.
2. Consider a payment platform that integrates with property management systems. No payment initiative should stand alone -- it's too costly and complicated. And make sure the payment system is aimed at property managers.
3. Understand exactly how fees are handled, and by whom. The fees imposed by credit card companies can be steep and, if you're not careful, charge-backs can complicate accounting.
4. Understand who manages the money. Who exactly controls the rent monies collected -- the financial institution, the property management company, or a third party? And is it FDIC-protected along the way? Can the funds be seized or rendered inaccessible at any time?
5. Assess the impact on the bottom line. Transaction fees, software implementation, and ongoing maintenance can be costly. If only 1 percent of your residents want alternative rent payment options or if their credit limits are too low, then don't go there.
6. When possible, select a system that offers electronic payment end-to-end. While any direct debit option is preferable to checks, if the process isn't fully automated and a bank issues a paper check to the property, it defeats the purpose.