Online Rent Payments Gain in Popularity
February 1 2008
Today, people are using the Internet for practically everything. The next logical step in this digital migration is for renters to pay their rent online via automatic deduction just like they do with their other bills.
The volume of electronic payment transactions for all goods and services nationwide surpassed that of paper checking for the first time in 2003, according to the Federal Reserve. As consumers put away their checkbooks, they are using online checking, debit cards and credit cards to pay for everything from food and entertainment, to utility bills and car payments. Industry observers believe that rent is next in the e-payment revolution.
Every month, more than 36 million Americans pay rent. Currently, over 90% of them do so the old-fashioned way -- by writing a check. This is mainly because traditionally there were no other payment options offered by landlords. While industry insiders estimate that only 6% of renters now pay their rent online through the automated clearing house (ACH) banking system, it is widely believed that within the next few years that percentage will grow rapidly as more renters consider electronic rent payment as essential a service as cable TV or high speed internet.
Ean Mering, VP of Operations for Savvy Landlord, believes "Generation Y renters who are accustomed to buying things on the Internet and paying by credit card don't like writing checks. Apartment owners with vacancies that don't offer an online payment option will soon be at a competitive disadvantage as more and more of these young people enter the rental market."
"Electronic payment is clearly where things are going because of the huge convenience for consumers," agrees Pat Gregory, chief information officer of United Dominion Realty Trust, the nation's eighth-largest owner and fourth-largest REIT. "Most people don't even write checks anymore these days, and we want and need to make rent payment as convenient as possible for them."
Many properties have already started implementing Internet-based payment systems using third party service providers such as RentPayment.com and PayClix to collect rents from their tenants in electronic form. Most services allow tenants to log in to a secure website and pay by eCheck or by credit card transaction. Residents can also set up automatic monthly deductions from their bank accounts.
What is an eCheck
An eCheck is an electronic transfer of funds in which the money is taken from a bank account, typically a checking account. To make a payment for rent or other expenses by eCheck, renters simply provide the service provider with their checking account and routing number.
The service debits the funds directly from the renter`s checking account and deposits the funds directly into the property's bank account. Both parties receive a confirmation email and have an electronic record of when the rent was paid. The process is similar to how telephone bills and other utility payments are handled using the online bill payment option offered by utility companies. Because everything is completely digital, eChecks clear much faster than written checks.
Checking in the New Century
It's not just that credit cards and ACH transactions are supplanting paper checks. The very nature of checking itself is changing thanks to the wide-ranging implications of The Check Clearing for the 21st Century Act (Check 21), a law which became effective October 28, 2004.
The new rules put forth by Check 21 mean that the float time for checks has fallen from an average of five days, to less than 24 hours -- in line with the availability of funds authorized by a credit card company.
Check 21 rules also allow for on-site check scanning, eliminating the need to visit a bank. Check scanning systems convert paper checks into digital form, which can then be imported to the appropriate accounting software for faster processing.
E-Payment Service Providers
A number of suppliers today offer various options for automating rent payments. Next month, we will be doing an in-depth special report on the top companies in this space, including a comparison chart to help you select the best product for your particular needs.
In general, you can choose from among three different electronic payment methods:
- Online Payment
- Pay By Phone
Payment by phone systems are popular among procrastinators who wait till the last minute to pay and mobile residents who travel a lot. When people are traveling, the last thing they want to do is think about paying rent. The downside of offering this option is that it's somewhat cumbersome to administer as it involves added labor to handle calls.
In-person systems allow residents to pay rent on-site in the manager's office either by credit card or paper check. This typically involves the tenant or manager swiping the credit card through a machine similar to those found in retail stores. A check scanning device is used to process hand-written checks. For example, RealPage, a property management software provider, offers users of its OneSite Payments module a combination credit-card swipe/ check-scanning machine that enables residents' paper checks to be deposited directly into an owner's bank account.
Benefits for Tenants
For residents, online payment offers several major benefits. One is convenience. It is easier for tenants to have their debit or credit cards charged monthly for all of their bills rather than writing out checks and mailing them. In the student housing sector, parents find it much easier to pay their children's rent electronically.
Secondly, paying rent this way helps some tenants avoid late fees if they get busy and forget rent is due or when they are traveling. Also, when money is tight due to a job change or for whatever reason, tenants can pay their rent on time with a credit card now, and pay the card balance off later. This way the landlord doesn't have to wait until the person gets their paycheck or deal with collection hassles.
Finally, residents can capitalize on credit card reward systems, earning airline miles for travel or other incentives from using the card.
Benefits for Landlords
The benefits of online payment for apartment owners and managers include better cash flow and lower operating costs. Electronic rent payments save time and reduce the administrative burden of processing paper checks, posting them to a journal, filling out deposit slips, and physically going to the bank to deposit them. Those time-consuming tasks become automated if a property has an online payment system.
Digital systems also offer extended deposit hours, giving managers flexibility. No more frantic last minute trips to the bank before they close. Returned checks are identified sooner, reducing fraud risk. And funds can become available within one to two days rather than the typical three to five days for paper checks.
"This is all about moving money and moving it more efficiently," observed David Cardwell, vice president of technology for the National Multi Housing Council (NMHC). "Automated payment systems are attractive to owners because they get better control over bad debt, they see reduced float times and they get automation of their books."
These are some of benefits that Avalon Bay Communities, a REIT which owns more than 40,000 units, has experienced since they began offering e-payments to tenants. Most of Avalon Bay's residents who pay electronically do so with regularly scheduled monthly ACH transactions.
"It allows us to better forecast our cash flow because we know the money will come in on a certain day every month," said Cheryl Barraco, Avalon Bay`s director of strategic business services. Even though Avalon Bay has yet to fully automate its e-payment system and must still manually enter data into its property management software, "we're getting electronic payments more efficiently and predictably than with paper checking."
In apartment buildings with high vacancy rates, property managers have noticed the added benefit of offering credit card payments in closing the initial rental lease on vacant apartments. Often a renter has not received a security deposit back from their previous landlord, and a credit card payment allows the renter to commit to a new apartment before getting back a previous security deposit. This enables the landlord to fill the vacancy sooner.
Is Electronic Rent Payments Safe?
You can feel confident that your property's information and financial data will be protected when you access your account on these systems. E-payment service companies such as RentPayment.com and PayClix use secure server authentication and data encryption to help ensure that your data is safe and available only to you. All transactions are securely processed by banks and are encrypted using the latest industry technology including 128 bit SSL Certificate Authentication software.
How Much Does It Cost?
The service is usually cost free for renters. Apartment managers want to encourage existing tenants to adopt the option because of the benefits, so they pay the service fee themselves. Most property owners find the system quickly pays for itself through savings on collection costs and employee overhead.
An e-payment program is easier to implement for new tenants moving into the property for the first time because the landlord can simply cover the extra cost by building it into the rent amount up front.
For instance, if an apartment would normally rent for $1200, then the landlord would set the price at $1210 to cover the monthly electronic rent payments service fee. Most tenants who like an apartment are not going to walk away from a deal because the rent is $10 higher.
If credit card payments are allowed, merchant fees charged by credit card companies can range from 2% to 3%.
As apartment owners begin offering this payment option, many are discovering that the technology poses some administrative challenges.
First and foremost, integrating e-payment systems with existing property management accounting software can be difficult. Many landlords continue to use older desktop-based software programs that are far less flexible than newer Web-based platforms.
"There is a lot of room for improvement," said Bryant Shoemaker, vice president of marketing for Yardi Systems "Right now, there are several different systems for doing rent payment, and there's not really a standard way of interfacing."
Poor data integration means that although e-payment providers can authorize credit cards and process payments, property managers must often still reconcile account ledgers and manually enter payments into the rent rolls within their property management software.
Integration gaps can also occur when payments are returned due to insufficient funds. Some e-payment providers cannot automatically post bad payments back to the tenant's account with late charges added, said Dean Schmidt, senior vice president of product development for RealPage, which offers an e-payment module within its OneSite property management system.
E-payment providers are wasting no time in addressing these and other concerns. Programmers are designing new software that integrates seamlessly with the wide variety of property management systems commonly in use.
For example, RentPayment now features two-way data integration. Not only does the software post payments directly into the rent roll of a property manager's database, explained Dan Urbina, an executive vice president at the company, but it exports data from the rent roll to "pre-populate" forms on the Internet portal where residents pay rent. When a resident logs onto a property-specific Web portal, Urbina explained, he or she is taken to a page actually located on one of RentPayment's servers. During this process, RentPayment's software automatically accesses a tenant's account balance so that when the renter is ready to pay, all necessary information--name, apartment number, rent balance, etc.--is already entered.
Two-way integration is an added convenience for residents, and it also makes account reconciliation easier for property managers.
Another barrier to adoption arises when credit cards are used because this method of payment typically incurs higher transaction fees than ACH eChecks. Credit card transaction fees -- generally around 2% to 3% -- can represent serious money and can significantly eat into profit margins, especially on higher rent units like 3-bedroom apartments.
Fortunately, credit card company rules allow Internet merchants to pass transaction costs through to consumers in the form of convenience fees. However, some credit card companies like Visa have placed limitations on the amount of transaction fees that property owners can pass through to a resident who uses that credit card, which means the landlord has to absorb a portion of the transaction cost.
"Renters generally would prefer to pay with a credit card to earn rewards points, but the convenience fees are too high," says David Bateman, CEO of Property Solutions, a property management software company. According to Bateman, 80% of renters who use Property Solutions' software choose the ACH eCheck option when given the choice of credit cards or eCheck. This is mainly because of the service fees of about $11 for a credit card payment versus $1 or $2 for eCheck.
Only about 15% of property managers who use Property Solutions software have decided to eliminate fees for residents and cover the costs entirely, says Bateman. He predicts that in the future more property managers will eliminate convenience fees to attract more renters and convert more of them to paying electronically. Bateman says that the best markets for credit card acceptance thus far have been university rental housing and luxury apartment buildings.
According to tenant surveys conducted by SatisFacts Research, renters strongly dislike paying convenience fees and are unlikely to use a credit card if they have to pay a high fee. Research shows adoption rates among residents who were very likely to use an electronic rent payment program dropped to 13% if a convenience fee was added to their monthly rent.
"When fees are not passed on to the renters by the property management company adoption rates increase significantly," says Ryan Gilbert, CEO of Property Bridge, an electronic payments service provider. Over the last 12 months, Property Bridge processed over $500 million in transactions, up from $250 million last year.