Why Rent Payment Technologies are Broken and Expensive

Why Rent Payment Technologies are Broken and expensive
 - AND HOW TO FIX THEM

This is a really exciting topic! While more than 80% of car loans and mortgages are paid electronically, and over 50% of Americans regularly shop online, less than 5% of rents are collected electronically. Adoption rates have grown ~100% annually since about 2001. Both VISA and American Express have divisions tasked with figuring out rent collection and hundreds of "rent payment" websites have started since 2004. For 1/3 of all Americans (the renter population), rent is their single biggest monthly expense. So, anyone who can crack the code of electronic rent payments is instantly more successful at securing customer share of wallet than the iPhone, Ford Motor Company, or McDonalds.

There are 37.4 million residential rentals in the U.S. collecting an average of $1,100 for a two bedroom nationwide. At these rates, nearly $500 billion in rent will be collected next year. A 2.5% transaction fee on those money transfers would be a $10 billion industry segment...annually...just in the U.S.

ADVANTAGES TO PROPERTY MANAGERS & LANDLORDS

* Reduce Late Payments by 75%
    o Delinquency rates vary but many report 2%-3% delinquency rates on non-electronic payments, including late and partial payments. By putting tenants on automatic recurring payments (especially if by credit card), property managers can reduce that number by 75%. Even ignoring the time and administrative costs saved with electronic payments, this reduction in delinquency alone offsets any transaction fees to the property owner.
    o Tenants never "forget" to send it in. The "1st" isn't a big day for many people and some simply forget to mail in the check. They're not bad people; they just forget like we all do.
    o Not subject to delays in mail delivery (holidays)

* Improve Debt Collection by 3x

    o E-checks get re-presented up to 3 times without charging Non-sufficient Funds (NSF) fees
    o Use of the "Verified by VISA" and MasterCard "SecureCard" programs insulate owners from tenant chargebacks, which equals more liability protection.
    o When rent is paid by credit card, debt collection is VISA's problem, not the landlord's.
    o Electronic payments have a better "paper" trail, ironically. Payment authorization can be tracked, audited, and verified.

* Lower Administrative Overhead by 10%
    o Fewer / no trips to the bank to deposit checks. No more waiting - "Should I go to the bank today or wait until more checks come in?
    o In some companies that translates into fewer personnel needed for rent processing. Those people can be reassigned to more value-added (and income generating) positions in the company.

WHAT TENANTS LOVE (AND HATE) ABOUT ELECTRONIC PAYMENTS

    * They love collecting frequent flyer miles. In Boston with a reward card signup bonus, this translates into ~48,000 frequent flyer miles - or nearly two free trips - in the first year alone just for paying rent by credit card.
    * They love not having to remember to pay rent or deal with angry landlords.
    * They love not mailing another bill - it's just signup and forget.
    * Many tenants hesitate to let landlords "get their hands" on checking accounts. But, if a quality credit card intermediary is used, tenants are completely comfortable paying rents by credit card.
    * On average, property management companies report a 10% adoption rate among communities rolling out electronic payments. I believe this is because of the marketing materials they use. Marketing to tenants normally sells "save a stamp" or "make your life easier". That's great but doesn't light a fire under their butts. "Get 2 free airline tickets" does light a fire. We've had nearly 100% adoption using that kind of marketing to tenants.

COSTS ARE DETERMINED BY VOLUME

If you process $2 million in rents per month, your fees will be half that of someone processing $100,000 per month. To the extent property managers and owners can band together when negotiating a fee structure with a bank or payment processor, they'll save enormous amounts of money.

    1. Electronic check - the true cost of processing can be lower than $0.25 per check. Most pay $0.75 - $1. Typically there are two transactions: one to receive the rents, and a second to disburse the rents to the landlord's account, for a total average cost of $1.50 per unit.
    2. Credit card - pricing structures are all over the map. There are normally three parts: monthly minimums (statement fees, maintenance fees, etc), per-transaction fees (may be $0.60 --> $2), and a transaction percentage fee (2%-3.5%). Each vendor prices their mix based on your volume, the dollar-per-transaction average, and how knowledgeable they think you are. People with fewer properties will do better negotiating higher per-transaction fees in favor of lower transaction percentage fees. Do the math for your situation and decide which plan is better.
    3. For both, lowest cost is not always the best option. Low cost bidders often provide minimal documentation, proprietary code integration or no support. A poor quality solution will negate all the great potential benefits of accepting electronic payments. You'll end up babysitting a payment system and trapped with that vendor. Find a high quality vendor with a reasonable price. The reduction in day-to-day hassle on your end will pay for itself 20 times over.

Please send questions and comments to username "takleberry" on Biggerpockets.com.