Today, people are using the Internet for practically everything. For apartment renters, the next logical step in this digital migration is 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 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 a resident-initiated 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 (example below).
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, usually on the next business day.
E-Payment Services
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
- In-person
Online payment systems allow tenants to pay by eCheck, debit card, or credit card via a portal website that can be branded with the apartment community’s name in some product lines. Most of these systems have a payment scheduler that allows for automatic recurring payments on a fixed schedule.
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.
Benefits for Landlords
Save Time: Electronic rent payments save time and reduce the administrative burden of processing paper checks, posting them to a journal, filling out deposit slips, and going to the bank to deposit them. Those time-consuming tasks become automated if a property has an online payment system.
Faster Funds Availability: Funds become available much sooner, usually within 1 day rather than the typical 3 to 5 days for paper checks to clear. Faster settlement means better cash flow and quicker access to working capital for your business when you need it.
Reduce Late Payments: Tenants sometimes "forget" to pay their rent on time. They're not always bad people; they just forget like we all do. Many landlords report 2%-3% delinquency rates on rent payments, including late and partial payments. By putting tenants on automatic recurring payments or letting them pay with a credit card, property managers can reduce that number significantly. Even ignoring the time and administrative costs saved with electronic payments, this reduction in late payments alone offsets any transaction fees to the property owner.
Improve Debt Collection: Returned checks are identified sooner when using electronic transmission, reducing fraud risk. E-checks get re-presented up to 3 times before charging Non-sufficient Funds (NSF) fees. Use of the "Verified by VISA" and MasterCard "SecureCard" programs insulate owners from tenant chargebacks, which equals more liability protection. When rent is paid by credit card, debt collection is VISA's problem, not the landlord's.
Better Accounting: Electronic payments have a better "paper" trail, ironically. Payment authorization can be tracked, audited, and verified.
"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, some property managers have started promoting debit and credit card payments as a lifestyle amenity in their sales pitch to help close new prospects. They've found that many residents prefer the option to pay online because of the convenience. Often a renter has not received a security deposit back from their previous landlord, and a credit card payment allows the renter to immediately commit to a new apartment before getting back a previous security deposit. This enables the landlord to fill the vacancy sooner.
Benefits for Tenants
Now that you're sold on the idea of electronic rent collection the challenge remains to convince your tenants. The good news is, that may be a lot easier than expected. For residents, online payment offers several major benefits:
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.
Avoid Late Fees: When a tenant has a busy lifestyle or travels a lot, they may forget rent is due from time to time. Automatic account withdrawals eliminates the chance of a late rent payment because the tenant doesn't have to remember to pay. Also, when money is tight due to a job change or for whatever reason, tenants can still pay their rent on time with a credit card now, and pay the card balance off later when they get their next paycheck. This way the tenant avoids the embarrasment and drama of explaining to the landlord why they don't have the money on the first of the month.
Credit Card Rewards: Residents can capitalize on credit card reward systems, earning airline miles for travel or other incentives from using the card. Most folks love collecting frequent flyer miles, and one year of paying rent with a rewards credit card can translate into nearly two free round trip tickets in the first year alone.
Save Paper, Save a Tree: If everybody did their part to stop using so much paper, many thousands of trees a year could be saved. Online payments means no more envelopes, stamps, or paper checks. By signing up for the service, tenants can dramatically reduce their paper consumption over time and feel good that they're doing a little something for the environment in the process.
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.
Many tenants are hesitant to let their landlords "get their hands on" personal checking accounts. But, if a neutral, highly professional credit card and/or eCheck intermediary such as PayPal is used, tenants are more comfortable paying rents online.
How Much Does It Cost?
Electronic rent payment is affordable for even the smallest rental operation. Overall costs are determined by volume. If you process $100,000 in total rents per month, your transaction fees will be less than that of someone processing only $20,000 per month because of volume discounts. And to the extent that property managers and owners can "band together" when negotiating a fee structure with a bank or payment processor, they may save enormous amounts of money.
When choosing which online payment solution to deploy, property managers have several options. Each one has pros and cons, and one may be more appropriate for you to deploy than the other.
Electronic Checks: With this method, the resident has the ability to choose the date on which he or she makes the payment each month and also the ability to control from which account funds are to be drawn. It meets the flexibility and last-minute payment needs of tenants and allows them to manage payments based on when they have money in their account to cover the rent. It offers residents the convenience of paying exactly when they want and from anywhere they can access the Internet. It also allows other parties, such as parents of college students, to make payments on the tenant's behalf without wire transfering funds or mailing checks. As an electronic payment, it is a low-cost solution. The cost of processing can be lower than $0.30 per check but most people pay $0.75 - $1.
Credit Cards: This payment method has seen limited deployment and resident adoption in the apartment industry thus far, mainly because it is more expensive. Pricing structures are all over the map. There are normally three parts: monthly minimums (maintenance fees, etc), per-transaction fees ($1 to $2), and merchant fees charged by credit card companies that range from 2% to 3%. For example, a $30 fee could be charged on a $1,000 rent payment. Each vendor prices their mix based on your volume and the dollar-per-transaction average.
Recurring Debit: With this option, funds are automatically deducted on a fixed schedule from a resident’s bank account. It’s a low-cost choice that protects tenants from their forgetting to pay rent. Transaction fees are generally the same as for eChecks, averaging $0.75 - $1. The downside is that tenants must relinquish control of withdrawals from their checking accounts and they must regularly maintain a high enough account balance to cover monthly scheduled withdrawals. So, this method might not be the best one for tenants who live paycheck to paycheck with no cushion. Moreover, a static, fixed withdrawal system like this fails to address the possibility of varying monthly payment amounts such as in situations when a resident is being billed for utilities by the landlord.
For both methods of electronic payment, the lowest cost service provider is not always the best option. Low cost bidders often provide minimal documentation, poor tech support, and proprietary code that is difficult to integrate with other software. 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 e-payment service with a reasonable price. The reduction in day-to-day hassle on your end is worth the extra cost.
Apartment managers want to encourage existing tenants to adopt the online option because of the benefits, so they typically pay the service fee themselves rather than charge the tenant. Most property owners find the system quickly pays for itself many times over 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 could 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.
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