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Rent Payments: The New Recurring Frontier for ISOs
By Lynn Walford
ISO&Agent
May 3, 2006
Every month, more than 36 million Americans pay their rent, more than 90% of them the old-fashioned way-by writing a check. The median rent – that is, half of rents are more and half are less-is $625, according to current U.S. Census Data. That means that there are roughly $300 billion in annual rent payments waiting for ISOs to convert to electronic methods, a potentially huge new revenue stream.
The conversion to electronics has begun. While industry insiders say fewer than 1% of rents are paid by credit card, 6% are paid through the automated clearinghouse (ACH) system, mainly by renters taking advantage of online bill payment.
As with any new market they enter, ISOs will have to get up to speed on the pros and cons of electronic payments for the merchants and consumers in that arena. Renters, for instance, like the rewards points they get when paying rent with a credit card and the time delay before they have to pay the card bill. Landlords like to get paid without having to chase down renters and the guaranteed payments inherent with credit cards. Neither likes the fees that credit card payments bring, and one of the challenges for ISOs is to figure out how to make the overall system attractive enough to landlords that they will absorb the fees. Landlords doing this provides a strong incentive for renters to pay with credit cards.
These are all challenges, to be sure. But early entrants into the rent-payment market say the potential payoff is great. “Rent payments are an enormous opportunity for ISOs looking for new clients. ISOs can offer property managers a way to automatically manage rent payments, and in turn property managers can give their renters a new way to pay,” says Bryan Wine, vice president of third-party sales for First National Merchant Solutions in Omaha, Neb., which offers three recurring-payment products to ISOs for property management, utility, cable, government and education. The products differ according the complexity of the transactions, type of payments accepted, batch processing and Internet account management.
The preferred way to pay for renters is the credit cards-but only if it’s free. “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 Provo, Utah-based Property Solutions, a property management Web portal and software company founded by Brigham Young University graduates. (They won the BYU Business Plan Competition and Fortune Small Business magazine’s first business plan competition in 2003.) Although Bateman would not disclose exact sales figures, he says their client base has doubled in the past three months, one indicator of the potential demand for electronic rent-payment systems.
Eighty-one percent of renters who use Property Solutions’ software choose the ACH when given the choice of credit cards or ACH for making their monthly payment electronically because of added surcharges of about $11 for credit cards versus $1 or $2 for ACH. About 15% of property managers who use Property Solution software have decided to eliminate fees for residents, 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 best markets for credit card acceptance have been university rental housing and luxury apartment buildings.
However, ISOs must do their homework as they move into their market. “Selling and servicing the multifamily industry is not a slam-dunk sale,” says Stephen Lefkovits, property management consultant at Oakland, Calif.-based Joshua Tree consulting and author of the American Express white paper, “The Value of Card Acceptance in the Multifamily Industry.”
“ISOs have to spend time and invest in understanding the industry to effectively serve property manages and offer both credit card and ACH services to meet demands,” says Lefkovits. Site-level marketing at the properties informing renters of services by property managers is important to the success of the program, he adds.
Lefkovits says that there are several reasons why credit card payments appeal to renters. Renters want to consolidate payments and their spending, and paying rent by credit card allows them to do that. Research reveals membership rewards programs help increase lease renewals and increase initial leases. According to Lutherville, Md.-based multifamily research provider SatisFacts Research LLC.’s “Automatic Rent Payment Preference Study,” 36% of residents surveyed cited that a rent payment program with rewards would have a positive impact on their decision to renew. Thirty-five percent of residents surveyed cited that a rent payment program with rewards would have positive impact on their decision regarding where to rent next. When deciding between two otherwise equal apartment communities, 31% of residents surveyed cited that a rent payment program would have a positive impact on their decision on which of the two they would select.
Renters, however, strongly dislike paying convenience fees and are extremely unlikely to use a credit card if they have to pay a fee. SatisFacts research shows adoption rates among residents who were extremely or very likely to use a rent payment program dropped from 35% to 13% if a convenience fee was added.
“We’ve found that there is a higher level of as much as 25% of all the rents at a property for credit card usage (for rent) when fees are not passed on to the renters by the property management company,” says Ryan Gilbert, CEO of Property Bridge, an Oakland, Calif.-based ISO that provides property-management payments software and online and telephone payment services to property managers. His company recently began contracting with agents to sell Property Bridge services. He says Property Bridge currently processed $500 million in transactions over the last 12 months, up from $250 million last year. He leaves it up to property managers to decide whether to charge renters fees for using the payment service and to set those fees.
Gilbert sees the most important aspects of selling payment services to property managers are the time-saving benefits of the software, including data integration for easier accounting reconciliation. Data can be imported directly into the major property management accounting software programs. There is less paperwork and trips to the bank for the property manager, he says. Funds are transferred faster than traditional check rent payments and next-day availability of funds compared with an average three days for traditional payments also is a bonus for landlords.
Automated payments ensure that the rents are paid on time. Property Bridge fees to property managers are based on straight interchange rates, plus a one-time set-up fee ranging from $495 to $3,000 depending on the number of rental units and the scope of the data integrations. A nominal undisclosed per-transaction fee is charged to the property manager for property management accounting software integration data.
“Generation Y renters who are used to paying online and by credit card don’t like writing checks and will often pay a convenience fee to avoid an even higher late fee,” says Matt Golis, CEO of San Francisco-based RentPayment. RentPayment is an agent of financial transaction processor Chase Paymentech and provides a Web portal for rental payments of “no card, no terminal present” transactions, which usually incur higher transaction fees. Fees average $19.95 and go as high as $29.95 (depending upon the rent). That is less expensive than a typical rent late fee of 10%, averaging $50 and going as high as $100, says Golis.
Paying rent with a credit card also adds a “float” time until the bill is due and creates a greater demand from renters. Popular convenience features for renters include the 24/7 availability of online, email and phone payments, which eliminate the need to wait in lines at property management offices.
When Golis started his company in 1999, after marketing Netscape e-commerce applications, he thought the primary selling aspect of credit card payments for renters would be rewards points. Recently, with high vacancy rates, he has noticed the added benefit of credit card payments in closing the initial rental lease on vacant apartments. Often a renter has not received a security deposit back from the previous landlord, and a credit card payment allows the renter to commit to a new apartment before getting back a previous security deposit. It also enables the landlord to fill the vacancy sooner.
Golis has also noticed that smaller family-owned apartment owners are more likely to absorb the cost of credit card payments because electronic payments save on the administrative time spend depositing checks.
All this is new, both for many ISOs and the property managers they are approaching. Thus, Gilbert advises thorough training of agents before they tackle this opportunity.
“The best way to get to the property managers,” he says, “is by having informed feet on the street.”
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| Property
Managers |
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Close More Leases |
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Eliminate Transaction Costs |
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Offer the Lowest Renter
Convenience Fee |
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| Renters |
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Pay Rent Via Phone, Fax
and Internet |
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Put Move-In Expenses on
Credit Card |
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| Benefits |
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Increase Manager Efficiency |
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Improve Renter Retention |
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