SECTOR SPOTLIGHT: The FinTech ‘Red Carpet’ for Renters
COVID-19 and its impact on the economy have challenged so many across the world. From health concerns, businesses shutting down, and employment uncertainty, individuals and families have undergone hardships in adapting to post-pandemic life.
For the 43M renters in the US, short-term relief came from government stimulus payments and relief programs. However, there’s still a gap in meeting both current and upcoming needs for this group. Credit reporting, flexible payment arrangements, security deposit funding, and rental assistance are resources in high demand but unavailable. Fortunately, numerous fintech startups from the last 6 years are turning this around.
PAYING RENT SHOULD BE EASY
Monthly rent payment and collection have been around for some time. In movies, the image of an angry landlord pounding on an apartment door comes to mind, “Your rent is overdue again!” If you have roommates, it may feel like herding cats to collect everyone’s rent portion by the 5th of the month and mail a check. Many landlords and property managers still utilize physical checks to collect rent and maintain their bookkeeping. Writing and mailing checks was my only option when I rented a house in San Francisco for 15 years.
Some property managers (especially in multifamily units and apartment buildings) are slowly changing the narrative by allowing for electronic bank transfers via ACH (aka Automated Clearing House network in the US), commonly used for direct deposit of wages from employer to employee. Payment processing presents an additional costs and risk of returned payment, which is why most landlords and property owners don’t accept card payments for rent (higher transaction costs than ACH).
Why haven’t similar updates in financial services come through for renters (as they have for other groups such as homeowners)? Unfortunately, there’s a lack of a external support or push for the renter experience to improve. As long as rent gets paid on time with minimal friction and cost, both sides of the equation are fine with the status quo. There’s an estimated percentage of payments that will be late or tenants that can no longer pay, at which point collection and/or eviction processes commence. Renters would need to find a new place to live. Landlords would find a new tenant to pay market rate.
FinTech companies have stepped in to turn the experience around for renters and property owners with a staggered, two-phased approach (V1 and V2).
v1 — rallying around RENTERS AS A PREMIER user GROUP
As rent rates increase across the US by 31% in the last 10 years, friends & family banded together as roommates to split the costs of housing & utilities. The duty of collection and submitting payment usually falls on one person (i.e. the individual listed on the lease) — responsible for splitting up bills evenly, collecting each roommate’s portion, depositing it to a bank account, and writing a check to their landlord. This is the manual, tedious process that many followed up until 2012, when banking apps improved transfer functionality.
Initial efforts from fintech companies (starting in 2015) aimed to streamline this painful routine. All roommates would download the fintech app, establish a profile, link their bank account, and setup an automatic transfer. Some of these platforms went as far as providing a single account for the individual unit in which funds funnel in and rent payment comes out of. In paying landlords or property managers, tenants can send an electronic bank transfer or physical check automatically. Pain point is gone.
Fintechs have gone further to partner with credit bureaus and add rent payment history to the credit profiles of tenants, which helps improve credit scoring. Budgeting tools are also available to help manage and split the phone, cable, streaming subscriptions, and utility bills. For an added fee, some platforms programmatically negotiate lower monthly billing rates that lead to annual savings.
The wave of fintechs serving renters continues to grow — with it so does the push for new products and services outside of payments and deposits.
V2 — credit PRODUCTS in HIGH DEMAND for renters
With so many hardships in the last two years due to the pandemic, the programs now gathering momentum offer rental assistance. When a renter can’t pay a portion of their monthly payment, a fintech platform steps in and covers the gap. By reviewing salary history from bank statements and other alternative data points, companies are extending ‘credit’ on a monthly basis.
The actual rent assistance can be structured as:
Advances: a non-recourse, small-dollar credit with no APR that is repaid with the renter’s next paycheck in a lump sum; if a renter refuses to pay back the advance, the platform cannot send the amount to collection and takes a loss;
Loan: requires an application to be reviewed & approved, in compliance with federal and state regulation, and user to agree to a loan agreement with payment terms and fees; since loans have recourse (in the event of non-payment or default), platforms can report negative payment history to credit bureaus and start collections processing;
Due to the complexity and cost of lending programs (either as advances or loans), established fintechs with existing users are most active in offering these new products. Understanding their customer base and being able to fund the assistance (from their balance sheet or capital partners), puts them a step ahead of brand new startups.
As with any credit offering in financial services, there’s increased financial, legal, and compliance risk. All product features, cost, qualification criteria, and terms must be clearly communicated to users upfront. For loans in particular, proper monitoring efforts must be in place on a monthly basis to evaluate disparate impact to protected groups.
meet the fintechs serving renters in the us and beyond
As fintech companies honed in on niche segments of users, it’s great to see renters start getting the attention and innovation they deserve. Here are some of the firms leading the charge:
TILL launched back in 2017 and is headquartered in Alexandria, VA. The company supports both renters and landlords/owners with its suite of services — for renters: payment smoothing, rent protection, payment reporting to credit bureaus; for owners: increased payment options and oversight that increases on-time collection and reduces delinquencies. The company shared in 2021 that it also had interest in credit builder products.
Based in New York, JETTY started in 2015 with a mission of making rent more affordable and accessible in a single ecosystem for renters and their property managers/owners. Benefits of being a member include a lower security deposit, flexible payment arrangements, and insurance offers.
ESUSU gained traction with users by offering a rotational savings program back in 2016, then expanded its efforts in improving financial access and credit through its rental platform. Besides reporting rent payments to credit bureaus, the company also has a rent relief program funded by donations that awards approved applicants a 0% interest loan.
A recent add-on to this group is a non-US platform from Australia, LIZPAY is also helping the renter experience through enhanced payment processing and scheduling and a Buy-Now-Pay-Later structure for bills and rent.
In terms of features, streamlining payments (i.e. custom scheduling of when a renter covers their payment) has become table stakes. Differentiation in this sector is coming from handling security deposits, rental assistance, competitive insurance coverage and rates, and other complementary services. For fintech companies, building partnerships with landlords, property managers, and other owners/operators, is becoming a crucial component of long-term sustainability.
what does a v3 look like?
With rental platforms becoming more sophisticated and all-inclusive, expects fintechs to lean towards more of a banking relationship presence. There will be incentives for users to direct a portion of their salary from each paycheck automatically to their rental payment wallet. This allows renters to improve budgeting and owners/operators to reduce the risk of missed payments.
For renters aspiring to be homeowners in the future, fintechs can expand towards a deposit account that builds savings monthly towards a down payment (5% - 20% of the purchase price of a home). Despite low interest rates on bank deposits, establishing this healthy financial habit early can make the reality of homeownership happen sooner. As renters close in on their target savings goal, they can also start receiving homebuyer education and resources that help them understand how to qualify for a mortgage and how much home they can afford.
Overall, the renter movement continues to gain momentum as companies, investors, and financial institutions rally around this user group. Anticipate stronger communities and ecosystems in this sector that allow tenants and property managers (or owners) to both win via the latest in financial technology.
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