Electronic Rent Collection: The Growing Use of ACH Payments
Today we can pay for gas with a credit card, receive direct deposit
of payroll, and pay tolls with an E-ZPass tag. The increasing ability
to use electronic funds transfers (EFTs) for payment is a reflection
of the convenience, safety, and efficiency of EFTs over traditional
forms of payment, namely cash and checks.
Following the popularity of EFTs in other industries, a growing number
of real estate investors are moving towards collecting rent electronically.
Although checks are still the most widely used rent collection method,
smart real estate investors are realizing checks are not as efficient
or reliable as electronic methods. Specifically, EFTs via the US banking
system's Automated Clearing House (ACH) payment network are an increasingly
popular and well-suited alternative to checks.
Electronic Rent Collection Methods
The three most common types of EFT are wire transfers, credit cards,
and ACH payments, each having its own benefits and costs:
- Wire Transfers: Wire transfers (wires) are typically used
for a one-time transfer of funds and cost around $30 per transfer.
They feature same-day clearing, so wires are convenient for moving
funds on short notice or to international locations. However, they
are a highly expensive method for collecting rent. Additionally, because
of their single-use application, wires are typically sent from financial
institutions. To pay rent with a wire, a tenant would have to make
a special trip to the bank to initiate the payment every time rent
In contrast to wires, credit cards and ACH payments require a one-time
set-up on the part of the tenant whereby authorization and credit card
or bank account information are provided. Once set up, rent is automatically
charged to or debited from the tenant on a recurring basis.
- Credit Cards: Paying rent via credit card is attractive to
tenants who may accumulate frequent-flier miles or other rewards through
credit card usage. However, the high cost and chargebacks associated
with credit cards are deterrents for real estate investors.
With credit cards, a percentage (approximately 2% to 3%) of the transaction
amount is charged to the merchant (real estate investor) as a credit
card processing fee. For example, a $1,000 rent would generate a $20
to $30 processing fee - a monthly charge that, similar to wires, is
financially unacceptable for many investors.
A chargeback is when a credit card company returns money to a customer's
credit card account because of an error by the merchant. Reasons for
chargebacks include unauthorized use of the credit card, an expired
card, or a simple complaint by the customer. Tenants can file chargebacks
at no fault of the merchant (real estate investor), thus creating
the possibility of lost rent and/or lost time spent disputing the
chargeback. Worse, with too many chargebacks, merchants may lose their
credit card accounts.
- ACH Payments: The ACH payment network is a decades-old nationwide
batch-oriented EFT system. It is the payment network best known for
its use in transmitting payroll for millions of employees through
direct deposit. NACHA - The Electronic Payments Association (www.NACHA.org)
- oversees the operating rules and business practices for the ACH
ACH payments enable EFTs without the high cost or possibility of reclaimed
rent. Rather than charge a percentage of each transaction amount,
bank account on the same day. Rather, there is a delay in crediting
(typically 3 banking days) while tenant funds are verified to be "good"
(i.e. the tenant bank account was not closed and there were sufficient
funds). The credit to the property's bank account reflects cleared
funds such that these funds will not be retracted as in the case of
a "bounced" check.
The Benefits of ACH Payments vs. Checks
ACH payments for rent collection offer significant benefits over checks
in the areas of cost, convenience, safety, and operational efficiency.
ACH payments are:
- Less Expensive: ACH payments eliminate much of the paperwork
and human interaction associated with checks. Paper, postage, and
trips to the bank for deposits are eliminated, and fewer errors occur
because of the reduction in human handling of the check-clearing process.
- More Convenient: Tenants value a payment option that is
reliable, accurate, timely, and confidential. With ACH payments, tenants
no longer need to remember to pay, write checks, deliver checks, and/or
pay for postage. Some ACH rent collection services, such as ClearNow,
are free of charge to tenants. According to NACHA, 84% of ACH payment
users are very satisfied. Furthermore, ACH payments are convenient
for the property manager, as the more timely payment of rent reduces
the hassles from and time spent on late payment notices.
- Safer: Checks can often get lost in the mail and/or placed
in unauthorized hands leaving little protection for tenants. With
ACH payments, tenants have peace of mind with Federal Regulation E,
the Electronic Funds Transfer Act of 1978, which protects consumers
using ACH payments. For example, changes to the amount that will be
debited from a consumer's bank account must be communicated and made
at least 10 days prior to the debit.
- More Efficient: A check in hand is not synonymous with cleared
funds in the bank. Checks take time to cash: time for delivery, endorsement,
presentation to the bank, and additional stopping points in the check-clearing
process. And, while "bounced" checks are an unwelcome surprise
long after checks are deposited, investors will know if a tenant has
insufficient funds within three days of debiting by an ACH payment.
Getting Started with ACH Payments
Processing ACH transactions can be administratively challenging. To
get started, a real estate investor needs to partner with a bank that
can originate ACH transactions or a third-party ACH processor so debit
and credit instructions can be sent to the ACH payment network. Once
a partner is found, the investor needs to establish an ACH account.
Next, the investor must purchase or lease software to create files that
can be read by the ACH payment network. This self-directed learning
process is quite costly in terms of purchased/leased tools and time.
In addition to populating and transmitting files to the ACH payment
network, the investor needs to learn how to retrieve "return"
files from the network that reflect failed attempts at debiting or crediting
a bank account. Finally, the investor needs to comply with NACHA's rules
and Federal Regulation E when handling ACH transactions.
Fortunately, there are now inexpensive rent payment services that eliminate
the administrative complexity of ACH transactions. The main task of
the real estate investor is simply to enroll tenants in the service.
Typically, tenants complete an authorization form and submit it with
a voided check. Thereafter, rent payments occur automatically leaving
the real estate investor with a safe, efficient, and reliable electronic
rent collection method.
Article Provided By:
ClearNow, Inc. of Durham, North Carolina is a pioneer in easy-to-administer
Web-based ACH solutions for the multifamily housing market. For more
information, contact ClearNow, Inc. at 866-882-5327 or visit their Website
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