The Pros and Cons of Setting Up Rent Payments Through Your Bank
March 6, 2020
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Collecting rent payments online for the first time is one of the most liberating and convenient things a landlord can do. Inevitably, most landlords start their search with a platform with which they have a great deal of familiarity – their bank. In addition to providing you with basic banking services like business and personal checking and savings accounts, your bank can provide you with a number of other tools and services that enable you to accept and collect rent and other payments online from your tenants, ranging from ACH transfers to credit-card services.
We’ve consulted a local financial institution to get the lay of the land when it comes to setting things up through your bank. Some of the biggest advantages of working through your bank is increased security and convenience. Still, working exclusively through your bank has its downsides. Whether you should work solely through your bank to set up online rent payments or combine banking services with other tools depends on your business needs and how you prefer to operate. Let’s go through some of the most common payment methods that your bank can offer and the pros and cons of working exclusively through your financial institution.
Common Ways to Collect Rent Through Your Bank
Accepting ACH Payments
You’ll recall in our post on the various forms of online payments fraud that ACH payments are automatic transfers facilitated by the Automated Clearing House. In an ACH transfer, money is debited from one account and deposited to another. It can be set up for one-time payments or on a recurring basis. One side is the RFDI (the receiving financial depository institution), and one party is the OFDI (originating financial depository institution). You (or your property management business) can’t be the RFDI, but your bank can. ACH payments are popular because they are relatively quick, secure, and automatic, and they tend to cost less per transaction than the fees associated with paying for credit card processing.
Setting Up Merchant Services Like Credit Card Processing
Credit card payments are a popular option to provide tenants, who appreciate the convenience of credit card transactions. To accept credit card payments, you need merchant services, which you can set up with your bank.
A merchant account is distinct from a business banking account in a few ways. Your business banking account is where you store funds from tenant rent payments (from cash, checks, credit card transactions, and so on), and it’s where you draw funds to pay employees and pay your operating expenses. Your merchant account is in between you and the bank that sponsors the credit card. Credit card payments happen through the merchant account, and then the merchant services provider (in addition to processing the payment) transfers the money to your business banking account.
Online Bill Pay
You can also set up rent payments with your bank by instructing your tenants to leverage online bill pay. Customers can visit vendors online to pay bills each month for things like Hulu, water, and internet. Online bill pay enables them to consolidate each of those online accounts to a central location — their virtual bank account — and pay through their bank each month. Customers’ banks will either make a transfer from their accounts to the vendors they indicate, or the banks will send a paper check to a person and an address provided by customers.
This means you can instruct your tenants to pay you through online bill pay. You can arrange for them to send you an electronic payment (if you give them your account information), or you can arrange for them to send you a check from their bank. Online bill pay is often a free service available with most checking accounts, so it would be a service that is readily available to most of your tenants.
The Pros and Cons of Facilitating Rent Payments Through Your Bank
It keeps everything under one roof. One of the most obvious advantages of facilitating payments through your business’s bank is that it keeps a lot of financial information that you manage under one roof. That’s fewer accounts, fewer passwords, and fewer locations through which you manage all the details, records, and money for your business.
Your bank is likely well connected to other services and providers as well, which is convenient if you want to expand the types of payment options you offer your tenants. If the convenience of your bank taking care of things appeals to you, then your bank can guide the process of getting you set up with a merchant account in addition to your business banking account.
You may experience increased efficiency. If you work with your bank to set up payment methods from ACH transfers or credit card payments, you may benefit by decreasing time spent handling administrative work (like rent collection) and increasing the time you can spend building your business. If you’ve had trouble filling your units, offering secure, online payments as an option might make your units more attractive and increase the number of tenants who’re able to rent from you.
You get legitimate security. Another of the biggest advantages to working with your bank is that you are working with a highly secure entity to conduct business. Financial institutions leverage state-of-the-art security technology and engage in robust security practices to protect your money (and theirs). There’s no method of collecting rent that is purely risk-free, but of all the parties with whom you might collaborate to run your business, a bank is going to have some of the strongest security infrastructure in place.
The bank provides payment records. Whether you set up ACH payments or credit card payments, or you arrange for your bank to work as the third party that securely processes checks, your bank account will record every transaction securely and automatically. This can save you a ton of time and effort and keep your records consistent and up to date. Other payment methods, like cash, require you to keep records manually. Payment tracking from the bank is automatic, so it’s quick and accurate. Unfortunately, your banks record keeping also has a dark side. Check out Cons below.
You get legitimacy for your business. In today’s uber-digital world, epayment methods are pervasive, and people increasingly consider more traditional payment methods like cash and paper checks to be outdated. One of the advantages of working with your bank to set up online rent payments is that you can offer your tenants modern payment options. Having the ability to offer things like credit card payments or ACH transfers to your tenants demonstrates that your business is legitimate and with the times, which can go a long way in boosting your business’s reputation. There are certainly more seamless solutions but working with your bank is a step in the right direction.
Your tenants experience increased convenience. It’s not all about your standing in the renting world, either. These methods increase convenience for your tenants, too. ACH transfers require a one-time setup, and, depending on how it’s setup, credit card payments can enable online and mobile payments, which mean that your tenants can easily pay you anytime, anywhere from the convenience of their tablets or phones.
Services through banks can be expensive. Some services, like online bill pay, are standard features that come with checking accounts when you sign up for them. Other services, like merchant services and their associated hardware, come with set-up fees, monthly charges, the cost of the hardware (if any) and the cost per transaction or a flat fee for transactions. When you choose these services through your bank, these services can come at a steep markup.
Services you choose through banks can incur additional expenses on top of routine fees. The fee per transaction that businesses pay for every single credit card payment are enough to prevent a sizeable portion of small businesses from accepting credit cards. ACH transaction fees are typically less than those for credit card charges, but there is a fee, nonetheless. On top of paying per transaction, you may be surprised by other fees, like setup fees, annual fees, gateway fees, chargeback fees, monthly minimum fees, and so on.
If you decide to pursue merchant services and credit card payments as an option for your tenants to get you rent, make sure the model makes sense per the number of tenants and units you manage and that you are signing up for services — be it through your bank or another provider — that are worth the costs.
Some of the records are tough to track, especially if you manage a lot of units. Although it’s true that online payments facilitated through your bank will come with a record of the transactions that you can access through your bank statements and online accounts, the information is not particularly detailed, and it can be a lot to look at if you are managing transactions from a high number of tenants and units. The records that come through in your bank accounts are just that — records of payments. They simply show you that a payment came through, that it came through a venue like a check or a credit card payment, and that it came in on a specific date. Other tools would show you more information and in a more useful format. With online banking, you’ll need to record somewhere else the purpose of a given payment. Online banking also offers no tools to show you the amounts owed that haven’t been paid.
It’s just a mailbox. Other than the digital venues through which your bank is facilitating rent payments, the bank is really only providing you with a mailbox. Unless you are paying for robust merchant services that include a POS system and associated software, your bank isn’t going to provide landlord-specific services. You won’t have the option to send reminder notices to your tenants through your bank, and you won’t be able to set up automatic late fees.
Your tenants have a few things to look after on their side of things, too, and rent payments through the bank won’t provide them with a central location through which to manage all of their apartment- or property-related business.
You lose some control. Arguably one of the biggest drawbacks of facilitating online rent payments through the bank is the loss of control you have over the process and timing. It’s important that you retain the ability to deny payments, which matters if you need to evict one of your tenants. Some of these payment methods facilitate recurring payments, and it might be difficult for you to shut down the connection through which your tenants can make even partial payments. For tenants, the problems can stem from the timing of payments and overdrafts that occur because the tenant wasn’t able to transfer enough money into the proper account on-time.
If the tenant pays you through online bill pay and the bank cuts you a check, it’s possible for the bank to be late in getting the check to you, and then the tenant is stuck with a late fee if the bank does not reimburse for the delay. ACH transfers are great because they are less expensive than paying the fees for processing credit card transactions, but the transfers can take a few days to process.
You still face security risks. Although working through your bank will provide you some of the best security available, ultimately, no method of accepting rent payments is risk free. If you set up rent payments online exclusively through your bank, you will still be at risk for problems like credit card chargebacks and other forms of payments fraud. Online bill pay is an attractive option because it doesn’t come with some of the fees that are standard for other payment methods. Still, bankers work with landlords who’ve had their financial information stolen through online bill pay, which exposes landlords to the exact same risks as sending paper checks. The trust that you establish with your tenants is critical for security even if you are working with a secure institution like a bank.
The Bottom Line: Do Your Research
You have lots of options when it comes to setting up online rent payments. We’ve outlined the most common, cost-effective rent-collection methods available if you set up rent payments with your bank. But these aren’t the only methods available to you. There are tools tailored specifically to landlords and rental collection that will help eliminate many of the cons listed above without limiting the pros.
Again, whether setting up these payment channels with your bank is the right approach for you simply depends on your business, the number of tenants and units you manage, and how you prefer to operate. It’s very personal and varies case by case. Ultimately, you need a set up that increases convenience for your tenants and is easy for you to manage without the whole system burning a hole in your wallet or making record keeping a nightmare.