Why this bank ventured into the landlord-tenant war zone
Landlords around the country — and, by extension, their banks — are subject to varying state rules governing tenant security deposits.
Massachusetts, for instance, requires landlords to keep the deposit in an interest-bearing account, provide the tenant with the account number, name and address of the bank holding the funds, and also pay tenants 5% interest on the security deposit per year, or the amount of interest paid by the bank.
Leader Bank in Arlington, Mass., says there’s a fintech opportunity to help landlords manage tenant security deposits better and enable other banks do the same.
The $1.2 billion-asset bank created and recently launched a new digital tool called ZDeposit, designed to streamline the security deposit collection process.
The digital portal allows the bank’s landlords and property managers to create security deposit accounts online by taking a picture of a check and inviting tenants to enter their information digitally. Additionally, it automates many paper-based compliance requirements for landlords, such as generating account disclosure forms and apartment conditions statements.
“Most landlords are not in compliance with many" of these regulations, said Jay Tuli, head of retail banking and residential lending at Leader Bank and creator of ZDeposit. “Especially if you’re managing over 100 units, it can be a real hassle.”
Massachusetts security deposit laws are so tenant-friendly that “many lawyers advise their landlord clients not to take security deposits because staying in compliance with the statute is not easy,” wrote attorney Arthur Hardy-Doubleday in a blog post from earlier this year. “Further, a violation of the statute may award tenants three times their deposit plus attorney fees.”
Tuli said ZDeposit aims to solve many of these compliance headaches for landlords so they don’t have to be afraid of even taking a security deposit from a tenant.
“Bigger landlords might have a person who is solely dedicated to just handling security deposits,” he added. “If you can automate that, then you’re providing them with real value.”
The product could be successful in attracting more landlord clients to the bank, said Julie Conroy, director of research at Aite Group.
“We’re in an age where people want to do stuff digitally,” she said. “If it can help with compliance and digitize a previously manual process, that’s a good combination. Landlords are like most other merchants; they just want to sell something and don’t want to become payments and compliance experts.”
ZDeposit is the second offering developed by Leader Bank’s in-house innovation unit, which launched three years ago. That same year, it developed ZRent, an online portal that lets landlords collect rent payments via ACH transactions. Tuli estimates that since ZRent’s launch in 2015, about 500 new landlord clients have become customers of Leader Bank. The segment “is an important target to our bank,” he said.
ZRent “has been a nice little profitable product for us,” which is why the bank sought to develop a companion offering in ZDeposit, Tuli said. (In 2016, the year after ZRent debuted, Leader was the most profitable bank based in Massachusetts by return on assets, according to FDIC data.)
After its initial success with ZRent, Leader decided to license the product to other banks; currently five banks white-label the service. The bank has the same plans for ZDeposit, and said it can be customized to comply with state regulations that may be different from Massachusetts’ for security deposits.
“We built the technology so that it can be customizable state by state,” Tuli said. “So as we get interest from other banks, we can figure out the components specific to their state.” Indeed, more than half the states in the U.S. have some sort of requirements relating to tenant security deposits, according the website legalnature.com.
For this reason, ZDeposit could be an appealing tool to license for banks that, like Leader, focus on attracting landlords and property managers as commercial clients, said Aite Group’s Conroy.
“I don’t know if it will be the next multimillion-dollar moneymaker for the bank, but it could definitely generate some revenue as a niche offering,” she said.
Tuli says it can also help Leader Bank and other banks that use the product to increase commercial real estate lending, which many banks are lagging in.
“It’s a good way of tying in CRE clients, if they see this as something that can help the managers who run their properties,” he said.
Leader Bank’s practice of developing digital products in-house happened somewhat by circumstance. Earlier this decade the bank was seeking a way to increase deposits, and in 2013 created its own rewards checking account that Tuli said brought in $70 million in new deposits.
“Using some lessons from that, and frankly some confidence from the success, we thought about the next products we could develop,” he said. “We’re already thinking about what our next projects could be for 2019 and 2020.”