Why this bank ven­tured into the land­lord-ten­ant war zone

Leader Bank says it can land prop­erty man­agers as com­mer­cial clients by help­ing them han­dle ten­ant de­posits.

National Mortgage News - - Contents - By Bryan Yur­can

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.”

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