Why This Community Bank Is Cannibalizing Its Lockbox Service

As banks work to understand potential tech threats to their traditional business lines, Leader Bank in Massachusetts has built its own software to usurp one of its services — lockboxes used by landlords.

"Putting checks in the mail to the landlord doesn't make sense," said Jay Tuli, senior vice president of retail banking at Leader Bank.

So the community bank created ZRent, an online portal launched in January, to replace what it considered an outdated process. It lets landlords automatically collect rent payments via ACH transactions.

In so doing, Tuli said, ZRent is "100% cannibalizing" the institution's lockbox services. "And we are really happy to do it."

In fact, the almost $1 billion-asset bank is marketing ZRent to its current lockbox customers, who are typically landlords.

There's plenty of motivation to do so.

In addition to cutting out manual labor, ZRent is seen as a way to win over new debit and savings customers. ZRent, after all, is free to all tenants but only free to landlords if they bank with Leader Bank. Landlords, who send email invites to their tenants to sign up on the system, must use the service in order for consumers to use ZRent to pay their rent.

Tuli views ZRent, which the bank is hoping to white label to other community banks, as an account acquisition tool as it helps solve a problem for smaller landlords: consumers often pay their rent with paper checks, causing a headache for landlords. If they don't use lockbox services, they are forced to waste their time depositing piles of checks in a branch or even on a smartphone.

"In this day and age, it seemed like a manual, arduous process," Tuli said.

So ZRent is meant to provide relief to the landlord, who may be traveling and wondering whether the renter's check arrived at a time when more ever-more people in the U.S. are renting properties.

Already, Leader Bank credits ZRent for driving acquisitions for the community bank: Since rolling out the tool in January, the bank has generated a half a million dollars in new deposits and about 50 new accounts from the 400 people already using the software.

Its initiative comes as rent remains one of the payment areas yet to widely move away from relying on paper. According to the Federal Reserve's most recent data, the number of checks paid declined more than 50 percent from 2000 to 2012 (from 41.9 billion to 18.3 billion).

"Checks aren't preferred," said Patricia Hewitt, vice president and managing director of consulting services for Mercator Advisory Group. "They are no longer de facto fallback. The days are long over."

Yet, Hewitt says paying rent is still a paper process that is often cumbersome for the renter — who may not even have a checkbook — and landlord.

Bill payment through the bank is another avenue for individuals with bank accounts to pay others. However, the technique can be an electronic illusion. Bank bill pay can actually mean the bank cuts a physical check on behalf of the retail customers to smaller billers, such as a landlord.

Stessa Cohen, research director at Gartner, said ZRent, if popular, could help the bank save on operational efficiencies, with less paperwork to process and fewer check images to save.

Still, Cohen says use of the tool will hinge on how good the experience is, including the value it adds beyond the payment.

But there are a number of issues ZRent will run up against regardless of the bells and whistles it puts in place: people don't always have bank accounts, and some may prefer to control the payment if they have irregular paydays and income, or grievances against the landlord. And there are startups that offer electronic means to pay rent.

But ZRent sees itself as different as the service is offered by a bank that already claims business with landlords (and already has contacts to a fragmented marketplace) in addition to being free in many cases.

Now, Tuli is hoping other community banks share ZRent's viewpoint as the bank works to sell the software to them. The white-label offering includes customization of the interface and handling of any customer service issues that arise.

Tuli sees ZRent as addressing a "frustrating" challenge community banks encounter: sure, the institutions often loan money to property owners, but their loan customers won't necessarily sign up for debit or savings accounts. So he is also positioning the service as akin to bill pay in its ambition to create key accounts and attract new customers. Plus, it's pointing to what he believes is an inevitable future.

"Checks are definitely on the decline," Tuli said. "For some reason the whole rent payment decline hasn't been as fast."