As Zillow enters rent payments, Cozy and YapStone adapt

As the digital rent market attracts new entrants like Zillow, mainstays like Cozy and YapStone are pressured to diversify and seek new audiences for their digital payments technologies.

Zillow is a formidable opponent — the company claims 35 million renters visit its websites and mobile apps each month in search of a home or apartment — and it's far from the only challenge that niche providers face.

Not only is the digital rent check market getting more crowded, it’s faced with other big challenges.

“The real estate industry is one of the last big industries to come online," said Gino Zahnd, founder and CEO of Cozy. According to the Federal Reserve, 80% of rent is still paid by cash, check or money order.

The other major challenge is fragmentation. Of the roughly 44 million rental units currently available, Zahnd estimates that up to 75% are owner/operators who have 20 rental units or less, making it difficult for vendors to build scale. “The small landlords invent their own way of working … As an industry, we have barely scratched the surface in the U.S., which is probably why Zillow has entered,” Zahnd said.

Chris Goodney/Bloomberg

Cozy's solution to this problem is to bundle payments with tools such as tenant screening, lease capture and maintenance management.

As for YapStone, its growth strategy now puts it on a collision course with payment processing powerhouses such as Stripe, Adyen and PayPal. It now targets the travel, vacation, rental and shared economy marketplaces including brands such as HomeAway and VRBO. In May, YapStone launched Kigo Marketplace with Kigo, a unit of RealPage, to provide a platform for vacation rental listings.

To fuel its expansion efforts, YapStone has been very active in raising funds. In February 2018, YapStone completed its latest funding round, which was led by Premji Invest and raised $71 million.

“It’s all for M&A, as acquisitions are clearly part of our roadmap. I probably spend 50% of my time evaluating companies and opportunities," said Tom Villante, co-founder, chairman and CEO of YapStone.

This year's round, which was its Series C, followed a string of successful fundraising and debt placements which provided over $186 million in capital according to Crunchbase, which tracks funding of private startups. Investors include Accel Partners, Mastercard, and Meritech Capital Partners. Debt financing came from Comerica Bank and Bregal Sagemount in an earlier debt round in 2015.

YapStone expects to generate $350 million in revenue for 2018, which is seven-fold increase in the last seven years, added Villante.

YapStone partnered recently with PPRO Group, a cross-border e-payment specialist to help it provide alternative payment methods (APMs) local to the various marketplaces serviced by YapStone. Essentially this will allow YapStone customers to be able to access dozens of APMs from around the world, including iDEAL (Netherlands) and SOFORT (Germany). This effort is critical to YapStone's geographic growth — in many countries, consumers may not own or want to use a credit card, preferring instead to use a bank transfer method, direct debit, or other method, Villante added.

“Alternative payment methods like iDEAL in the Netherlands have become a significant, if not dominant payment alternative for the markets they serve," said Thad Peterson, senior analyst with Aite Group. "By enabling acceptance of alternative payments, global businesses like vacation rentals can accommodate any interested customer and dramatically reduce payment friction by offering a payment method that the customer is used to using."

YapStone has no plans to enable bitcoin for marketplace rentals, given the cryptocurrency's relatively low usage compared to mainstream payment options. But “we’re looking into Alipay," Villante said. "It’s definitely in the roadmap; not the next six months, but it’s in the discussion.”

Taking what the company has learned from launching its digital rent check platform back in 1999, YapStone has expanded into marketplaces for vacation rental brands such as HomeAway and VRBO. It also provides services to inns, bed and breakfasts, and non-travel related companies such as storage facilities. YapStone has also been engaging in pilot efforts with marketplaces to take advantage of the recent trends of the shared economy.

However, expansion into new marketplaces is not a simple or risk-free matter.

“Each marketplace will need to be addressed individually based on risk and regulations. Having the relationship in place with payment networks is a great first step, but validating the ability to manage risk will remain a challenge that needs to be overcome," said Tim Sloane, vice president of payments innovation of Mercator Advisory Group.

In response to the challenges it has faced as it has expanded into new markets and geographies, YapStone has made significant investments in its infrastructure. “We’ve spent over $100 million on our platform and have 80 people in our risk area” noted Villante.

The company has also expanded geographically, adding Canada and Europe. YapStone built an office in Drogheda, Ireland in 2012 to serve its European markets, with plans to bring employment in that office to over 300 personnel this year. It says it may also consider an Asian office in Singapore. Latin America, Asia and Australia are on the roadmap for 2019, Villante said.