2016 • No. 16–02
By David Zhang
For many households, rent is their largest monthly expenditure. Therefore, it is important for a well-functioning financial system to serve renters’ payment needs. This report explores how households pay rent.
How Do People Pay Rent?
- Households still pay rent primarily with paper methods, even though electronic methods are featured more prominently among high-income, high-education, and high-rent households. These patterns may be explained either by the lack of landlord acceptance of electronic methods or by the unwillingness of tenants to pay using these methods.
- The dominant methods for paying rent are cash (22 percent), check (42 percent), and money order (16 percent). Electronic methods are still rarely used, at 8 percent for bank account number payment and 7 percent for online banking bill payment, and less than 2 percent for debit and credit cards.
- Compared with other large bill payments of more than $200, rental payments are much more likely to be made with paper-based methods than with electronic methods, despite the recent attempts by start-ups to make it easier for landlords to accept electronic payments. They are also much less likely to be automatic.
- Check and electronic methods are more frequently used for higher-value transactions and by those with higher income and education.
The observation that rental payments are slow to move to electronic methods may be puzzling in light of recent attempts by start-ups and banks to smooth the acceptance of electronic methods. Issues like bounced checks (settlement risk), speed, and records (to keep track of late rental payments) may be significant concerns for landlords considering electronic payment methods. If so, then rental payments may be a potential use case for faster payments services, which could provide a fast and secure (in terms of settlement risk) way to make payments.
Further study of the landlord acceptance issue might help us to better understand whether there is room for improvement in the rental-payment system.