The Case For Freeing Up $190B In Security Deposits

Why Rhino Wants To Remove Cash From Rentals

For most renters, coughing up a cash-based security deposit means parting ways with that money for the duration of the lease. Now, there’s a movement to replace cash deposits with insurance policies or electronic contracts. In this month’s Disbursements Tracker, Paraag Sarva, CEO of Rhino, makes a case for retiring security deposits for insurance policies, which can protect both landlords and renters, while freeing $190 billion tied up in deposits.

Many tenants must deal with landlords asking for cash or checks at the end of the month. Traditional payment methods are common in all aspects of real estate: managing rent, moving costs, broker fees and security deposits, with the latter representing $190 billion of renters’ funds. Tenants and property owners are also forced into legacy reimbursement processes that can continue for months at a time. Landlords seeking payments for property damage or unpaid rent often need to withdraw funds from an escrow account, safety deposit box or other holding method, while renters often wait weeks or months for their security deposits to settle in their bank accounts. These processes are frustrating for consumers who are used to dealing with digital transactions that take minutes or seconds to complete.

These antiquated methods present an opportunity for the real estate world to rethink how it approaches security deposits, especially as younger consumers enter the market. Paraag Sarva, CEO and co-founder of Rhino, believes this might mean removing cash-based security deposits entirely, replacing them with insurance policies.

“Cash security deposits are used to protect owners from something that may or may not happen in the future, [but] that’s really the definition of insurance,” Sarva said in a recent interview with PYMNTS.

Sarva believes that replacing cash security deposits with insurance policies is more efficient and creates lasting relationships between tenants and landlords. Such solutions would also eliminate a decades-old point of friction in that relationship.

“Whether you’re a first-time renter, second-time renter [or] lifetime renter … [it’s] about creating a transactional efficiency by replacing a cash security deposit with a form of insurance,” he said.

The Rental Market’s Strange Grip on Cash

Cash has continued to maintain a stronghold in the real estate world, where tenants seem to regard it as the typical way to rent, despite its many inconveniences.

“When you think about it, it’s kind of silly that, in 2019, people are [making] cash security deposits, but that’s the habit,” Sarva said. Consumers would find it odd to leave a $5,000 cash deposit to rent a car, he noted. “Yet when you rent an apartment, which [involves] bigger checks, bigger amounts of money, people are so ingrained to think, ‘Of course I have to leave a cash deposit to protect against something that might or might not happen.’”

Residential security deposits are currently valued at $40 billion for the U.S. market alone, he said. Eliminating these deposits would put thousands of dollars back into tenants’ hands, which can be critical for first-time renters, like recent college graduates or professionals moving into new areas, who may need the funds for moving expenses.

Tenants can use Rhino’s platform to sign up for a monthly insurance policy to remove the frustrations that come with spending a large volume of cash, while still protecting the landlord. Tenants pay the installment fee digitally, and landlords can file for claims to be reimbursed for missing rent or other issues via same-day ACH transfers. This process is very different from how consumers typically perceive the leasing and insurance processes, which continue to be very manual and paper-based.

Not only is cash an outdated way to rent or reimburse tenants and landlords, but it can also affect the financial health of many renters, he added.

The Future of the Rental World

There may be a growing need for services such as Rhino’s, but replacing cash deposits with insurance policies or electronic contracts isn’t the easiest of tasks, he noted.

“I think we’re still at the very infancy of this sort of movement,” Sarva said, adding that Rhino is also looking at technologies like artificial intelligence (AI), which could shorten the time it takes to approve a claim or reimbursement. “By and large, the de facto way those transactions are done today are cash security deposits, and we’re just starting to make a dent in turning that tide. I’d love to see that flip to where cash security deposits are the exception.”

Cash security deposits may remain the dominant method in the rental world for the next few years, but renters are fast losing interest in them. As consumers get used to completing complex financial transactions online, real estate and insurance processes are likely to follow the digital payments route.