Roey Dor 
“Things are never as good or as bad as they seem” is one of my favorite proverbs. In hindsight, I was overly optimistic in 2021 about our business and the security deposit alternative space at large. At the time, there was a lot of reason for optimism, with a flood of new renters re-entering the market and increasing adoption of new technologies in the real estate space. As it turned out, things weren’t as good as they seemed.
2022 and 2023 were difficult years for many businesses. Rising rental prices, low turnover and supply constraints ultimately caused our growth to slow a bit: a good time to remind ourselves that things are never as bad as they might seem.
When businesses aim for rapid growth and take an overly optimistic outlook, they often embrace higher levels of risk. Inevitably, some of these risks will materialize, leading to performance setbacks and, in certain instances, reputational damage.
Lately, there has been a lot of that going on in the security deposit alternative space, and I wanted to share my views. There are some fundamental flaws with the surety bond model that I’ve seen first hand in the market, which is why Obligo chose a different, credit-backed model for our deposit alternative.
Why Trust is Key for a Deposit Alternative
Unfortunately, there have been, and still are, multiple companies in our space that continue to present their alternative as a solution for people who can’t afford a security deposit. This causes two problems:
1. Catering to renters who are unable to pay a security deposit will create a negative selection bias, which will in turn drive up losses (and consumer prices) for these deposit alternative offerings.
2. Placing renters in apartments beyond their financial reach often results in unpaid rent and ultimately, eviction.
When you last checked-in to a hotel, you probably didn’t pay a “deposit” – you effortlessly swiped your credit card, and provided the hotel with a pre-authorization – a “deposit alternative.” This has been standard practice in the hotel industry for decades, and guess what, you’re not doing it because you can’t afford the hotel’s required “deposit”. In fact, if you didn’t have enough available credit on your card, you would be asked for another card or a cash deposit, and if unable to provide either, you would be prevented from checking into the hotel.
The reason a hotel requires you to swipe your card is to provide accountability for incidentals and damage incurred during your stay, and a payment method for you to pay for those charges. This process allowed hotels to simplify how trust is established, without adding new risk or sacrificing customer accountability.
This was Obligo’s original inspiration, and has always been Obligo’s approach to replacing deposits. We wanted trust to be at the center of the transaction, powered by technology enabling a fast and simple process.
What do Renters Want in a Deposit Alternative?
It’s clear there is massive demand from renters for solutions that provide them with financial flexibility. In fact, according to our recent survey, 55% of renters cited our deposit-free option as a key factor in their decision to choose their current rental home.
Renters want to know exactly what they’re signing up for, which unfortunately isn’t the case with many deposit alternatives on the market. Historical alternatives such as surety bonds are often marketed as “insurance”, leaving renters confused as to whether they are “covered” for the damage they cause. What good is a security deposit alternative if renters are unsure about their accountability?
Renters also want to be able to reach support if and when they have questions – about their fees, about landlord charges, about repayment options. With Obligo, renters are given the details of their offering and responsibilities every step of the way, with resources and human customer support readily available. We make it clear to renters upfront that they are responsible for keeping their unit in good condition and will be accountable for any charges at move out.
Transparency and accessible customer support are our top priorities when it comes to serving renters, along with property managers, owners and strategic partners.
Qualifying Renters & Maintaining Accountability
When applying for a credit card, issuers use various qualifying methods to assess if you’re eligible. They prioritize your ability to pay back any balance owed. If payments fall behind, credit card issuers diligently try to collect from card holders.
The collections sector often faces criticism, perhaps justifiably. But consider a hypothetical credit card issuer that approves everyone and disregards repayment for purchases. It’s pretty clear that such a card company wouldn’t last long in the market.
Similarly, can a surety bond that is marketed as insurance and available to anyone, without regard to their ability to repay charges, serve as the foundation for a sustainable business?
Screening and qualifying renters for a deposit alternative is a critical step in creating a viable and sustainable business model. At Obligo, we use an AI-powered open banking model to qualify each and every renter invited to Obligo, ensuring we work with renters who will take care of their rental and pay us back if damages occur (we also accept traditional deposits for any renters that don’t qualify or would prefer to opt out!).
Knowing Your Clients: Property Owners & Managers
When introducing a security deposit alternative to the market, it is essential to understand the goals of property manager clients. At the end of the day, owners & operators care about three things:
1. Access to Funds: They want to know that when something happens and they require funds from a deposit, they will always get them, and fast. Is there a claims process that will prevent property owners and managers from accessing these funds? Is there an invisible third party (a reinsurer) that will have the final say on any claims? High loss rates have already led to reinsurers dropping some deposit alternative companies.
(With Obligo, there is no claims process for property managers — our platform immediately initiates payment to the property and sends a bill to the renter for repayment).
2. Renter Accountability: They want to make sure that the renter is incentivized to take good care of the apartment; this can only be achieved if there’s total clarity around the renters’ accountability for paying any charges at move-out. (“Insurance” implies the charge amount is paid by someone else, other than the renter).
3. Ensure High Quality Renters: They want reassurance that the renters they are bringing into their units are able to afford them and they won’t be saddled with rent delinquencies. This requires security deposit alternatives to screen renters and have a clear qualification process in order to sign up for their product.
Any security deposit solution must be transparent in how they address these goals, needs and concerns.
While it’s not customary in the security deposit alternative space, Obligo always vets landlords and property management companies before we consider partnering with them. Through a portfolio assessment, we try to forecast the percentage of security deposits that will eventually be charged at move out, which indicates their risk level for our business and provides a signal as to how they treat their renters.
Over the years we’ve developed pretty accurate benchmarks to understand when landlords are charging too frequently or too much, which is revealed in the process of their filling out the portfolio assessment. You can read more about our methodology here.
When renters move out, Obligo also measures a property’s security deposit deductions (if any), renter sentiment towards those deductions, and whether any outstanding charges are paid back in full. Each year, we hand out our Renter’s Trust Awards, which recognizes property management companies that have achieved a high degree of trust with their renters based on these criteria.
Innovating with Leading Financial Institutions
As of 2022, our security deposit alternative is supported by Wells Fargo Letters of Credit, in a modern twist on a tried and trusted bank product. By providing our partners with a direct line to a Wells Fargo instrument, these letters proactively protect landlords from any risk of non-payment of charges. The letter of credit program is a key part of Obligo’s business and distinguishes us from all other security deposit alternatives on the market. Wells Fargo is one of the largest banks in the country, serving one in three U.S. households, and they share our vision of leveraging existing financial products in new ways to support proptech innovation.
Last year, Obligo embedded our solution within two leading property management systems, AppFolio and Buildium, and since then, our R&D team has further deepened our integration capabilities and solidified our position as the deposit-free software partner of choice.
Our partnership with AppFolio on their FolioGuard Security Deposit Alternative is becoming widely adopted as property managers look to attract more qualified renters and rid themselves from operational burden. We also became a top activated solution through the Buildium Marketplace, an ecosystem of property management apps that allows Buildium users to have their entire tech stack under one roof.
Obligo’s scalable API-first technology and best-in-class security program powers a seamless and embedded deposit-free experience for software partners. We’re excited about more PMS partnerships to come in 2024 (stay tuned…)!
We collaborated with BNY Mellon earlier this year through the bank’s Ascent Program to digitize the rental experience for property managers, further accelerating and strengthening our ability to collaborate with key financial institutions.
Innovating and growing with these types of leading financial institutions and industry partners requires a high degree of transparency, and Obligo has the foundation to provide it.
The Bottom Line
As our financial environment is constantly evolving, the lesson we’ve learned over the past two years is that businesses must prioritize responsible growth and healthy business fundamentals. We cannot underestimate the importance of trust in our industry. Renters, property managers, owners, operators, property management softwares and financial institutions cannot adopt technology if they can’t trust that it will stick around for many years to come. A security deposit alternative that is built to last will become the new standard in the market, just like the credit card pre-authorization model was adopted by hotels over 50 years ago.
We need more examples of responsible growth and more products that truly stand the test of time. Now is the time to focus on prioritizing transparency and promoting responsible practices that benefit all rental market participants.
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