The way we reference tenants is broken, and everyone is either unaware or doesn’t care.

Photograph by Jill Mead for the Guardian

When somebody applies to rent a property in the UK, they go through a process called tenant referencing. Generally, this is to try and work out if they’re likely to be able to pay rent, and look at their credit history.

The way tenants are referenced today is broken. And I believe that people are either unaware of how it’s broken, or don’t care that the result of the existing process is worthless.

Let me explain:

  • How income verification actually works.
  • Why an employer reference is worthless.
  • Why payslips and bank statements can’t be trusted.
  • Why previous landlord references are useless.
  • Why referencing companies actually need to fail sometimes.
  • Why referencing companies need the process to take days.
  • Why I’m hopeful about the future of tenant referencing.
The way tenants are referenced today is broken. And I believe that people are either unaware of how it’s broken, or don’t care that the result of the existing process is worthless.

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What a reference actually is

A tenant reference can essentially be split into two parts: the Credit Reference Agency check, and income/previous rental payment verification.

The CRA check is simple. These companies take your information, send it to CallCredit, Equifax or Experian, and they instantly receive back results about the applicant. It’s straightforward and will cost large referencing companies less than £1.

Then there are internal processes, where referencing companies will try and prove that the tenant earns money, and get a character reference from their previous landlord. For doing this service, the referencing company will typically charge the agency an additional £10-£30.

So, the referencing companies are up-selling a check that costs them pence — plus some internal work, for £10-£30, and then letting agencies are up-selling this check again for £120.

It’s even worse for tenants with no income, who will pay £120 for themselves, and then the same again for a guarantor.

So that’s how it works today. Except it doesn’t work.

So that’s how it works today. Except it doesn’t work.

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How income verification actually works

I know we like to believe that referencing companies — and agencies who do it themselves — have a team of experts who tirelessly investigate tenants’ lives. Perhaps turning up unannounced at their place of work, or have pictures of the applicant pinned up to a notice board with wild pieces of string connecting pictures to locations.

Alas, it’s not like that at all. In fact, referencing employees are rushed to meet quotas and like most call centres, only stick to the job for around 12 months. So put down your preconceptions of these employees — they’re just regular people like the rest of us. The people who make these phone calls haven’t ‘seen it all before’, even if the directors of those companies have.

Put down your preconceptions of these employees — they’re just regular people like the rest of us.

I’m an employer, and so I’m occasionally on the other end of the referencing process. Let me show you a real example, with our employee, that we’ll pretend is called Paul.

Paul was asked to fill out a form, and in it he was asked for the details of his employer. He gave mine.

On February 12th, I received this email from an award-winning letting agency:

Although it may look like I’m trying to paint them as inept, this is actually the most pro-active agency I’ve dealt with. Most didn’t bother contacting me at all, and once I had a phone call that literally went:

Them: “Hey are you Peter Ramsey of Movem”
Me: “Yes, who is this?”
Them: “I’m ____ calling from _____, I’m just trying to verify that you have a [Paul] working for you.”
Me: “Yeah, we do”
Them: “Brilliant thanks”

So I replied:

It was everything they needed.

It was everything they needed, and after a short reply of “thanks”, it was done. Paul was never asked to show any bank statements or payslips — that email was sufficient.

As far as they’re concerned, they’ve verified that Paul is employed. But they haven’t, have they? All they’ve done is get a response from the email account Paul said was his employer.

Whilst at university I knew somebody who gave his own mobile number as his employer, said he was on £40k a year, replied to the email himself posing as his employer, and passed.

In fact, after sharing a draft of this article with a few friends for feedback, I learned that I know a second person who did the same thing.

Whilst at university I knew somebody who gave his own mobile number as his employer, said he was on £40k a year, replied to the email himself posing as his employer, and passed.

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Why an employer reference is worthless

And here we really find one of the biggest problems with tenant referencing. Even if you could verify that ‘Bill Gates’ at ‘Microsoft’ is a real employer, there’s no way to verify that the person answering your emails, or speaking on the phone, is really Bill Gates.

“But it came from a company email address, so it must be someone in the company”.

Wrong. Really wrong. It’s called Email Spoofing, and LifeHacker have written a great article about how it works. There’s even a 10-step guide on how to do it.

In fact, I can almost guarantee that right now you’ll have spam from spoofed emails, like ‘noreply@dropbox.com’ or ‘invoice@paypal.com’.

That’s the email option, but what about phoning? What about if you went on Google and phoned the registered number of that company?

See, that’d be fine if every company had one phone number, but they don’t. Small companies don’t all have public phone numbers, and do you really think if you call HR at ‘Sky’ they’ll be able to give you a personal character reference of every employee?

Take nurses who work shifts at 3 different hospitals; who do you call?

Movem doesn’t have a public phone number

So what do referencing companies say about this? Well I bought this point up with one of the largest referencing companies recently, and their reply was a vague dismissal of “if it feels suspicious on the phone we hang up, and if we can’t get a number we just use email”.

If you don’t believe me, ask them. There is no ‘expert intuition’. They wing it.

Let’s be honest. This isn’t verifying employment. My only suggestion if referencing companies wish to keep marketing employer checks in this way is if they physically drive to every office, walk in their front door and insist on seeing them at a desk working.

Let’s be honest. This isn’t verifying employment.

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Why bank statements and payslips can’t be trusted

It’s common for referencing companies to ask applicants for at least 3 months of bank statements, and they use this to verify income instead, or in addition to a employer reference.

By this point you’ve probably guessed where I’m going with this.

It’s very easy to create a fake bank statement. Did you know that you can use Inspect Element to modify any web page, including online banking pages?

Here’s an example, where [Paul] spent £14,000 in his favourite local burger place.

“But Inspect Element only works on web pages, I ask for the original bank statement”.

Ah, good point. Did you know Mac has a built in PDF editor?

This PDF below took me 30 seconds. This time we spent £189,000 on burgers. This would be a full PDF, and be identical to the original copy.

Guess what? You can do exactly the same with employment contracts, payslips or letters from your CEO. They could probably even photoshop themselves having lunch with Elon Musk inside the Tesla he sent to space.

They could probably even photoshop themselves having lunch with Elon Musk inside the Tesla he sent to space.

Let’s forget for a minute that anyone can just create a fake payslip in Word; you can edit real payslips using basic Mac software.

But let’s not give referencing companies a hard time; we’d all likely fall for this too.

The point is this: unless the transaction can be verified with the bank, you don’t know it happened. If at any point the applicant has to send you anything, assume they’ve photoshopped it.

Unless the transaction can be verified with the bank, you don’t know it happened.

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Why previous landlord references are useless

I know it’s tough, but pretend for a moment you have a ‘phone-verification-thingy-mo-bobby’, and you know that the person you’re speaking to is the landlord.

Else, how do you know that you’re not just speaking to the applicants friend?

It doesn’t exist by the way.

Paul is currently in a property and he’s looking to move on. He barely spoke to his landlord (Catherine) throughout the tenancy. He hasn’t given notice on his new house yet though, because he hasn’t secured anywhere to move to yet.

So, the new agency phones Catherine. Let’s play out a few scenarios:

  1. James was a terrible tenant and Catherine can’t wait to get rid of him. So she lies and says he was great, because otherwise James will carry on living in her house.
  2. Catherine barely knows anything about James, in fact they haven’t even had the deposit deductions back so she has no idea how much damage he’s done. She says he was fine, when actually he’s broken everything and she doesn’t find out for another month.
  3. James was a great tenant and Catherine doesn’t want him to leave. So she doesn’t give a glowing reference, instead she just answers the questions and has her fingers crossed James doesn’t get it, and stays.

I could go on with these; the point is that asking the previous landlord for an opinion on the tenant is full of bias and game theory.

Really, we shouldn’t be asking the current landlord for a reference, but the one before that who has nothing to gain by James staying or leaving. But then how useful is a 2 year old character reference?

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Why referencing companies actually need to fail sometimes

And here comes the kick to the teeth we’ve been waiting for — most referencing companies are financially tied to insurance companies, that use referencing as a way to sell more rental-guarantee policies.

That shouldn’t come as news to you. The real gold mine is in the up-selling of insurance, not the margins on tenant referencing.

So ask yourself this: how do insurance companies make money? Well, they have an appetite for risk, and it relies on the public belief that there is a very real risk of tenants not paying rent on time.

The risks are real. My point isn’t that referencing companies have fabricated this risk, rather that they‘re not incentivised to innovate methods of making referencing bullet-proof.

Let me put that another way;

Referencing companies wouldn’t want a 100% success rate of filtering out bad tenants, or they’d never sell their insurance.

This approach isn’t specific to this industry. Ask yourself; assuming car insurance wasn’t a legal requirement, would you buy it if everybody drove autonomous cars that never crashed? Do you think that the large car insurance providers are desperate for driverless cars to become mainstream?

In fact, KMPG released a study stating that by 2040 the car insurance market will have shrunk by 60%. Scary right?

You need to know that a tenant reference, right now, isn’t a ‘complete know your tenant’ check at all. It’s more of a ‘yeah, based on these factors they haven’t screwed up so far, but really we have no idea what they’ll be like, so buy our insurance just incase’ check.

It’s more of a ‘yeah, based on these factors they haven’t screwed up so far, but really we have no idea what they’ll be like, so buy our insurance just incase’ check.

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Why referencing companies need the process to take days

The obsession with cross selling insurance has really been forced on the industry as the margins for tenant referencing have shrunk. It may not be why they entered the market — but look around, it’s why they’re all still in it.

And here’s another reason why referencing companies are happy with the status quo;

the longer a reference takes, the more opportunities they have to sell insurance products.

This ‘referencing latency’ is entirely to the benefit of the insurance companies, and occasionally the letting agencies who take a commission. It’s not in the interest of the tenant or the landlord.

It’s the equivalent of making people queue up in a single line at an airport, even though they could easily open another lane, just so a guy can have more time to walk up and down trying to sell water and pretzels.

Even if these large referencing companies were able to innovate a truly instant tenant reference, they would need to find a way to do so with many unnecessary points of contact, just to sell insurance.

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Why I’m hopeful for the future of tenant referencing

I want to take a moment to explain what we’ve done to fix this broken system. And also to reach out to letting agencies and landlords who are helping to keep a broken flywheel spinning.

At Movem, we’ve created the first instant tenant reference that verifies income and previous rental payments directly with the applicant’s bank, using data provided by Open Banking.

Unlike bank statements, payslips or phone calls with people you think may be their employer, we receive transactions directly from their bank, and use our own internal data processing to verify regular income and rent.

We don’t phone your landlord or employer; we look at 12 months of transactional history and see exactly what you’ve been earning, and how consistently you pay rent.

We’re still in the early stages of this technology, but one day the majority of tenants will be referenced using this kind of process. Of course, there are some puzzles to work through, for example:

  • How do you know those transactions are regular income?
  • How do you stop people bastardising this with transactions between friends?

Good points, but we’re working on it. We’re not a referencing company; we’re a tech company, and we innovate like one.

Right now, the way we reference tenants is broken, and there are very few incentives for large referencing companies to fix it.

Letting agencies, and landlords; start demanding better. Even if you have no interest in using Movem, talk to your current supplier about how they handle the issues I’ve mentioned. Put pressure on them to innovate and change.

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Conclusion

To finish, let me run through a poignant historical example.

A few decades ago, American Express employed people to phone both merchants and consumers, and manually authorise large payments that they considered may have been risky. They relied on people speaking to people, and the responsibility was on humans to decide which payments were suitable — very similar to how referencing is conducted today. The risk for American Express to accept a fraudulent payment was high, and they would incur financial loss if they made a mistake.

Today, credit card companies have greater access to rich data, and this process has been largely automated. The vast majority of lending decision-making is instant and requires no manual labour.

Historically, in the short term, people have tendencies to underestimate the utility of new data and the impact it will have on existing markets. Having access to this raw data is the first step, but the value is in the automation of interpreting that data to make smarter decisions.

I have no doubt that in 5 years the vast majority of tenants will be referenced in this way, and rental decisions will be made based on the access and interpretation of raw data.

The call centres will be empty.

I have no doubt that in 5 years the vast majority of tenants will be referenced in this way.

One day we will be able to detect subletting, tax benefits, loan repayments and use machine-learning to make a thousand other decisions in an instant.

One day, we will look back on how we reference tenants today and laugh. It will seem as archaic as CRT televisions, phones with physical keyboards and those Furby things.

Movem is live now, and we’re welcoming agencies to join us.

If you’re interested in learning more about the future of tenant referencing, please email me on peter@movem.co.uk.