Lockbox | B2B Finance Glossary

Jul 27, 2023 by Zazil Martinez

What is a Lockbox?

A lockbox, or bank lockbox, is a service provided by a bank that allows companies to receive check payments from their customers securely. These checks are mailed by customers and deposited into a specified, secure post office box, and picked up by the bank. The bank then processes and deposits the checks on behalf of the business.


How Does a Lockbox Work?

Lockboxes can be especially helpful for businesses that receive most payments via paper check because they make the collections and payments process more efficient. To date, many banks use highly developed technology to make the lockbox process as seamless as possible.


What is a Virtual Lockbox?

A virtual or smart lockbox is a digital alternative to a traditional lockbox service. Today, 40% of all B2B payments are still made via paper check, which means businesses rely upon checks to be sent in the mail to receive their revenue. This causes a multitude of problems: firstly, mail float – the time it takes for a check to travel through the postal system from payer to payee – can greatly increase DSO periods; secondly, checks are highly susceptible to fraud (in fact, check payments fall prey to fraud 74% of the time. Virtual lockboxes solve both problems by eliminating the need for paper check payments.


How Does a Virtual Lockbox Work?

Paystand’s Smart Lockbox gives AR teams the keys to a fully paperless cash cycle from payer to merchant – one that incentivizes customers to move to a digitized payment model that eliminates manual tasks and lowers operational costs for finance teams.

This is how the check payment cycle works with Smart Lockbox:

  1. Customers have the option of paying via a “pay now” button or sending a paper check
  2. Checks are sent to a traditional lockbox and subsequently scanned; then, the data is automatically sent to Paystand
  3. Paystand’s Smart Lockbox receives a check payment, matches it to the corresponding invoice information, and deposits the payment into your bank
  4. Check information and transaction details are fully integrated into your Paystand reports and dashboard
  5. Paystand sends all transaction details to your ERP system and updates your reconciliation status; you’ll also get automated data entry and remittance matching as part of the process

Paystand’s Smart Lockbox also offers seamless, automated payment acceptance that includes the following:

  • Matching algorithms that ensure accurate, automated processing
  • The ability to receive images digitally, so no paper processing is required
  • A more efficient collections process that significantly reduces DSO

When it comes to cash application, cash flow transparency is essential. Smart Lockbox was built to enable essential features and functions to help your AR team speed up time-to-cash. Here are some other features that Smart Lockbox offers:

  • Payment data is displayed as it comes in, giving you immediate visibility of your cash flow
  • Integration of digital and paper payments into a single data file that simplifies posting
  • A centralized collections process and a reduction in receivables risk with 24/7 payment tracking


How Much Do Traditional Lockboxes Cost?

Traditional lockbox services can be costly. These services spend much time on manual operations, allowing them to process thousands of monthly checks. To acquire a lockbox service, companies must pay a setup fee, a recurring monthly fee, and a fee per transaction.


What Are the Pros and Cons of Using a Traditional Lockbox?

Lockboxes, just like many other business-to-business services, come with their own set of advantages and disadvantages.

The number one downside to traditional lockboxes is that they can be tampered with. Oftentimes, bank employees who deal with lockboxes have access to your business’s payments under little-to-no supervision. Because the checks pass through the hands of many individuals, they are highly susceptible to fraud. In fact, on average, eight people will handle a check before it goes through the full payment cycle. Lockboxes are particularly susceptible to check counterfeiting because the checks stored within the lockboxes include all of the information necessary to make counterfeit checks.

On the other hand, the top benefit of traditional lockbox services is that they can be very efficient for companies that primarily rely on check payments for their revenue. For these companies, it can be inconvenient to constantly wait to receive customer payments in the mail and then spend time depositing the checks by hand. Therefore, a lockbox service can be helpful.


How Can Virtual Lockboxes Mitigate the Cons of Traditional Lockbox Services?

Because virtual lockboxes offer touchless check processing that automatically shares data with your native ERP system, they eliminate the need for check payments altogether and therefore eliminate the risk of counterfeit check payments and other forms of fraud.

On top of all that, Smart Lockbox compiles unmatched payments in real-time, so your AR team can quickly apply outstanding payments to invoices, match checks to open invoices, and determine overpayments and match them to multiple invoices. It also fully digitizes the paper check payment cycle and ensures that these payments all go to one place: your ERP system.

Smart Lockbox is designed to offer a digital-first and entirely automated process, giving your AR team a way to completely outsource the time spent collecting and processing paper check payments.

If you’re ready to transform paper check payments into a seamless, automated experience and decrease your DSO by as much as 80%, you can schedule a demo with one of our payment experts here.