What is a Bank Lockbox Service and How is it Used for Payments
Across the cash management process, Bank Lockbox Services have been around for decades as a way for treasury and finance teams to improve their receivable process for checks and other payments sent through the mail. But in today's digitally connected Internet economy, electronic alternatives to traditional lockbox services have emerged.
Today we'll explore a little bit about the advantages and disadvantages of a lockbox services and how Digital Lockbox alternatives such as an online billing portal may be the next step in the evolution to a traditional commercial lockbox service.
What is a Lockbox?
A lockbox is a safe holding location essentially rented by businesses to initiate the process of B2B payments. 'Lockbox Service' is a utility offered by commercial banks geared to ease the ebb and flow of business transactions and used as a way to speed-up & simplify the collection and processing of account receivables by having those organizations' customers' payments and remittance documents mailed directly to a location accessible by the bank.
These are typically PO boxes, or other unified bank mailing addresses, that a business can leave on their invoice as an easy & consistent place for their customer's accounts payable departments to always know where to be able to send payments to.
Lockboxes are strategically placed in a business centric location to reduce mail delivery time as well even encourage a physical drop off by the clients. Lockboxes are commonly used in industries such as business to business services, real estate & property, manufacturing, utility billing, and other cases where high volumes of checks are being sent.
How does a Lockbox work?
Once a bank receives a lockbox payment on behalf of a business, a bank representative will collect the total sums of money dropped off on a daily (or more frequent) basis from the box. Each payment and any remittance info that has been received are set to process.
From there, the bank typically uses an outsourced BPO team to manually process each payment or automatically batch run use OCR and Check21 to scan, capture and process high volume electronic payments and discard the original check. The processed payments are posted to a secure website where the banking staff can be then apply the given funds to the organization's accounts receivable.
Depending on the service level from the bank, daily reports and nightly backups can be applied as needed.
Advantages of a Lockbox
- Speeding up Mail Float. ‘Mail float’ is a term for the time required for a check payment to travel from the payer to the payee through the postal system. The payers are highly aware of the downfalls of ‘mail float’ and capitalize on the time that it takes for the payee to receive the funds - using the token procrastinators phrase ‘the check is in the mail’.
During which time, the payor may not have the funds yet available, or they may be keeping the funds in a high yielding account for a little extra time in order to gain a bit more interest on those funds. On the flip side, this may be costing the recipient interest income and lowering their DSO.
- Lockboxes reduce mail float in a few ways. First, by having multiple geographic locations closer to your customers location, the postal time is likely to be faster than delivering to your business address. Second, a lockbox can shorten the processing time by having bank staff directly deposit payments into the bank account ensuring payments are received and deposited same day.
- Increasing back-office staff efficiency. Because the banks are doing lockbox processing at scale, there is efficiency gain with them doing the check processing versus having a staff member do it. There is no need to prepare deposit slips or drive to the bank or build reports. Further scaling the volume of checks based on the ebbs and flows of the business becomes easier without the need to hire additional staff.
Disadvantages of a Lockbox
- Lockboxes can be relatively costly. The banks typically earn a fixed setup and continuous monthly fee for each lockbox. They also charge a service / transaction fee for each payment processed. As with many banking pricing models, their rate sheets are usually complicated and hard to read. Typical lockbox candidates are processing many thousands of checks a month so these minute charges that you see on the front end of signing up for the service, end up adding up quickly. This is because while the bank maybe more efficient than your own back office, they still are relying on a fair degree of manual effort and labor costs.
- Lockboxes can have security concerns. Because lockboxes still require tedious manual processing, many of the staff at banks that are responsible for the data entry are new to the bank or are offshore contractors. The information from a lockbox payment provides all of the necessary components needed to counterfeit a check. And the volume of lockbox payments is usually so high that it becomes relatively easy to slip a fraudulent check amongst many good payments.
With these dangerous combinations, a criminal can exploit both vulnerable process and personnel...not to mention that with any manual task, comes margin for error - and when it comes to getting paid, a grantees leniency for oversight is minimal; fraud or even a slight blunder has potential to tarnish business to business relationships.
- Lockboxes are still slow. While it's true a lockbox can be faster than a check sent to directly to your organization, lockboxes are not a digital or electronic process. This means that while they may lesson the time that a check is in the mail, they don't eliminate the time a check is the mail. Further because the check still must be deposited and processed (albeit by a bank employee), the funds are not available in real-time.
- Lockboxes don't tie into your system. While Lockbox reports can certainly be sent to your finance team, and your ERP system is aware of the deposits, an automatic matching of the customer information at the time of payment to the information stored in your CRM & ERP systems is unlikely to magically happen. Instead back-office teams sill likely need to reconcile the deposit to the information in their system of record.
- Lockboxes don't account for other payment types. Most business accept forms of payments other than checks. Lockbox services do not directly integrate with payment methods such as cards, ACH, EDI, or newer Internet based digital payment rails such as eCheck. This adds complexity in a receivable process running different systems for different payment methods.
- Lockboxes are becoming inconvenient for your customer's AP department. Many AP departments are modernizing their invoice & payment process to reduce the number of physical checks they have to manually cut & process. With commercial spend cards, payment virtual cards, ACH, EDI & direct bank transfer all rapidly growing as preferred methods for the AP department to improve efficiency, business process and security, lockboxes ability to completely serve the customers payable team is fast on the decline, making the Lockbox Service an antiquated one.
Digital Lockbox Services
A Digital Lockbox Service replaces the physical address of a traditional lockbox with a digital web address and replaces paper checks with electronic forms of payments such as eChecks, ACH, debit cards, credit cards and electronic bank transfers. These Digital Lockboxes are a natural evolution of physical lockboxes and aim to further improve receivables in speed, security, efficiency and cost.
We explore more about how Digital Lockboxes work in Part 2 of our Lockbox Guide: The advantages of Digital Lockboxes & modern billing portals.