What is a Bank Lockbox Service and How is it Used for Payments?

Feb 6, 2024 by Zazil Martinez

For a long time, bank lockbox services have helped treasury and finance teams manage their receivables. These services help with processing checks and other payments sent by mail. But now, there are a number of options for lockbox services in the internet age.

Businesses increasingly seek other ways to process customer payments efficiently for better cash flow and savings. And they need something more than the paper-check-focused bank lockbox service. According to a 2022 Association for Financial Professionals (AFP) survey, 73% of businesses switched to electronic payments instead of paper checks.

The lockbox experience often hinges on the efficiency and security provided, while bank lockbox costs remain crucial for businesses evaluating these services. That means alternative, cost-effective lockbox payment processing solutions are often a win-win for AR teams and their payers.


An efficient electronic lockbox solution can streamline receivable systems, boost payment collection, and improve cash flow.

But not all lockbox solutions are the same, so it's essential to learn when to use each type of service.

Today, we will talk about the advantages and disadvantages of lockbox services. We will also examine how online billing portals and automation change the traditional commercial lockbox.

 

What is a Lockbox?


With the rapid change in business payments technology, your team members may ask themselves what a lockbox is in the first place. How does a lockbox work for businesses in this evolving landscape?

A lockbox is a safe holding location essentially rented by businesses to initiate the process of B2B payments. Banks help businesses with lockbox services to process customer payments faster and smoother. These are designed to make it easier to collect and process account receivables.

So, what does a lockbox payment mean in terms of streamlining financial transactions? 

month end close stress free


Lockbox services allow customers to send payments and remittance documents directly to a bank's location. These are typically PO boxes or other unified bank mailing addresses where customers can pay and ensure secure, efficient processing of their transactions. This location doubles as an easy and consistent location for the customer's AP team to direct payments and should be on every invoice.

Lockbox sites are strategically placed in a business-centric location to reduce mail delivery time and encourage a physical drop-off by the clients. Lockbox payments are often used in real estate, manufacturing, and utility billing industries. They're beneficial when many checks need to be sent.

 

What is a Lockbox Payment and How do They Work?


After a bank gets a lockbox payment for a business, a bank representative will collect the money dropped off daily (or more often) from the box. Each payment and any remittance info that has been received is set to process.

The bank usually uses an outsourced BPO team to process payments. They do this manually or through optical character recognition (OCR) and Check21 to scan, capture, and process electronic payments as a digital image. Afterward, they discard the original check. The payments are processed and put on a secure website. The banking staff can then use the funds for the organization's accounts receivable.

The bank will provide daily reports and nightly backups based on their service level. This offers peace of mind and streamlined financial management for businesses.

 

Advantages of a Traditional Lockbox

  • Mail float speed-up. 'Mail Float' is the time required for a check payment to travel from the payer to the payee. Payers are aware of the delay in mail delivery and use it to their advantage by saying, "the check is in the mail."
  • More flexibility for the payer. The person paying the check might not have enough money, or they might be keeping the money in an account to earn interest. Lockbox processing benefits the payer and improves customer service. However, it may also increase the recipient's DSO and reduce their interest income.
  • Lockboxes reduce mail float in a couple of ways. Many locations near your customers will speed up delivery compared to your business address. A lockbox can make things faster by having bank staff deposit payments into your account. This way, payments are received and deposited on the same day.
  • Back-office staff efficiency increases. Because the banks are doing lockbox processing at scale, there is an efficiency gain versus having a staff member do it. There is no need to prepare deposit slips, drive to the bank, or build reports. Further scaling the volume of checks becomes more manageable without hiring additional staff.

 

Disadvantages of a Traditional Lockbox


Despite the several benefits of using lockbox services, there are significant drawbacks. Legacy systems are less secure and take longer than digital versions like the electronic lockbox. Here are some reasons AR teams are moving away from the traditional model:

 

Lockboxes Can Be Relatively Costly

The banks typically earn a fixed amount and continuous monthly fee for each lockbox. They also charge a service or transaction fee for each payment processed.

People who use lockboxes for processing checks every month end up paying a lot in fees. The bank might be more efficient than your back office, but they still rely on manual effort and labor costs.

 

Lockboxes Can Have Security Concerns

The bank hires new people or pays contractors to do the tedious manual processing of lockboxes. The information from a lockbox payment provides all the necessary components to counterfeit a check. And the volume of lockbox payments is so high that it becomes relatively easy to slip a fraudulent check amongst the legitimate payments.

With this dangerous combination, a criminal can exploit vulnerable internal processes and personnel. Even in the best-case scenario - which is human error and not fraud, comes a margin for error -leniency for oversight is minimal. Fraud or even a slight blunder has the potential to tarnish customer relationships.

 

Lockboxes Are Still Slow

Centralizing lockbox payments at a bank is faster than a check sent to your organization. However, lockboxes aren't digital or electronic. This means that while they may lessen the time a check is in the mail, the time saved is negligible. Furthermore, the funds are not available in real time because the check still must be deposited and processed (albeit by a bank employee).

 

Lockboxes Don't Tie Into Your System

Lockbox reports are sent to your finance team, and your ERP system records the deposits. But your accounting team still has to match customer information during payment manually. Back-office teams need to spend hours reconciling the deposit to the information in their record system.

 

Lockboxes Don't Account For Other Payment Types

Most businesses accept forms of payment other than checks. Lockbox services do not work with cards, ACH, EDI, or digital payment methods like eCheck. The receivable process becomes more complex when different payment methods use different systems. Specific electronic lockbox solutions may have this capability, but we'll get to that soon.

 

Lockboxes Are Inconvenient For Your Customer's AP Department

AP departments are updating their invoice and payment process to cut down on physical checks. Lockboxes are declining fast as AP departments prefer virtual cards, ACH, EDI, and bank transfers for efficiency and security. Thus, the traditional Lockbox Service needs to be revised.

 

Digital or Electronic Lockbox Services?


The traditional lockbox accounting system has many disadvantages. It's clear that the lockbox model needs to change with AR technology. And some solutions give AR and AP teams the best of both worlds - the electronic lockbox.

A digital lockbox service replaces the physical address of a traditional lockbox with a digital web address. Instead of paper checks, it uses electronic payment methods like eChecks, ACH, debit cards, credit cards, and electronic bank transfers. Digital lockboxes are like physical lockboxes but better. They are faster, more secure, more efficient, and cheaper.

An electronic lockbox is different from an old-fashioned lockbox. It's automated and gives you access to your funds quickly. Some companies offering electronic lockboxes also have a way to convert paper checks into digital form. This is helpful for customers who prefer to use something other than ACH or bank-to-bank transfers.

The electronic lockbox automatically scans and matches invoices, reconciles payments, and marks invoices as paid in your ERP. In addition, customer data is exposed to fewer people and applications, making it more secure. If you choose an electronic lockbox, you'll probably need extra security measures for each payment.

month end close stress free

Next Steps


We've gone from what a lockbox is to understanding the basics of the new and improved electronic lockbox. But how does an electronic lockbox work?

We explore more about the digitized lockbox and how it boosts AR systems in Part 2 of our Lockbox Guide: The Advantages of Digital Lockboxes and Modern Billing Portals, or see more on Paystand's Smart Lockbox service.

 

Common Lockbox FAQ

 

Q: How much is a lockbox at a bank?

A: The cost of a lockbox at a bank depends mainly on the specific institution. Some banks may also charge additional fees, such as a setup fee, in addition to their monthly billing. This monthly account can be charged either as a flat fee or on a transaction basis. The more receivables you need to proceed, the higher your monthly fee.

 

Q: What is the difference between a lockbox and a PO box?

A: A Post Office (PO) box is a general way for anyone —business or customer, to receive mail away from their home or office address. But a lockbox is a specific type of PO box for commercial banking. In this case, the bank not only collects checks sent to the box but also processes them. The bank will typically send your accounts receivable team a statement of the payment collection.

 

Q: Are lockboxes only for checks?

A: Traditional lockboxes are used for check payment collection. A smart lockbox, however, can receive an electronic payment, such as ACH, credit cards, or eCheck. Depending on your provider, you can even log mobile payments.

 

Q: Are there lockbox processing solutions for both paper and digital payment types?

A: Yes! Digital or smart lockboxes often offer comprehensive payment processing. This can include ACH, eChecks, credit cards, debit cards, mobile payments, bank-to-bank transfers, cash, and checks.

 

Q: What businesses would benefit from a smart lockbox?

A: A traditional lockbox is helpful if you process 60% or more of your customer payments with paper checks. But with digital lockboxes, you can use them even for electronic payments.

 

If you want to improve to scale your B2B payment operations but can't expand your headcount, smart lockboxes are often a great option. These measures can make incoming payments more secure and decrease the chance of fraud. Regardless, it's crucial to choose a provider you trust.