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

Dec 2, 2021 by Eduardo Lopez

Across the cash management process, bank lockbox services have been around for decades as a way for treasury and finance teams to improve their receivables process for checks and other payments sent through the mail. But in today's digitally connected internet economy, alternatives to traditional lockbox services have emerged.

And for AR teams and their payors, these solutions are a win-win.

Electronic lockboxes can streamline receivable systems and improve cash flow.

However, not all lockbox solutions are made equal, and it's important to understand when to use which type of lockbox service.

Today we'll explore the pros and cons of using lockbox services and how electronic lockbox alternatives, such as an online billing portal, will be the next step in the evolution of the traditional commercial lockbox.

What is a lockbox?

With the rapid change in business payments technology, it may be possible that members of your team are asking themselves what a lockbox is in the first place.

A lockbox is a safe holding location essentially rented by businesses to initiate the process of B2B payments. As a business payments processing tool, lockbox services are a utility offered by commercial banks geared to ease the ebb and flow of business transactions and as a way to speed up the collection and processing of account receivables.

Essentially, lockbox services work by having a company's customer payments and remittance documents mailed directly to a location accessible by the bank. These are typically PO boxes or other unified bank mailing addresses. 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 as well as encourage a physical drop-off by the clients. Lockbox payments are commonly used in industries such as business to business services, real estate and property, manufacturing, utility billing, and other cases where high volumes of checks are being sent.

How do lockbox payments 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 is set to process.

From there, the bank typically uses an outsourced BPO team to manually process each payment or automatically run batches using optical character recognition (OCR) and Check21 to scan, capture and process high volume electronic payments before discarding the original check. These processed payments are posted to a secure website where the banking staff can then apply the 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 Traditional 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. The payers are highly aware of the time lag of ‘mail float’ and capitalize on the extra time and often invoking the phrase ‘the check is in the mail’.
  • More flexibility for the payor. The payor may not have the funds to cover the check or they may be keeping the funds in an account for a little extra time to earn interest on those funds. While this is an advantage for the payor and contributes to customer services, the additional time required for lockbox processing may be costing the recipient interest income and raising their DSO.
  • Lockboxes reduce mail float in a couple of ways. First, by having multiple geographic locations closer to your customers' locations, 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 your bank account ensuring payments are received and deposited the same day.
  • Increasing back-office staff efficiency. 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 or drive to the bank or build reports. Further scaling the volume of checks becomes easier without the need to hire additional staff.

Disadvantages of a Traditional Lockbox

Despite the several benefits of using lockbox services, there are significant drawbacks. Legacy systems, unlike digital versions like the electronic lockbox, continue to be mostly, insecure, and time-consuming. 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. Typical lockbox candidates are processing thousands of checks a month so these processing charges add up quickly. This is because while the bank could be 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, the bank either uses new hires for data entry or outsources the work to 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 so high that it becomes relatively easy to slip a fraudulent check amongst the legitimate payments. With this dangerous combination, a criminal can exploit both vulnerable processes and personnel. Even in the best-case scenario - which is human error and not fraud, comes 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. While it's true that centralizing lockbox payments at a bank can be faster than a check sent directly to your organization, lockboxes are not a digital or electronic process. This means that while they may lessen the time that a check is in the mail, the time saved is negligible. Furthermore, 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. Lockbox reports are sent to your finance team, and your ERP system records the deposits. But automatic matching of the customer information at the time of payment to the information stored in your CRM and ERP systems is still a manual process for your accounting team. Back-office teams need to spend hours reconciling the deposit to the information in their system of record.
  • Lockboxes don't account for other payment types. Most businesses accept forms of payments other than checks. Traditional 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. Certain electronic lockbox solutions may have this capability, but we'll get to that in a minute.
  • Lockboxes are becoming inconvenient for your customer's AP department. Many AP departments are modernizing their invoice and payment process to reduce the number of physical checks they have to manually cut and process. With commercial spend cards, payment virtual cards, ACH, EDI, and 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 or Electronic Lockbox Services

Given all the disadvantages related to the traditional method of lockbox accounting systems, it's clear that the lockbox model needs to change in pace with AR technology.

And there are solutions out there now that 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 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.

Unlike the traditional lockbox, an electronic lockbox is completely automated and provides nearly instant fund availability. Some electronic lockbox providers even have a method of digitizing the paper check workflow for those customers who aren't ready to move on to ACH or bank-to-bank transfers.

Ulatiemyl, the electronic lockbox will automatically scan and match invoices, reconcile payments with bank statements, and mark invoices as paid in your ERP. Furthermore, sensitive customer data comes in contact with fewer people and applications, making the process far more secure. Depending on your chosen electronic lockbox solution, there will likely be additional measures for every electronic lockbox payment.

Next steps

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

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.