What is a Lockbox ?

Lockbox is an additional service provided by banks in the United States. This service allows companies to drastically cut short or even eliminate the tasks that need to be performed by accounts receivables departments.

The logic behind the lockbox system emanates from the concept of economies of scale. When every customer processes their own accounts receivables, it becomes an expensive and time-consuming affair for each of them. Instead, the bank could just set up a massive accounts receivables department that works on behalf of all their customers and passes on the benefits of economies of scale for a fee! Hence, the lockbox system came into existence.

The lockbox is a mailing address provided by the bank to their customers. The customers can then tell their own customers to send their checks to this mailing address. These lockboxes can be placed in such a way that the postage time is also reduced to a minimum.

There are various kinds of lockbox services that are offered by banks in the United States. The correct service to choose depends on the scale of the business and the desired turnaround time for payment processing. For instance, some lockbox services are fully automated, and lead to the funds being credited to the companies account almost instantaneously. If the scale of business is not large enough or the payments need not be processed so quickly then, customers can opt for less expensive but less efficient services where manual intervention is required.

The banks service these lockboxes periodically. They process all the checks that have been received in the mail and send scanned copies of the checks as well as the remittance advice back to the customers so that the accounts can be closed. Also, the banks can simply send information only items like account statements and remittance advice to customers in the form of an electronic image.

The banks charge a periodic fee for providing and servicing a lockbox. On top of that, they also charge for every payment that they process. Hence, the lockbox system generates a stable revenue stream for the banks making it a lucrative business for them.

The bank’s customers also benefit in multiple ways from this lockbox arrangement. The benefits derived are as follows:

Advantages of Using a Lockbox

• Lower Cost: Maintaining an accounts receivables department is an expensive affair. Firstly personnel have to be hired to perform the tasks, then software and computers also need to be purchased and then there are overheads like rent, water, electricity, security, etc. Also, all these costs are fixed costs and are incurred regardless of the amount of workload that the accounts receivable department has in a given month. The lockbox service provides a much cheaper alternative as all of the above-mentioned costs can simply be eliminated if there is no requirement of an accounts receivables department. Also, the entire cost is a variable cost and so expenses only arise if checks are processed.

• Faster Processing: Lockbox also enables faster processing of checks. This is because the final destination of the checks is the bank itself. Hence, if a company orders its customers to send the checks directly to the bank, the time and effort spent in collecting and collating the information and sending it to the bank is saved. The payments issued by the customers reflect faster in the accounts of the company. For a huge company with millions of dollars of daily transactions, increasing the float by even a single day can have a significant impact on the interest earned on the deposits.

• Compatible with ERP Systems: The lockbox information that is sent by most banks is compatible with a lot of ERP systems being used by mega corporations. Hence, when the bank sends an electronic report of the payment received with the remittance advice, this information can simply be uploaded to the system, and the payments are applied to the respective customer accounts. Thereby the amount of manual effort required is almost eliminated. Also, since humans are not required to key in the information, the possibility of manual errors is reduced to a bare minimum.

• Customized Reporting: Lastly, banks allow a lot of customization when it comes to lockbox processing. Banks are intent on providing excellent service to their customers. They, therefore ask for the format that is used by their customers to report and analyze their receivables. Then banks ensure that their software is configured in such a way that periodic reports regarding the customer’s accounts receivables are created and presented to them in a format which they desire. Hence, the need for an accounts receivable clerk may not even arise for reporting purposes. The report too is simply sent over by the bank in the desired format.

Almost all large companies in the United States use the lockbox system. This service has also become popular amongst the medium scale enterprises. It is only the small scale businesses that still prefer to manage their own receivables. Hopefully, soon banks will be able to provide a lockbox solution to them as well!