What is a Lockbox Payment and How Does it Help Businesses?

Cash flow means more in uncertain economic times like these.

Businesses need cash to purchase raw materials, market and sell their products, manufacture and distribute finished goods, operate their facilities, pay staff, and cover administrative costs.

Businesses have too much riding on their cash flow to trust it to inefficient receivables processes.  That is why more businesses are outsourcing their receivables payment processing to a lockbox.

This article describes lockbox payment processing and how it benefits businesses.

What is lockbox processing?

Lockbox processing is an outsourced service that reduces costs and speeds up cash flow by automating manual tasks, matching payments to open invoices and auto-reconciling payments in real time.

Although banks and other third parties have been offering lockbox processing services for years, lockbox processing has assumed greater urgency with the prolonged shift to remote working and the increased possibility of an economic downturn that could put a squeeze on corporate cash flows.

How does lockbox processing work?

Lockbox processing redirects a biller’s customer payments and remittances to a lockbox provider.

Lockbox providers are banks or other third parties that receive and process business-to-business (B2B) or consumer-to-business (C2B) receivables payments on behalf of a biller, such as a utility, telecommunications firm, waste management company, healthcare provider, manufacturer, or university.  Customers mail their payments to a Post Office box, where they are collected by the lockbox provider.  The lockbox provider deposits checks submitted by the customer to the biller’s designated bank account.  Checks are deposited electronically using Check 21.  Any supplemental documents submitted with the payment, such as remittance coupons or copies of an invoice, are converted into electronic format and digitally sent to the biller.  For an additional fee, a lockbox provider might extract the data from supplemental documents for the biller to use for reconciliation.  Banks and third parties use optical character recognition (OCR), artificial intelligence assisted by machine learning, and other technologies to extract the data from supplemental remittance documents.

Many banks and third-party lockbox providers use ultra-high-speed production scanners such as the ibml Fusion to process checks and supplemental receivables documents submitted by customers.

The biller receives a file of deposit details that they can use to update their receivables system.  The file provided by some lockbox providers can be uploaded directly to a biller’s enterprise resource planning (ERP) application or accounting package for touch-free posting.  In other cases, billers must rekey the lockbox provider’s file and/or the details from supplemental remittance documents.

Lockbox providers may collect, and process electronically submitted payments and supplemental documents.  Electronic payments are deposited directly into the biller’s designated account, while the lockbox provider collects remittance details sent to an email box or online bill payment solution.

Benefits of using a lockbox provider

Lockbox payment processing services provide significant benefits to billers of all sizes.

• Accelerated cash flow. Many lockbox providers operate geographically dispersed facilities that reduce the time it takes for payments to be received through the mail.  Some lockbox providers also collect mail from the Post Office on behalf of billers, multiple times each day.
• Improved back-office efficiency. Partnering with a lockbox provider eliminates the need for a biller’s back-office staff to spend time making trips to the post office, opening the mail, processing checks, preparing deposit slips, or transporting paper checks to a bank branch.
• Reduced costs. Because a lockbox provider’s overhead is spread across multiple customers, the fees charged to a biller are often lower than what they would spend to process payments in-house.  And billers avoid making big capital investments in software or hardware.  Buying more software or hardware to support business growth can be a considerable expense.
• Best-in-class processes. Billers benefit from the Center of Excellence and ongoing process improvements established by bank and third-party lockbox processing providers.
• Greater scalability. By partnering with a lockbox processing provider, billers can quickly handle fluctuating payment volumes without impacting their internal staffing.

These are some of the reasons that consulting firms, government entities, healthcare providers, property management firms, utilities, schools, and other billers embrace lockbox services.

Tips for choosing a lockbox provider

Bank and third-party lockbox providers offer different types of outsourced services.

Here’s how to determine if a lockbox processing service is right for you.

• Retail lockbox. Does your business receive most of its payments from consumers?  If so, a retail lockbox processing service might be right for you.  Retail lockbox processing is used to automate low-dollar transactions, such as payments for rent, utilities, or telecommunications services.  In many cases, payments are accompanied by a machine-readable remittance coupon (or stub) that streamlines the posting of the payment to an open invoice.  Banks and other third parties often use high-speed scanners to process retail lockbox transactions.
• Wholesale lockbox. If your business receives most of its payments from other businesses, then a wholesale lockbox service might be what you need.  Wholesale lockbox processing is used to automate the deposit of high-dollar transactions between businesses.  Wholesale lockbox transactions typically do not include a machine-readable remittance coupon, making it more difficult to apply payments to open receivables.  It is not uncommon for a customer to submit one payment for multiple invoices, or to pay more or less than the invoiced amount.  Fortunately, wholesale lockbox transactions are much lower than retail lockbox transactions.
• Wholetail lockbox. For receivables payments that have attributes of both retail lockbox processing and wholesale lockbox processing – such as healthcare or property management transactions – a wholetail lockbox service might be the solution.  In many cases, wholetail lockbox transactions are payments submitted with full-page documents containing the remittance details.  A lockbox processing provider typically scans the supplemental document and extracts the data the supplier needs to apply the payment to the customer’s account.

Many banks and third parties offer retail, wholesale, and wholetail lockbox processing services.

Is a lockbox right for you?

If your organization wants to accelerate its cash flow and streamline its receivables processes, lockbox processing might be the answer.  Many banks and third parties offer these outsourced receivables services to help organizations of all sizes automate B2B and C2B payment processing. Want to discuss this further? Contact one of our expert consultants to have your questions answered.