Bank Lockbox Services: Benefits, Costs and More
Curious about lockbox services? We’ve got your back. Lockboxes can be a great way for businesses to speed up their collections processes while offering faster service to their customers, but it comes at a cost.
We’re going to cover what a lockbox is, how they work, the typical pricing for lockbox services, and how to decide if your business should use them.
What is a bank lockbox service?
Also known as a remittance service, a bank lockbox service is a way for banks to reduce the burden on businesses by collecting payments such as checks on behalf of their business clients.
A lockbox is an official drop-off point that businesses can direct their customers’ physical payments to, which are then collected by a bank and processed. By charging on a per transaction or monthly fee basis, banks can make a little extra cash while saving their clients a lot of time and headaches collecting physical payments.
The "dropoff point" is usually a P.O. box of sorts, and businesses will often have different lockboxes all over the country.
Imagine you’re a wholesale art frame manufacturer that operates out of Boston, but most of your customers live in southern California. It would be smart for you to have a lockbox in Los Angeles — that way your customer could write a check, it could be delivered to the P.O. box that day, and then it would be processed by your bank in L.A. — all within a few hours and ultimately taking days off of your payment processing time.
How the Check21 Act modernized lockboxes
Years ago this was all handled manually, but now banks can take electronic copies of the checks, shred the checks, make the deposits, and deliver a receipt with an image of the remittance all within a matter of hours.
This transition was facilitated by the Check21 Act in 2003. The Check21 Act modernized electronic billing by allowing consumers and banks to use images of checks to complete deposits. In the context of lockbox services, this allowed banks to take scans of physical checks and then shred them thereafter, increasing security.
The scanned image goes straight to the accounting department, and all the accountants have to do is match and apply the receipt to the customer’s account, which boosts your processing time by quite a bit.
And what do you do with that extra processing time? Ship sooner, have happier customers, and enjoy more accurate accounting.
What is a lockbox payment?
A lockbox payment is a payment that a customer sends to an official business address/P.O. box that is dropped in a lockbox and then processed by the business’s bank.
These payments are also known as remittance, which is just another word for a mailed payment.
How expensive are lockbox services?
That varies according to the bank you work with, but banks generally charge a setup fee & some sort of monthly cost or per-transaction fee. Sometimes they charge all of the above.
They also get more expensive when dealing in B2B, large-sum payments because more security is involved. The more complex your operation, the more you’ll pay. If you know you’ll be setting up multiple lockboxes all over the country and are looking for a comprehensive solution, then you should use that to your advantage to secure a bulk price discount of sorts. Being a big contract can open a lot of doors.
Don’t forget to run the numbers when shopping around.
Lockbox fees can add up, so you should estimate the volume of payments being sent to your future lockboxes and see if the time your accounting team saves and the benefits lockboxes provide offset the costs of your decision.
The best lockbox services will sit down and work the math out with you. Look for smart businesses that have a wide variety of case studies on hand.
Should my business use a lockbox service?
That depends on the type of business you run. If you’re an eCommerce business where less than 1% of your income is based on physical payments, then no, you probably don’t need a lockbox service.
If you’re a national distributor where over 60% of your payments are from checks, then a lockbox system could be a fantastic asset.
Here are a few signs that you could benefit from a lockbox or remittance service:
- If you get a high number of physical checks on a regular basis.
- If you don’t have the manpower to process physical checks at the speed you need.
- If you work in a time-sensitive industry where saving a day or two on process claims makes a significant difference in your service to customers.
If that sounds like you, you should start shopping around and thinking about strategic lockbox locations.
Here are a few more benefits you can think about while weighing the costs and benefits:
Benefits of lockbox services
There are a lot of benefits of a lockbox service that can outweigh its costs if you have the appropriate volume and business model.
Here are a few examples:
- Usually lowers processing costs. Because your team doesn’t have to deliver and deposit the checks themselves. Your payments will be digitized and emailed to your accounting department.
- Speeds up your accounting. Due to the physical proximity of lockboxes and same-day processing. This is known as a reduction in “mail float”, a.k.a. the time things are stuck in the postal service system. If your service or product is held up by floating cash, then this could reduce those bottlenecks.
- Payments are automatically digitized. This means your team saves time scanning and inputting documents. Scanning and shredding hundreds of checks is a huge burden on your accounting team, and a lockbox service could reduce that burden.
- Forecast more accurately. Since the payments are delivered faster, your accounts receivable will be more up-to-date, and you’ll have a more immediate and clear vision of which clients and products are the most profitable.
- More flexibility with your cash. It’s delivered directly to your bank account. If you need more liquidity, then lockbox services could help.
Those are all benefits to consider when thinking through a lockbox service, but there are a few cons to be aware of.
Downsides of lockbox services
Keep these two cons of lockbox services in mind:
- Could increase the risk of fraud. Because sensitive information will be held by unknown bank partner employees, there is a risk that personal information will be abused at a higher rate, although the odds of this happening are low. You can also ask your bank partner how they deal with fraud and breaches. If they offer protection or guarantees, that’s a good sign.
- Lockbox service fees can add up. With monthly service fees, per-transaction fees, and other costs particular to the company you work with, having a lockbox isn’t cheap — make sure you are positive of the ROI before signing anything.
Difference between retail remittance and wholesale remittance
Retail lockbox services are usually used by businesses that receive high volumes of small payments, and each payment gets a payment receipt that is sent to the business by the bank.
Wholesale lockbox services are typically B2B or corporation to corporation. It’s a faster method for sending large sums of money and the banks facilitating these interactions between corporations typically have a more involved and secure process to protect these more lucrative lockbox drop-offs.
There are also some other common uses of lockboxes, like property management when collecting rent or healthcare collection.
Other things to note about lockbox services
A few things to keep in mind with lockbox services:
- Lockboxes aren’t digital, so deposits aren’t instant. Lockboxes aren’t electronic payments, so they don’t happen instantly. There are still manual components involved, which slows the process down.
- Lockboxes are only for checks and cash deposits. Users can’t pay with a card or other digital payment types when using lockboxes.
- Physical lockboxes are becoming antiquated, and there’s a cost associated with them. Checks aren’t used at nearly the same rate as they used to be, and chances are your reliance on checks will decline with each year. Forecast a downward trend with your ROI calculations before using a lockbox service.
- Modern "e-lockboxes" are just eCommerce payment gateways. It’s a crude analogy, but it’s a fair comparison. eCommerce payment gateways are replacing more and more checks, and since electronic payments are so fast and can be accepted anywhere, there’s no need for a lockbox service in a solely digital context.
The bottom line on lockbox services
Lockbox services are becoming more and more out-of-date, with electronic payments taking over many of the same transactions lockboxes used to be useful for.
That being said, if your business still receives a high number of checks on a consistent basis and your accounting department is falling behind on their cash application procedures, then lockbox services could still be a smart option for your business.