When a B2B customer mails a check to another B2B company, there’s a mail delay as the recipient waits for the check to arrive. Once it arrives, it must be processed by the recipient’s accounting department.
For a long time, banks have offered a solution to this problem: lockboxes. A lockbox is basically a post box for a business to which customers can mail their checks. Once the check arrives, the bank processes it. Lockbox services basically offload paper check processing. In this article, we’ll look at how they work.
A 2017 B2B payments survey conducted by nacha.org found that checks account for 50 percent of B2B payments. Of all the forms of B2B payments, checks are the most laborious to handle. Checks must be mailed, collected by staff, entered into accounting software, potentially scanned for auditing, and finally stored or destroyed. There’s also the occasional hassle of checks getting lost in the mail.
A few decades ago, banks created a service to solve the inefficiencies of processing paper checks. The service was called a lockbox since it is a physical location to which mail can be sent. Only authorized personnel have access to the lockbox contents.
Instead of mailing payment to a merchant, customers mail it to the merchant’s lockbox address. Customer payments arrive just like regular mail. From there, bank staff picks up the contents several times per day, bring them to the bank at which the merchant has an account, and process all the checks.
Lockbox services have special zip codes, which allow mail to be routed to them faster. They are also distributed regionally or throughout the USA, depending on the bank. Large company with customers all over the USA can provide their customers with the lockbox address that is closest to them.
“Not only can we process payments faster, but mail that is sent to lockboxes arrives more quickly because of the special ZIP codes,” as stated in a press release by Keith Theisen, executive vice president and director of product management at Wells Fargo’s Treasury Management Group.
As an example, if the company is located in New York but the customer is in San Francisco, the company can provide the customer with the closest West Coast lockbox address, speeding up the delivery of payments.
A lockbox service can also work as a fraud deterrent. Because invoices go out from the business but payments come in at a bank and are handled directly by bank employees, fraud is more difficult. There are more people involved, which splits the payment cycle across multiple people. Most accounts receivable frauds occur when one individual controls the entire process.
Theisen continued, “It also deters theft, fraud, and error by reducing the number of employee touches on each transaction.”
Some lockbox services provide more than a delivery address and processing of checks.
Ability to view scanned checks - If the bank is set up for it, it can scan high volumes of checks using optical character recognition (OCR) software. These scanned checks are then delivered to the customer via CD or uploaded to a portal that the customer can view. Scanned checks are also searchable by the customer.
Online portal - An online portal is a website provided by the bank where the customer can securely login and view processed checks. This includes searching and checking for any errors or even missed checks. In contrast to scanned checks delivered by CD, viewing them online provides more access to employees and is also more convenient. Some computers no longer have a CD/DVD bay, making online access their only option.
Integration with accounting software - Once checks have been processed, the bank can clear them through the customer’s accounting software. For this to work, the bank needs first to offer an accounting integration service and have the ability to integrate with the customer’s software. With this level of integration, the bank is able fully to process payments for its customers.
For small businesses that receive only a few paper checks each month, lockbox services can be cost prohibitive. Lockbox services are meant for larger enterprises that have hundreds or thousands of paper checks to process each month. If the cost charged by the bank is lower than the cost to process checks internally, lockbox service capability certainly be beneficial for a business to outsource paper check processing.
Services such as making scanned checks available and integrating with accounting software cost extra.
Fee structures for lockbox services vary across banks. Fees can include:
For larger companies that are offloading non-core operations or need quicker processing of paper check payments, lockbox services offer a great solution.