What Is Lockbox Payment & How Automation Can Help Save Lockbox Key-in Cost for Your Business?

Introduction

While paper checks aren’t as popular as before, they’re still widely used. Surprisingly, even with digital options available, 42% of B2B payments are made with a paper check. The reason is straightforward: Some people still prefer this traditional payment method for its familiarity.

Accepting check payments can be time-consuming and costly, and managing and depositing checks can become challenging, especially outside regular business hours. This can lead to inaccurate records and hinder your cash flow. However, a tailored solution exists to address these issues: lockbox services, provided by your bank.

By leveraging lockbox services, you can eliminate the challenges of manual check processing and enhance your collection process. 

In this article, we will explore the mechanics of lockbox services, uncover their benefits, and discover how automation can revolutionize your collection process. Let’s get to it.

What Is a Lockbox Payment?

A lockbox payment is a type of payment processing service where a company’s payments, such as checks or money orders, are directed to a designated post office box. The payments are then collected by a third-party bank or processing company, who will deposit the funds into the company’s account.

This method is commonly used by businesses that receive a large volume of payments by mail. It streamlines the payment collection process and allows for faster access to funds. For example, Company A can have a P.O. box address where customers from a particular region can mail their checks. The bank that manages the address then converts the checks to cash and sends the payment updates to the business.

How does B2B lockbox payment work?

Businesses that operate in multiple regions can have separate lockboxes with banks in different regions. They can then provide their customers with the respective lockbox addresses they are supposed to mail their checks to. 

On receiving the checks, banks collect them and scan the remittance slips of the checks to provide the business with a digital copy of the payment. After this, the bank deposits the money in the business’s bank account.

What Are the Key Advantages of Using Lockbox Payments?

A lockbox allows businesses to collect payments more efficiently and reduces the hassle of handling the payments themselves. Now, let’s consider a few more advantages that B2B businesses gain from utilizing lockbox services.

1) Increases efficiency

By using a bank lockbox, companies can pass the hassle of managing customer payments, converting them to digital format, maintaining records, and depositing the money to the bank. This reduces a lot of manual work and increases the employees’ overall productivity and business performance.

2) Reduces the time to receive payments

Let’s assume that a company receives checks only at one location. Payments from customers near that address will be faster than those located far away. This impacts the cash flow of the company.

Businesses can mitigate this problem by using multiple lockboxes in different geographical locations where customers can send their checks. This will decrease the overall time to receive and process the payments.

3) Decreases errors

Accounting errors are a significant problem for many businesses. And when there are a lot of manual processes involved, errors become almost inevitable. However, using B2B lockbox payments can reduce these errors to a large extent. 

Banks receiving checks can directly process and deposit the money in the business’s account. They can also simultaneously update the information in the company’s accounts receivable(AR) portal.

4) Improves speed and flexibility 

Depositing checks manually can be troublesome, especially post working hours of a bank. However, banks process B2B lockbox payments even after the fixed working hours, which ensures that the payment is credited to the business’s account on the same day.

Top 3 Problems of Using Lockbox Payments

Using a lockbox for receiving checks is much better than using your company’s address. However, there are also some problems that businesses are bound to encounter along the way. Let’s have a look at them.

1) Inefficient when compared to electronic payments

Using a lockbox for receiving checks does speed up the entire payment process to a considerable degree. However, it is still inefficient compared to electronic payment methods such as bank transfers, credit cards, debit cards, and so on.

2) Security risk

In the advantages section, we talked about how B2B lockboxes can reduce accounting errors. But lockboxes are not 100% error-free. They are prone to fraud and manual errors, especially when the volume of transactions is very high. Security threats to lockboxes can seriously impact a business’s finances.

3) Extra costs

Banks often charge a hefty amount of fees for offering B2B lockbox services. There are fixed monthly costs in addition to the fees for every check deposit and handling of other manual tasks. Yes, it takes away a huge responsibility from the business and saves time for employees, but checking whether the benefits outweigh the additional costs is crucial. If a company receives most of its payments via checks, then using a B2B lockbox might be profitable. Otherwise, processing them in-house will be a better option.

How Can Businesses Save Lockbox Key-in Fees?

The primary task that bank lockboxes help businesses with is invoice and remittance matching. Manual cash application processes take a lot of time and are prone to errors. Therefore, businesses are inclined to spend thousands of dollars monthly on bank key-in fees.

HighRadius helps companies eliminate bank lockbox fees by automating their cash application process with its AI-based multi-OCR engine. Its cash application software can auto-extract payment information from email bodies and file attachments and match it with invoices. It also supports automated data aggregation from web portals.

The AI capabilities help predict missing remittances and enhance the image quality of checks with noise reduction. This helps in scenarios where a check is soiled or slightly damaged. The cash application automation also enables faster dispute resolution.

FAQs on Lockbox Payments

1. What is a bank lockbox?

   A bank lockbox is a service for streamlining accounts receivable management. Customers mail payments to a secure P.O. box controlled by the bank, instead of the business’s office. The bank collects, opens, and processes the payments daily, then deposits the funds into the business’s account.

2. What is the primary purpose of a lockbox?

   A lockbox is a service provided by banks and financial institutions that helps businesses streamline their accounts receivables process. The purpose of a lockbox is to expedite the receipt of payments from customers by having them sent to a designated post office box, which is then collected and processed by the bank on behalf of the business. This allows for quicker access to funds and more efficient cash flow management.

3. What is the lockbox payment processing?

   Lockbox is a service provided by banks that enables businesses to accept customer check payments. Customers send the checks to the P.O. box address that the bank allots to a business rather than its main office address.

4. Why would a business use a lockbox to receive payments?

   A business would use a lockbox to receive payments for efficient and secure handling of check payments. It eliminates manual processing, improves efficiency, and ensures accurate records. Lockboxes enable faster payment processing, enhancing cash flow management and boosting overall performance.

5. What is the bank lockbox cost?

   The bank lockbox cost can range between $200 and $1,000 or more per month for businesses. However, actual pricing depends on factors like service package complexity, transaction volume, and additional features required.