Lockbox Banking

Lockbox Banking

Lockbox banking is a service provided by banks to companies for the receipt of payment from customers. _Lockbox banking is a service provided by banks to companies for the receipt of payment from customers._ _There are pros can cons when it comes to lockbox banking; while it is convenient, it can also be risky and lead to potential fraud, like counterfeiting._ _Utilizing advanced lockbox technology, banks have established multiple communication hubs for businesses to use to receive payments and deposits._ _Businesses can use lockbox banking to lower their internal processing costs, convert receivables into cash quickly, and speed up collections._ There is no need for businesses to prepare their own bank deposits or maintain accounting records because that is done automatically through lockbox banking. Part of the lockbox processing is done on a daily basis, so businesses can increase their control and efficiency in receivables management while improving audit controls and data security. **\[Important: A company can protect itself from such fraud by using a bank that it trusts and by constantly monitoring its lockbox.\]** Businesses using lockbox banking can substantially lower their internal processing costs, speed up collections and convert their receivables into cash more quickly. For businesses that receive a large volume of payments or large-denomination checks accompanied by remittance documents, a lockbox arrangement can streamline collections and payment processing.

What Is Lockbox Banking?

Lockbox banking is a service provided by banks to companies for the receipt of payment from customers. Under the service, the payments made by customers are directed to a special post office box instead of going to the company. The bank goes to the box, retrieves the payments, processes them and deposits the funds directly into the company's bank account.

How Lockbox Banking Works

For businesses that receive a large volume of payments or large-denomination checks accompanied by remittance documents, a lockbox arrangement can streamline collections and payment processing. Utilizing advanced lockbox technology, banks have established multiple communication hubs for businesses to use to receive payments and deposits.

A business establishes a post office box to receive payments from customers. The bank couriers the day's deposits and communications to its processing center. The business's remittance documents are scanned, payment information is captured, and clearing updates are transmitted to its accounts receivable. Each night, the business's lockbox data is backed up for secure storage and easy access.

What is the Cost of Lockbox Banking?

L_ockbox banking services can be costly._ The banks charge a setup fee and a recurrent monthly fee. They also charge a fee per transaction. Their rate system is usually not simple and hard to read. Typical lockbox service departments process many thousands of checks a month and charge for the time. The minutes charged add up quickly. Thus, even if the bank might be more efficient than your own back office, they still are relying on a fair degree of manual processing that incur labor costs.

The Advantages and Disadvantages of Lockbox Banking

As with most payment processing services, there are both pros and cons to lockbox banking. It provides companies with a very efficient way of depositing customer payments. This is especially beneficial if a company is unable to deposit checks on a timely basis or if it is constantly receiving customer payments through the mail.

On the other hand, lockbox banking can also be very risky. Bank employees who have access to lockboxes are rarely supervised, which opens up the situation to possible fraud. The fraud primarily occurs in the form of check counterfeiting, because the checks that are in the lockboxes provide all the information needed to make counterfeits.

[Important: A company can protect itself from such fraud by using a bank that it trusts and by constantly monitoring its lockbox.]

Special Considerations

Businesses using lockbox banking can substantially lower their internal processing costs, speed up collections and convert their receivables into cash more quickly. There is no need for businesses to prepare their own bank deposits or maintain accounting records because that is done automatically through lockbox banking.

Part of the lockbox processing is done on a daily basis, so businesses can increase their control and efficiency in receivables management while improving audit controls and data security. Businesses benefit from enhanced reporting capabilities with daily access to deposit amounts, fund availability and payment information, including electronic images of processed payments and coupons.

Key Takeaways

Related terms:

Accounts Receivable (AR) & Example

Accounts receivable is the balance of money due to a firm for goods or services delivered or used but not yet paid for by customers. read more

Bank Deposits

Bank deposits are money placed into a deposit account at a banking institution, such as savings accounts, checking accounts and money market accounts. read more

Checking Account

A checking account is a deposit account held at a financial institution that allows deposits and withdrawals. Checking accounts are very liquid and can be accessed using checks, automated teller machines, and electronic debits, among other methods. read more

Chip-and-Signature Card

A chip-and-signature card is a type of credit card that encodes its information in a magnetic stripe as well as a square microchip. read more

Deposit

A deposit is both a transfer of funds to another party for safekeeping and the portion of funds used as collateral for the delivery of a good. read more

Fraud

Fraud, in a general sense, is purposeful deceit designed to provide the perpetrator with unlawful gain or to deny a right to a victim. read more

Petty Cash

Petty cash is a small amount of cash on hand used for paying expenses too small to merit writing a check. Learn how to balance petty cash in accounting.  read more

Reconciliation

Reconciliation is an accounting process that compares two sets of records to check that figures are correct, and can be used for personal or business reconciliations. read more

Recurring Billing

A recurring billing or recurring payment is when a merchant automatically charges a customer for goods or services on a prearranged schedule. read more

Defining Remittance Letters

A remittance letter is a document sent to a creditor along with payment. This is so the account will be credited properly. read more