Lockbox, in general, is a service offered by banks to the companies where the company receives all the payments via mail and directs them to a special post office box. This special post office box is termed “lockbox”. The Bank obtains this box from the Postal Service department. The bank, in turn, picks up the payments and deposits them into the company’s accounts. The company is also notified of the deposit.
Lockbox are nothing but containers to collect the paper cheques. The collection, conversion, processing and clearing of the cheques to and from financial institutions is known as cheques processing. cheques processing and lockbox processing terms can be used interchangbly.
Lockbox is an efficient cash management tool which provides cash management services to all the needy corporate customers.
Lockbox is mainly used to enable funds to be readily available and to avoid tight cash flow.
Lockbox is mainly used by businesses that receive cheque payments by paper in mail from consumers or business customers.
Using Lockbox is an efficient way to minimize the fraudulent activities since payments are handled by the bank.
In short, the bank collects the receivables and deposits them into the operating business accounts of its customer companies.
Types of Lockbox
The prime objective to consider lockbox services is to increase the speed and efficiency in processing the payments received. Hence different types of lockbox services are introduced to support this objective. They are: Wholesale lockbox and Retail lockbox
Deals with large value payments
Used to process small volume of payments.
Used for business payment.
Advantage: More money is available on a daily basis. Hence debt cost can be reduced.
Deals with small value payments and also higher processing volumes than wholesale lockbox.
Used for making payments to the consumers.
Advantage: Reduce costs while maintaining accuracy
Some banks process the cheques at no cost for their bug customers. But there can be fees for higher volume of cheques.
Some banks charge some maintenance fee to maintain the lockboxes.
Retail accounts processing are always more expensive than wholesale accounts processing.
Lockbox Processing by the Bank
Lockbox is a cash flow technique in which all the payments of a Company’s customer are delivered to a special post office box.
Customers can be situated in any geographical location. Lockboxes will be situated in places nearest to the customers’ geographic location.
Now the couriers of the bank, who have a key to the lockbox, remove the entire contents from it and deliver all the payments into the customer’s bank.
Now the bank processes all such payments received and deposits it directly into the corresponding bank account.
Lockbox Processing by the Company
Once any cheque or payment is processed in the lockbox department, a notification is sent to the Company intimating the successful processing of the remittance document.
Advantages of Lockboxes
Efficient and faster access to funds and faster return-item processing.
Improves cash flow and hence availability of funds for the corporates.
No postal delay involved since there is a dedicated box to receive all your customer’s payments instead of you receiving it and processing the payments.
Remittance information can be tracked all the time and customers will get updates regularly.
Lower floating cost due to faster processing with less effort.
It is widely used by corporate customers as their payments and statements are both processed by various financial institutions using this facility
Disadvantages of Lockboxes
Lockboxes need to be closely monitored to prevent theft or fraudulent activities.
The courier persons should be trained efficiently on the bank’s security and Policies to ensure full security.
It involves tremendous amount of paper movements between a bank provider and their customers which may lead to human error sometimes.