Lockbox Banking

Lockbox banking is a collection service in which a bank receives a company's incoming customer payments at a dedicated post office box, opens the envelopes, deposits the cheques straight into the company's account and sends the company an electronic file of who paid what. It lets businesses get mailed payments into the bank faster and without handling paper in their own offices. The service developed in the United States in the mid-20th century and remains most common there, where businesses still receive many payments by cheque.

A lockbox is part of a bank's treasury or cash management offering. It is paired with concentration accounts that gather the deposits, and it is the receivables-side counterpart of controlled disbursement on the payables side. Lockbox processing in the US is shaped by cheque law and Federal Reserve clearing practice, including the Check Clearing for the 21st Century Act (Check 21), which made electronic cheque images legally usable in clearing from 2004.

Imagine a small shop owner who receives cheques by post every day. They have to collect the mail, open it, note who paid, walk to the bank and queue to deposit. If the owner is away for a week, the money sits in a drawer.

With a lockbox, customers send their payments to a special postal box that the bank empties several times a day. Bank staff open the envelopes, pay the cheques into the shop's account the same day and email the owner a list of every payment. The owner never touches the paper, the money reaches the account sooner, and nothing gets lost in a drawer.

1. The company tells its customers to send payments to the lockbox address, usually printed on invoices and return envelopes.
2. The bank or its processor collects mail from the post office several times a day.
3. Staff open the envelopes, scan the cheques and remittance slips, and capture the payer, amount and invoice details.
4. Cheques are deposited, generally by image clearing, into the company's collection account.
5. The bank transmits a data file, often in BAI2 or an ISO 20022 format, plus images, so the company can post payments in its enterprise resource planning (ERP) system.

The data file is often as valuable as the faster deposit, because it feeds automated cash application against open accounts receivable. Items the bank cannot process, such as unsigned cheques, cash sent by post or letters disputing an invoice, are set aside as exceptions and passed to the company with images so its staff can decide what to do. Companies with customers across a large country sometimes use several lockbox sites in different regions to cut postal time, though this matters less now that mail volumes have fallen.

• Wholesale lockbox. Used for business-to-business receipts: fewer, larger payments with varied remittance documents that often need manual keying.
• Retail lockbox. Used by utilities, insurers and card issuers that receive large volumes of small consumer payments with standard scannable coupons.
• Electronic or integrated lockbox. Combines paper receipts with electronic ones, such as ACH credits and wires, into one remittance file, so the company has a single feed for all incoming payments.

The financial case rests on reducing float, the time between the customer sending a cheque and the company having usable funds. A common estimate of the annual value of reducing float is:

• $V$ is the annual value of the faster collection.
• $R$ is the average amount collected per day.
• $d$ is the number of days of float saved.
• $i$ is the annual interest rate earned on, or saved by, the cash, as a decimal.

A company collecting 400,000 a day that cuts float by 1.5 days, with money worth 4% a year, gains $400{,}000 \times 1.5 \times 0.04 = 24{,}000$ a year. If the lockbox fees, typically charged per item and per image and shown on the account analysis statement, are lower than that, the service pays for itself. Faster collection also shortens days sales outstanding (DSO).

Cheque use in the US has fallen for decades as payers move to ACH, cards and instant payments, and in most other countries cheques were never a major business payment method. Lockbox networks have consolidated as volumes dropped, and many banks now combine lockbox with remote deposit capture and electronic receivables matching. Lockboxes remain useful for businesses whose customers still pay by post, and they reduce internal fraud risk because company staff never handle the cheques. Consumer lockbox operations that also receive card details must meet the PCI DSS security standard.

• Federal Reserve Financial Services
• Association for Financial Professionals