Lockbox Banking is a payment service where banks and post offices process payments on behalf of a business. It solves the challenge of slow, manual payment handling by speeding up deposits, reducing errors, and enhancing security.
For finance and procurement leaders, Lockbox Banking can free up staff time, improve cash flow, and streamline operations. But it’s important to weigh up the costs of Lockbox services to determine if they align with your payment and security needs. Either way, Trustpair can help to strengthen your payments security.
Key Takeaways
- Lockbox Banking speeds up deposits, reduces errors, and strengthens payment security.
- It works best for mid-to-large companies with high volumes of check payments.
- Costs include setup fees, transaction charges, and ongoing reporting, which can burden smaller businesses.
What is Lockbox Banking?
Lockbox banking is a form of payment collection for businesses. Businesses don’t have to collect customer payments directly. Instead, the bank collects on its behalf by partnering with local post offices to process payments (most often check payments) in-person.
Businesses choose to use this outsourced service because it’s handled completely by the bank and post office – from customer collection to depositing, bank processing and reporting.
Lockbox services work to improve operational efficiency and cash flow, and can significantly change a company’s accounts and end of year profits. However, there are security risks and a cost burden associated with outsourcing these transactions, which disproportionately affects smaller businesses.
How does Lockbox Banking work?
Lockbox solutions generally work in a six step process:
- The business selects its post office and notifies their bank
- Payments from customers are made into the PO box
- The bank couriers the day’s deposits and communications to their processing centre
- The business’ remittance documents are scanned, including capturing payment details, transaction data and accounts receivable clearing information
- The bank transfers the funds and settles the Lockbox payment into its financial systems
- The bank backs up their data each nightto ensure that the information is securely stored. This is compliant for when organizations want to reconcile lockbox transactions into receivables management.
What is the cost of Lockbox Banking Service
The costs associated with Lockbox Banking include a one-time set up fee, transaction processing costs, and ongoing reporting fees. It can be difficult for firms’ existing accounting systems to work out the exact figure they’ll receive on their invoice, as each of these elements have different pricing structures. This can make Lockbox Banking difficult for budgeting and financial management.
Here are the typical costs of Lockbox Banking elements:
- One time setup fee: the business’s account opening costs
- Remittance processing fees: these transaction based fees are the cost to settle paper checks, including paying bank employees
- Monthly maintenance fees: for ongoing account and software costs
- Ongoing reporting: optional – but if you’re looking for the integrated accounting software benefits, such as when businesses reconcile Lockbox transactions this feature is necessary
Pros and Cons of Lockbox Banking
Pros of Lockbox Banking
The biggest advantage of Lockbox Banking is that it enables businesses to deposit customer payments incredibly efficiently, cutting out manual data entry. This is especially beneficial when a large proportion of customers are paying by check, because it’s a labor intensive process for the accounting team. Here are some more pros of Lockbox check processing:
- faster access to funds: since customer payments are sent directly to a bank-operated lockbox, where they are quickly processed and deposited, businesses exclude themselves as the ‘middle man’
- improved cash flow: eliminating the need for in-house staff to handle check collection and and processing delays
- enhanced security: the security facilities and rules that financial institutions must abide by are typically much stricter than for less-regulated organisations, minimizing the risk of theft, fraud or payment errors
Ultimately, Lockbox Banking, suitable for large organizations, allows companies to save time, reduce costs, and focus resources on core operations rather than administrative payment processing.
Cons of Lockbox Banking
The biggest drawback of the Lockbox system is cost, especially because the complex fee structure can cause billing headaches. Here are some more cons of Lockbox Banking:
- disproportionate to small businesses: setup, maintenance and reporting fees can be very costly for those with fewer transaction volumes
- risk of payment delay: if customers fail to follow instructions properly, or make an error in this manual process, mistakes can lead to freezes and cause cash flow issues
- risk of fraud is not fully eliminated: firms are forced to rely on third party banking systems where security performance is out of their control
- uneven security standards: across multiple electronic payments, creating gaps in data security that fraudsters could exploit
Fortunately, Trustpair secures payment from end-to-end, validating vendor accounts in real-time to automate fraud detection and prevent unauthorised payments.
Is Lockbox Banking Right for Your Business?
Whether Lockbox Banking is the right choice for your business largely depends on your transaction volume, payment methods, and cost tolerance.
For companies that handle a large number of check payments, the associated manual tasks can be hindering. Lockbox Banking can provide significant benefits by accelerating cash flow, improving efficiency, and enhancing security. By removing manual in-house processing, businesses can save time and reduce administrative burdens, which is especially valuable for organisations with high receivables activity.
However, for smaller businesses the costs associated with Lockbox Banking, such as setup fees, monthly maintenance, and reporting charges, may outweigh the benefits. Additionally, reliance on a third-party system can create potential risks if errors or customer missteps occur. Digital payments may therefore be better to collect.
In short, Lockbox Banking is often best suited for mid-to-large-sized businesses with high check payment volumes and a need for faster cash flow, whereas smaller companies or those with primarily electronic or online payments may find it less cost-effective.
An overview of Lockbox Banking
Lockbox Banking streamlines payment collection by having banks and post offices process and deposit customer payments directly, improving efficiency, cash flow, and security. However, it comes with high costs that can be expensive. Whether you choose Lockbox Banking or not, protect all of your payments with Trustpair.
