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.

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 the 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

  • 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.