Lockbox Banking : Meaning, Example, Advantages, Disadvantages


Meaning Of Lockbox Banking

Lockbox banking is a secured mailing locations run by banks or financial institutions to provide businesses the facility of redirecting their paper check payments, allowing banks to take charge of the depositing process are called Lockboxes.

It is a time-saving alternative that saves a lot of time for businesses with the help of systematic management of paper checks. Before lockboxes, businesses used to receive checks at their location which were then manually opened and recorded in the ledger and then were carried to banks to deposit them personally. 

This process took three to four days, and the business had to wait to receive the check from all over the nation to reach their location. This resulted in a huge mail float. Mail float refers to the time taken by money to travel from the payer to the receiver.

How do lockboxes work?

Various financial institutions lay down the facility of lockboxes under which they provide the counterparties the option to send the paper checks to their mailing locations instead of the business’s direct location. 

Then the bank employees at the end of the day empty the lockboxes and convey the mails to big processing places where the employees open, scan, and deposit the checks into their nominated bank account. After this the businesses are updated about the emails they have received with the help of lockbox files sent by the bank to the institution. These files also include information like any returned or bounced checks.

Example Of Lockbox Banking

For example, Silk textiles is a cloth manufacturing company in Chennai and it sells its products in North India, say Punjab. Even though Silk Textiles is located in Chennai but they use XYZ bank lockbox facility in Punjab to easily manage the checks coming in from different regions of Punjab. With this facility Silk Textiles doesn’t have to wait for its customers to send the check across the country, it can ask its customers to mail the checks to the lockbox location in Punjab of XYZ bank.

Now, at the end of the day, employees of XYZ bank will collect all the mails of Silk Textiles, process them, and get them deposited in the account of Silk Textiles. This transaction information will be recorded and forwarded to Silk Textiles. It made the work easier for both the receiver as well as the payer. 

Types Of Lockbox Banking

Generally, there are two main types of Lockbox banking services:

  1. Retails Lockboxes: These lockbox services are generally used by businesses that get more frequent but lower-value payments.
  2. Wholesale Lockboxes: These lockbox services are generally used by businesses that get less frequent but higher-value payments.

Advantages Of Lockbox Banking

Lockbox services generally hold the following benefits –

  1. Makes the accounting procedure fast: The accounting procedure speeds up due to a reduction in the mail float i.e. the time taken by a mail to reach the receiver from the sender. The physical proximity of the mailboxes and same-day processing accelerates the process efficiently.
  2. More accurate business forecasting: With faster accounting procedures the account receivables of the businesses remain up-to-date, and they have a clear picture of the profits and clients immediately.
  3. Reduces the burden on the business: As the collection, processing, and depositing of the pay cheque is done by the banks themselves, the burden of these tasks on the business is eliminated.
  4. Improves the cash availability of the business: The banks process the payments on a daily basis which allows the business to use the money instantly to carry out their functions.

Disadvantages Of Lockbox Banking

There are a few drawbacks or demerits of the Lockbox banking service –

  1. Increases the risk of fraud – Bank employees with access to the lockbox can easily commit fraud. The most common fraud in such services is the forgery of cheques in the mailbox carrying all the information which can be counterfeit easily.
  2. Increases the cost for the company – As the bank charges a fee for the lockbox as well as for processing every transaction which eventually increases the cost of the company or business.
  3. Training for the accounting staff – The company needs to train its accounting staff on how to access the payment information that the bank sends.
  4. Slower than digital banking – Even though the lockbox banking system is faster than the traditional system, it is still slower than the online banking payment system.