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Lockbox banking is a service offered to organizations by commercial banks that simplifies collection and processing of account receivables by having those organizations' customers' payments mailed directly to a location accessible by the bank.
In general, a lockbox is a Post office box (PO box) that is accessible by a bank. A company may set up a lockbox service with their bank for receiving customers' payments. The company's customers send their payments to the PO box. Then the bank collects and processes these payments directly and deposits them to the company's account. Typical costs are several cents per transaction to as high as one dollar or more.
Lockbox services are sometimes called 'Remittance Services' or 'Remittance Processing'.
One benefit of the lockbox service to the commercial customer is that it can maintain special mailboxes in different locations around the country and a customer sends payment to the closest lockbox. The company then authorizes a bank to check these mailboxes as often as is reasonable, given the number of payments that will be received. Because the bank is making the collection, the funds that have been received are immediately deposited into the company’s account without first being processed by the company’s accounting system, thereby speeding up cash collection.
Lockbox is generally divided into Wholesale and Retail. Retail lockboxes are for companies with high volumes of consumer oriented payments such as utility payments, loan payments, etc., and these remittances often include a standardized 'payment coupon'. Wholesale lockboxes are for corporate to corporate payments and tend to be higher dollar amounts than retail lockbox transactions. These transactions usually do not include a standardized payment coupon and require more manual effort for the bank to process.
Modern operations usually "capture" images of the checks and associated documentation (payment coupons, for example) into a digital format for use in computer systems (i.e., JPEG files). These files can then undergo data entry for further specialized processing. Banks often use specialized equipment that can scan hundreds, or thousands, of checks per minute.
Due to the Check 21 Act, some lockboxes even wholly convert some checks to electronic data, and the paper checks are shredded and never actually returned to the originating bank.
Many online electronic bill pay services are not 100% online. The payee might not be set up to accept electronic payments, so the bill pay service will print out large numbers of paper checks and then mail them to the lockbox, where they will be processed alongside all the other paper checks.
Transferring data from paper to electronic format involves labor intensive data entry work. This has prompted a movement to "offshore" the data entry of the information on checks to countries (e.g., India) that have abundant employees--which helps in ultimately lowering the costs.