Long Live the Lockbox

By Christina P. O’Neill


Digital online, remote deposit capture and mobile payment systems are growing rapidly, but they haven’t eclipsed the growth of the analog lockbox yet. For some banks – and their customers – the lockbox remains a payment system staple, and not just because of a fondness on the part of banks for retro technologies.

“I do think that lockboxes have some real value still in the marketplace,” said Nancy Atkinson, co-author of a recent study on lockboxes, noting that companies are looking for more efficient ways to handle lockbox service – “if they’re doing their own payment processing as checks [decrease], the per-item cost goes up.”

The study, “North American Lockbox: Outsourcing Viability,” by Boston-based financial services analyst firm Aite, outlines the state of lockbox outsourcing in the country. It determines that $58.3 billion in remittance envelopes were processed via bank lockbox in 2014 and details the likelihood that banks are either outsourcing lockbox services or have already done so.

Lockboxes fall into three categories – retail, in which the end customer, a retail borrower, mails payments to a post office box; wholesale, which handles business-to-business payments; and “whole-tail,” a combination of the two.

The Aite report forecasts a calculated annual growth rate (CAGR) from 2009 to 2016 of 0.4 percent for retail, 2.9 percent for wholesale and 1.8 percent for whole-tail. The average for all three categories is 1.5 percent over the same time period.

Atkinson noted that Federal Reserve studies done in 2012 and 2013 show a significant decline in check use as more businesses migrates to online bill pay, customers’ increasing comfort level for automatic deductions from their account for repetitive bills, and also point-of-sale payments, wherein a customer writes a check at a merchant’s point of sale and the check is converted on the spot to ACH.


Decreasing Electronic Babel

Lockboxes are only as good as their oversight systems – and the provider’s relationship with the United States Postal Service (USPS). When there’s a glitch with a receivable, the process needs to be reconciled by an individual who determines how to proceed with the receivable in question, and that’s often on a case-by-case basis.

In that way, the lockbox is a relationship-builder. But it has also kept up with technology, Atkinson noted. For years, providers have used equipment that will convert any type of paper document into an electronic solution, she said. Lockboxes can collect payment information from ACH, wire, card and check. They can provide reports in different types of formats, in a file transfer directly to their wholesale customer company, or translate it into a PDF for email, or an online report documenting authorization and entitlements.

The explosive growth of different payment channels make this all the more important. But where lockbox can shine is in the case of payments to wholesale customers that don’t match up with the receivables list – payments that cover more than one invoice, or which contain deductions due to a dispute over delivery of goods or services – or even overpayments resulting from a dispute of a prior payment that has been resolved.


Outsourcing A Popular Choice

Banks and technology vendors are increasingly looking at how to provide better reconciliation, match invoices and payments, and allow wholesale customers to set parameters to accept payment in full or a percentage of the total amount due based on the integrity of the relationship with the payable company.

A full suite of lockbox-supporting technology and staff can be cost-prohibitive for smaller institutions, so they contract their lockbox services to third-party vendors and/or correspondent banks. The country’s larger banks, which own their own lockbox infrastructure, are doing a steady business providing lockbox services to smaller banks. Among these providers are BNY Mellon and Wells Fargo Bank. [In disclosure, Atkinson said that BNY Mellon, a correspondent bank for many others for decades, contacted some of their correspondent customers to respond to the Aite study. The resulting response rate of 38 banks, while not large, provides a statistically significant base on which to base responses.]

Wells Fargo Bank was included in the Aite study. Justin Freeman, senior vice president of Wells Fargo Treasury Management Product Management, said the bank outsources its retail lockbox business to a third-party supplier, but it retains its wholesale service capabilities and benefits from its position as a large-scale player.

“We are not seeing our volumes decline,” he said, adding that it’s a big-ticket business that requires multimillion-dollar investments on a regular basis.

The returns must be worth it. Freeman said a surge in the bank’s customers’ lockbox use can be attributed to health care related mailings. But it’s not, as one might think, due to payments spurred by the Affordable Care Act. Instead, it’s insurers paying medical providers. In this sphere, the check is still king. Payments by insurance companies to health care providers. “Paper payments are a big part of that vertical [system]. Lockbox is very essential,” he said.

Essential to the process is the bank’s ownership and operation of its own lockboxes and its relationships with the USPS. “We have relationships with the post office that is critical in this business; we are able to set the bar on quality,” Freeman said.

He added that the bank benefits from net acquisition of new customers from its competition, primarily in the health care and energy sectors.

Customer receivable matching facilitates matching the customer’s open receivables file – what was sent out as invoices – with payments coming into the lockbox. Typically, he said, 80 percent to 90 percent of transactions already come in as straight processing that does not require oversight. Receivable matching gets that figure to 99 percent, he said. Customers receive more timely information to determine how receivables should be treated based on the existing customer relationship. “At the end of the day, it’s a people business,” Freeman said.


Christina P. O’Neill is editor of custom publications for The Warren Group. She may be reached at coneill@thewarrengroup.com.