The number of payments made by check is declining, but lockboxes, the bank facilities that process payments for businesses, are keeping busy. The demand for their services is coming partly from companies that used to process their own payments but decided they could benefit from using a lockbox instead. Lockboxes are also increasingly processing electronic payments in addition to paper checks.
An Aite Group report released last year estimated that retail lockbox, which handles consumer payments to businesses, is growing 0.4% a year as more consumers pay bills online, while wholesale lockbox, which deals with business-to-business payments, is growing at a compound annual rate of 2.9%.
Nancy Atkinson, a senior analyst at Aite Group, said that while the use of checks is not growing, lockbox volume is getting a boost as companies that previously handled their receivables in-house decide to outsource that work, perhaps because they’re impressed by the efficiencies offered by increasingly automated lockboxes.
Companies are “looking for the opportunities out of that,” Atkinson said. “As new equipment comes along, I think a good number of large corporates are going to look to either their bank or a third-party processor.”
Using a lockbox is particularly attractive for companies if the lockbox can handle not only paper, but all types of payments, she said. “If they can find a way to get it all consolidated, it will make it easier for them.”
Ray Gatland, senior vice president and lockbox services group product manager at Wells Fargo, said compliance issues related to regulations like the PCI security standards for card payments are also pushing companies toward having a bank or third-party lockbox process their payments. “All of the various regulatory and compliance regimes are very much changing what someone who does their own processing in-house can do or might want to do,” he said.
Another factor is the prospect that mail delivery will slow as the U.S. Postal Service cuts back in the face of falling revenue.
“I absolutely tell my clients: The day is coming when mail float will be degraded; there’s going to have to be some hard choices,” said Rodney Gardner, head of global receivables in Global Transaction Services at Bank of America Merrill Lynch. “That, to me, is another reason to think about moving from paper to electronic.”
Going forward, Gardner said, he would like to locate lockbox facilities in the fastest cities (as measured by Phoenix-Hecht) needed by the bank’s clients and “in very close proximity” to the Postal Service’s mail-sorting facilities.
Checks’ Staying Power
While the use of paper checks may be declining, “checks aren’t going anywhere anytime soon in the B2B space,” said Gardner, pictured at left. A Fed study showed that while consumer-to-business checks had fallen almost 10% between 2009 and 2013, business-to-business checks were off only 3.8%, he said.
More and more businesses are taking advantage of the savings that can be realized by paying electronically—for instance, via ACH instead of by check. But for the company that’s owed the money, electronic payments complicate the reconciliation of payments to invoices.
“The remittance data on an electronic transaction presents a whole new host of challenges vis-a-vis the way you take in paper today,” Gardner said.
Information about an ACH payment might arrive by email, separate from the payment, he said, and the information that accompanies an electronic payment will vary from client to client. “How does your bank or third-party processor know where to find the invoice number?” he said. “It’s almost like you’re reinventing lockbox.
“You have to invest in new technology, as a bank or non-bank provider, if you want to drive paper-to-electronic migration,” Gardner added.
Lockbox technology has already made great strides. For the most part, facilities have left manual processes and inputting behind. Machines open envelopes, scan checks and documents, and use optical character recognition technology to gather from those documents information about how much is being paid and which invoices are involved.
“There’s been a dynamic shift, a lot of that wrapped around image technology, recognition technology, and how we service customers around the various payments,” said Gatland, pictured at right. “As those players that continue to be in the lockbox processing space understand the value proposition for our clients, they will continue to invest in those technologies that help them do it better.”
Gardner said that when it comes to dealing with electronic remittance data, lockboxes need technology that learns.
He cited the example of a customer that always cuts off the first two digits of an invoice number when making electronic payments. “What is required is software that can remember that pattern,” he said. “When you do the exact same thing next month and everything else matches, the system will auto-post those first two digits.”
Technology can also now handle the situation of a payment that’s accompanied by an email with the remittance information, Gardner said, noting that gathering information from an email isn’t much different from gathering the data from a scanned paper remittance document. And when the customer sends an electronic payment along with a link to a Web page that provides information about the payment, lockbox technology can incorporate “website crawlers,” he said, software that can pull the page and get the information.
Gatland cited a tighter integration of remote deposit capture (RDC) technology with lockboxes.
“If you think about RDC as a way of organizations being able to capture checks and deposit those into accounts themselves, this is the next step,” he said. Wells Fargo’s new Virtual Lockbox product lets companies scan not only the check, but also any accompanying correspondence, and then feed those images into the lockbox. “We take those payments, which would have been stranded otherwise, and integrate them into their receivables flow,” Gatland said.
In B2B receivables, the name of the game is to be able to match as many payments as possible to the appropriate invoices, despite the vagaries of remittance information.
The key is to focus on ensuring straight-through reconciliation, Gardner said. “I think a reasonable target for a corporate is to say, ‘I’m going to try to get 90% of my transactions to post.’”
Atkinson said some lockbox providers are trying to resolve problems by providing workflow that allows buyers and sellers to come to terms when problems arise. “That’s something a lot of the providers are looking to add, if they don’t have it already, along with being able to provide consolidated receivables or integrated receivables, and provide information across multiple payment channels and multiple payment instruments,” she said.
Gatland said technology can allow a company’s employees to weigh in on payments the lockbox is having a hard time applying.
“We have built an online decisioning capability so if there is an inbound payment that needs to be matched to a receivables record or a payment that, because of information not provided by the remitter, doesn’t allow us to provide a clean input without an exception, we can make that information available to our client so they can go in and review it,” he said. “They can correct information; they can match information to their receivable. So at the end of the day, when it’s time for us to create the posting file, it’s much, much cleaner.”