Why outsource lockbox? Don’t ignore the middle ground

Each year, American consumers and businesses write billions of checks. These payments cover everything from utility bills and car payments to commercial rent and corporate receivables. Despite ongoing rumors of their imminent demise, paper checks remain firmly entrenched for both C2B and B2B payments.

After COVID-19 placed a spotlight on digital efficiencies, worker safety and overall expenses in 2020, financial institutions (FIs) continue to debate the merits of maintaining check processing capabilities in-house.

Lockbox service outsourcing is no longer a black-and-white, all-or-nothing decision. Thanks to new technology innovations and experienced third-party resources, banks and credit unions have more choices than ever to make lockbox, elockbox and receivables processing a viable—and profitable—service for their customers. These shared solutions let each FI determine how much to outsource, how much to integrate and how quickly to move forward.

The humble lockbox has evolved

Since lockboxes first debuted in the 1930s, they’ve been a growth channel for banks and a bottom-line advantage for the business customers who use them. And while lockbox is a mature product, it remains a top five revenue generator for many large and mid-sized banks, according to industry analysts Aite Group. The Association of Financial Professionals estimates more than 40 percent of B2B payments are still made by check, providing adequate volume to fuel lockbox opportunities for years to come.

At its core, lockbox delivers a mailing address for companies to consolidate their incoming check payments. The lockbox provider then handles the legwork: opening the envelopes, matching and scanning the payments, payment coupons and remittance information, then depositing the funds into the company’s bank account.

The growth of lockbox spawned three distinct versions: retail, wholesale and the hybrid “wholetail.” Of these, retail lockbox is by far the most efficient and straightforward. It is characterized by high volumes of low dollar payments, such as those for cable TV, credit cards, electricity and cell phones. It is also the most commoditized, and with this increased competition on price, banks are most likely to outsource their retail lockbox offering.

By contrast, wholesale lockbox offers far more opportunity for enhancements, differentiation and automation, due to the more complicated nature of B2B payments and remittances. When done well, a modern and reliable wholesale lockbox adds significant value for commercial customers, through efficiency, automation and cost savings. At the same time, it provides a steady recurring revenue stream for FIs.

In recent decades, banks and lockbox providers have added a number of capabilities to their lockbox offerings, including:

• ACH deposit functionality to speed customer cash flow
• Sophisticated fraud detection to protect customer payments
• Convenient online archives to simplify research, customer service and audits
• Greater integration with ERP and accounting systems to reduce customer workloads
• Improved matching and exception management capabilities to boost straight-through processing rates

The humble lockbox has now evolved from a simple check collection site to a multi-faceted tool that forms the core of an integrated receivables (IR) strategy.   

How lockbox services are used for banking and business solutions

Lockbox services are widely used in both banking and business solutions. In banking, a lockbox refers to a service provided to corporate customers to process their incoming checks. The bank receives the checks on behalf of the customer at a dedicated post office box, and then uses automation technology to scan and deposit the checks into the customer's account. This service enables companies to speed up the processing of their receivables, reduce the risk of fraud, and improve cash flow management.

In contrast, lockbox services in business are commonly used by companies to outsource their check processing services. By utilizing a lockbox provider, a company can redirect its incoming payments to a designated post office box, and the provider will take care of scanning and processing the checks. This allows companies to streamline their accounts receivable processes, reducing costs associated with manual processing, and minimizing the risk of errors and fraud.

Automation is a key feature of lockbox services in both banking and business solutions. The use of automation technology helps quickly and more accurately process checks. With lockbox automation, companies and banks can also offer their customers real-time information on their paymetns and account balances. 

Understanding the cost-value equation

The argument for outsourcing typically focuses on operational costs and an FI’s core strengths.

Undertaking an in-house lockbox is no small feat. Banks and credit unions must contend with many expenses:

• Leasing or buying physical space
• Capital investments in equipment
• Ongoing maintenance and upgrades
• Physical security for payments and digital protections for data
• Meeting regulatory requirements for more specialized processing

Those who move forward with in-house capabilities value the control and customization it affords, particularly when it comes to managing the all-important customer relationship.

Another factor is the FI’s size, and whether it will become a “super processor” by offering white-labeled lockbox processing to smaller banks and credit unions in the market. FIs like Bank of America, Wells Fargo and JPMorgan Chase are known for this approach.

FIs weigh opportunity versus uncertainty

Though lockbox services have a long and stable history, it’s not uncommon for banks to periodically reconsider their lockbox offerings.

A few factors prompting the current debate include:

• Competition. Third-party providers have upped the game, with several now offering sleek integrated receivables services that go head-to-head with traditional lockbox operations. Banks recognize the need to deliver a service that keeps pace with industry leaders.

• Profitability. While lockbox helps FIs attract deposits and add fee income, banks and credit unions must also factor in the cost of maintaining facilities and modernizing equipment. Adding to the challenge are interest rates at record lows, which continue to undercut the overall profitability of core banking services.

While FIs must weigh these realities, it’s important to note that numerous opportunities for growth still exist. In particular, FIs that treat lockbox as more than a stand-alone product stand to gain. Those that combine wholesale lockbox with new receivables offerings—such as Remote Deposit Capture (RDC) and integrated receivables—can create profitable and sustainable service lines.

Checks slowly decline while digital payments skyrocket

The changing landscape of payments also plays into bank discussions. While American consumers and businesses did make 11.2 billion check payments in 2021, which represents a continual decline since 2000.

However, while the number of checks written per year has decreased, it’s important to note that the average value per check (in dollars) is the highest it’s ever been at $2,430 in 2021. B2B payments are responsible for the majority of funds that are moved by check.

According to the Federal Reserve, B2B checks have proven the most resilient of all check types. They are declining at a much slower pace and are especially entrenched with small businesses.

At the same time, banks and credit unions must acknowledge—particularly during the initial months of the pandemic—the rapid rise of electronic transactions and emerging payment methods.

The value of non-cash payments in the United States grew faster from 2018 to 2021 than in any previous FRPS measurement period since 2000, according to the Federal Reserve. The top three non-cash payments (ACH, check and card) experienced changes:

• The increase in the value of ACH transfers accounts for more than 90 percent of the rise in non-cash payments value from 2018 to 2021. 
• The average value of check payments saw a substatial increase from 2018 to 2021. The average value of check payments increased from $1,908 in 2018 to $2,430 in 2021. 
• The value of card payments grew faster from 2018 to 2021 than in any previous Federal Reserve Payments Study measurement period, rising 10 percent per year since 2018. In 2021, the value of card payments reached $9.43 trillion, or 7 percent of non-cash payments value in that year.  

FIs are right to evaluate how best to expand their limited resources. Make improvements to legacy check-based processing services? Or fund innovations that will serve the next-generation of digital payments? The best news is by partnering with a business-minded vendor, FIs can do both.

Strategic product or table stakes?

The FIs ready to eliminate lockbox entirely or outsource the function as a whole cite several factors:

• Declining check volumes
• Growth of alternative payment methods
• Higher per-unit costs on paper-based transactions
• Pressure to cut costs and grow revenues

In the other camp are those actively looking to expand their receivables capabilities, with lockbox playing a central role.

These banks and credit unions see a number of opportunities related to lockbox, including:

• Growing deposit revenues
• Building a robust receivables offering for clients
• Actively differentiating their FI from others in the local market
• Improving automation and efficiency for business customers

In truth, there is no single answer that will meet the goals of every FI.

A first step in a clear lockbox strategy starts with each bank or credit union’s perception of the service. Is lockbox a core part of the treasury management offering, or simply table stakes to satisfy a few commercial customers?

FIs that view lockbox strategically appreciate how easily the service bundles with other receivables offerings, such as Remote Deposit Capture and Integrated Receivables. Lockbox serves as a starting point with commercial customers and a lever to attract larger opportunities.

Partial outsourcing represents an effective middle ground

Partial outsourcing options represent an effective middle ground in the lockbox debate. In this scenario, banks can outsource a portion of their receivables processing to a third-party provider, while maintaining select capabilities in-house.

With this hybrid approach to receivables, FIs can:

• Gain operational efficiencies
• Reduce capital investment costs
• Continue to capture acquisition and fee-based revenue

Best of all, banks and credit unions keep control of their customer relationships, with full oversight of onboarding, service and other critical functions.

Additionally, partial outsourcing lets FIs take advantage of the latest tools and technology, without the staff resources or expense that research, product roadmaps, equipment upgrades and system integrations require. (The third-party lockbox provider handles these tasks, often seeking FI input for future enhancements.) With this hybrid approach, banks and credit unions stay competitive and offer customers the latest functionality.

Hybrid lockbox options to help banks boost efficiency and profitability

Partial outsourcing options provide greater flexibility. Each FI can choose which functions to outsource based on local market conditions and treasury management strategy. It’s also a smooth transition to move additional services to third-party providers in the future, as growth, profitability, internal resources or other factors necessitate changes.

The flexibility of partial outsourcing appeals to banks and credit unions that want an off-balance-sheet solution to generate new revenue. It also opens the door for small and mid-sized regional banks to cost-effectively access receivables services that can differentiate them in the market.

Explore these five lockbox options:

1.  Leverage Remote Deposit Capture

• For: Consolidating check processing across multiple intake points.
• Opportunity: Add-on service for current lockbox customers.
• Value: Gain new revenue, future-proof existing revenue, grow deposits.
• How it works: RDC solutions give consumer and business customers the convenience of anytime, anywhere digital deposits. However, data from RDC deposits usually resides separately from the checks processed by the lockbox. Integrating RDC in an outsourced environment adds muscle to an FI’s solution, through access to a unique nationwide capture network and a receivables resource equipped to handle deposit volumes and data transfers efficiently.

2.  Add value with Integrated Receivables

• For: Increasing straight-through processing and accommodating digital payments.
• Opportunity: Add-on service for current lockbox customers.
• Value: Gain new revenue, future-proof existing revenue, strengthen overall receivables offering.
• How it works: Electronic receivables are convenient and cost-effective to issue, but often result in messy processing and inefficient cash application for the receiver. In many cases, digital payments arrive “stranded” with remittance data trapped in separate email transmissions. An IR solution leverages AI and other cutting-edge technology to remedy this situation. IR tools integrate with an FI’s existing lockbox to provide a one-stop receivables hub that vastly improves efficiency, automation and straight-through processing for wholesale customers.

3.  Grow vertical markets

• For: Growing vertical markets.
• Opportunity: Attract new lockbox customers.
• Value: Gain new revenue, grow deposits, strengthen vertical offerings.
• How it works: Certain vertical markets, such as property management, healthcare and insurance, offer significant opportunity, provided FIs can accommodate specialized processing and data requirements for these industries. In this instance, partial outsourcing enables FIs to maintain general check processing at in-house lockbox sites, while simultaneously growing vertical markets through outsourcing.

4.  Easily add more sites

• For: Expansion to new geographic areas.
• Opportunity: Attract new lockbox customers.
• Value: Gain new revenue, grow deposits, reduce capital investment expenses.
• How it works: A merger, acquisition, new market expansion or other change can leave banks and credit unions with a geographic hole in lockbox coverage. Instead of major investments in new facilities and equipment, FIs can outsource check processing in one or more regions for full and effective coverage. It’s a great way to test an outsourcing relationship (and market viability in a new region) while complementing existing in-house processing sites.

5.  Improve data access and reporting

• For: FIs with in-house retail or wholesale lockbox processing.
• Opportunity: Add-on service for current lockbox customers.
• Value: Gain new revenue, improve customer retention, strengthen overall receivables offering.
• How it works: Current, accurate data on corporate receivables drives a range of treasury management decisions. Feeding lockbox data to a robust archive gives corporate customers more visibility and transparency to important receivables metrics, such as daily investible cash and customer correspondence. FIs skip the time and costs for IT development, testing and integration and instead leverage a plug-and-play solution that’s fast and easy to use.

Flexible, innovative solutions create a win-win situation

Too often, the industry dialogue around lockbox makes outsourcing an all-or-nothing decision—an either/or value proposition that pits FIs and their customers as winners or losers. In reality, there’s far more nuance to the discussion, and no need to maintain or outsource every aspect of lockbox operations. Flexible solutions that allow for partial outsourcing enable large, mid-sized and small banks to choose the model that best meets their needs.