Credit Research Foundation Current Trends in the Practice of Lockbox Usage

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1 Credit Research Foundation Current Trends in the Practice of Lockbox Usage Background To stay competitive, your organization needs lockbox and electronic remittance services that accelerates cash flow, improve the efficiency of your accounts receivable processing, and provides increased control in applying accurate payments. Advantages to using a lockbox and electronic remittance service are: Lockbox service provides you with accelerated cash flow by assuring timely deposits. Electronic remittance services on your lockbox receipts provide a more efficient accounts receivable management function by speeding up the payment posting process and reducing tedious clerical tasks. A remittance service reconciles your cash deposits to your posted payments and improves payment-posting accuracy. By enabling the timely posting of payments, a lockbox facilitates a shorter statement dunning cycle that can enhance cash receipts. Timely remittance information reduces the generation of unnecessary statements, reducing labor, forms, postage and phone expense. Lockbox clients can choose the standard menu of services or custom design services to meet their specific needs. Available services include: Check photocopies Daily notification of deposit information Daily remittance via transmission Wire transfers Daily reconciliation of remittance to deposit Delivery of back up documents Paid in full handling Detail reporting Payment files can be uploaded directly into your A/R cash application system and update your receivables automatically, with no re-keying. Daily deposit and keying of your customer payments. A lock box is defined as a mechanism that allows a financial entity (i.e. a bank) to collect payments on behalf of the user, and to electronically transmit the associated data to the user's cash receipts system. Most lock boxes require a simple interface. However, it is seldom that any two are exactly the same. As a result, lock boxes almost always require some degree of custom interface development. 1

2 Corporations are frequently faced with the need to review their collection systems. Of prime concern in such reviews are the level of float the company experiences, the costs incurred and the quality of service obtained from the processing vendor. Many times a collection system review results in what is known as a lockbox study. An effective lockbox study identifies the best locations for these sites, the most efficient assignment of customers to the selected sites and the amount of float in the lockbox system. The study also can be used to evaluate the current performance of an existing lockbox system and fine tune the system by reassigning customers among existing lockbox sites. In recent years, the focus of many lockbox studies has been to downsize overgrown banking networks and to evaluate lockbox networks offered by a single bank provider. An organization that conducts extensive cash management surveys and is recognized for its expertise in the field of lockbox studies and strategies is Phoenix- Hecht. Information on Establishing and Maintaining an Efficient Lockbox System is available in the Credit Research Foundation Technical Reference Manual. That section was written by Richard D. Richardson, Senior Vice President of Phoenix-Hecht. Mr. Richardson can be reached in Research Triangle Park, North Carolina at or visit their website at for the latest in Cash and Treasury Management news, information and the most up-to-date survey and study results. Outsourced cash management is a highly competitive business. Therefore the services offered are from many vendors (usually banks) and vary in levels of offerings and satisfaction. In reality, wholesale lockbox providers differ greatly because of the unique processing requirements of each corporate customer. This makes it difficult to compare many key features. (However, the essence of the typical lockbox service required by most of the CRF respondents to this survey are discussed below. The essence of the service is based on processing bill payments received by mail via postal lockbox.) The key operations of these services are: Mail pick-up; Envelope opening and distribution to workstations; Remittance qualification, including verification of completeness, payment amount and correct payee; Check encoding, photocopy and scanning; Preparation of check deposits and forwarding to transit operations; Intra-day deposit reporting; Electronic transmittal of remittance data to customers; and the Dispatch of remittance documents, check photocopies and account maintenance items to customers. Typical Features of a lockbox arrangement are: Unique Post Office Box: A post office box is opened in your name and mail is picked up twice per day by a bank courier. Payment Review: Payments are reviewed, using your specifications, to determine if they should be processed. 2

3 Microfilmed or Imaged Checks: Checks are microfilmed or imaged to ensure an accurate audit trail. Remittance Information: Remittance information is forwarded to you, per your specifications, once the processing of each day s deposits are completed. This information can be captured electronically and transmitted to you. Benefits of using a lockbox are: Reduction of Administrative Expense: If you receive a large volume of payments, the cost of using a lockbox may be significantly less than adding staff to process payments internally, especially as volume increases. Better Availability of Funds: Payments are deposited on the same day they are received, which gives you a better availability of funds. You don t have to worry about making it to the bank with your deposit by 2 p.m., and checks are securely in the bank rather than residing on a cash appliers desk. Redirection of Human Resources: Using a lockbox will give you the opportunity to redirect Human Resources. Instead of using your office staff to process paper, you can redirect them into accounts receivable support to help deal with the kick-outs or payments that cannot be automatically applied. Audit and Control: A lockbox establishes an audit trail outside the company for payments received, and segregates the function of opening mail and depositing checks from other accounts receivable management functions. Types of lockbox services: Wholesale Lockbox For companies receiving low volume large dollar payments, streamlining the collection process saves time and labor. Cash flow is also improved thanks to reduced mail and processing times. With a Wholesale Lockbox, the bank collects, processes and deposits receivables directly from a designated post office box. All items collected during the business day are deposited on a same-day basis, with same-day reporting available through electronic transmission, phone, fax or Internet. Retail Lockbox For companies having large volumes of payments with low individual dollar amounts, a Retail Lockbox can reduce processing time and cost. The bank will collect, process and deposit receivables directly from a post office box. High-speed image scanning equipment reads, verifies and captures remittance data from the machine-readable remittance documents using optical recognition technology. Remittance data is transmitted to you for accounts receivable posting. Electronic Lockbox For companies receiving payments by check, credit card or Automated Clearing House (ACH) credit, updating accounts receivables can be quicker and easier. Electronic Lockbox service combines each form of remittance into one electronic file for automated accounts receivable posting. 3

4 The Statistics Our survey was devised to help those who work with a lockbox institution evaluate the current performance of the bank and to give an idea of costs and services generally available by competing lockbox providers. Frankly, the data collection on the Internet survey did not lend itself to a qualitative analysis of the individual banks due to insufficient data collection at the specific bank level. Therefore, these accompanying statistics are presented to reflect the data at the aggregate level of reporting. The survey was sent to 736 companies and we received 92 responses. Not every question was answered by every respondent. Questions 1 & 2 are illustrated below depicting the popularity of the banks and sites (locations) that were reported by survey participants: 20% 20% 20% 18% 1 Lockbox s Reported 14% 12% 11% 10% 8% 9% 8% 4% 3% 3% 3% 3% 3% 2% 0% of America One Citibank Citizens First Union Firstar Fleet Harris Mellon SunTrust U S Wachovia All Others Popularity of Locations of Lockbox Sites Dallas 25% Philadelphia Chicago 33% Charlotte 18% Atlanta 18% 4

5 Questions 3, 4 & 5 dealt with information that banks key for their customers. 63. of the respondents who use a lockbox service have the bank key data for their company. The data keyed by the banks is indicated in the chart below: 45.00% Type of Data Keyed by Lockbox 40.00% 35.00% 30.00% 25.00% 20.00% 15.00% 10.00% 5.00% 0.00% Payee Name Check Number Check Amount Remittance Detail Invoice Number Invoice Amount Invoice Date % of type of data keyed 13.20% 38.50% 41.80% 18.70% 38.50% 25.30% 8.80% 11.00% Other Other types of data keyed by banks would be: Postmark dates and MICR number Questions 6, 7 & 8 addressed the lockbox services that banks charge their customers for. Service Median Fixed Cost Median Variable Cost Keystrokes $0.010 $0.010 Scanning insufficient data $0.065 Photocopying $0.270 $0.032 Transmission $125 per month $.135 per item Stapling $0.060 $0.070 NSF Check Charge $ $7.000 Question 9 asked what data does the bank scan for your company: MICR Number 22% Payee Name 7% Invoice Date 7% Check Number 17% Invoice Amount 9% Invoice Number 9% Remittance Detail 13% Check Amount 1 5

6 Question 10 & 11 queried how data from the bank was transmitted: 80.5 % use an electronic file transfer 7.3% use the Internet and 12.2% use a variety of other means such as: tape generation, mail or fax There was not sufficient data to report on Question 12. Question 13 & 14 answered the question concerning what hardcopy information does the bank send: 73.2% of the respondents said they receive a photocopy of the checks 72.0% receive the remittance advice 62.2% get the envelope and 26.8% receive other miscellaneous information such as: any customer correspondence & deduction backup (i.e. debit memos) Question 15, 16, 17 & 18 indicated that slightly over half (51.) of the lockbox banks collate the hard copy information for the respondents. Of those who receive hard copy information from their lockbox banks, 57.3% receive it via an overnight service (i.e., Fed Ex, Airborne, UPS, etc). Only 7.3% receive the data from the US Postal Service and 15.9% use other means such as private courier. 60.3% said they could choose their own courier account to save administrative fees. Question 19, 20 & 21 addressed data transmission. Question 19 asked if the lockbox bank that transmits the data to you could consolidate data from other lockboxes/edi receiving banks into one transmission to you. 78.8% indicated that their transmitting bank could do this for them. The answer to Question 20 illustrates that an overwhelming 81.5% of the lockbox banks that transmit the data to you do not do any configuration of incoming data prior to transmitting. Of the 18.5% who indicated their lockbox banks do configure the incoming data, most said the banks reconfigure the data to conform to their A/R system for autocash processing. Question 22 dealt with the clearance time for good funds: the median was 2.0 days. Question 23 suggests that for those who use the Internet to transmit data, the security measures taken are: encrypted data, firewalls, multiple logins and digital certificates. Question 24 & 25 asked if the lockbox bank provided a simple zip code locator to determine the site (bank location) the customer s payments should be mailed to. Only 36.4% of the responses implied that the banks did. Of those banks that do provide a locator, 51.4% have a customized locator for those sites. 6

7 Satisfaction Level of Lockbox Customer Service Question 26 & 27 dealt with the lockbox banks customer service. Above Average 35% Average 45% 95.2% of the banks have a dedicated customer service division that takes care of all your lockbox and bank related needs. Superior 9% Poor 5% Below Average The overall level of satisfaction seemed generally good, as illustrated in this chart. Question 28 addressed the overall satisfaction with the lockbox banks. The chart below illustrates this level of satisfaction: Overall Satisfaction of Lockbox s Satisfied 4 Very Satisfied Considering 12% Another Below 2% Average Room for Improvement 32% Noteworthy miscellaneous comments by survey participants: We visit at least once a year to discuss any problems and review technology advancements. Use imaged lockbox browser but our bank is not currently able to image detail {coming soon}. We perform a lockbox study every three to five years and it is difficult to find folks who still do the studies although, Wachovia was still doing them a couple of years ago. of America has good coverage but terrible service and we actually moved from boa in Atlanta to SunTrust a couple of years ago. Wachovia is first class in every respect but is pricey. We tend to pay for lockbox charges rather than use compensating balances. For the services they perform, their fees are cost effective and 7

8 pay for themselves many times over versus doing the function ourselves and the loss of mail and collection float that would result. All fees are per item. We are in the process of switching four different banks and lockbox locations to one centralized bank and lockbox. This is our first month of utilization. We believe the fees to be too high and would be open to investigating other possible alternatives High cost for quality service, but very accommodating for solutions to problems/issues. Also, the costs reported do not cover all our costs. I only answered for the specific services you asked about. There is always room for improvement to processes, services, etc. s lose a lot of paperwork. Our banking costs are absorbed by our corporate office. We get charged approximately 1 cent per keystroke, but I have no info on any other charges. Seems the bank is understaffed and sometimes unable to give timely information. Believe there may be a lot of turnover as well. 8