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What are Lockboxes?

Welcome to Learn, where we provide straightforward, easy-to-understand definitions of the payments industry.

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Lockboxes are secure bank-run mailing locations where businesses can redirect their paper-check payments, allowing banks to take over the depositing process.

By systematizing the management of paper checks, lockboxes provide a time-saving alternative to in-person deposits. Before lockboxes, businesses had checks sent directly to their address. They manually opened and recorded every check in their general ledger, then traveled to a bank to deposit each in-person.

In addition to the three to seven days it takes banks to process a check, businesses had to wait as checks traveled nationwide to arrive at their facilities—known as "mail float." Mail float refers to the time it takes for money to travel between the payer and recipient. Local lockboxes allowed checks to spend less time in transit, so businesses could access their money faster.

How do lockboxes work?

Banks have many lockbox locations across the country, allowing counterparties to mail paper checks to a nearby address instead of a business’s direct location.

Bank employees typically empty lockboxes at the end of the day, then bring the mail to large processing facilities where they open, scan, and deposit the checks into their designated bank accounts. To keep businesses up-to-date about the checks they’ve received, banks send out daily lockbox files with images and data associated with each payment and notifications of any bounced or returned checks.

For example, let’s say there's an education-based nonprofit called Pennies for Pencils receiving a large amount of donations via check daily. Even though Pennies for Pencils is located in Washington, D.C., they use Crayon Bank's lockbox services in Seattle and Chicago to help programmatically manage the checks coming in from different areas of the country. This means they don't have to wait for corporate donors on the west coast and in the midwest to send their checks across the country. Instead, they can have their donors send payments to their lockboxes.

At the end of each day, Crayon Bank representatives collect the checks, processes them, and deposits the payments directly into Pennies for Pencils' business banking account. The payment information is captured and forwarded to Pennies for Pencils' accounts receivable department. Lockboxes expedite check deposits by allowing banks to process checks in large batches and providing businesses with an easily trackable paper trail to record in their ledgers.

Who uses lockboxes?

Despite being slower than electronic payment methods like ACH and RTP, paper checks are still responsible for some of the highest value payments in the US. A 2019 study conducted by the Federal Reserve found that in 2018, consumers and businesses deposited 14.5 billion paper checks, worth nearly $26 trillion—in value, checks came second only to ACH credit transfers.

Businesses that use lockboxes tend to be large, mature organizations processing large volumes of payments or receiving high value checks. Lockbox services cost companies money, potentially offsetting the cost of doing it yourself. This, in addition to processing fees, can make lockboxes prohibitive to small businesses or businesses that receive few payments by paper check.

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