3 strategies for a profitable wholesale lockbox

Lockbox has been a staple banks and credit unions could count on for reliable recurring revenue and satisfied customers. Check payments were ubiquitous, and the humble lockbox provided an efficient way for businesses to manage their biggest receivables stream.

Today, digital payment methods outpace checks. New payment types emerge regularly. As a result, many financial institutions (FIs) have allowed their lockbox services to languish, routing investment dollars to other products instead of upgrading equipment or launching enhancements. While volumes remain steady, many are rightfully questioning the viability of operating a lockbox.

3 strategies for FIs to find the right path forward

How can banks improve the relevance of a mature and often commoditized offering like wholesale lockbox? Should an FI maintain a lockbox at all? Is there a business case—especially for mid-sized and community banks—where ROI and customer benefits tip the scales in favor of lockbox?

These are the questions that nag at decision-makers, in part because no single answer will suit every FI. Yet there are practical ways to advance the conversation and move forward with a realistic product roadmap.

These strategies can help FIs revitalize and “future-proof” their lockbox offering:

1. Choose the right business model
2. Invest in receivables automation
3. Demonstrate value in key verticals

Modernization is key. An old school solution (even the most efficient) will eventually go the way of the dinosaurs if it cannot keep pace with current requirements. But a wholesale lockbox that meets the new challenges faced by corporate treasury and solves for both check and electronic pain points can deliver a clear competitive advantage. It’s one of the primary reasons industry analysts like Aite Group argue lockbox deserves continued investment.

A viable lockbox must address new receivables challenges

In its heyday, lockbox solved some of the most pressing challenges facing accounts receivable (AR) departments.

These solutions included:

• Efficiently and securely processing payments by check
• Accelerating cash flow by extending deposit windows and using multiple collection points across the country
• Leveraging cutting-edge technology—without the expense of equipment, facilities or maintenance
• Freeing in-house staff for more strategic activities

While these benefits remain, they’re no longer the defining characteristics of a profitable lockbox operation. In fact, most banks (and their customers) would define traditional lockbox capabilities as “table stakes” rather than differentiators.

The shift in thinking follows the evolution of receivables. Check volumes remain steady, particularly in B2B settings, but the rise of electronic payments has introduced new complications for AR teams. Consider the sheer number of payment types and channels that AR departments manage today, and the complexity becomes readily apparent.

Today’s top receivables pain points include:

• Managing a different process and provider for every remittance type
• Mailed-in and field-based check payments that arrive outside the lockbox
• Stranded electronic payments, where remittance data is trapped in separate emails or PDF documents
• Hands-on work required to handle exceptions
• Difficulty obtaining a holistic view of receivables

It all adds up to delays in cash application. Slow posting then snowballs into poor visibility and forecasting, customer service issues with credit availability and payment status, and hours of manual work for internal staff.

Is it any wonder corporate finance teams are ready for a better way?

Lockbox acts as a springboard to new revenue opportunities

These challenges represent the next opportunity for lockbox. Forward-thinking FIs can generate immediate and tangible value for wholesale customers by solving one or more issues with the receivables process.

Existing lockbox providers, arguably, are in the best position to present solutions. There are several reasons for this advantage:

• Trusted relationship
• Established workflow
• Intimate knowledge of customer receivables volumes and processes
• Proven integration to transmit receivables data
• Exceptional data security

Having these critical connections in place sets up lockbox to act as the core of a robust and modern receivables solution. It shortens the sales and implementation cycle for add-on services, thanks to the inherent customer knowledge and existing data feeds established through traditional lockbox operations. In short, it provides a springboard for savvy banks and credit unions to launch their next opportunity.

Competitors—especially fintechs—have already recognized this opening. Many have introduced add-on packages that leverage the images and data extracted by the lockbox. These solutions turn raw payment information into a goldmine of automation, efficiency and analytics. Customers benefit, and fintechs (rather than FIs) reap the accompanying fee income. Most at risk are FIs with legacy technology, outdated receivables solutions or a complacent attitude toward innovation. 

Choose the right business model

Moving forward starts with a realistic evaluation of the business model behind your bank’s lockbox operations.

Undertaking an in-house lockbox is no small feat; cost is one of the top reasons why FIs neglect (or exit) the service.

Typical lockbox expenses can include:

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

The good news for FIs is that there are now a number of options for day-to-day lockbox operations; it’s no longer an either/or decision that revolves around 100 percent in-house or 100 percent outsourced models.

Instead, there’s a continuum of choices that give banks and credit unions the flexibility to customize their capabilities. Hybrid or partial outsourcing models have grown in popularity for this very reason.

In this scenario, banks outsource a portion of their receivables processing to a third-party provider, while maintaining select capabilities in-house.

By sharing lockbox services, FIs can:

• Maintain an important revenue stream
• Eliminate capital investment costs
• Take advantage of the latest tools and technology
• Maintain control of customer relationships
• Manage onboarding, service and other functions through bank staff

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

Invest in receivables automation

Regardless of its operating model, modern capabilities are critical for a wholesale lockbox that not only survives the next decade but thrives. Banks that take a strategic mindset (rather than viewing lockbox as a commodity) will edge out their competition. Investing in tools that automate one or more parts of the AR workflow, introduce new fee opportunities and shore up core revenue streams with wholesale customers will win out.

Top priorities for investment should include:

• Delivery of a single receivables file for checks and electronic payments
• Consolidated analytics and reporting that provide a holistic view of receivables
• Automated remittance matching powered by artificial intelligence (AI)
• Greater straight-through processing to optimize AR staff productivity

Through this lens, bundling Remote Deposit Capture (RDC) and Integrated Receivables (IR) offerings with lockbox become top priorities. IR, in particular, demonstrates an FI’s innovation and shows a commitment to deploying the latest technology for customers. It also represents a largely untapped market where corporate customers are eager to fund enhancements. Both solve pressing treasury challenges by making it convenient and efficient to process multiple streams of receivables.

These enhanced services appeal to customers at various stages of maturity, which helps increase sales opportunities. For FIs, it creates a step-by-step sales process to continually add value and grow revenue.

As a first step, a consolidated receivables file has a big impact on customers. An Integrated Receivables solution combines check data from the lockbox with ACH and other electronic payment data, then normalizes it all for easy import to the customer’s ERP or accounting system. The result is faster cash application, reduced days sales outstanding (DSO) and fewer data entry errors that require manual intervention.

The same data feed can also power comprehensive reporting as a next step. In effect, it creates a single “source of truth” for customers to analyze their cash flow and receivables. Instead of hours of legwork and reams of spreadsheets, stakeholders can make decisions with an IR-enabled dashboard that provides a holistic view of their business.

Tapping the power of AI delivers a third advantage for FIs and treasury customers. A standard of most leading IR solutions, this feature tackles one of the most vexing and widespread problems of electronic payments: stranded remittances. For example, NACHA estimates that over 60 percent of ACH payments send remittance information separately from the payment, most commonly by email. Tracking down and re-entering this data can significantly delay posting—almost three times longer than with checks.

IR solutions leverage sophisticated machine learning techniques to find, “read,” extract and match remittance data to a customer’s open invoice file—all within seconds. Treasury accelerates receivables processing, strengthens business intelligence and saves vast amounts of staff time compared to current manual workflows. The FI helps achieve the ultimate goal of higher straight-through processing rates – especially during a time when cash flow is critical for many businesses.

The pandemic has proven that accepting electronic payments is no longer a luxury. Accepting electronic payments improves cashflow, even when business is disrupted. Today, there a sizable market opportunity that’s ripe for the taking if FIs offer an online bill pay solution. A fully hosted online bill pay solution equips corporate customers with a turnkey, cost effective digital payment method that requires minimal IT resources or investment. And when the bill payment engine feeds directly into an Integrated Receivables service, a powerful value chain is created.  FIs that offer these technologies help their corporate clients businesses boost cashflow and the customer experience. Today’s consumer’s expect choice and want their billers to offer wider array of payment options.

How your FI delivers these new capabilities will vary. Banks and credit unions with sizable resources and strong internal product teams may opt to build from scratch. Smaller FIs or those looking to accelerate time to market will choose to partner with a third-party provider. What’s important is identifying the path and moving forward before fintechs and other competitors capture this profitable market.

Demonstrate value in key verticals

A tailored approach to key industries represents a final opportunity for lockbox growth. FIs can tap additional revenue opportunities by creating packages of receivables services that meet the unique needs of certain sectors.

Chief among these are markets where:

• Checks remain prevalent
• Custom reporting is important
• Regulatory compliance needs exist
• Lengthy DSO cycles occur

Industries with these characteristics usually struggle with complex receivables streams. A one-size-fits-all approach to lockbox services helps, but typically meets only a portion of their needs. FIs that can bridge the gap with a more tailored solution are in position to charge a premium for their services. In return, this customization yields a solid customer relationship that will be more difficult for competitors to replicate.

Three audiences that meet these criteria are:

• Healthcare
• Insurance
• Distribution

Banks and credit unions that take time to become fluent in these industries (or partner with a lockbox provider with industry experience) will have an advantage. Lockbox remains the central offering, with additional bank services bundled by sector for a robust and full-featured solution.

Here are three pairings to pursue:

Healthcare organizations like hospitals and clinics rely on a lean AR staff to manage multiple receivables channels. The lockbox must be equipped for the stringent healthcare privacy requirements of HIPAA, as well as top-flight data security. Integrated Receivables capabilities are essential as more providers attempt to transition from checks to electronic payment options. Cash application is also critical, as healthcare suffers some of the longest DSO cycles of all business types.

Insurance companies need flexible billing and payment technologies that can accommodate payments across multiple product lines, from life and health to auto and home. Complexity is high and regulatory compliance is a must. Integrated Receivables give FIs an edge by delivering highly desirable advanced analytics and reporting. Many carriers work regionally or nationwide, making the lockbox network’s geographic footprint another advantage.

Distributors need to maximize efficiency at every point in the cash flow cycle. These sales-driven organizations work in an intensely competitive environment with tight operating margins, often with limited working capital on hand. Accelerating cash application is crucial. A combination of traditional lockbox, IR, online bill pay and RDC solutions will generate value through their speed and accuracy. This industry, more than the average, relies on AR staff to find missing documents, match invoices to proof of delivery and resolve discrepancies, making AI-driven tools a good fit.

Make lockbox a hub for future innovation

With ongoing upkeep and innovation, FIs can celebrate the longevity and success of lockbox far into the future. Prioritizing key enhancements, promoting them to the right audiences and treating lockbox as a hub for greater receivables solutions are three ways to keep lockbox profitable and relevant for years to come.