Technology is sweeping away stacks of paper, making more and better information available sooner. And corporations are cashing in.
Wholesale lockbox processing is undergoing a technological revolution. Finance executives are already seeing dramatic improvements, and more are on the way. Imaging applications are sweeping away stacks of paper -- checks, postmarked envelopes and a plethora of remittance documents -- and speeding up the processing of these critical sources of payment information. Some leading banks have completed the changeover to first-pass imaging. They scan every relevant piece of paper the moment it hits the lockbox; after that, everyone who does any processing works with its image on a screen, not with the hard copy. Employees start their work sooner and do it faster.
In addition, cost-effective ways to deploy intelligent character recognition (ICR) technologies mean that more and more of the remittance data corporations ask their banks to capture is being "read" by software, instead of being typed in by a human clerk. Banks using ICR pass on more accurate information about receipts and do so more quickly.
Down the road, banks expect to replace tightly focused lockbox processing with broader A/R services. Cash management will never be the same.
See It Now
The benefits of archiving alone would make imaging a hit. Viewing an item electronically requires a few keystrokes and a two-second delay, not a days-long wait for boxes to be delivered from a warehouse. But archives are the sideshow. Taking center stage when lockbox banks use imaging software are:
- Timing. Companies can view images at the bank's Web site a few hours after the documents arrive in the mail; they don't have to wait for an overnight (or slower) delivery.
- Access. Anyone who needs the data can see the images; no longer must cash managers call the bank on behalf of their colleagues in credit.
- Efficiency. Cash application clerks can use split screens instead of working with paper documents to resolve exceptions.
However, just because images of remittance documents are available doesn't mean they are pushed to maximum advantage. Some companies download images, print them and work with the paper -- same old process, only with a quicker start, notes Pat Zdunowski, vice president and team leader in the global services division of FleetBoston Financial Corp. in Boston. Eliminating all paper can speed up processing and significantly reduce costs, she says, but A/R methods are deeply ingrained and not easy to change.
Companies that get the most benefit from new lockbox services move beyond paper-centric internal processes, notes Steve Stone, senior vice president and director of product management in PNC Bank's treasury management department in Pittsburgh. For example, although many companies' cash application starts in the morning -- following the arrival of boxes of paper sent by overnight courier -- the process can start the previous evening if images are available through an intraday transmission, Stone points out. Some cash application clerks now work an evening shift, he says.
Speedy access to images gives companies choices. If their receivables volume is low, they can immediately post receipts from the images, eliminating the need for (and cost of) bank data capture and transmission. This cuts at least a day off of days sales outstanding (DSO), says John G. Feldman Jr., senior vice president and director of U.S. and Canada product management for Bank of America's global treasury services division, Charlotte, N.C.
Businesses with high volume tend to come out ahead if they wait for the bank transmission in most cases but check same-day images when they need to know about a particular receipt urgently, like when an order is on hold until a check arrives, Feldman explains. As imaging technologies become familiar, savvy finance managers are using them "more surgically," he says. "At first, they wanted access to all their images. Now large corporations are using it primarily to view and process exceptions" -- those items that do not match when the lockbox processing file is run against the A/R system.
Imaging and indexing technologies have also created options in the way receipts are batched and cash application is performed. In the old days, Stone says, companies got their receipts in the order in which the bank processed them. Period. Now receipts can be organized in any number of ways -- by descending dollar amount, for example. One popular way is to assign a range of invoice numbers to each cash application employee, then have the bank group receipts by invoice numbers so that it effectively presorts employees' work for them, Stone explains.
As banks switch over to image-based platforms to gain internal efficiencies, some are making imaging a basic lockbox service, while others cling to the idea that it is a premium product which justifies a premium price. Since banks save money in the long run by converting to image platforms, look for premium pricing to disappear, or push your bank to drop it.
Most data that can't be captured by machines reading a check's MICR line is still manually keyed in, but that's changing too. When the same document format is used many times, the bank can manually build a template that enables soft-ware to read the form automatically. Even more useful is the "roping," or "rubber-banding," technique by which a human operator looks at a document's image and highlights key fields to tell the computer that it should read those fields to obtain a certain type of data.
And the story continues. The leading edge today is "dynamic forms recognition," Stone says. This image-processing software is so sophisticated it figures out how to read forms it has seen before and recognize what information it can find in each field, so it essentially generates document templates itself.
"Technology lets us capture data more effectively, with greater speed and accuracy," Feldman observes. That's good because companies are asking banks to provide more information than they traditionally offered. "They're starting to leverage the power of their new ERP and accounting systems to improve their internal processes. They can make better use of information, so they are asking for more of it," Feldman says. MICR-line data and invoice numbers don't cut it anymore. Many companies want information such as payee names tied to the payments.
The result of new technologies is not just more data or quicker data capture but better data. Hit rates in matching receipts to accounts receivable are starting to climb. The most common lockbox error, Stone says, is missorted mail that puts company A's receipt in company B's lockbox. With dynamic forms recognition, a computer can read the payee name on the image -- perhaps by searching for a P.O. box, then reading the line above it -- and compare that name with all the valid payee names for a given lockbox, he explains. Mistakes can be caught sooner.
ERP systems and database management tools are cleaning up traditional processes within companies and reducing the number of lockbox exceptions that require manual intervention. Something as simple as a large corporation tracking internal invoice numbers so that no two subsidiaries ever use the same one has improved the automatic hit rate from around 60 percent to around 85 percent in some cases, reports Henry Waszkowski, senior vice president and head of treasury consulting for Wachovia in Atlanta.
Another reward that comes with more data: The lockbox study -- traditionally an expensive, infrequent undertaking to determine which site should receive which companies' payments -- can now be an ongoing process that enables the bank to rapidly adapt as payers change their patterns, Stone says.
Of course, not every innovation lives up to expectations. The once-hyped "proactive notification" software, which sends a message to someone's cell phone when a flagged payment hits the lockbox, has been slow to catch on. "It's a tremendous opportunity across our whole product suite, including positive pay notification, but we're still searching for the right application," Feldman admits.
Debbi Youmans, senior manager of cash operations for Ikon Office Solutions in Malvern, Pa., reports that her company is saving $400,000 a year in paper and storage costs and $1.2 million in administrative costs with its new image-based lockbox service. Throw in the extra banking fees, and it nets out to an annual hard-dollar savings of more than $1 million, she says.
Plus, things happen more quickly than they used to. Compared with the classic lockbox transmission method Ikon used to use, the average payment posts about half a day sooner, and exceptions are resolved as much as two days faster, Youmans reports. Ikon sees 3.4 million checks a year worth $2 billion pass through 15 lockboxes at five PNC Bank sites. The bank captures and transmits data, and Ikon currently achieves an 80 percent hit rate. After testing the imaging system for 30 days and finding it reliable, Ikon told the bank to burn its paper. "We reduced head count in cash application since we don't have to file, sort and copy all that paper," Youmans points out.
Each transaction is indexed by invoice number, check number, check amount and date and can be retrieved using any of that information, she says. This leads to another benefit: Ikon can provide better customer service when so much transaction information is so accessible so quickly. "Imaging lets us address issues on the same business day they surface," Youmans says. "It has let us integrate our customer service, collections, general accounting and cash operations activity across the country."
Changes are ongoing. "The bank has asked about our future needs and is actively bringing ideas to the table that might benefit us both," Youmans says.
From Lockbox to A/R Processing
Now every major bank is talking about making the leap from being a lockbox provider to offering a much broader receivables matching service. "The future belongs to banks that can provide integrated A/R solutions, not just high-tech lockbox processing," Fleet's Zdunowski predicts. That means banks must merge the systems that process incoming checks, wire transfers and payments via ACH, then provide a single reporting stream. It also means banks will offer to match invoices with payments, a service Fleet has offered for years, she adds.
As a nod in the direction of integrated A/R service, PNC and other banks are branching out into the invoicing part of the process. "If we generate and send the invoices, we have them and can do the A/R matching at the bank," Stone says. PNC is negotiating with a supplier of deduction management services to exchange information for common clients and create one processing stream that combines their services, he adds.
A few corporate giants have asked for and gotten broad A/R management services -- notably UPS from Citibank and IBM from Bank of America -- but these services aren't yet available to most customers. "There has been more talk than action; it's not ready for Main Street," Wachovia's Waszkowski observes.
"It's evolving," insists Bank of America's Feldman. "We haven't seen a client yet who is ready to turn the whole cash application process over to us." But the topic continues to stir up discussion. "The bank and the company could co-own a server," Feldman adds, "and the bank could do the real-time posting. Or the MICR-line data could be run against the A/R file, and then the bank could go in through the Web to the company's A/R system and do the exception processing. It will happen; it's just a matter of time. But companies want to be sure they will save real dollars by making the change."
3 Big Trends
How wholesale bank lockboxes work will change significantly as a result of three major trends, observes Richard J. Poje, veteran cash management consultant and president of R.J. Poje & Co. in Barrington, Ill.
1. Banks are starting to move from lockbox processing to comprehensive receivables outsourcing. So far there's more sizzle than steak, but that will change in the next few years. Look for more banks to actually perform the cash application.
2. As technology streamlines lockbox operations, the service is starting to move down market to smaller companies. Ten years ago, it took large volume -- 400 to 500 payments per month averaging $7,000 to $8,000 -- before a wholesale lockbox paid for itself. In a paperless environment, more midmarket companies are discovering they can reduce staff when employees no longer file and search for paper documents. And that pays for a lockbox.
3. As lockbox processing becomes more technology-intensive, the cost of setting up shop soars. Banks are choosing either to build a state-of-the-art operation and then sell processing to other banks, or else to close up shop and buy their processing from other banks. Most large corporate banks will continue to offer lockbox service, but fewer bank factories will do the processing.