Dexteyra Consulting Group Inc.

Trends in electronic lockbox banking


Navreet Kaur Randhawa*



October 7th, 2010




Over the years, companies with large customer databases have been utilizing electronic lockbox services offered by banks to handle their incoming payments. The process has helped to avoid manual errors and shortened check processing times for payment collection. The information is first entered manually by a data entry clerk at the bank to an electronic file for transmission to the company to which lockbox account belongs. This electronic file is transmitted at pre-agreed intervals for further reconciliation in the payee's accounting system of record such as their SAP system.


Problems faced by lockbox owners


In many financial institutions, the individuals in the lockbox area are the newest employees. Some of them are not well trained, poorly paid, and vulnerable to temptation. That has led to the latest fraud wave in lockbox banking. The criminals bribe the staff and collect information required to create forged checks. Their criminal activity is not easily detected as they keep their amounts relatively small. Moreover, customers do not examine their bank statements quite often.


Intelligent Character Recognition (ICR), Optical Character Recognition (OCR), and Courtesy Amount Read (CAR) technologies are recommended for lockbox processing to improve safety.


According to the Association of Certified Fraud Examiners (ACFE), approximately $4500 per employee is lost annually as a result of fraud. In a recent survey in Austin, Texas, 55 percent of certified fraud examiners reported that occupational fraud has augmented since the start of the economic crisis initially in 2001 and then became more severe in 2007.


For example, on April 9, 2009, Emmanuel Ekwuruke; a Bank of America (BOA) employee was sentenced in Texas to sixty-six months in jail and four years of supervised release, for stealing 21 checks, totalling approximately $485,539 after impounding his vehicle from the bank?s parking lot. The money belonged to the Internal Revenue Services (IRS) Dallas lockbox.


According to the U.S. General Accounting Office (GAO) report; in 2001 more than 76,000 income tax payments valued at $1.2 billion were gone astray by a Pittsburgh lockbox facility. 


There are numerous reported cases, such as the 2003 conviction of Edmond Ekene for a lockbox fraud; 2006 conviction of Ursula Nicole Moore; 2007 conviction of Sharon Walker in Ohio; and 2008 conviction of Jacqueline White in Windsor, CT, among others.


Tips to reduce lockbox fraud


1.        Consistently evaluate your system: Businesses must implement internal control systems such as authorization, controlled environment, secure information system, monitoring, periodic and unscheduled audits through external consulting partners, and so on.


2.        Separate banking responsibilities: Statistics show that smaller companies with 100 or less employees experience higher median of fraud losses as compared to companies with 10,000 employees or more. Lack of proper accounting controls including segregation of duties is an important factor. An increased level of trust between the co-workers can also cause employees to be less alert.


The fraud can be reduced by unannounced cash checks, observation of cash handling, and independent review of general ledgers such as reconciliation and disbursement journals. This will help to identify the financial ambiguities early-on.


What is an electronic lockbox?


An electronic lockbox is a payment collection account usually represented as a PO Box number where banks receive customer payment on behalf of large businesses.


The standards for lockbox transmission files are defined by 'Bank Administration Institute', while the initial design was introduced in 1971 as BAI1 standard. This format has evolved over the years; and in 1987, a newer BAI2 format was introduced.


BAI2 format is most popular these days. It contains the check total line items separated out into respective invoice numbers and their corresponding invoice amounts. It also contains customer Magnetic Ink Character Recognition (MICR) and other information such as customer's name, number, and payment dates. BAI2 provides greater possibility of matching invoices with payments with faster clearing and less manual work as compared to the older BAI1 format.


Lockbox data flow: electronic data interchange (EDI)


Electronic lockbox banking utilizes EDI methodology which is an interchange of structured data according to agreed message standards between computer systems.


Customers send their payments to the lockbox. The bank then collects that data and sends it either through EDI 820 or 823 formats to the users in the EDI server. The server translates the message using EDI interface into IDOC (intermediate documents) and then sends it back to the enterprise resource planning (ERP) system.


Important check processing features in SAP


Interestingly, the lockbox program uses meticulous information from the payment advice to automatically search and match customer open items. The post process function entails reviewing the status of checks applied through the lockbox by manually clearing any checks that were on-account of a customer or not applied to the customer account.  


Partially applied checks require further processing; for example: check may have paid 10 invoices, but one was incorrectly keyed. The first 9 invoices would clear. The payment amount for the 10th invoice would be put on a separate account and would have to be post processed manually.


Any payment that could not be identified either by customer MICR number (check) or the document number would remain unprocessed. Once the payment is matched to the customer and the invoice, it can be applied during post processing.


From an SAP point of view, lockbox setting is a Sales and Distribution (SD) setting in Customer Master Record which is utilized by Finance (FI) to populate transactional data.




Electronic lockbox process has evolved consistently to accommodate sophisticated functions, though pro-active measures will have to be taken to prevent manual fraud. It is projected that due to incessant improvement in electronic banking, accounting, and the ERP systems; lockbox process will continue to grow as a robust payment processing mechanism.


*Ms. Navreet Kaur Randhawa works as Sr. Consultant with Dexteyra Consulting Group Inc. She has an expertise in designing SAP Best Practices based solutions in financial supply chain management (FSCM) and Banking. Ms. Randhawa holds a Masters Degree in Electrical Engineering from Guru Nanak Dev University in India. She likes reading and listening to Indian classical music.



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