Published: January 01, 2000
Despite a continued decline in cheque volumes, the majority of payments received by many US companies today are still made by cheque. For these companies, possible upcoming changes to the US Postal Service delivery model could unexpectedly impact their businesses – and as a result, the rationales for using a lockbox service are increasingly important.
US Postal Service volumes have declined dramatically due to a number of factors, most notably the rise of electronic communication. This declining volume — 21% between 2008 and 2012 — has had a powerful impact on the Postal Service’s revenues, so much so that the service’s capacity has far outstretched its volumes. Adding to this pressure is legislation passed in 2006 requiring the Postal Service to pre-fund its pension plan obligations, all of which has negatively impacted the organisation’s cash flow, and in 2012 led to a $16bn loss [1].
This situation has prompted the Postal Service to set in motion a number of possible initiatives. The organisation began rationalising its network, leading to three waves of processing site closures that are currently under way. It has also proposed ending its Saturday delivery service for first class mail (but not packages), a measure which aims to save over $2bn per year. While this proposal was initially scheduled to take effect in August 2013, implementation has recently been placed on hold as a result of Congressional action. Meanwhile, it has also petitioned Congress for legislative relief in terms of its pension funding obligations, although its efforts have been unsuccessful thus far.
While the Postal Service is taking action with respect to its financial viability, these initiatives may well have an adverse effect on delivery options in the US. The ongoing site closures, which are a key feature of the network rationalisation process, have already resulted in the elimination of the one-day delivery standard in some areas. The Postal Service’s stated intention is that by February 2014, the one-day delivery standard for first class mail will be eliminated entirely, with all mail falling into a standard two-day or three-day category. [2]
The lengthening of delivery times will have a clear impact on the many US companies which continue to receive payments from their customers by cheque. This model is still favoured by a significant number of companies, both large and small, including consumer-to-business as well as business-to-business corporations. While overall cheque volumes are declining year-on-year, for business-to-business cheques the conversion is expected to occur at a slower pace. Cheques may be falling out of favour – but there are still many out there to be processed.
What will the anticipated changes to the Postal Service mean for these companies? Where the cancellation of Saturday delivery is concerned, there may be more impact than expected even though most businesses operate on a Monday to Friday basis. The proposed elimination of Saturday pick up of retail/consumer mail means that some mail that would have been delivered on Monday will be delivered on Tuesday and Wednesday instead.
With some customers waiting longer to receive their bills, and cheques taking longer to arrive at their destination, the extended mail float can be expected to have a negative impact on the company’s receivables.
While many of the Postal Service changes have not been finalised and have yet to come into effect, the impact on delivery times is already being felt. The Phoenix-Hecht Postal Survey [3] conducted in October 2012 found that 68% of respondents reported slower delivery times than in June by an average just over 0.10 of a day. For select cities and for regional distribution, this average exceeded 0.20 of a day.[[[PAGE]]]
In the current low rate environment, the loss of value to companies resulting from the longer float may be relatively minor. However, if interest rates start to rise, the impact of the increased mail float will likewise grow. At that time, this topic is likely to attract more attention, but prevention is better than cure, and companies which are heavy cheque users should be looking at this topic today.
For companies receiving direct payments by cheque (non-Post Office box), one recommendation is to use a lockbox service. The objective of a lockbox is to reduce mail float in the collections process. Without a lockbox, a company receives cheques at its offices and then must process them internally before taking them to the bank. Alternatively, companies can speed up this process by having cheque payments delivered directly to a lockbox held by the bank. The bank processes the cheques directly and as a result can often accelerate cash collection by a full day.
In addition, many companies would like to encourage more remitters to pay by electronic means. However, changing a customer’s paying behaviour can be challenging while ensuring that the same level of remittance detail is obtained. To address this, there are industry- as well as provider-specific efforts to facilitate data-enrichment of electronic credits to the same levels as lockbox processing.
A key feature of a lockbox is that it has a unique zip code. Cheques sent to that zip code are processed as remittance mail – which has the benefit of accelerated availability since there are fewer USPS sorting requirements and around-the-clock access for lockbox providers to retrieve available mail. Today, the difference can range from half- to a full day. It is expected that, if /when first class mail moves to a two-day delivery model, lockboxes may continue to benefit from overnight processing, making the gap between remittance and first class delivery times even greater. It is also important to note that the proposed discontinuation of Saturday deliveries will not impact remittance mail processing and deliveries on Saturdays; remittance mail will still be available to remittance processing providers and post office boxes on Saturdays.
However, considering the other possible changes to the Postal Service, the argument for using a lockbox in the collections process is becoming even more compelling.
The benefits that a lockbox can bring are simple but significant. Using a lockbox means that companies can accelerate the processing of cheques. When a lockbox is used, the bank’s role includes not only depositing the funds but capturing critical information that comes with a remittance, such as who has paid which invoices, and whether they have paid the correct amount. The bank transmits this information to clients to post to their accounts receivable systems. As a result, companies using lockboxes generally can access their cash more quickly, post to their accounts receivable sooner, and enhance their days sales outstanding (DSO).
Ironically, as a company’s cheque volumes go down, the argument for using a lockbox may become even stronger. In general, for some companies, the cost of the internal infrastructure required to process cheques and update accounts receivable files may be fixed, a structure which may become harder to justify when volumes decline. In contrast, when a company utilises a lockbox, it pays for the service on a variable cost basis.
With the recent and anticipated changes to the Postal Service, every US company collecting payments by cheque should be monitoring the situation. This applies equally to companies which are already using lockboxes. The closure of processing centres, such as the Pasadena centre that shut down last year, has had an impact on lockbox services in the vicinity, which are now having to have mail delivered from sites further away – a situation potentially leading to longer processing times. And more closures are coming: 140 consolidations are scheduled to be completed by the end of 2013, with another 89 planned for 2014. [4]
Companies with existing lockboxes should, therefore, analyse the impact on their businesses and determine whether their lockboxes are likely to be affected by any of the anticipated closures. In some cases it may be appropriate to change the geographical location of the company’s lockboxes or to add additional lockbox collection sites in order to keep processing times as low as possible. Companies may also experience nationwide lockbox receipts shifting to later in the day due to the changes in the Postal Service processing standards. This may make additional lockbox locations beneficial for select companies.
Meanwhile, for companies which do not currently use a lockbox, now is a good time to consider it. In addition to reviewing the anticipated increase in mail float, companies should consider that a decrease in cheque volumes may mean that fixed investments will become more expensive on a per item basis over time.[[[PAGE]]]
The potential end of the Saturday delivery service is attracting much attention – but it is just one aspect of the wider programme of change which companies should be monitoring carefully. Even if the Saturday delivery closure is ultimately rejected by Congress, the processing site closures which are complete or under way may already be slowing mail delivery times.
Lockbox services have been providing clients the benefit of faster cash collection and enhanced reporting capabilities for years. Noting this established track record, companies that continue to receive a significant volume of payments by cheque should act now to assess the impact of the anticipated Postal Service changes on their existing lockbox arrangement – or should consider adopting a lockbox solution in order to mitigate the effects of those changes.
Notes
1 USA Today 2/7/12 http://www.usatoday.com/story/news/nation/2013/02/07/post-office-graphic/1898053/
2 USPS: Revised Service Standards for Market-Dominant Mail Products http://about.usps.com/news/facility-studies/_pdf/market-dominant-final-rule.pdf
3 Phoenix Hecht Postal Survey Oct 2012 http://www.phoenixhecht.com/TreasuryResources/Products/Postal_Survey.html
4 USPS fact sheet 5/7/12 http://about.usps.com/news/electronic-press-kits/our-future-network/assets/pdf/fact-sheet-network-op.pdf
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