Concentration banking

Concentration banking ⇒ is a way to speed up collection of payments on accounts. Using this technique, customers in an area make payments to a local branch office rather than firms headquarter. The local branch makes deposits in an account at a local bank. Then surplus funds are periodically transferred to the firm’s primary bank. Since these branches are closer to customers, the firm gets the use of the funds more quickly. The availability float related to cash receipts is shortened. However, transferring funds between accounts can be costly. Wire transfers generally involve a significant fee. A slower but less expensive way of transferring funds is through the use of official bank checks (depository transfer checks) which are preprinted checks used to make transfers.

Concentration banking ⇒ is a system in which a company uses one or more major concentration banks along with many different regional bank accounts that are near its various collection points. The money deposited to the regional accounts is transferred regularly to the concentration bank or banks from the regional banks. Concentration banking may be used either along with a lockbox arrangement or when regional offices process the receipts and deposit them to their local banks. When used with a lockbox arrangement, each local bank that is collecting and depositing receipts for the company transmits the deposit amount information to a central location throughout the day. At a specified cut-off time, the deposit information from all of the local banks is transmitted to the concentration bank. The concentration bank electronically moves the funds from the local banks into the concentration account. This gives the company faster use of its cash for investments, debt reduction or working capital uses.

Lockboxes and concentration banking are fairly expensive services. They can benefit a company with widespread operations only if the company’s receipts are great enough to make the benefit from speeding up collections greater than the cost of the services.

A concentration bank ⇒ is a large bank account to which a company transfers funds from local depository banks. These local banks operate the company’s lockboxes and thus serve as collection points. The transfer of funds to the concentration bank account allows the company to take advantage of economies of scale in cash management.