Everyone who has a checking account has at some time probably taken advantage -- or at least been temmpted to take advantrage -- of the float, the period between check deposit and collection of the funds. Writing checks on more than one account before you actually have the money to cover them is also referred to as check kiting -- if you have the misfortune to get caught.
But two can play the same game. Banks also make the most of the float in customers' checks and quite legally make bilions of dollars profit in the process. Bank float occurs when a check is deposited in an account but the customer cannot withdraw the funds for several days, or several weeks "until the check clears."
In reality most checks clear through the Federal Reserve banking system in two to three days. Clearance through the private sector may or may not take longer depending on the relationship the depository institution receiving the check has with that paying the funds.
Yet customers are being told with increasing frequency they must wait for up to 20 business days (four weeks) for their money. Checks sometimes bounce when written on the assumption that funds once deposited have become available and that there is a certain minimum balance in a given account. Customers may be charged up to $20 for making such a mistake, and everyone dreads that one chance in a million of getting caught with your funds down.
Several years ago New York lawyer Sheldon Burman sued the Dime Savings Bank, charging that Dime required customers to leave checks on deposit for an excessively long time -- nine to 21 days -- before allowing funds to be drawn. Last year the New York State Appeals Court upheld a lower court ruling in the case stating that the bank's customers "had assented to a collection agreement containing specific time frames."
According to a 1978 Fed survey of 1,000 banks, just 38 percent of banks routinely delayed the availability of funds from personal checks or out-of-town checks. Since then the number of banks having so-called hold policies has increased substantially, particularly with automation, according to a Fed official who added that exact figures are not yet available.
Average hold time for the country as a whole is five business days for local checks and 10 days for out-of-state checks, according to Charles E. Arner, senior vice president of the First National Bank of Saint Paul (Minn.) who served on a bank task force on delayed funds availability. The 1978 Fed survey showed the most frequently imposed hold on local personal checks was seven to nine days, and 10 to 12 days for out-of-state personal checks. A hold is often imposed just on large checks and may be lifted if the account holder is a good customer.
Credit union and savings and loan association holds are lengthened by several days at each end of the cycle as checks clear through banks. But, of course, deposits to savings accounts and share draft accounts earn interest from the day of deposit, so thrift institutions are not getting as rich off their savers as banks are off their demand deposit customers.
A random sample of 10 Washington-area financial institutions revealed that the hold on funds imposed by banks varied between none and three business days for local checks, and between six and 12 days for out-of-state checks. At savings and loans, the hold ranged from seven to 15 days, and at credit unions, from 10 to 20 days. Barbara Anderson, branch administrator of the Bank of Bethesda, a state-chartered institution, said its three- and 12-day policy was based on Fed clearing times plus a few days to clear through correspondent banks. Another state bank, Potomac Valley, has a maximum hold of six days.
Bolling Federal Credit Union had the longest hold -- 20 days -- of the 10 local institutions questioned. For checks on California banks, manager Phil Loiacona says the hold is sometimes raised to 30 days: "We've had a big problem with checks bouncing. We need the extra protection."
The Fed says its consumer complaints about bank float, or delayed funds availability, come primarily from the East Coast and urban areas. The American Bankers Association set up a task force two years ago to study the question and make recommendations to the Fed. But the matter appears stalled as the Fed attacks problems it seems to feel are more important.
Lorin S. Meeder, assistant director of the Fed's bank operations division, said in an interview, "It rankles customers that banks have the use of their funds between the time necessary for collection and the end of the hold. There is no solid rationale for it."
The banks' rationale for the hold is twofold: deterring the would-be "paper hanger" or bad check passer and protecting themselves against actual losses. Yet, is the length of the hold justified by loss protection or is it just another way to make money?
To understand how long the Fed's clearing process takes, one should know that checks are routed automatically by computer from the payee bank, or the financial institution where the check is first deposited, to the payor bank. This can take up to six business days, holidays and weekends, not included, if the check goes through local and regional Federal Reserve banks as well as correspondent banks. Normally the process is cut short by several steps.
However, if the payor bank refuses to honor the check because of insufficient funds, forgery, unclear signature or any of a number of other reasons, the check must by law be rerouted manually back to the first bank through all the banks that handled it in order to establish an audit trail.
Fuzzy endorsements complicate the return which may take up to 15 days in the worst cases and sometimes double the time the check took on its forward journey. The Bank Administration Institute in Chicago puts return time at anywhere between nine and 23 days.
A study of return items done this year at the request of the American Bankers Association by three commercial bankers in Boston, Denver, and St. Paul showed the average time between initial deposit and return at these large, highly automated, urban centers was only 4.6 days.
According to Fed statistics, the number of checks returned for all reasons is 1.2 per 100, a percentage that has remained stable in the past 18 months; BAI estimates 4 per 100 are returned. Last year the Fed estimated that 187.5 million checks were returned.The ABA task force put the median value of each returned check at about $400 in 1979. BAI reports that 71.7 percent of all checks returned are due to insufficient funds but does not say how many were eventually made good.
Because no statistics on the total value of bad checks are kept by the Fed, only estimates are available. Most of these appear to be extrapolations of a survey done by the Small Business Administration more than a decade ago. Consequently they vary widely and cannot be considered reliable.
For example, the National Council on Crime and Deliquency estimates banks alone suffered $500 million in losses on 100,000 bad checks in 1978. The American Bankers Assiciation quotes the Federal Bureau of Investigation as saying there are 30 million fradulent checks written annually, resulting in $4 billion in losses to banks and merchants.
Telecheck, the check verifying service, says merchants alone suffered $2 billion in losses last year. Banks are not externally insured against check losses.
Against any of those figures should be mmeasured the profit from banks' float. The value of the 35 to 40 billion checks that pass each year through the clearing system works out to about $20 trillion. The Fed estimates that perhaps one-quarter of that volume represents consumer banking. (According to the Fed's Meeder, holds are rare on corporate accounts because corporations frequently have compensating balances which cover any losses).
To get an idea of the float on $5 trillion, consider that the interest earned overnight on $1 million is about $300 at 10 percent annual return. That works out to $1.5 billion a day. Your bank earns 30 cents every day it withholds your funds on a $1,000 check, if you have a regular checking account that does not pay interest. Subtract 2.5 days, the average time required to clear from 7.5 days, the average hold time, and you find a potential five-day difference between the time actually required and the hold imposed. If it could be shown that all financial institutions held consumer funds five days longer than necessary to clear the checks, the float would be worth about $7.5 billion minus losses, the cost of processing checks in both directions, and where applicable, interest paid out on sayings accounts.
The length of the hold is left up to the business judgment of banks; it is not regulated by the Fed. Banks, for their part, would be reluctant to have the Fed impose more realistic holds. The ABA has recommended that holds be based on actual experience, reflecting average return times rather than worst cases. The Fed, for its part, would run into a legal and insurance quagmire if it were to impose holds and the banks suffered losses on bad checks that were returned after the hold period expired.
Another ABA recommendation calls for standardization of endorsements, each successive bank in the clearing process putting its stamp on a designated line on the back of the check. ABA would also support a voluntary notification system whereby the payor bank would alert the payee bank by phone or wire of bad checks in an effort to speed up the return process.
Legally a customer is liable for funds if a check bounces even after the hold period expires. In order to avoid such a nightmare, particularly when the funds have already been spent or invested, Meeder suggests two alternatives. The customer should ask his or her bank not to credit the funds to the account until the payor bank on which the check is written has sent the funds. The first bank is instructed to send the check directly to the payor bank, thus bypassing the system. When it is received, the funds are wired back. The cost to the customer runs between $5 and $15.
Another way is to ask the first bank to estimate how long the check will take to clear, then have that bank telephone the payor bank and say when the check has been paid. The customer at that point arranges to have the first bank release the funds. The charge is limited to the cost of the call.