Technology makes the float risky for consumers
By Michelle Samaad • Bankrate.com

Do you ever write checks before payday, figuring that by the time they get cashed, the money will be in your checking account to cover the cost?

Watch out -- technology is working against you.

The electronic era brings with it a shorter span between the time a check is deposited and the time it clears. The days of playing "the float" are floating away.

The float is that lapse in time between when a check is deposited into an account and when the money becomes available.

The float for paper checks is between two and five days. Banks use this time to verify the legitimacy of a check. In the meantime, the bank or credit union earns interest on dormant checks -- which has had some consumer groups crying foul. In 1995, $73.5 trillion worth of checks were cleared -- an average of $201 billion per day, according to a Federal Reserve Board study. The overnight interest rate for that year averaged about 16 cents per check, or $11.7 billion.

Technological change sinks float
Soon that will be a complaint of the past, as online banking and electronic bill payments become more popular. Payments made online usually clear by the end of the day. Debit card transactions are instantaneous because point-of-sale transactions are cleared at the time of purchase.

"Playing around with float has now lost its innocence," says Wyn P. Lewis, managing principal at J.D. Carracker & Associates, a Dallas-based consulting and software company.

Here's how the paper check float works: Once a check is deposited into a checking account, it is routed automatically by computer from the recipient's bank to the check writer's bank. This can take up to six business days. During this time, the check is shipped to one of the regional Federal Reserve banks for clearance, and then sent back to the recipient's bank.

Along the way, several occurrences can add more days to the clearance process: The check writer's bank can refuse to honor the check because the account doesn't have enough money, the check may appear to be forged or the signature may be unclear. If the check is not honored, it is sent back to the check writer's bank and all of the Federal Reserve banks to establish an audit trail.

The length of time it takes for a check to clear depends upon where the check is going and how the check writer's bank decides to get it there.

"A group of neighboring banks that consistently present many checks to each other might find it convenient to organize a regular check exchange," says Kirstin E. Wells, senior analyst with the Division of Reserve Bank Operations and Payment Systems for the Federal Reserve Bank of Minneapolis. "They all might agree to accept check presentment at a central location." This buddy system can cut down the float time.

Following the rules
Regardless of the shortcuts, banks must make money available on local checks within two banking days of deposit, according to the Expedited Funds Availability Act. The time allowance may be longer for deposits made by new account holders or with out-of-state checks. Money on checks drawn on out-of-state banks must be available within five banking days. In reality, most checks clear through the Federal Reserve banking system in two to three days.

Wells said laws were passed in the early 1980s, partly in response to consumer complaints that banks were exploiting the float to their own advantage, holding on to checks and putting the money into short-term investments that would earn interest.

"Over the years, legislation has made it harder for banks to hold checks, but you're still going to have those institutions that will hold your out-of-state check for the maximum time allowed just to earn the interest," says Ed Mierzwinski, director of the U.S. Public Interest Research Group, a consumer rights organization.