Check 21 / CCAF Act
The Float has sunk
Check 21 and the Consumer
Checking Account Fairness (CCAF) Act
The Float Has Sunk
Near the end of 2004, the Check Clearing for the 21st Century Act (Check 21) went into effect, bringing with it mixed opinions on what consumers and bankers alike could expect. The now law dealt with the exchange of digitized checks opposed to physical checks, and decreased processing time drastically. The belief among many circles was that checks would begin to bounce en masse, and that the consumer would be impacted in a drastic way. This paper touches on the underlying subject of the “float” as well as subsequent legislation entitled the Consumer Checking Account Fairness Act (CCAF) that addresses imperfections in Check 21. We will offer information on both acts and show how we as the consumer can expect to be affected.
Ventureline.com defines the term “float” as being “the time between the deposit of checks in a bank and when the amount is truly accessible” (2005). This term, although unfamiliar to some, represents a time honored practice that virtually everyone, of any age, has become familiar with. With respect to our personal finances, a float is used to buy the consumer time before funds must be withdrawn from an account. It is advantageous to use from the standpoint of cash flow, as funds might not be available immediately to cover a check, but are expected. This gives the consumer a small amount of leeway in writing checks, as the float may afford the consumer several days before they must cover a check. In a business setting, things are a bit different. There are still advantages that can be realized from a cash flow standpoint, however the float is more of a tool than a resource for the business, and corporate use of the float has revolved more around profit than prevention.
In every business, or household for that matter, there will always be two separate balances for cash. The first refers to the actual recorded amount on the corporate books, while the second is represented by the balance that the bank shows. The difference between these figures, or the float, means that a business can take advantage of short term cash to use for other means. For example, if a company writes $1,000 worth of checks to vendors and receives $1,000 from customers, there would be no difference in what the corporate books show as operating cash available. However, consider another possible scenario. If the full $1,000 from customers clears the host bank while only $600 of payables checks run the clearing cycle, there is a temporary, short term amount of cash that is available to the firm. In some instances, the float can enable companies to benefit from short term “loans” with no interest consequence. In their text entitled Foundations of Financial Management, Block & Hirt state that “Some companies actually operate with a negative cash balance on the corporate books, knowing float will carry them through at the bank”. Our example above illustrates this fact, and the float makes it possible to write $1,400 of checks against income of $1,000 and benefit from what is, in essence, a short term loan.
Reality Check 21
In late 2004, Congress enacted the Check Clearing for the 21st Century Act (Check 21). The act took technology to the forefront of banking and eliminated one, time consuming step in the check cashing process-the need for the physical check to change hands. The law permits the use of substitute checks to facilitate the clearing process, and as a result, clearing times would be substantially decreased. One could obviously see how this technology could jeopardize the use of float both personally and commercially. This new technology would enable banks to eliminate the time it takes to clear checks and potentially eliminate float altogether. However, in her article entitled Still Got Float, author Karen Bankston suggests that there is still hope. Addressing the issue of whether we have seen the last of float, Bankston states that “for many institutions the return for quicker check clearance-except for those checks of high amounts-does not justify the current, relatively high cost of converting them (estimated at 5 to 7 cents per check) to an electronic image” (Jan 2005). This fact suggests that full conversion is still a matter of time. Michael Sisk, author of Shifting Gears agrees with this estimate on cost and implementation, and believes that in the infancy stages of implementation, the largest banks will have the resources to jump in headfirst. Following this, will be the ones hoping to learn from mistakes made by the initial wave, and finally the rest of the industry (Sisk, 2005). One drawback in the progression of this theory is that “there are competitive reasons to be a leader in this realm; specifically, cost advantages can be passed onto corporate clients and bundled into cash management packages” (Sisk 2005).
In response to Check 21, and the potential death of float, New York Rep. Carolyn B. Maloney, a member of the House Financial Services Committee, has sponsored H.R 5410, the Consumer Checking Account Fairness Act, or CCAF. This legislation was proposed to “redress imbalances between the speed of withdrawals under Check 21 and the slower speed of crediting deposits” (Schneider, 2005). In other words, there is apparently life left in “float”, only not the way the check writer would hope. Banks are still able, and willing to hold certain deposits made by consumers and businesses alike, taking advantage of float interest. Allowing this to happen, would only become more problematic for consumers as Check 21 gains momentum. With reduced clearing times and check holding procedures remaining at the status quo, the float advantage shifts to one side only, and left holding the overdraft fee is the bank member or business. To combat this, the aforementioned legislation is seeking to address hold times, as well as other issues involving deposits such as ATM deposit availability, and credit v. debit priority. In response to this, Ivan Schneider, in his article entitled The Flap Over The Float, suggests that Check 21 is not to blame, stating “it (CCAF) explicitly makes a connection between Check 21 and hold times, even though the two are unrelated” (Schneider, 2005). In other words, the new law simply eliminates the “formality of a piece of paper” (2005) and was not penned to do away with float for the consumer.
In the opening paragraph, we defined float according to financial standards. One definition we are probably more accustomed to is Webster’s, “n- something that floats in or on the surface of a fluid” (Webster’s). This could refer to a device that helps us keep our heads above water. Ironically, our financial definition could serve as a figurative equivalent. However, float, as we have known it, is on life support. Check 21 may not have been designed for the purpose of eliminating float time, but it most certainly has achieved this as a by-product. It remains a mystery as to how much longer it will be before banks are able to spend the money to fully integrate with what has come to be known as IRD’s, or image replacement documents. So in the meantime, depending upon whom you bank with, or the size of the check you write, may dictate whether or not your documents are electronically sent. One thing that is certain, the advantage has now swung in the direction of the banking center, and only time will tell whether or not there will be relief under CCAF.
Bankston, Karen, Still Got Float, Credit Union Management; Jan2005
Sisk, Michael, It’s Time for a Reality Check on Check 21, Bank Technology
Retrieved Apr 25, 2005 from www.ventureline.com/glossary
Schneider, Ivan, Cut the Fee or Wait and See?, Bank Systems & Technology,
2005, CMP media LLC. Retrieved April 26, 2005 from: www.banktech.com
Schneider, Ivan, The Flap Over The Float, Bank Systems & Technology, 2005,
CMP media LLC. Retrieved April 26, 2005 from: www.banktech.com