Odyssey of a Check : Bank ‘Holds’ Defy Age of Electronics
When a Los Angeles woman went to her bank on Aug. 7 to deposit a $7,500 check from suburban New York, she was told that there would be a “hold” on the funds for 10 working days. This meant that she couldn’t draw on the money until Aug. 21.
On the 19th, with the hold still in force, the woman called the payor and learned that the money had been paid out on Aug. 9. “So my bank,” she says, “learned that check was good right away, and just held my money all that time! Isn’t that unfair?”
Indeed, the U.S. Public Interest Research Group in Washington calls it a “long-standing abuse of consumers.” Many fiscally sound people find themselves unable to use money from the sale of one house for a down payment on another, to send children funds that can be used immediately for college bills or even, sometimes, to cash checks written on the U.S. Treasury in Washington--all thanks to the banks’ insistence that they must hold funds until a check “clears.”
This is a day of instant phone connections, television transmissions from the moon and “calculators the size of a thumb nail,” explains American Bankers Assn. staff attorney William Stanley, “and people ask why banks can’t get a check cleared for the consumer any faster.”
Some, like the woman above, suspect that the banks can and do clear checks promptly. And if they are not, they may soon have to start: On Jan. 23, the House of Representatives passed--and the Senate will soon debate--a bill that would set clear limits on such “check holds” and the banking custom known as “delayed funds availability.”
Clearing Process Complex
Trouble is, it’s not that simple: The woman’s bank didn’t really “hold” her money, at least not knowingly. Just what happens to checks--or anything else--behind the scenes at banks is unknown to the layman, and very hard to comprehend. “The more you get into it,” says Ken McEldowney, director of Consumer Action in San Francisco, “the less you understand.”
Most consumers guess either that the entire transfer is electronic, purely a computer exchange, or that some modern version of a Wells Fargo wagon goes back and forth between cities, exchanging bags of checks for bags of cash.
Actually, it’s a little of both: the bank of deposit does send the check (yes, the actual piece of paper) to the paying bank, but it gets no positive notice of payment. It hears only if the check bounces, because the actual check returns with a notice from the paying bank that it couldn’t be paid. If it doesn’t return within a reasonable time (the “hold” period), the deposit bank assumes it was good.
Banks don’t even receive separate payment for each check. What they get is “provisional credit” at a regional Federal Reserve Bank for that check and all others cleared for them that day--credit that could be reversed if the check bounces when it finally gets to the payor’s bank.
Unfortunately, the whole business can take a while. There are 40,000 financial institutions nowadays, and most of the 40 billion checks written on them annually get from bank of deposit to paying bank via intermediaries. There may even be several intermediaries, if the banks involved are small, out of the way and dependent on larger banks or a regional branch of the Federal Reserve to do their processing.
“The further away they have to move, the longer it takes, and the slower the return of the funds,” says Earl Hamilton, an official of the Federal Reserve Board in Washington.
Slow Return Trip
Actually, only half the trip is slow. Banks want that credit fast, so the movement from bank of deposit to bank of payment has become high speed and automated. Deposited checks go in bundles from outlying banks to the banks that process them, often in big rooms that literally have checks flying around them on various tracks.
Each check has its value encoded next to the code numbers for paying bank, branch, and account: those just passing through, already encoded, are stamped, then all are sorted according to destination (the paying bank), rebundled and put on route. However far they go, the vast majority get to the writers’ banks, cleared and credited, within two days.
If the check then bounces--and fewer than 1% of checks do--it must be returned to the bank of deposit, but the return is slower. Much slower. According to the Bank Administration Institute in Illinois, the whole cycle takes an average time of 6.8 days--only 1.6 days for a check’s forward movement, but 5.2 for its return to the bank of deposit (40% take longer than 7 days).
It goes back by the same route all right, but no one ever developed a high-speed mechanism for this tiny counter-flow. Each way station in the original “endorsement chain” handles it manually, figures out the routing from the endorsements on the back and sends it on to the next by midnight of the day after receiving it--sometimes by ordinary mail.
No Hurry on Return
So what if it’s a rather pony-express system? The paying bank is in no hurry, not having paid anything out, and the deposit bank has protected itself by simply holding the funds against the possibility of bounce. No one’s in a hurry but the consumer.
That consumer, however, has also become less accepting, partly because the whole relationship between banks and their customers has changed with the deregulation of the industry, the new fees and charges levied to balance the higher interest paid for deposits, and the sudden public understanding that banks are just profit-making businesses. Among other things, customers are less inclined to accept the bankers’ explanation that check holds reduce the losses they suffer on bad checks.
There is no official estimate of total industry losses on bad checks (“I once heard $100 million,” one banker offers). “Banks tend not to release loss information broken down,” the ABA’s Stanley says, “given the aspect of safety and security.”
Banks Estimate Losses
Individual banks do estimate their own losses at as high as $2.9 million (Bank of America’s 1981 estimate, its most recent), but they offer only estimates, usually explaining that they don’t disclose bad-check losses separately.
They also point out that in many areas of the country, consumers rarely experience a check hold: According to a state banking department survey, for example, California’s banks on average hold only .04% of all checks deposited--those deemed high risk because of such factors as size, the depositor’s account history or the remoteness of the paying bank. (The survey did not include savings and loans.)
Banks also tell customers when a hold is placed, says Greg Wilhelm, vice president and counsel at San Francisco-based Wells Fargo Bank, so that people know that they “shouldn’t be writing checks” against those funds.
Consumer advocates, on the other hand, claim that consumers probably lose more money from check hold policies--$125 million a year, says Consumers Union, given an average bounced-check charge of $13 and a Bank Administration Institute estimate that 2.7% (or 9.7 million) of all bounced checks were returned because people wrote them against funds already paid but not yet available to the consumer.
Customers in the Dark
One reason for all the bounced checks might be ignorance: only 60% of the ABA members surveyed, for example, even tell customers when a hold is placed. Another reason might be that check holds are so inescapable in some areas: blanket holds on all deposited checks are “frequent” in some places, Consumers Union said.
Many critics believe that holds have never proved necessary or helpful, given the industry’s lack of real data on bad-check losses and on the number of held checks that actually do bounce. Indeed, where holds are selective, “the bank’s administrative costs of placing those holds on checks is probably larger than the loss from bad checks,” says Consumer Action’s McEldowney.
The fairly widespread public suspicion is that banks may simply be playing the “float.” Says one New Yorker, “Why do they hold my money? Because they’re using it to earn interest for themselves!”
“It may well be that certain institutions are able to enhance their revenue through the practice of imposing blanket, rather than selective, delay policies,” said Theodore Allison, a Federal Reserve Bank official, in 1982 congressional testimony. At the same time, he added, such blanket holds, while “seemingly more profitable for the institution, might be used in conjunction with lower fees or lower minimum-balance requirements”-- a situation not yet widely noted.
‘Float’ Goes Both Ways
Bankers sometimes add that they give a little “float” as well: many pay interest from day of deposit on interest-bearing accounts, even if the funds are placed on hold, instead of waiting until the funds come in. And even if a check bounces and the funds are subtracted, they rarely take back the interest accrued.
Given the absence of real figures, the continuing arguments about bank “float” income, bad-check losses and interest earned here and there lack a certain vitality. Bankers themselves prefer to emphasize the “deterrent effect” of check holds. “If we never place holds,” says Wilhelm, “people will bounce checks with impunity,” depositing checks they’ve written on far-away banks and drawing on their deposits before the funds turn out to be fictional.
“Some banks may think the holds are protective,” retorts Consumers Union attorney Michelle Meier in Washington, “but others just don’t want to provide quick availability of funds.”
What seems uncontested is the irritation value. Even where holds are selective, “a rare occurrence for most customers,” says Wilhelm, “you only need a hold done to you once. It’s an experience not easily forgotten, because of the inconvenience and aggravation.”
Personal irritation even helped to spur legislative action in California, one of several states with a law now limiting check holds. In effect since 1984, California’s law was spearheaded by Assembly Speaker Willie Brown (D-San Francisco), partly because he had two daughters in New York schools whose banks put long holds on the funds their father sent them.
California Limits Holds
California’s financial institutions must make not only general disclosures of check-hold policies, but specific disclosures whenever an individual check is placed on hold--a time-consuming obligation that helps keep them selective about holds. Regulations implementing the law also limit hold periods, require next-day availability on government checks and checks for less than $100, and set maximums of three to five days on most intrastate checks (depending on the kind of institution and its locale) and eight to 10-day holds on out-of-state checks.
Personal experience may also enter congressional discussions of whether to speed up “funds availability.” Blanket holds, long ones, are said to be common in Washington.
The current House bill, sponsored by Banking Committee Chairman Fernand J. St Germain (D-R.I.), and passed last month 282 to 11, also concentrates on limiting hold periods. At the outset, checks could be held only overnight (government checks, checks under $100) or from two to six days, depending on whether they were local, in state or out of state. Within three years, however, local checks would have to get next-day availability, and no check could be held longer than three business days.
Banks Doubt Possibility
The industry’s confirmed response is that such hold periods are not just infeasible, but impossible. Under the current system, no one can make funds available so quickly, and couldn’t, even “in the foreseeable future,” the American Bankers Assn. said.
Given such hold limits, banks “might as well not have a hold at all,” says Wilhelm, “because you’d have to release the hold before you knew if the check was good.” In response, he says, banks might make such deposited funds subject to collection, which means mailing the check to the paying bank with a request that it send back the funds, no midnight deadline involved-- “the ultimate check hold,” he adds, and one that would carry a substantial service charge.
Better, the banks say, to hold the legislation while they change their system--if not by converting “wholesale” to a fully electronic, paperless system (at a “monumental” cost, the ABA said, “to the industry, and ultimately to the consumer”), at least by doing something to speed up the return trip.
To that end, the industry, in conjunction with the Federal Reserve, has begun testing the feasibility of returning bounced checks directly to the depositing banks, skipping any intermediaries--a plan that needs federal legislation to override the half dozen states where commercial codes still require that checks go back through the whole endorsement chain.
Another pilot project, under way in about 100 banks nationwide, would use the existing high-speed forward system for returning checks--an impossibility if everyone has to follow a routing spelled out by the endorsements on a check’s back. Instead, the bounced check is put into an envelope encoded for fast transmission, as if it were an outgoing check. “The beauty is that it uses the existing technology,” says Wilhelm, “and nobody has to design new equipment.”
Some surmise that the industry could conform to shortened hold periods without altering the current system, and with no significant problems.
New York, for example, instituted regulations limiting check holds in March, 1984. Despite industry protests that bad-check losses would increase, the New York State Banking Department believed, spokesman Richard Riley says, that “it could and should be done faster; some institutions were already crediting funds more swiftly than others.”
Rules for Delays Proposed
For consumers depositing checks of less than $2,500 (larger amounts are exempt), banks may hold government checks only one day, local (same city) checks two days, in-state checks three days and out-of-state checks six days. Thrift institutions get an extra day.
After three months under the regulations, the department took a survey of the effects. Ninety percent of the institutions that responded reported no added losses on bad checks, and those that did report losses had an average loss of only $2,400 for that period.
This might not be everyone’s experience--certainly not in states like California (say California bankers), where banks don’t have the added cushion of blanket holds. But who knows? If federal legislation does cause banks a problem, the industry might muster the same kind of ingenuity and technical acumen that developed the high-speed trip to paying banks, and come up with something for the return trip.
