Customers blast bank robbery
Last January, Gayle Essary, 42, owner of a small advertising firm in Queens, N.Y., wrote a string of checks that bounced. Essary was shocked and bewildered; he had just deposited a check for $24,000, more than enough to cover the checks he had written, into his account at Citibank. When he demanded an explanation, bank officials said they had put a temporary hold on his check to make sure it was good. Essary claims that Citibank held his $24,000 in limbo for ten days-business days, that isand his money was unavailable to him for two full weeks.
Such episodes have long infuriated customers at many big-city banks. Funds deposited as checks can often be used only after waiting periods that may range from two days to three weeks. Chicago's Continental Illinois bank, for example, puts a five-business-day hold on Illinois checks and a seven-business-day stay on out-of-state checks. For years depositors have shrugged off this inconvenience, but protests are now on the rise, and politicians are beginning to pay attention. Legislation to regulate bank check-clearing policies is pending in Congress and in at least two state legislatures.
Banks and savings and loan associations maintain in their defense that it may take several weeks to find out if a check is going to bounce. But critics point out that only 1% of all checks turn out to be no good. They charge that banks are really delaying payment to pad profits.
Banks frequently collect money from checks far faster than they credit it to their customers' accounts. To receive payment for a check, a bank usually sends it to a Federal Reserve branch or some other check-clearing institution. The bank typically receives credit from the Federal Reserve within 24 to 48 hours, even if it takes the Fed longer to collect from the bank on which the check was drawn. After being paid for the check by the Federal Reserve, a bank may wait several days, or in some cases a couple of weeks, before permitting the customer to use his own money. During that time, the bank invests the money and earns interest, a strategy known as "playing the float." In essence, the customer often unwittingly gives the bank a free loan. Says New York State Senator Franz Leichter: "I think it's the biggest consumer scam going on in America today."
Bankers point out that the check credit granted by the Federal Reserve is only provisional. If the check later proves to be no good, then the Fed takes its money back. Revenues from playing the float, however, can be much higher than losses from bad checks. Lee Falls, a vice president at San Francisco's Bank of America, estimates that his bank earns $3.35 million off the float each day and suffers only about $3 million of bad-check losses during an entire year. But Falls says that the number of bad checks would rise dramatically if the bank eliminated waiting periods. Says he: "The crooks would come out of the woodwork. We have to protect ourselves from losses."