The Death of the Float

Once upon a time, you could present a check for payment with the knowledge that it would “float” as it made the journey through the banking system.

The float was the time – typically days – that you had to use that money before the check was presented for payment at your bank.

Well, that was a nice walk down memory lane, wasn’t it?

For several years, the banking industry has been adopting new technologies and practices that move money more and more at the speed of light. And with each new generation, the check float time shrinks.

The U.S. banking system physically transports over 100 million checks every day. So after the events of 9-11, it became evident that a system was needed that would be less vulnerable to the disruptions of air and ground transportation.

Consequently, the “Check Clearing for the 21st Century Act,” or “Check 21,” was passed and will go into effect Oct. 28, 2004.

Although it was not the prime motivation for Check 21, it turns out that one of the by-products is the end of check float as we know it.

Practically speaking, when a customer presents a check for payment to a merchant with Check 21 capability, the amount tendered will be debited from the account at the point of sale, as with an electronic approval of a debit card.

In fact, the merchant will likely just hand the check back to the customer after verification.

With Check 21, the days of shopping with checks first and making a deposit later are over.

So if a paper check is basically going to be treated as a debit card, it’s easy to see how this icon of our consumer society will join “float” in the history books. Indeed, one expert predicted that with Check 21, the current movement away from paper checks and toward electronic money “will shift into hyperspeed.”

Another goal of Check 21 is processing efficiency. Under the new law, banks won’t be required to return canceled checks. This will mean significant savings for banks, but if you rely on returned checks for record keeping you’re going to need a new system.

Initially, Check 21 technology will likely be too expensive for most small businesses, but not for our larger vendors. So expect checks to some vendors to clear your account very soon after their mail runs.

Even though Check 21 will mean less float time on your checks, theoretically the impact should be offset by quicker availability of cash from checks you take in. The new law, however, doesn’t require banks to reduce the time they can hold checks for collected funds.

If your bank’s overdraft protection service is starting to sound like a good idea, your instincts are good.

But the good news is that, since Check 21 will hasten the already growing use of debit cards, you can improve your cash flow now by offering your customers this currently available and affordable technology.

One more good thing about Check 21 is fewer paper checks also means fewer bad checks.

Write this on a rock…
Say goodbye to the float, and hello to Check 21.