Most people bank where it is most convenient, and, large institutions with many branches have traditionally had an advantage. But in today’s electronic age, most small banks have the basic products the consumer wants and needs (credit and debit cards that work at most merchants and ATMs worldwide, interest bearing accounts, some even have investment services). In addition, in Nevada and in most states, banks are required to carry FDIC insurance which now insure interest bearing accounts to $250,000 and non-interest bearing accounts to an unlimited amount. [A married couple can get more than a million dollars of FDIC coverage on interest bearing accounts by opening separate and joint accounts (ask at your branch).] As a result, much of the advantages of bricks and mortar and size have dwindled. Since there doesn’t seem to be much difference in the products offered, maybe the consumer should examine a bank’s attitude.

Two Questions

Attitude can me measured by getting answers to two questions (ask your local branch manager): 1) In the bank’s daily work, are deposits credited before checks are cleared? 2) What is the bank’s check “hold” policy on deposited checks?

Crediting Deposits

Theoretically, the entire banking day can be viewed as a single instant because the bank computers process the day’s work in the evening after the branches are closed. So, the order in which the work is processed is important. A bank that posts the deposits first and then the clearing checks is friendly to consumers. One that does it the opposite way isn’t friendly. The following example will clarify exactly why. Assume that you had $500 in your account on Friday and you wrote $750 in checks over the weekend to local merchants as follows: $200 to NV Eye Plastic Surgeons; $150 to Integrated Home Systems; $125 to Washoe Wine; $100 to MCSS Ltd.; $75 to NV Retina Assoc.; $50 to Adadia Medical; $25 to Cupit, Milligan, Ogden CPAs; $25 to AMC Consulting & Design. You expect all of these folks to deposit your checks on Monday. So, at 9 a.m., you deposit $260 in cash into your account. At the end of the day, you expect that your checking balance will be $10 ($500 – $750 + $260). This may or may not be true depending on how the bank processes the work and how it gets posted to your account. An unfriendly bank will process the work such that they generate the maximum in fees to themselves and the largest possible charges to you. They do this by crediting deposits last and posting clearing checks to your account with the largest amounts posting first and the smallest amounts last (which generates more fees if there are insufficient funds).

Note that the unfriendly bank has levied $25 in overdraft fees. A really unfriendly bank may even bounce the last check and levy an additional $25 to $50 bounced check fee. Now let’s see how a friendly bank would process the same set of transactions:

Note that the friendly bank posted the deposit first and the small checks before the large checks so as to minimize any possible charges to you, their loyal customer.

Check Holds

In bygone days (not so awfully long ago), the bank would gather up all deposited checks, encode them, and physically deliver these to a clearinghouse. At the local clearinghouse, the local banks exchanged checks presented to them and settled the difference with each other via a wire transfer of funds. Out of town checks were sent to the Federal Reserve Bank of SF via a courier who drove them over the mountain. The Federal Reserve went through a similar clearing process with its other 11 sister Federal Reserve Banks. Some checks could take several days to clear depending on weather conditions in transporting the checks and meeting required deadlines. (The movie, Catch Me If You Can, the Frank Abignale Story, is about how con men worked the money float system and why banks put holds on checks.) In order to protect both banks and consumers, in 1987 the Congress enacted the Expedited Funds Availability Act (also known as Reg CC) which defined permissible holds on checks. The regulations require that the first $100 of deposits be available for withdrawal on the following business day. For checks written on local banks, the next $4,900 must be made available on the 2^nd business day, and the remainder on the 7^th business day. For non-local checks, the next $4,900 must be available for withdrawal on the 5^th business day, and the remainder on the 11^th business day.

That was then. Today, all checks are electronically encoded, read into electronic files and fed to electronic clearinghouses. Your bank gets most of the funds the next day, two days at most. They know quickly if a check isn’t going to clear. Reg CC, however, has not yet caught up with today’s world. Friendly banks, who know their clients and have a strong relationship with them, may not put holds on checks, and if they do, the holds are much shorter than the maximums allowed by Reg CC. Unfriendly banks put holds on deposited checks for the maximum period allowed under the Regulations. After collecting the funds overnight or the next day, they use them to earn interest for themselves for several days prior to making them available to their customers.

Generally speaking, you can tell if your bank cares about you from the answer to these two questions. If they care, it will permeate their whole organization and be evident in every transaction they do with you and in the way you are treated. If your bank doesn’t care, perhaps you should consider a different one!

Robert Barone, Ph.D.

December 9, 2009