Technology has revolutionized the banking business. Today, transactions that only a few years ago took days and even weeks are completed instantly around the world via high-speed computer networks.
But, when it comes to the little guy who just wants to deposit a pay check and pay a few bills, the world of banking suddenly becomes complicated–and slow and, often, very expensive.
It’s all part of something called “funds availability” or “check holds” in the jargon of banking. Translated, it means that banks can deprive a depositor access to funds–the depositor’s own funds–for anywhere from two to five business days if the deposit is in the form of a check. Intervening holidays and weekends could lengthen the holds to five days for a local check and up to ten days for a non-local check.
When the banks and their friendly regulators at the Federal Reserve try to explain why they need to hold the deposits, all the talk about new technology is forgotten and the consumer is left with the image of an industry operating with quill pens, clearing checks by hand and moving them around the nation via slow freight.
If the present system isn’t slow enough and burdensome enough for consumers, the Federal Reserve is proposing that Congress add another day to the hold on local checks. That would mean a minimum of three days before the consumer or worker could access funds–even if the check was drawn on a bank in the next block.
Underneath this proposal as well as the entire scheme of checkholds is a shell game which hurts consumers and enriches the banks. With their pay checks frozen under the check holds, many consumers are at risk when they write checks to pay mandatory end-of-the-month bills for shelter and other necessities.
This means that many checks bounce–and here the banks pick up a bundle in the form of bounced check fees, some of which run to $25 to $30 per check. Studies conducted by the U. S. Public Interest Research Group (PIRG) show that banks generate almost four billion dollars annually in profits from fees assessed in connection with returned checks.
In addition to the fees, banks make a nice return on the consumers’ money that lies idle–called float–while the hold periods remain in effect–and while the consumer is denied access to the funds.
The banks and the Federal Reserve try to excuse this consumer rip off by suggesting that the check holds are needed to prevent fraud. But, the fraud numbers put the lie to this theory.
Check fraud losses from all sources average only one cent per check cashed at the nation’s banks and other depository institutions, according to surveys conducted by the Center for Study of Responsive Law.
The great majority of the checks that are placed under holds are drawn on corporations and established firms in the community. The chances are remote that these checks will bounce, but the holds are enforced nonetheless. Pay checks deposited by hardworking families are not the source of fraud, as the banking industry and the Federal Reserve would have the public believe.
Clearly, the technology is available to clear checks overnight. In fact, a survey conducted by American Bankers Association (ABA) in 1994 showed that 80 percent of banks already receive available funds on local checks in one business day or less. Many of these checks are now being moved through clearing houses formed by financial institutions for the purposes of clearing checks between institutions more quickly than is accomplished by the Federal Reserve System.
But, the Federal Reserve, instead of adopting these faster methods, tells the Congress to tack another day on the hold period and let the consumers wait. The Fed’s cavalier pro-bank attitude about check holds is a good example of why the President needs to appoint people who represent consumer interests to the Federal Reserve Board of Governors, and not just those who protect the interests of the financial community.
The Congress should not fall for this game. It should reject the request for the longer hold period. Instead, it should order
the Federal Reserve to take immediate steps to employ the technology that is available to shorten the time frames, not lengthen them.
Banks already collect billions of dollars in fees from customers for basic banking services every year. Banks are enjoying year after year of record profits. The industry does not need additional handouts in the form of bounced check fees and float that would be created by the Federal Reserve’s effort to lengthen the time consumers must wait for their hard earned dollars.
A little of the technology that has fattened the profits of the nation’s financial institutions should be used to benefit consumers by providing a more efficient and timely clearing of checks.