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Do Banks really need to Hold Checks for so Long?

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Stephen Johnson knows how long it can take for a bank to set your money free. Last year his mother sold a large amount of stock and deposited a check from Wachovia - a large securities firm - into her Wells Fargo account. She was told the check would take several weeks to clear.

Knowing just enough about the banking system to cause some trouble, Johnson explained to his mother that it should only take about 48 hours for Wells Fargo to confirm the transfer of funds. His mother went to the bank to discuss the issue and had what he describes as "an acrimonious argument" with the bank representative. Eventually, persistence paid off: "The bank manager begrudgingly released the funds," says Johnson.

This situation applies to both money transfers and checks. Stephan Siegal, Assistant Professor of Finance at the University of Washington, confirms Johnson's understanding of the banking system. "Electronic connections happen within 48 hours and wouldn't require more than a few days to verify that funds are there," says Siegal. He also has his own tale of missing money: "I waited for a check to clear and it took three weeks... I deposited my own Citibank check to my own Bank of America account. Of the $10,000 deposit, they broke it into two parts. After 10 days, they credited $5,000 and in another 10 days, the balance."

Siegal wanted to know what caused the delay, and why - all of a sudden - thousands of dollars of his own money was no longer available to him. But, over time, bank bureaucracy wore him down. "I just gave up," he says. "Someone at the call center just kept giving me the same run-around. It seems to be the standard. It's a practice for the bank that works conveniently and they see little incentive to change it."

"We have a federal legal scheme that can withhold checks," explains Gail Hillebrand, senior attorney at [Consumers Union West Coast Office]. "Federal law permits the hold depending upon the size of the check." So a bank can make a customer service decision based on this law. But if you want a hold shorter than the maximum amount permitted by law, you can ask but may not receive, depending upon which bank you are dealing with and who you ask.

Banks could potentially be sitting on billions of dollars in 'floats'.

"The federal law is out of date, and with high interest rates these 'floats' are becoming a bigger issue as more money is at stake," says Hillebrand. This may come as a surprise to consumers: "You can be subject to the maximum length of time if you put in many checks that amount to thousands of dollars."

Hillebrand says the banks are getting away with it because the Funds Availability Act (on the federal reserve website) hasn't been updated for more than a decade.

"The Federal Reserve Board could solve this problem at any time by tightening up hold time," she says. Look at the speed that checks are clearing; when you hand over a check to a merchant who then treats it as an authorization for an electric debt, that check has essentially been converted into a debt and goes through your account, just like a debit card payment." In other words, checks you write are leaving your account sooner. So why can't banks shorten the hold period?

Warnings for consumers

There's a lot of advice about trying to deal with your bank, and it can all get very confusing. Here are some critical steps you can take to protect yourself and your money:
  • Know your bank's policy on holding checks and get it in writing. If you don't like the policy, ask your banker if there are other options. If the answer is no, consider moving your money.

  • Be aware: Not all checks are created equal. The hold time can vary depending on the size of the check, who wrote it and where it originated (for example, banks often put longer holds on out-of-state or out-of-country checks).

  • When you open an account, tell the bank how you plan to use it. The bank's representative can help you select the right kind of account.

  • Avoid surprises: Review the documents your bank sends you. In addition to your statements, review anything the bank sends regarding changes to your account. If you don't understand it, get someone at the bank to explain it.
Consumers Union has compiled a [chart] comparing today's rules regarding how long banks can make consumers wait until deposited funds clear their accounts and those proposed under the Consumer Checking Account Fairness Act.
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