The term float refers to funds tied up in checks or other non-cash transfers that have been issued, but not yet processed or collected.
In banking, a float is the time between the deposit of a check and actual payment by the check writer’s bank. At least some minimal float time is legal and inevitable any time an account holder writes a paper check even now when most check processing and checks process and clear by electronic means.
If the account holder writes a check when the checking account does not have sufficient funds to cover payment, the check writer is practicing as check kiting. Kiting is illegal almost everywhere, even if the check writer quickly deposits funds to cover the check before the receiver's deposit transaction processes (to avoid a rejecting the deposit and discovery of kiting). In such cases, the practice is still legally an instance of kiting.
The remainder of this article further defines and illustrates check float and check kiting in the current business environment.
- What are check float and check kiting?
- What is check float time?
- What is check kiting? Why is kiting illegal?
Check floats operate to the check writer’s advantage. The writer receives credit for issuing payment, even though the recipient depositor may not be able to use the funds until the float closes. As a result, the check float writer inherently benefits from a free loan and a few extra hours or days to earn interest on funds before they leave the bank account. At worst, the check writer does not deposit funds to cover the check in time and thereby defrauding the check recipient.
Check floating was more common before the twenty-first century, when check clearing always required moving paper checks between banks and a clearinghouse (except when check writer and recipient both had accounts at the same bank). Under those conditions, the time between check writing and final clearance by the writer's bank typically took anywhere from 2 to 10 days. In such cases, the longer float times were normal when check writer and recipient had accounts in different banks in different cities. Not surprisingly, some individuals and businesses deliberately took steps to lengthen float time, by writing paper checks from accounts in small banks in remote locations, far from the recipient banks. Floats in such cases were legal as long as sufficient funds were already on deposit at the time of writing.
With recent advances in check handling efficiency, check float times everywhere have shortened and the risk of getting caught for kiting have drastically increased. In the United States, for instance, the "Check 21 Act" of 2003, allows the depositor's bank to make an electronic version of the written check and submit that instead of the paper original for clearance (US Federal law, Public Law 100 enacted by the 108th Congress).
Whereas some amount of float time is still inevitable and legal with any written check, the practice of deliberately writing and issuing checks when funds are not on deposit to cover the check is not legal. This practice is kiting, and banking laws almost everywhere ban the practice.
Security officers from different banks cooperate, looking out for a particularly common form of kiting in which an individual deposits and withdraws checks at the same time from accounts at two or more different banks so as to take advantage of the float (the time it takes for the deposit bank to collect from the withdrawal bank). Due to Interbank cooperation and electronic check clearance, this kind of kiting fraud is more likely to suffer exposure than it was a few years ago.
Securities traders also use the term kiting, referring to a practice that drives stock prices up by creating artificial trading activity (collusion between seller and buyer, for instance, exchanging the same funds back and forth).