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 in fact inevitable any time a paper check is issued, even now, when most check processing and check clearing are handled by electronic means.
If a check is written when there are not sufficient funds in the checking account to cover payment, the practice is known 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 is completed (thus avoiding a rejected deposit and discovery of kiting), the practice is still viewed as 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 (who is credited with having issued payment) and against the recipient depositor, who may not be able to use the funds until the float clears. At best, the check float writer in effect 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, funds to cover the check are not deposited in time to cover the float, and the check recipient is defrauded.
Check floating was much more common before the twenty first century, when all check clearing required movement of paper checks between banks and a clearing house (except when check writer and recipient used 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—with the longer float times coming when check writer and recipient had accounts in different banks in different cities. In fact, it was not unheard of for some individuals and businesses to maximize check float time deliberately 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 actually on deposit when the check was written.
Recent advances in check processing efficiency have drastically reduced check float times and increased the risk of getting caught for those kiting checks. In the United States, for instance the so-called "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 inevitable and legal with any written check, the practice of deliberately writing and issuing checks for which funds are not available on deposit is known as kiting, and the practice is illegal almost everywhere. Security officers from different banks in fact 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). Interbank cooperation and electronic check clearance have made this kind of kiting fraud more difficult to get away now than it was few years ago.
The term kiting is also used In securities trading, referring to a practices that drives stock prices up by creating artificial trading activity (collusion between seller and buyer, for instance, exchanging the same funds back and forth).