The financial landscape for businesses has changed dramatically in the past few decades as electronic transactions have become commonplace. Thanks to digital banking advances, money can be transferred almost immediately from one account to another, making quick payments to vendors, clients, or other businesses much easier.
Since processing financial transactions now is faster than it used to be, some common business payment tactics are becoming obsolete. Check floating is one such practice since it relies heavily on high-interest rates and long waiting periods between check cashing, both of which have fallen by the wayside in the recent years. With bank interests at an all-time low and check processing times at an all-time high – often within two days – it does not make financial sense to rely on check floating over other more profitable options.
What is Check Floating?
Check floating refers to the waiting time between when you issue a check and when that check is deposited. When you send a paper check, the money is not taken from your account right away: The recipient needs to deposit the check and then the bank needs to take funds from your account and move them into the other account. During this time, your business could accumulate interest on the to-be-paid amount as it is waiting to be deposited into the payee’s account. In other words, you could earn interest on money you have already paid.
Check floating was a very popular business tactic in the 1980’s when interest rates were anywhere from 10 to 21 percent, and it could take nearly ten days for checks to clear. Companies were benefiting from close to two weeks of interest on money that they technically already paid to another entity. It is no wonder this was such a popular method of earning extra revenue. But as quick electronic fund transfers have become easier and more cost-efficient for banks, this method may no longer be a smart option for your business.
How Has Check Processing Changed?
Processing electronic checks to quickly transfer funds has become common practice. In 2004, Congress passed a new federal law called The Check Clearing for the 21st Century Act (or Check 21). This law allows banks to process checks electronically to send and deposit funds. Check 21 has made the entire process much faster and more efficient since transporting physical checks is costly and leaves room for error.
Electronic checks have become so efficient, in fact, that processing physical checks may actually be costing you more in the long run. The actual cost to your business when it comes to issuing physical checks varies considerably, averaging from $5.91 to $7.78 per check. If your company uses checks as its primary payment method, any cost saving method like relying on check floating is not as effective as you might think. What’s worse is relying on traditional checking systems has become riskier: check fraud is on the rise, now considered to be one of the biggest risks to financial systems and the primary type of fraud 52 percent of businesses have faced, according to a 2014 study by the Institute of Financial Operations.
How Does This Affect Check Float Profitability?
Relying on check float to clear payments or accumulate interest is not as effective as it used to be before Check 21. Even if you sent a physical check through the mail, once it reaches the bank it can be converted and processed electronically, reducing that float time to around two days. Fewer days float time combined with low interest rates leads to a small profit margin for your business.
In the chart below, we have outlined the differences in interest rates and waiting times:
Finding Cost-Effective Solutions in Electronic Payments
There are many other payment options available to your company that are arguably more cost effective than issuing checks and waiting for check floats to accumulate interest. Processing payments through the ACH Network, for example, allows you to securely move funds from one account to another, set up recurring payments to vendors, and maintain updated records about your current finances, all while avoiding the high costs associated with issuing paper checks. Most electronic payment methods carry low costs for businesses, and some options are free, meaning your company saves money simply by not using checks.
Electronic payment methods allow you to automate payments as well, which is not possible with paper checks that need to be manually signed and sent out. No matter the size of your business, automating processes – particularly your accounts payable – will reduce error and improve workflow. It makes business sense to move away from physical checks.
Avoid Relying on Check Floating
Though check floating may have been profitable for businesses of all sizes back in the 1980’s, the world of payment transactions has changed. Check floating does not produce the same level of interest as it used to, nor does it guarantee a longer float period between payment deposits anymore. With low interest rates and faster turnaround times on payment processing, your company is better off looking for solutions elsewhere.