In banking and finance, the term float refers to the temporary inaccuracy of a bank balance in an account that occurs due to the period between when a check is deposited and when the issuing bank acknowledges that deposit. During this latent period, both banks claim ownership of the funds. A given bank account may have disbursement float, spent money that the bank has not yet removed from the account, and collections float, deposited money that the bank has not yet cleared into the account. The net float is the sum of the two kinds of float in an account. An account holder can calculate an accurate bank balance by adding the net float from the previous account balance.
For example, Joe’s Hot Dog Stand has a previous account balance of $10,000 U.S. Dollars (USD). Joe has written three checks, totaling $2,000 USD, which have not cleared the bank. He has deposited some checks, totaling $3,000 USD, which have not cleared into his account. The net float for the account is calculated by subtracting the disbursement float, the $2,000 USD, from the $3,000 USD collections float, yielding a net float of $1,000 USD. Joe’s Hot Dog Stand has a current account balance of $11,000 USD, the sum of the net float and the previous balance.
Before electronic banking and debit cards, a few bank customers would illegally engage in check kiting, a practice that capitalizes on float time. A customer would write a check for more money than his account contained. Just before the check would clear, resulting in an overdrawn account, the customer would deposit a check from another account into the overdrawn account, again with nonexistent funds, or make a real deposit into the account. If convicted, a bank account holder who has kited checks can be fined up to $1 million USD and sentenced to up to 30 years in prison. The Check Clearing for the 21st Century Act, enacted in October 2004, sped up the processing of checks between banks, increasing the likelihood of bounced checks if funds are not immediately available to cover the check.
Although banks may receive funds electronically soon after a deposit is made, the funds are not available for use by the account holder until the next day. This money, called negative float, may be invested by the bank overnight to generate revenue for the bank. Although the Check Clearing for the 21st Century Act sped up the processing of checks, it did not speed up the process of the bank making the deposited funds available.
