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The Straight Dope

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A few weeks ago I got a check for 25 cents from Illinois Bell. The check was drawn on a bank in Lake Lillian, Minnesota. Do you know how obscure Lake Lillian is? (Of course you do. You know everything. I'm just asking rhetorically.) It's so obscure it's not in the Minnesota key to my road map book, which includes such metropolises as Dundas, population 422. It's so obscure the person I talked to at the Minnesota tourism office couldn't find it on her computer (she said to call back when Jerry gets back from lunch). Why would a major corporation have its checking account in such an obscure bank when there are lots of banks right in the neighborhood? --V.M., Chicago

Maybe they want to head off the lunchtime rush of people cashing their 25-cent checks. Illinois Bell was not very forthcoming on the subject. The company says it employs a contractor to handle its refunds, and the contractor uses the Lake Lillian bank because it's cheaper, somehow. I believe that, of course. I believe everything. Let me merely speak in generalities, therefore, of what it usually means when a big company uses a tiny boondock bank. I refer to the arcane world of corporate cash management.

The idea behind managing cash is simple: speed it up coming in, slow it down going out. The boondock bank stunt is an example of the latter. It's called "remote disbursement," and it's so ridiculously snaky it deserves some kind of award. You know how sometimes you'll write a check to somebody when you haven't got any money in your checking account, then rush to the bank the next morning to put some money in before the check clears? Same idea.

Here's what happens. Let's suppose a large Chicago company--the Flurgg Corporation, say--owes you some money. They mail you a check drawn on a bank in, oh, Lake Henrietta, Minnesota. As soon as you receive it you rush down to your local bank to get the 25 cents, so you can invest it in 30-day CDs. Your bank sends the check to the Chicago branch of the Federal Reserve, which sends it to the Fed's Minneapolis branch, which sends it to Lake Henrietta for payment. Since Lake Henrietta is so out of it that most deliveries are probably handled by yak, this process takes a couple days. But finally the check arrives. Lo and behold, there is no money in the Flurgg Corporation's account. Not to worry. At a prearranged time, the Lake Henrietta bank tells Flurgg how much it needs to cover all the Flurgg checks that have arrived that day for payment. Flurgg promptly wires the money. The net result: you've officially been "paid," but Flurgg gets a two-day grace period (also known as the "float") before it actually has to come up with the cash to cover your check.

Who gets screwed in this arrangement? Probably you. Most banks are wise to the check-float game, so they put a hold on any out-of-state checks presented for payment. You can deposit the money in your account, but you won't be permitted to walk out of the bank with it for several days, thus giving the check time to clear Lake Henrietta or wherever.

If the whole thing sounds like a bit of a scam, that's because it is. To eliminate the worst abuses the Federal Reserve has greatly accelerated its check-clearing schedules, so that a check that might have taken five days to clear years ago now takes only a couple days. As a result, remote disbursement has been giving way to something called "controlled" disbursement. In controlled disbursement, you select a bank that isn't necessarily in Irkutsk but is still small and far away enough that the only checks of yours it's going to have to cash are going to come by way of the Federal Reserve (as opposed to some mope walking in off the street, say). Since the Fed typically makes its last delivery of checks by 9 AM, you know early on exactly how much cash you're going to have to put in your account to cover that day's debits, without leaving extra cash for checks dribbling in later. So you get maybe an extra day of float and you don't have money sitting around in non-interest-bearing accounts. A small thing, seemingly, but in the world of corporate finance, it's a big deal.

Art accompanying story in printed newspaper (not available in this archive): illustration/Slug Signorino.

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