The magic of the ‘float’: Banks cash in on other people’s money

Patricia is a landlord, and she’s noticed a consistent trend when it comes to payments from her tenants.

They’ll typically set up their bank accounts so that a payment is made on the first of the month. But she often won’t see the money in her bank account until four or five days later.

Why the lag?

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Welcome to the world of bank floats, where a bank places people’s money in limbo for a brief interval yet manages to draw (and keep) interest on the cash.

Sounds kind of sneaky, right? I’ve asked banks to explain the process, and they consistently say that it takes time to securely process a money transfer.

Maybe that was true in the age of the telegraph. But in this era of lightning-fast computing and worldwide digital networks, that explanation seems dubious at best.

A cynic might conclude that banks perpetuate this archaic practice because it contributes so lucratively to their profits. But far be it from me to suggest that banks would place self-enrichment before customer service.

For more, check out today’s Ask Laz video.

If you have a consumer question, email me at [email protected] or contact me via Twitter @Davidlaz.