The key to understanding how to use your checking account lays in how banks determine their fees. Banks have fees that combine profit protection and penalties. Profit protection is how banks stay in business. A bank must be able to maintain the %10 deposit reserve or the bank faces penalties. The FDIC can declare a bank insolvent if it has too much activity that keeps it below that level. So the profitable banks carefully balance lending and deposit accounts to make sure that they don't wander from their reserves. They are also careful not to exceed the reserve allowed, because holding too much in reserve is like having unperforming inventory. The excess reserves aren't making money. This would be the same as you keeping money hidden in a mattress or a coffee can. It would be there, but it wouldn't be doing anything for you.
As a business owner, you know the importance of only keeping the inventory that generates profit. If your inventory is labor, such as in a mechanical shop or in metal fabrication, you work to make your labor more productive and do your best to make sure that your employees have the equipment that will enhance their productivity. A bank works the same way.
A loan granted through underwriting is a carefully considered decision by the bank. Underwriters review the credit history of the business and often review the turnaround of accounts receivable to make sure that the business is churning money and will have the monthly cash flow to cover agreed payments. Banks will lend to riskier customers, but as you may have experienced in the past, they will offer a rate that is higher than you had hoped. They do this to offset the increased possibility that the loan may not be paid back, which would cause an imbalance in their loan reserves.
What Happens When You Write A Check That Isn't Covered?
Banks have computers that are programed to make decisions based on your account's past history, your total relationship with the bank, the amount of the check and the likelihood that you will be able to cover an overdraft in a short period. The bank's computers can also be set to read the following three items:
With those three measurements, the overdraft program is set to make a decision as to whether to bounce or pay a check. Officers assigned to accounts have authority to override system decisions within a limited time-frame, and banks allow this because of human factors that can't be programmed. But they do this at risk to the bank, so they don't often pay items that the system decides to return.
Until your deposits cover the outstanding overdraft items, the bank is lending you the money. A bad check is a loan that is held against the reserve and costs the bank money in several ways.
As a business owner, you know the importance of only keeping the inventory that generates profit. If your inventory is labor, such as in a mechanical shop or in metal fabrication, you work to make your labor more productive and do your best to make sure that your employees have the equipment that will enhance their productivity. A bank works the same way.
A loan granted through underwriting is a carefully considered decision by the bank. Underwriters review the credit history of the business and often review the turnaround of accounts receivable to make sure that the business is churning money and will have the monthly cash flow to cover agreed payments. Banks will lend to riskier customers, but as you may have experienced in the past, they will offer a rate that is higher than you had hoped. They do this to offset the increased possibility that the loan may not be paid back, which would cause an imbalance in their loan reserves.
What Happens When You Write A Check That Isn't Covered?
Banks have computers that are programed to make decisions based on your account's past history, your total relationship with the bank, the amount of the check and the likelihood that you will be able to cover an overdraft in a short period. The bank's computers can also be set to read the following three items:
- the Ledger Balance, which is measured as the total credits to your account less the total credits that have posted completely into the account,
- the Available Balance, which is measured as the Ledger Balance and the net balance of any pending items that have not completely posted to your account, and
- the Collected Balance, which is the sum of the Ledger and Available Balances and the net amount that the bank has actually received from other banks through items you have deposited.
With those three measurements, the overdraft program is set to make a decision as to whether to bounce or pay a check. Officers assigned to accounts have authority to override system decisions within a limited time-frame, and banks allow this because of human factors that can't be programmed. But they do this at risk to the bank, so they don't often pay items that the system decides to return.
Until your deposits cover the outstanding overdraft items, the bank is lending you the money. A bad check is a loan that is held against the reserve and costs the bank money in several ways.
- The overdraft costs additional human handling. Overdraft notices are generated by the computer, but have to be stuffed and mailed by human hands.
- The credit ability of the bank is reduced, and so the bank makes less money.
- The bank incurs greater risk, and so its rating can suffer. This may mean that the rates at which it borrows money is increased. (Yes, banks borrow money. Big amounts that they have to pay back.)
- Your account may be in trouble from long-term financial difficulties. The officer realizes that no matter how nice you are, your business may be getting close to insolvency. The bank may have to write off your overdraft.
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