Float is the term given to delays in the payments process that occur between the time a payer initiates a payment and the time that funds are made available to the payee. This is sometimes referred to as ‘collection float’ when the payment instrument is a cheque. The term ‘float’ also has a wider meaning encompassing other delays in the purchasing cycle, but in this article we will focus on the more common definition which is the time delay between a payment being made and the beneficiary receiving the funds.
The most frequently used example of float is the time it takes to process a payment by cheque, so we shall use it as an illustration. Float in this case can be divided into three different types:
The delay between the cheque being posted and it being received by the payee. Paper-based instruments, such as cheques, are sent through the post and are consequently at risk of delay from a number of factors, such as the efficiency of the postal service.
The time it takes for the payee, having received the cheque, to deposit it. There are usually administrative processes to be gone through before the cheque is deposited.
The time it takes for the funds to become available once the cheque has been deposited. In this time the cheque is sent to the clearing system, sorted and then sent to the payer’s bank, where the payer’s account is debited. Depending on the country in question, however, the payee may not receive value until some time after the payer’s account is debited. When there is a delay of this kind, the float is taken by the banks until the payee’s account is credited.
Float can arise in any type of payment. In a transaction, where the remitter (the paying party) asks its bank to make a payment, the remitter gets debited and the bank then sends the money to the beneficiary via a clearing system. In these cases, the beneficiary (the payee) may not receive value for one or more days. The delay in the receipt of funds may be even longer if it is a cross-border payment. This form of float also stays with the bank until the recipient’s account has been credited. In the meantime the bank uses the funds for its own benefit.
In many domestic payment systems, this form of float has been eliminated, but banks still derive a large amount of revenue from the float on cross-border payments. The SEPA-influenced Payment Services Directive (PSD) currently being enacted into national legislation in the EU will eliminate this form of float on all electronic payments in any EU currency.
What are the consequences?
Float is sometimes advantageous to the remitter and always disadvantageous to the beneficiary. Any delay in settlement of payment means that the principal amount, together with any interest it can earn, remains with the payer or one of the banks handling the payment.
Treasurers will find themselves in the roles of both remitter and beneficiary – payer and payee. In order to manage cash effectively they could theoretically try to reduce float in their receivables and increase it in their payables. However, in practice this approach will conflict with the goals of the company’s counterparties who may also be striving to optimise their float in this way.
A company receiving many cheques or high value cheques will always need to review its processes to eliminate or minimise mail, processing and availability float and it is always important to identify and, if appropriate, eliminate bank float in any payment type.