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WILD COOT: Bank ‘rinsing’ or cautious

Harry Russell

WILD COOT: Bank ‘rinsing’ or cautious

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“Rinsing” customers’ money is a term used when the bank has the use of funds belonging to customers and uses those funds to its own advantage, with or without the knowledge of the customer or paying for those funds.

It dates back to the days when interest on savings and fixed deposit accounts was calculated manually on the minimum balance during any one month. Suppose the balance on a savings account was $10 on the first day of a month and the customer lodged $10 000 on the second day of the month, then interest would be paid on $10 for that month and the bank would “rinse” the $9 990 for that month. Maybe that was an easy way of calculating interest. The system has improved somewhat with the age of the computer, as banks are able to pay interest on the average balance in any one month. However, there is still an element of “rinsing”. Banks that are not paying anything for savings under a certain balance are indeed “rinsing”.

“Rinsing” may not be involved in your loan account. Just suppose that your loan balance was $1 000 on the first of the month and a payment of $500 was made on the 15th. The average balance would be $750 and today interest would be charged on a daily basis – or should be. Banks charge interest on a daily basis most times.

Complaints have been circulated by customers that having deposited foreign cheques, the funds are held by the bank for 21 days or sometimes a month before being available for their use. This has various implications.

First of all, the banks have the capability of knowing if the cheque is good within two to three days. The bank sends a photograph of the cheque by microfiche or computer to the drawee bank almost immediately. The drawee bank will be able to say if there are funds in the drawer’s account to meet the cheque. If there are no funds, the customer’s bank in Barbados will be alerted by email, telephone or whatever that the cheque is being returned mostly for “refer to drawer”, “uncleared effects” or “insufficient funds”. Therefore within a few days, the bank in Barbados will know if the cheque that has been lodged is good or not.

In most cases nothing comes back from the drawee correspondent bank to say that the cheque is good. However, if the cheque cannot be paid, the customer’s bank is swiftly alerted. The bank in Barbados will know that it will have to reverse the proceeds of the cheque from the customer’s account. If it has paid out against the cheque, it may have a problem recouping. If in the meantime it has been presented with cheques drawn on the funds lodged and has returned the cheques, it needs the evidence of the returned cheque from the correspondent bank.

The correspondent bank will return the cheque appropriately marked, but it will do so by ordinary mail. This could take up to three weeks depending on the post office. This is the real crux of the problem.

Customers who find themselves in this position need to have a dialogue with the bank in Barbados. Many of these customers may have pensions that are paid from a United Kingdom or a United States account. These payments may be relied on once the customer is alive. Many are loyal customers of the bank in Barbados. They should engage the bank in a conversation that could lead to immediate use of the funds lodged. However, non-pension cheques that are not regularly lodged may present a different problem.

Meanwhile, once the cheque, be it for $10 or $1 000, has been lodged in the local bank, it is an asset of the bank for the time being in that it forms part of the bank’s corresponding bank balance, either in earning interest or an accumulating balance. Is it “rinsing”? Maybe, but that is one of the advantages of being a bank. 

If the person is a customer of a credit union, then the problem is more acute because credit unions do not normally maintain an account for clearing purposes with a correspondent bank. When it credits the cheque to the local account, that local bank needs to go through the same process as outlined above.

• Harry Russell is a banker. Email [email protected]