What Is Remote Disbursement?
Remote disbursement is a cash-management technique that some businesses use to increase their float by taking advantage of the Federal Reserve System's check-clearing inefficiencies.
A company that practices remote disbursement intentionally draws its checks on a bank in a location that is geographically remote from whomever it needs to send checks to. It does this to maximize "disbursement float", which represents a reduction in book cash but no current change in actual cash in the bank. This means the company still has the money in its bank account and can keep earning interest on it. Using remote disbursement can also allow a company to keep a smaller amount of cash on hand and more of its money in higher-interest-paying accounts.
- Remote disbursement is a strategy to capitalize on geographic inefficiencies in the Fed's check clearing services to boost cash management.
- The Federal Reserve Banks provide check collection services to depository institutions, taking up to one business day to clear.
- The scheme, which is discouraged by the Fed, works because depositors are credited with funds immediately, even though it will take slightly longer to clear and post.
Understanding Remote Disbursement
The Federal Reserve discourages the practice of remote disbursement, and today it clears almost all checks within one business day, so it is the Fed, not the writer nor the recipient of the check, that loses in the remote-disbursement game. The recipient never has to wait more than one day to receive payment, so it will not necessarily object to doing business with companies that practice remote disbursement.
Other ways companies extend disbursement float include zero-balance accounts and purchasing supplies and services on credit (managing trade payables).
The term float is used in finance and economics to describe duplicate money present in the banking system during the time between when a deposit is made in the recipient's account and when the money is deducted from the sender's account. Float is also associated with the amount of currency available to trade—i.e. countries can manipulate the worth of their currency by restricting or expanding the amount of float available to trade. Float is most apparent in the time delay between a check being written and the funds to cover that check being deducted from the payer's account.
Financial institutions invest a lot of resources to manage float, cash management best practices, and utilizing remote disbursements when possible.
A company that wants to use remote disbursement to its full advantage needs to also minimize its collection float, or the time it takes to receive payments. Companies can speed up their collections through techniques that reduce float, such as concentration banking and lockbox banking. By slowing down payments and speeding up collections, a company increases its net float and therefore its cash balance.
When a depository institution receives deposits of checks drawn on other institutions, it may send the checks for collection to those institutions directly, deliver them to the institutions through a local clearinghouse exchange, or use the check-collection services of a correspondent institution or a Federal Reserve Bank. For checks collected through the Federal Reserve Banks, the accounts of the collecting institutions are credited for the value of the checks deposited for collection and the accounts of the paying banks are debited for the value of checks presented for payment.