Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Kiting

What it is:

Kiting is the illegal practice of exploiting settlement delays to transfer unavailable funds from one bank account to another.

In the brokerage industry, kiting occurs when a securities firm fails to settle buy and sell orders by the proper settlement deadline.

How it works (Example):

Let's say you have a checking account at Bank ABC and a checking account at Bank XYZ. You use the Bank ABC account to pay the household utility bills, and your electric bill is set up on autopay. Your electric bill this month is $200, and it's going to come out of the Bank ABC account today. However, you only have $15 in the account.

You could move money into the account from the Bank XYZ account, but that account only has $5 in it, so that won't work. If you engage in kiting, you would write a Bank XYZ check for $200 to the Bank ABC account. You take the $200 check to Bank ABC, which instantly credits your ABC account with $200 -- enough to pay the bill. You do this knowing that you don't have $200 in the Bank XYZ account but that actually takes two days for the check to settle. In other words, you won't see a $200 deduction in your Bank XYZ account for two days. If, say, your $1,000 paycheck is scheduled to be deposited into the Bank XYZ bank account tomorrow, you might be tempted to do this, but the act of transferring money you don't have is still kiting.

Why it Matters:

Kiting is more difficult to pull off these days, because settlement times have shortened dramatically. Banks also often put holds on deposits, and of course they charge hefty fees for bounced checks.