A Straight Dope Classic from Cecil's Storehouse of Human Knowledge

Why are rebate checks drawn on obscure banks in the middle of nowhere?

May 5, 1989

Dear Cecil:

A few weeks ago I got a check for 25 cents from Illinois Bell. The check was drawn on a bank in Lake Lillian, Minnesota. Do you know how obscure Lake Lillian is? (Of course you do. You know everything. I'm just asking rhetorically.) It's so obscure it's not in the Minnesota key to my road map book, which includes such metropolises as Dundas, population 422. It's so obscure the person I talked to at the Minnesota tourism office couldn't find it on her computer (she said to call back when Jerry gets back from lunch). Why would a major corporation have its checking account in such an obscure bank when there are lots of banks right in the neighborhood?

Cecil replies:

Maybe they want to head off the lunchtime rush of people cashing their 25-cent checks. Illinois Bell was not very forthcoming on the subject. The company says it employs a contractor to handle its refunds, and the contractor uses the Lake Lillian bank because it's cheaper, somehow. I believe that, of course. I believe everything. Let me merely speak in generalities, therefore, of what it usually means when a big company uses a tiny boondock bank. I refer to the arcane world of corporate cash management.

The idea behind managing cash is simple: speed it up coming in, slow it down going out. The boondock bank stunt is an example of the latter. It's called "remote disbursement," and it's so ridiculously snaky it deserves some kind of award. You know how sometimes you'll write a check to somebody when you haven't got any money in your checking account, then rush to the bank the next morning to put some money in before the check clears? Same idea.

Here's what happens. Let's suppose a large Chicago company — the Flurgg Corporation — owes you some money. They mail you a check drawn on a bank in, oh, Lake Henrietta, Minnesota. As soon as you receive it you rush down to your local bank to get the 25 cents, so you can invest it in 30-day CDs. Your bank sends the check to the Chicago branch of the Federal Reserve, which sends it to the Fed's Minneapolis branch, which sends it to Lake Henrietta for payment.

Since Lake Henrietta is so out of it that most deliveries are probably handled by yak, this process takes a couple days. But finally the check arrives. Lo and behold, there is no money in the Flurgg Corporation's account. Not to worry. At a prearranged time, the Lake Henrietta bank tells Flurgg how much it needs to cover all the Flurgg checks that have arrived that day for payment. Flurgg promptly wires the money. The net result: you've officially been "paid," but Flurgg gets a two-day grace period (also known as the "float") before it actually has to come up with the cash to cover your check.

Who gets screwed in this arrangement? Probably you. Banks are wise to the check-float game, so they put a hold on any out-of-state checks presented for payment. You can deposit the money in your account, but you won't be permitted to walk out of the bank with it for several days, thus giving the check time to clear Lake Henrietta or wherever.

If the whole thing sounds like a bit of a scam, that's because it is. To eliminate the worst abuses the Federal Reserve has greatly accelerated its check-clearing schedules, so that a check that might have taken five days to clear years ago now takes only a couple days.

As a result, remote disbursement has been giving way to something called "controlled" disbursement. In controlled disbursement, you select a bank that isn't necessarily in Irkutsk but is still small and far away enough that the only checks of yours it's going to have to cash are going to come by way of the Federal Reserve (as opposed to some mope walking in off the street, say).

Since the Fed typically makes its last delivery of checks by 9 AM, you know early on exactly how much cash you're going to have to put in your account to cover that day's debits, without leaving extra cash for checks dribbling in later. So you get maybe an extra day of float and you don't have money sitting around in non-interest-bearing accounts. A small thing, seemingly, but in the world of corporate finance, it's a big deal.

News from Lake Lillian

Dear Cecil:

Recently I heard one of your readers was concerned about the existence of my hometown of Lake Lillian, Minnesota. It's there, all right, all 300-plus people (350-plus if you count the cats and dogs). Lake Lillian is on Highway 7 about 12 miles north of Bird Island, in case you can't find it on the map.

One more thing. There are no yaks in town. Harold Olson does have a llama but its purpose is to keep his donkey company, not to make deliveries. Whoever told you there were yaks in Lake Lillian was obviously misinformed.

Cecil replies:

John has kindly enclosed an informative booklet published by an affiliate of First State Bank of Lake Lillian, no doubt the same outfit that sent our original correspondent that 25-cent check.

Lake Lillian, we learn, is the "Gateway to the Little Crow Lake Region from the South." Despite this, the brochure says, "Finding Lake Lillian has always frustrated many folks. That must have started when recent Rand McNally road maps didn't show Lake Lillian even existed. And yet a small hamlet named Thorpe, Minnesota, did make the map. Thorpe, located a few miles east of Lake Lillian, consists of a few houses and a grain elevator, which is owned by the family of one of the bank's employees who lives there now. Unfortunately he constantly rubs the map incident in our face."

The history of Lake Lillian is filled with Keilloresque poignance. For example, "government land records show that claims had been made by a Peter Furdeen and a Peter France on the shore of Lake Lillian as early as the fall of 1858. They must not have stayed any length of time as none of the early settlers ever heard of them."

There are many tales of ventures that started out strong, then just sort of petered out. For instance: "HOTELS — Mr. and Mrs. Rudolph Vath built a hotel in 1923 called the Lake Lillian Hotel, but in 1944 sold it to Mr. and Mrs. Aug. Junkermier, who used it as a residence. In 1963 the K.M. Funeral Home purchased the lot and building which was torn down so they could construct an addition to the mortuary."

Finally we learn about First State Bank. First State, it seems, "is one of a handful of banks with expertise in processing high-volume, low-dollar rebate checks — the checks that companies send to consumers in return for buying a product being promoted or introduced. First State was the clearing bank for 55 million rebate checks [in 1985] alone. The little bank has won the loyalty of 120 corporate clients [including] General Electric, GM, Pillsbury, R.J. Reynolds, AT&T, and Procter & Gamble" — and evidently Illinois Bell as well.

How'd the bank get into this line of work? The booklet's answer is refreshingly candid. "About a decade ago, a fulfillment house — a company that makes sure people who send in rebate applications meet all the requirements — was looking for a bank to use as an endpoint for returned checks. The person in charge of the project happened to be a relative of First State Bank's president."

Why rebate checks? "For one thing, it's cheaper to mail out the checks than to transport, count, monitor, and mail cash. Also, by issuing bearer draft checks, which do not require endorsement, a company qualifies for bulk-mailing postage rates. … Most important of all … when checks are mailed, there's always some `slippage.' Some people who send for rebate checks will not cash them before the expiration date. Because these checks are payable `to the bearer,' any uncollected money is returned to the company that issued the checks. This avoids the `escheat' laws — state laws that require companies to pay taxes on uncollected funds."

One more thing. Bank president Duane Lindgren "denies that corporations issuing rebate checks choose banks situated in out-of-the-way places to maximize float. `One reason we're chosen is that we're centrally located. We also try to provide a comprehensive service at a competitive price. That's the name of the game.'" Whatever you say, Duane. Regards to all the folks in Lake Lillian.

Uh-oh

Dear Cecil:

As president of the Lake Lillian Civic and Commerce organization, I am writing in response to, as you phrased it, "your brilliant disquisition on corporate cash management and boondock banking." On behalf of the city of Lake Lillian, I would like to take issue with the comments contained in the article.

Yes, Mr. Adams, there is a Lake Lillian. Lake Lillian is located in the south central part of the State of Minnesota. We are approximately 90 miles west of the Twin Cities. Edwin Whitefield, an artist and land promoter, visited the Kandiyohi Lakes in 1856 and gave his wife's name, Lillian, to one of the lakes.

Recreation and relaxation can be enjoyed at Big Kandiyohi Lake, four miles northwest of Lake Lillian on County Highway #8. Two resorts — County Park #1 and #2 — have camping available, as well as resort services and public beaches.

From the article that was written I will guesstimate that your Chicagoan reader is a "city-slicker" just as I was before moving here approximately four years ago. I was under the impression a "farmer" had a tractor, two or more cows, and had a barn. You have not seen farmers, I'll assure you. The tractors our farmers use are huge and they do not plow only ten acres — that probably would be a good-size garden for them! They do not raise a "couple" cows, or pigs, or turkeys; they raise them by the hundreds or thousands.

It is unfortunate, to say the least, that a person from Chicago should automatically equate being from a small town with being obscure or make innuendoes about both the town and the townspeople being backward. I cannot help but wonder, since this whole incident seems to have begun over our local bank's processing of a 25-cent rebate check, what would have been said if there had been a whole dollar rebate check at stake! No doubt this person would have really believed our deliveries are handled by yaks!

In conclusion, while I know it is your job to print the news, I also know that being the dedicated writer that I'm sure you are, you feel a duty to also inform your readers. Therefore, I'm sure you'll pass all this information along to the particular reader in question. If you're ever in our area, please stop in to see us. The coffee is always on, it's free, and we'll even treat you to a free "yak-ride"!

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