What Is a Negotiable Order of Withdrawal (NOW) Account?
A Negotiable Order of Withdrawal (NOW) Account, also known as a NOW Account, is an interest-earning demand deposit account that allows customers to write drafts against funds held on deposit. These accounts were a popular choice for earning interest prior to the Dodd-Frank Act.
Key Takeaways:
- A NOW Account provided an interest-bearing option for liquid funds.
- The Dodd-Frank Act repealed Regulation Q, which previously prohibited interest on demand deposit accounts.
Understanding Negotiable Order of Withdrawal Account
Investors seeking to optimize returns on liquid funds have various choices, such as interest-bearing checking accounts, high yield savings accounts, money market accounts, and certificates of deposit. Typically, commercial banks, mutual savings banks, and savings-and-loan associations offer these account types.
Until 2011, NOW Accounts were sought after by consumers wanting returns on idle cash. These accounts, once distinguished from conventional demand deposit accounts due to Regulation Q, which prohibited interest on checking accounts, lost their advantage after the Dodd-Frank Act allowed banks to pay interest on demand deposits.
History of Negotiable Order of Withdrawal Accounts
The roots of prohibiting depositors from earning interest on accounts trace back to the Great Depression, when interest payments on demand deposits were criticized as excessive competition. To circumvent this, banks in the 1950s introduced non-monetary incentives and eventually began offering implicit interest, leading to the development of NOW Accounts by Ronald Haselton in the 1970s.
Initially limited to certain states, NOW Accounts expanded nationwide in 1980 and evolved into Super NOW Accounts in 1986, featuring higher interest rates. The Dodd-Frank Act’s repeal of Regulation Q in 2010 paved the way for interest-paying checking accounts, rendering NOW Accounts mostly obsolete.
NOW Accounts vs. Demand Deposit Accounts
In today’s banking landscape, NOW Accounts are outdated. The main difference from demand deposit accounts was the seven-day holding period, requiring customers to provide advance notice. With the repeal of Regulation Q, checking account offerings have diversified, with most mainstream banks offering minimal to no interest.
Competitive interest rates are typically tied to certain account conditions, like maintaining specific balances, direct deposits, or debit card usage. Some checking accounts also offer additional perks, such as cash back rewards.