A negotiable order of withdrawal, or NOW, bank account is basically a checking account that can earn interest. NOW accounts were created in the 1970s to get around banking regulations that prohibited banks from making interest payments on demand deposit accounts. Since 2010, NOW accounts are largely unnecessary because the rules that once banned interest-bearing checking accounts no longer apply.
Today, there are several ways that consumers can earn interest on money that’s meant to be liquid (i.e., easily accessible), such as high-yield savings accounts, cash management accounts, money market accounts, and interest-bearing checking accounts. However, for decades before the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 repealed Regulation Q, you couldn’t earn interest on a checking account.
At the time, the only way you could earn interest on a checking account was by opening up a negotiable order of withdrawal (NOW) account at a bank, credit union, or other financial institution. Read on to learn all about NOW accounts, the only available interest-earning account from which you could also write drafts.
How NOW accounts work
A NOW account essentially works like the traditional checking account (also known as a demand deposit account) offered by banks and credit unions. Both types of accounts allow customers to make deposits and withdrawals, write drafts, and use a debit card.
However, unlike most traditional checking accounts, a NOW account earns interest on a customer’s demand deposit balances. In addition, NOW accounts technically require seven days’ notice in writing before a banking customer can make a withdrawal. Although this old rule is rarely enforced, it was one of the primary distinctions between money held in an ordinary checking account versus the balance in a NOW account.
Today, NOW accounts are typically offered by commercial banks, mutual savings banks, and savings and loan associations. However, they’re not as common as they used to be because the banking rules that prohibited interest-earning demand deposit accounts no longer exist.
What is a demand deposit account?
To clarify, “demand deposit” refers to any highly liquid bank account — that is, an account from which consumers can withdraw money at any time without needing to give the bank advance notice. These days, the most common demand deposit accounts include checking accounts, savings accounts, and money market accounts.
History of the NOW account
Back during the Great Depression, amidst the substantial turmoil in the banking sector, the Glass-Steagall Act, also known as “The Banking Act of 1933,” was passed. Among other provisions, this act prohibited banks from paying interest on demand deposit accounts. The reasoning was that the practice, used primarily by large New York banks, caused “excessive competition,” which led to diminished profit margins and bank failures.
In the 1970s, Ronald Haselton, former President and CEO of the Consumer Savings Bank in Worcester, Massachusetts, officially developed the idea for negotiable order of withdrawal accounts to get around the Banking Act and offer customers an interest-earning bank account. He was able to skirt the rules by requiring customers to give seven days’ notice prior to making a withdrawal, which technically disqualified them as demand deposit accounts.
By the mid-70s, consumers all across New England were able to open NOW accounts, but the interest rates were capped at 5%. By 1980, NOW accounts were available nationwide, and a few years later, the 5% interest rate cap was removed, paving the way for Super NOW accounts that gave financial institutions the leeway to offer higher interest rates.
According to Loretta Kilday, spokesperson for Debt Consolidation Care and financial expert with over 36 years of experience,
“Banks that offered NOW accounts did experience a surge in customers during the 1970s and 1980s when these accounts were first introduced. This was because NOW accounts were seen as an attractive alternative to traditional savings accounts, as they offered a higher rate of interest and greater flexibility in terms of withdrawals.
The introduction of NOW accounts also helped to level the playing field between banks and savings and loan associations, which had previously been able to offer higher interest rates on their deposit accounts due to regulatory restrictions on banks.”
However, only NOW accounts could still offer interest payments, as demand deposit accounts were still prohibited from paying interest to account holders. Finally, in 2010, the repeal of Regulation Q by provisions in the Dodd-Frank Act allowed financial institutions to offer demand deposits that earned interest.
Since the majority of banks began offering traditional checking accounts that pay interest, NOW accounts are not as common as they once were. Because they have essentially the same features as interest-bearing checking accounts, there’s virtually no reason to specifically seek out NOW accounts anymore.
What are Super NOW accounts?
Super NOW accounts are similar to regular NOW accounts in that they allow you to write drafts from them and they pay interest on your deposits. That said, Super NOW accounts typically offer a better interest rate: the interest paid on a Super NOW account is higher than you can expect on a regular checking account, albeit less than you’d receive from a money market account.
Who is eligible for a NOW account?
While NOW accounts have generally fallen out of favor, they are still available. However, a for-profit organization (like a corporation or partnership) cannot open a NOW account. NOW accounts are only for individuals, sole proprietorships, and some non-profit organizations.
Does a NOW account require a minimum balance?
Most banks that offer NOW accounts do require a minimum balance, which can vary by financial institution. They may also require a minimum deposit to open the NOW account, as well as a higher minimum to earn the going interest rate.
For example, you may need to deposit $500 to open a NOW account but a balance of $1,000 to start earning interest. In addition, you may also be charged a monthly maintenance fee if your NOW account drops below a certain balance. To be fair, however, this is also true of many interest-earning checking accounts offered by banks today.
- A NOW account, or negotiable order of withdrawal account, is a special type of interest-bearing demand deposit account that was created in New England in the 1970s.
- Aside from the fact that they earn interest, the only distinction between NOW accounts and standard checking accounts is that a NOW account requires at least seven days’ written notice for withdrawals.
- NOW accounts have mostly become a relic of the past since Regulation Q, the rule prohibiting checking accounts from paying interest, was repealed in 2010.
- Modern NOW accounts are simply demand deposit accounts that pay interest, but they often come with other restrictions and fees.
Are you in the market for a good checking account that earns interest? SuperMoney can help! Check out our recommendations for the best high-interest checking accounts, or use our comparison tool to find a checking account with the more convenient features you’re looking for!
View Article Sources
- What is the difference between a checking account, a demand deposit account, and a NOW (negotiable order of withdrawal) account? – Consumer Financial Protection Bureau
- Federal Reserve Bank of New York Circulars : 7292. “NOW” Accounts – Federal Reserve Bank of St. Louis
- Federal Reserve issues final rule to repeal Regulation Q, which prohibited the payment of interest on demand deposits – Board of Governors of the Federal Reserve System
- My bank refused to open a Negotiable Order of Withdrawal (NOW) account for my business. Why? – HelpWithMyBank.gov
- Cash Management Account: What Is It & How Does It Work? – SuperMoney
- How to Open a Checking Account – SuperMoney