Negotiable Order of Withdrawal (NOW)

A Negotiable Order of Withdrawal (NOW) account is a type of bank account that allows the account holder to write drafts against the money held in the account. These drafts function much like checks, permitting the holder to withdraw funds in order to pay for goods and services. NOW accounts were introduced in the United States in the 1970s as a way to bypass federal regulations that prohibited the payment of interest on demand deposit accounts, essentially offering an interest-bearing checking account. The history, mechanism, advantages, and regulatory environment of NOW accounts can provide a comprehensive understanding of their significance in the financial landscape.

History and Background

The concept of NOW accounts emerged in response to Regulation Q, a federal regulation that set ceilings on the interest rates that banks could offer to depositors and prohibited the payment of interest on demand deposits (such as checking accounts). The regulation was established during the Great Depression to maintain the stability of banks by controlling the interest they paid on deposits, thus preventing excessively risky behaviors. However, by the 1970s, economic conditions had changed, and consumers were looking for more profitable and flexible banking options.

In 1972, the Consumer Savings Bank in Worcester, Massachusetts, introduced the first NOW account. The idea quickly gained traction because it provided account holders with the ability to earn interest on their deposits while retaining the convenience of writing checks. The Depository Institutions Deregulation and Monetary Control Act of 1980 eventually permitted the nationwide use of NOW accounts, significantly altering the banking landscape in favor of account holders.

Mechanism of NOW Accounts

A NOW account essentially combines the features of a savings account and a checking account. The principal mechanism includes:

Interest Payment

Unlike traditional checking accounts, which typically do not pay interest, NOW accounts offer a modest interest rate on the deposited funds. The interest rate is generally lower than that offered by savings accounts but higher than the zero interest characteristic of most standard checking accounts.

Draft Writing

Account holders can write drafts against their deposits, similar to writing checks. The drafts serve as a negotiable instrument, instructing the bank to pay the specified amount to the holder of the draft or another designated party.

Minimum Balance Requirements

To maintain a NOW account, banks often require a minimum balance to avoid fees. This minimum balance varies from one financial institution to another and can influence the interest rate applied to the account.

Terms and Conditions

The terms and conditions of NOW accounts can vary widely among financial institutions. Some may limit the number of transactions per month without incurring fees, impose monthly maintenance fees if the minimum balance is not maintained, or set other parameters that govern the account’s operation.

Fund Accessibility

Funds in NOW accounts are typically accessible on demand, much like a checking account, providing liquidity and convenience for account holders. This means that, unlike certain types of investments or savings products, the depositor can use the funds at their discretion without significant withdrawal penalties.

Advantages of NOW Accounts

The NOW account offers several advantages that make it an attractive option for consumers:

Interest Earnings

The primary advantage is the ability to earn interest on deposits while still having the flexibility to write drafts. This provides an incentive for individuals and businesses to keep larger balances in their accounts, thus potentially increasing their total earnings over time.

Liquidity and Flexibility

NOW accounts offer liquidity similar to that of checking accounts, allowing account holders to access their funds easily. The ability to write drafts means that the funds can be used to pay bills, make purchases, or be transferred to other accounts, providing significant flexibility.

FDIC Insurance

Most NOW accounts are insured by the Federal Deposit Insurance Corporation (FDIC), up to the standard limit (currently $250,000 per depositor, per insured bank, for each account ownership category). This insurance adds a layer of security for depositors, making NOW accounts a safe place to store funds.

Financial Management

By combining features of both savings and checking accounts, NOW accounts help individuals and businesses manage their finances more efficiently. They can earn interest on their funds while still having the ability to write checks and pay for expenses as needed.

Regulatory Environment

The regulatory environment governing NOW accounts has evolved since their introduction. Key regulations and acts that influence the structure and function of NOW accounts include:

Regulation Q

Initially, Regulation Q prohibited the payment of interest on demand deposits. However, NOW accounts were designed to circumvent this regulation by technically classifying the drafts as negotiable orders of withdrawal rather than checks, thereby allowing banks to pay interest.

Depository Institutions Deregulation and Monetary Control Act of 1980

This act gradually phased out Regulation Q and allowed NOW accounts to be offered nationwide. The removal of interest rate ceilings and the expansion of NOW account availability significantly altered the competitive landscape for banking products.

Regulation D

Regulation D places restrictions on the types of transactions that can be conducted through NOW accounts in regards to reserve requirements for depository institutions. Specifically, it ensures that NOW accounts are not used in a manner that conflicts with the regulation’s intent concerning the reserve requirement ratio for transaction accounts.

Consumer Protections

Various consumer protection laws, such as the Truth in Savings Act (TISA), also apply to NOW accounts. TISA requires financial institutions to provide clear and accurate information about the terms and conditions of deposit accounts, including NOW accounts, thereby protecting consumers from misleading practices.

Comparison with Other Accounts

To understand NOW accounts more comprehensively, it is helpful to compare them with other types of deposit accounts, specifically checking and savings accounts.

Checking Accounts

Savings Accounts

Examples of Institutions Offering NOW Accounts

Many financial institutions offer NOW accounts, catering to both personal and business customers. Some prominent examples include:

Bank of America

Bank of America offers various deposit products, including NOW accounts. Customers can expect competitive interest rates, robust online banking services, and comprehensive financial products to complement their deposit accounts. More information can be found here.

Wells Fargo

Wells Fargo provides NOW accounts as a part of its suite of deposit options. Wells Fargo focuses on delivering user-friendly online and mobile banking experiences, along with strong customer service support. More details are available here.

JPMorgan Chase

JPMorgan Chase offers NOW accounts to its customers, highlighting attractive features such as mobile deposits, real-time alerts, and comprehensive financial services. For further information, visit here.

Conclusion

Negotiable Order of Withdrawal (NOW) accounts represent a significant innovation in the realm of deposit accounts, bridging the gap between checking and savings accounts by providing both interest earnings and easy access to funds. The evolution of NOW accounts in response to regulatory changes and consumer demand underscores their importance in the modern financial landscape. By understanding the history, mechanisms, advantages, and regulatory context of NOW accounts, consumers and businesses can make informed decisions about how to manage their funds effectively.