Negotiable Order of Withdrawal (NOW) Accounts: Features & Benefits

A negotiable order of withdrawal, also known as a NOW account, is a type of deposit account that provides interest and allows the depositor to write drafts against the money that is held on deposit.

In the U.S, commercial banksCommercial BankA commercial bank is a financial institution that grants loans, accepts deposits, and offers basic financial products such as savings accounts., lending associations, and mutual savings banks are allowed to offer NOW accounts. Individuals, some government entities, and certain non-profit organizations are also permitted to open NOW accounts.

What is a Demand Deposit?

A demand deposit account is a bank account where the funds held can be withdrawn at any time. They are usually thought of as checking accountsChecking AccountA checking account is a type of deposit account that individuals open at financial institutions for the purpose of withdrawing and depositing money. Also known as a transactional or demand account, a checking account is very liquid. To put it simply, it provides users a quick way of accessing their money. and are characterized by being highly liquid and offering little to no interest.

What is a Draft?

A draft or check is a document where a payer agrees to make a payment of a certain amount from an account held by another party, usually a bank or other financial institution.

Negotiable Order of Withdrawal Account Explained

Investors who are seeking a method to put liquid capital into a short-term investment can choose among a few different alternatives. They include deposits or investments, such as:

• Interest-bearing checking accounts
• Interest-bearing savings accounts
• Money-market funds
• Certificates of deposit (CDs)

Negotiable order of withdrawal (NOW) accounts were an additional alternative for such investors prior to the Dodd-Frank ActDodd-Frank ActThe Dodd-Frank Act, or the Wall Street Reform and Consumer Protection Act of 2010, was enacted into law during the Obama administration as a response to the financial crisis of 2008. It sought to introduce significant changes to financial regulation and create new government agencies tasked with implementing the various clauses in the law.. Until 2011, NOW accounts were commonly used for consumer and retail consumers who wished to get a return for their unused funds while still being able to use the funds if needed. NOW accounts were clearly distinguished from “demand deposit accounts” by the U.S banking regulators because of Regulation Q.

What is Regulation Q

Regulation Q is a Federal Reserve Board regulation that sets capital requirements and capital reserve standards for U.S financial institutions. The regulation was updated several times throughout its history, mainly to ensure that banks maintained sufficient capital to weather any economic recession.

Regulation Q prohibited banks from paying interest on checking accounts and demand deposit accounts. However, it was repealed by the Dodd-Frank Wall Street Reform Act in the wake of the 2008 Global Financial Crisis2008-2009 Global Financial CrisisThe Global Financial Crisis of 2008-2009 refers to the massive financial crisis the world faced from 2008 to 2009. The financial crisis took its toll on individuals and institutions around the globe, with millions of American being deeply impacted. Financial institutions started to sink, many were absorbed by larger entities, and the US Government was forced to offer bailouts.

When Regulation Q was repealed, banks were then allowed to pay interest on demand deposits, which removed the attractiveness that NOW accounts offered.

History of NOW Accounts

In the U.S, “The Banking Act,” passed in 1933, specified that no member bank is permitted to pay interest on a deposit that is payable on demand. The reason was that the interest paid on checking accounts caused excess competition in the U.S banking industry. The excess competition led to reduced profitability and more bank failures. As interest rates increased, banks felt the incentive to get around the rule so that they could attract more customers.

The NOW account was created to “challenge” the band of interest payments on checking accounts. Consumer Savings Bank’s President and CEO, Ronald Haselton, was the first to introduce the concept of NOW accounts, and it led to Congress permitting NOW accounts in the states of Massachusetts and New Hampshire in 1974 with a 5% interest rate ceiling.

By 1986, as part of the deregulation of interest rates, the interest rate ceiling on NOW accounts was removed, but interest was still not permitted on demand deposit accounts.

NOW accounts were never prohibited, but after 2011, the prohibition of paying interest on demand deposit accounts was removed. Therefore, the only distinction between NOW accounts and demand deposit accounts was gone.

NOW Accounts vs. Demand Deposit Accounts

NOW accounts and demand deposit accounts are very similar. They essentially are deposit accounts that allow funds to be withdrawn very quickly and without delay.

NOW accounts are not used any more – mostly after the Dodd-Frank Act. The primary advantage that a NOW account offered was the fact that it was interest-bearing. After the repeal of Regulation Q, the interest benefit was no longer there, as interest could be paid on checking and demand deposit accounts.

Another main difference was that NOW accounts were available for seven-day holding periods, so consumers needed to plan ahead at least seven days for advance notice. However, the feature is not exercised often in practice.

Super NOW Accounts

Super NOW accounts are NOW accounts that are combined with money market accounts. The accounts generally carry a lower interest rate than a money market account, but a higher interest rate than a NOW account. Super NOW accounts come with more liquidity than a money market account, but less liquidity than a NOW account.

Additional Resources

CFI offers the Commercial Banking & Credit Analyst (CBCA)™Program Page - CBCAGet CFI's CBCA™ certification and become a Commercial Banking & Credit Analyst. Enroll and advance your career with our certification programs and courses. certification program for those looking to take their careers to the next level. To keep learning and advancing your career, the following resources will be helpful:

• Callable Certificate of DepositCallable Certificate of DepositA Callable Certificate of Deposit is an FDIC-insured time deposit with a bank or other financial institutions. Callable CDs can be redeemed by the issuer before their actual maturity date, within a specified time frame and call price.
• LiquidityLiquidityIn financial markets, liquidity refers to how quickly an investment can be sold without negatively impacting its price. The more liquid an investment is, the more quickly it can be sold (and vice versa), and the easier it is to sell it for fair value. All else being equal, more liquid assets trade at a premium and illiquid assets trade at a discount.
• Money MarketMoney MarketThe money market is an organized exchange market where participants can lend and borrow short-term, high-quality debt securities.
• Sarbanes-Oxley ActSarbanes Oxley ActThe Sarbanes-Oxley Act is a U.S. federal law that aimed to protect investors by making corporate disclosures more reliable and accurate.