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How Does a NOW Account Work?
Introduced in the U.S. in 1972 and available nationwide by 1980, a negotiable order of withdrawal (NOW) account is an interest-earning bank account similar to a checking account. These accounts are available to individuals, certain government organizations, and specific nonprofit organizations. However, NOW accounts began to decline in popularity in 2011 when the federal ban on paying interest on demand deposit accounts was lifted. Despite this, some banks still offer NOW accounts.
How Does a NOW Account Work?
NOW accounts pay interest, unlike traditional checking accounts. Typically, people open NOW accounts at banks. However, there are some conditions attached to the interest earned. While traditional checking accounts allow immediate, unrestricted access to your money, a NOW account might require seven days’ written notice before a withdrawal can be made, although this rule is rarely enforced.
Additionally, NOW account holders write drafts instead of checks. Drafts are documents that resemble checks but are guaranteed by the bank’s funds rather than the account holder’s personal funds. When you request a bank draft, the bank withdraws the funds from your account and deposits them into their institutional account, usually for a small fee. When the draft is cashed, the money comes from the bank’s institutional account.
What Is the History of NOW Accounts?
NOW accounts were once a popular type of bank account, first introduced at a small savings bank in Massachusetts. Initially, a NOW account was essentially a checking account that paid 5% interest. Some banks opposed NOW accounts, arguing that they violated the Federal Reserve Board’s Regulation Q, which prohibited the payment of interest on demand deposit accounts. After a court battle, Congress authorized NOW accounts in Massachusetts and New Hampshire in 1974. By 1980, NOW accounts were available nationwide.
How Common Are NOW Accounts?
Three decades after their nationwide debut, the Federal Reserve Board repealed Regulation Q in 2011, making NOW accounts largely obsolete. The Dodd-Frank Wall Street Reform and Consumer Protection Act required the Fed to eliminate this regulation, allowing financial institutions to pay interest on all checking accounts and other demand deposit accounts. Despite this, some banks still offer NOW accounts, which are insured by the Federal Deposit Insurance Corp. (FDIC) and available only to individuals, certain government agencies, and some nonprofit organizations.
Should You Get a NOW Account?
Given that NOW accounts are uncommon and outdated, you might be better off opening another type of account. For example, a traditional checking account that earns interest could be a better option. Some NOW accounts require a high minimum balance to earn interest or avoid fees, and there is often little transparency about the interest rates they pay.
Alternatives to a NOW Account
Several alternatives to a NOW account are available, although some may not offer check-writing privileges. These alternatives include:
- Traditional checking accounts, which don’t pay interest.
- Interest-earning checking accounts, which generally have lower interest rates than savings accounts.
- High-yield savings accounts, which typically offer higher interest rates than regular savings accounts.
- Money market accounts, a hybrid of checking and savings accounts with higher interest rates than interest-earning checking accounts and traditional savings accounts.
- Certificates of deposit (CDs), which usually have higher interest rates than other interest-earning accounts but offer less access to your funds.
The Bottom Line
Once popular, NOW accounts have become outdated. Initially, they provided a way to earn interest on checking-like accounts. However, changes in federal law in the 21st century mean that some checking accounts and other bank accounts now serve the same purpose as NOW accounts.
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