A Negotiable Order of Withdrawal (NOW) Account is a type of interest-earning deposit account that allows account holders to write drafts against the funds they have on deposit. Commonly referred to as a NOW Account, this financial product has experienced significant changes in its availability and regulations over the years.
Key Takeaways
- NOW Accounts were once a popular choice for earning interest on liquid funds prior to the enactment of the Dodd-Frank Act.
- They provided an interest-bearing option for demand deposits, which was particularly attractive for those looking to optimize their returns.
- The Dodd-Frank Act, enacted in 2010, repealed Regulation Q, which had previously prohibited banks from paying interest on demand deposit accounts, effectively eliminating the competitive edge that NOW Accounts once offered.
The Functionality of NOW Accounts
A NOW Account is designed for customers who want to earn interest on their deposited funds while still retaining easy access to their money. Similar to traditional checking accounts, these accounts allow withdrawals without penalties, but they also usually offer interest accumulation—typically at rates lower than those of high-yield savings accounts or money market accounts.
Choices for Liquid Funds
In the quest for maximizing returns on liquid capital, consumers have several account types at their disposal, such as:
- Interest-bearing checking accounts: These accounts allow for writing checks and making transactions while also providing interest.
- High-yield savings accounts: These offer a comparatively higher interest rate but may limit access to funds.
- Money market accounts: Generally offer higher interest rates and come with check-writing privileges.
- Certificates of deposit (CDs): These provide fixed interest rates for a predetermined time, usually offering higher rates than regular savings accounts, but they do restrict access to funds until maturity.
History of NOW Accounts
The origin of NOW Accounts can be traced back to the economic strains experienced during the Great Depression in the 1930s. To counteract what was perceived as excessive competition among banks, the government imposed limitations on the ability of banks to pay interest on demand deposits. This allowed banks to maintain their profit margins amidst a challenging economic climate.
Throughout the 1950s and beyond, banks sought ways to circumvent these regulations by offering non-monetary incentives, such as enhanced customer service and promotional giveaways. These attempts gradually paved the way for the first official NOW Account, developed by Ronald Haselton, CEO of Consumer Savings Bank in Massachusetts.
In 1974, Congress allowed NOW Accounts in select states, and by 1980, they were available nationwide. The removal of the interest rate ceiling in 1986 led to the introduction of Super NOW Accounts, which provided higher rates of interest.
However, the landscape changed dramatically with the passing of the Dodd-Frank Act in 2010, which repealed Regulation Q. This legislation allowed banks to offer interest on demand deposits without the restrictions that previously existed, diminishing the uniqueness of NOW Accounts.
NOW Accounts vs. Demand Deposit Accounts
While NOW Accounts once provided a competitive advantage over traditional demand deposit accounts (DDAs) by offering a modest interest rate, the repeal of Reg Q has made the two more comparable. Currently, many demand deposit accounts can also earn interest.
Historically, a significant distinguishing feature of NOW Accounts was a seven-day notice requirement for withdrawals, compelling customers to plan their transactions in advance. While banks could choose to enforce this holding period, not every institution did, leading to a diverse offering of checking products.
In today’s banking environment, while NOW Accounts are largely regarded as obsolete, the competition for attractive interest rates among banks remains limited. Many institutions offer minimal to no interest on checking accounts. However, some specialized checking structures provide higher interest rates alongside various features such as cashback rewards or bonus offerings, though these usually come with specific requirements like maintaining a minimum balance or ensuring regular deposits.
Conclusion
Though NOW Accounts have faded from prominence, their historical significance and the context around their development illustrate evolving banking regulations and consumer needs. The Dodd-Frank Act marked a pivotal moment in the financial industry, leading to more competitive offerings for demand deposit accounts. As the competitive landscape continues to evolve, consumers are encouraged to remain informed about their banking options, ensuring they choose accounts that best suit their financial strategies and liquidity needs.