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First introduced in the U.S. in 1972 and rolled out nationwide in 1980, a negotiable order of withdrawal (NOW) account is an interest-earning bank account, similar to a checking account, that's available only to individuals, some government organizations and certain nonprofit organizations. But NOW accounts began falling out of favor in 2011, when the federal ban on paying interest on demand deposit accounts—namely checking accounts that provide instant access to your cash—went away. Some banks still offer NOW accounts, though.
How Does a NOW Account Work?
NOW accounts pay interest, while traditional checking accounts do not. People typically open NOW accounts at banks.
The interest earned with a NOW account does come with strings attached.
While a traditional checking account allows immediate, unrestricted access to your money, a NOW account might require seven days' written notice before a withdrawal can be made. However, this rule normally isn't enforced.
Also, a NOW account holder doesn't write checks but instead writes drafts, which are documents that look like checks. When you write a check from your personal checking account, the funds in your account are what guarantees the payment of that check. A bank draft, on the other hand, is guaranteed by the bank's funds, not the funds in your personal account.
Your bank withdraws the funds from your account when you request a bank draft and, in most cases, deposits them into their institutional account. There is usually a small fee for this service. When the other person cashes a bank draft, the money then comes from the bank's institutional account.
What Is the History of NOW Accounts?
Once a popular type of bank account, the first NOW account became available at a small savings bank in Massachusetts. At the outset, a NOW account was essentially a checking account that paid 5% interest.
Some banks opposed the NOW account, though, arguing that it violated the Federal Reserve Board's (the Fed) Regulation Q. This regulation prohibited payment of interest on demand deposit accounts. Following a court battle launched by opponents but won by NOW backers, Congress in 1974 authorized NOW accounts in just two states: Massachusetts and New Hampshire. Within the following five years, federal lawmakers expanded NOW access to the rest of New England as well as New York and New Jersey. NOW accounts became available nationwide in 1980.
How Common Are NOW Accounts?
Three decades after the nationwide debut of NOW accounts, the Federal Reserve Board repealed Regulation Q. The Dodd-Frank Wall Street Reform and Consumer Protection Act, passed in 2011, required the Fed to ditch this regulation. As a result, NOW accounts effectively became obsolete because financial institutions were free to pay interest on all checking accounts and other demand deposit accounts.
Despite Dodd-Frank's abolition of Regulation Q, some banks still offer NOW accounts. These accounts, which are insured by banks that are members of the Federal Deposit Insurance Corp. (FDIC), are available only to individuals, certain government agencies and some nonprofit organizations. Businesses and other for-profit organizations cannot open NOW accounts.
Should You Get a NOW Account?
Because a NOW account is uncommon and antiquated, you're better off opening another kind of account instead. For instance, you might opt for a traditional checking account that earns interest.
One knock against NOW accounts is that some of them require a high minimum balance, such as $500 or $1,000, to earn interest or avoid fees. You may be able to find other interest-earning accounts that don't require a minimum balance.
Furthermore, a check of websites for several banks that do offer NOW accounts found little to no transparency about the interest rates they pay.
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Alternatives to a NOW Account
A variety of alternatives to a NOW account are available, although some options may not provide check-writing privileges. The alternatives include:
- Traditional checking accounts, which don't pay interest.
- Interest-earning checking accounts, whose interest rates generally are lower than those for savings accounts.
- High-yield savings accounts, which typically pay higher interest rates than regular savings accounts do.
- Money market accounts, a checking-savings hybrid whose interest rates tend to be higher than those for interest-earning checking accounts and traditional savings accounts.
- Certificates of deposit (CDs), whose interest rates normally are higher than those for other interest-earning accounts but don't offer as much access to your funds as other account types.
The Bottom Line
Once-popular NOW accounts have gone out of style. At one time, a NOW account enabled a pioneering way to earn interest on checking-like accounts. But with 21st century changes in federal law, some checking accounts and certain other bank accounts now serve the same purpose as NOW accounts.