Now accounts

What Is Now Accounts?

A Negotiable Order of Withdrawal (NOW) account is a type of interest-bearing deposit account that allows the account holder to write drafts, similar to checks, for payments or withdrawals. Falling under the broader category of Banking and Deposit Products, NOW accounts were a significant innovation in U.S. banking, offering consumers a way to earn interest rates on funds that were also readily accessible for transactional purposes. While they offered features akin to traditional checking accounts, their key distinction was the ability to accrue interest, a feature historically restricted for demand deposits. These accounts were structured to comply with specific banking regulations that governed interest payments.

History and Origin

The concept of NOW accounts emerged as a direct response to a long-standing federal regulation, Regulation Q, which, since its promulgation in 1933, prohibited banks from paying interest on demand deposits. This prohibition was initially intended to curb what was perceived as "excessive competition" among banks that could lead to risky lending practices and bank failures during the Great Depression era.

As interest rates began to rise in the 1950s and beyond, the opportunity cost of holding non-interest-bearing checking accounts became more pronounced for consumers. This led to pressure for innovative banking products. Ronald Haselton, then President and CEO of Consumer Savings Bank in Worcester, Massachusetts, is credited with introducing the first NOW account in 1972.¹² These accounts were structured such that the bank technically reserved the right to require seven days' notice for withdrawals, a rarely exercised right that allowed them to circumvent the demand deposit interest prohibition under Regulation Q.¹⁰, ¹¹

Initially, NOW accounts were only permitted in Massachusetts and New Hampshire in 1974, then expanded to all of New England in 1976.⁹ The widespread adoption and pressure for greater competition led to the passage of the Depository Institutions Deregulation and Monetary Control Act of 1980 (DIDMCA). This landmark legislation authorized all financial institutions nationwide to offer NOW accounts to individuals and certain non-profit organizations, effectively legalizing interest-bearing checking for a broader market.⁷, ⁸ The interest rate ceilings on NOW accounts were eventually lifted entirely by 1986.⁶ However, the definitive shift came with the Dodd-Frank Act in 2010, which repealed Regulation Q altogether in 2011, allowing banks to pay interest on standard demand deposit accounts. This change largely eliminated the unique advantage of NOW accounts.⁵

Key Takeaways

• NOW accounts were interest-bearing transaction accounts that allowed for unlimited check-writing before 2011.
• They were created to circumvent a federal regulation that prohibited interest payments on traditional demand deposits.
• Nationwide authorization for NOW accounts was granted by the Depository Institutions Deregulation and Monetary Control Act of 1980.
• The repeal of Regulation Q in 2011, allowing interest on all demand deposits, significantly reduced the distinctiveness and prevalence of NOW accounts.
• While technically still permissible, most banks today offer standard interest-bearing checking accounts rather than specifically branded NOW accounts.

Interpreting the Now Accounts

In their prime, NOW accounts were interpreted as a consumer-friendly banking innovation that offered the best of both worlds: the transactional convenience of a checking account and the interest-earning capability of a savings account. For individuals and eligible non-profits, the availability of NOW accounts meant that idle funds held for daily expenses or short-term needs could still generate a return, however modest. Their primary utility lay in enhancing the liquidity and efficiency of personal finances by reducing the need to frequently transfer money between different account types to earn interest.

Hypothetical Example

Consider an individual, Sarah, in the late 1980s. She receives her bi-weekly paycheck and needs to pay rent, utilities, and grocery bills throughout the month. Before NOW accounts, she might have kept a minimal balance in a non-interest-bearing checking account for transactions and transferred excess funds to a savings account to earn interest. This would require frequent manual transfers.

With a NOW account, Sarah could deposit her entire paycheck into the account. The portion she intended to use for immediate expenses would be available via checks, while the remainder, sitting in the account, would accrue interest. This simplified her financial management, as she no longer needed to meticulously manage transfers between a zero-interest checking account and a separate savings account to maximize her earnings. The NOW account provided both accessibility and yield in one product.

Practical Applications

Historically, NOW accounts were a crucial product in the evolution of retail banking, addressing consumer demand for interest-bearing checking. Their emergence and eventual nationwide authorization were significant milestones in the deregulation of the U.S. financial system.

While the specific "NOW account" designation is less common today due to regulatory changes, the underlying principle—interest-bearing transactional accounts—is a standard offering. Modern checking accounts often offer varying tiers of interest, echoing the utility that NOW accounts once uniquely provided. These accounts allow consumers to manage their daily finances while still benefiting from modest returns on their balances.

All funds in these accounts, like other qualifying deposit accounts, are typically insured by the Federal Deposit Insurance Corporation (FDIC) up to the standard insurance limit, which is currently $250,000 per depositor, per insured bank, for each ownership category. Thi³, ⁴s provides a layer of security for depositors' funds.

Limitations and Criticisms

While innovative, NOW accounts had certain limitations. Prior to the repeal of Regulation Q, they were often subject to interest rate ceilings, which limited the amount of interest that could be paid compared to other investment vehicles like money market funds or certificates of deposit. Add²itionally, some NOW accounts came with stricter minimum balance requirements or service fees to qualify for interest, which could offset the earnings for smaller balances.

From a regulatory perspective, NOW accounts were a workaround to an existing rule, highlighting the complexities of the regulatory environment at the time. The very existence of NOW accounts was a testament to the market's attempt to innovate around restrictive regulations designed to control bank competition and maintain stability. Critics of Regulation Q, and by extension the need for products like NOW accounts, argued that such restrictions hampered free market forces and innovation in banking. The eventual repeal of Regulation Q via the Dodd-Frank Act ultimately rendered the specific distinction of a NOW account largely obsolete, as banks could then directly offer interest on all demand deposits. This broader regulatory reform streamlined offerings and reduced the need for specialized account structures like NOW accounts solely for the purpose of paying interest.

Now Accounts vs. Demand Deposit Accounts

The distinction between NOW accounts and demand deposit accounts was historically rooted in regulation, specifically Regulation Q by the Federal Reserve.

Before 2011, the primary confusion arose because both account types offered transactional capabilities (like check-writing), but only NOW accounts could legally earn interest for eligible holders. With the repeal of Regulation Q, banks gained the flexibility to pay interest on all demand deposits, blurring the lines and effectively merging the functional benefits of NOW accounts into standard interest-bearing checking accounts.

FAQs

What does NOW stand for in NOW accounts?

NOW stands for "Negotiable Order of Withdrawal." This refers to the draft, or check-like instrument, that could be written against the funds in the account.

Are NOW accounts still offered by banks today?

While the term "NOW account" is less prevalent as a distinct product, banks commonly offer checking accounts that pay interest, effectively fulfilling the same role. The regulatory changes in 2011 made the specific NOW account structure largely unnecessary.

What was the main reason NOW accounts were created?

NOW accounts were primarily created to allow consumers to earn interest on funds held in readily accessible transaction accounts, circumventing the historical prohibition on interest payments for demand deposits under Regulation Q.

Are funds in NOW accounts insured by the FDIC?

Yes, like other eligible deposit accounts at FDIC-insured banks, funds held in NOW accounts (or their modern equivalents, interest-bearing checking accounts) are covered by Federal Deposit Insurance Corporation (FDIC) insurance up to the standard limits.¹