What is a Negotiable Order of Withdrawal Account?

The Negotiable Order of Withdrawal Account, commonly known as NOW account is a deposit account that pays interest and allows the customers to write drafts against the money held in the account. The number of withdrawals and transfers under a negotiable order of withdrawal account is unlimited.

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How Does a NOW Account Work?

Commercial banks, savings and loan associations and mutual savings banks are allowed to offer NOW accounts. Only individuals, some governmental units, and certain nonprofit organizations are allowed to open a NOW account. Corporations are not allowed to open such accounts. Negotiable order of withdrawal account and demand deposit accounts are defined differently by the United States banking regulation, although both are essentially similar in nature. Money can be withdrawn from both types of accounts quickly and without any hassles. Historically the financial institutions were not allowed to pay interest on the demand deposit accounts under Regulation Q, whereas interest-earning is an integral part of a negotiable order of withdrawal account. In the 1930s, during the Great Depression, banks in the U.S. faced turmoil in their economy. Many believed an excessive competition in the banking sector due to the interest payment on demand deposits contributed towards this turmoil. They believed that competition led to diminished profit margins and bank failures. As a measure to prohibit this, the Banking Act of 1933 was passed by Congress. The Act imposed a ban on paying interest against the demand deposits. The Act mentioned, no member bank shall, directly or indirectly, by any device whatsoever, pay any interest on any deposit which is payable on demand." The restriction was incorporated into the Regulation Q on August 29, 1933. Initially, the banks accepted the ban without any attempt to avoid it. However, during the 1950s, as the interest rate rose the banks started to take non-pecuniary efforts to avoid the ban by offering convenience features and giving away consumer goods to new customers. In the 1970s, Ronald Haselton, president, and CEO of Consumer Savings Bank in Worcester, Massachusetts, led an effort for banks to offer interest-paying checking accounts. In 1974, Congress allowed the banks in Massachusetts and New Hampshire to offer NOW accounts to its customers. In the following two years, the NOW account was permitted in all of New England. In 1980 it was expanded nationwide. There was a ceiling of 5% interest rate for all the NOW accounts. The maximum limit was removed in 1986, as part of a general deregulation of the interest rate. In 2011 the ban on paying interest against demand deposit accounts was also lifted by Congress.