Negotiable Order of Withdrawal (NOW) Account – Definition

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Negotiable Order of Withdrawal (NOW) Account Definition

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.

A Little More on What is a NOW Account

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 Money can be withdrawn from both types of accounts quickly and without any hassles.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.

References for Negotiable Order of Withdrawal Account

Academic Research on Negotiable Order of Withdrawal Account (NOW)

Federal Legislative and Regulatory Treatment of NOW Accounts, Kaplan, A. J. (1974). Banking LJ91, 439.

Negotiable Orders of Withdrawal, Riordan, P. J. (1974). The Business Lawyer, 151-164.

Restrictions on Ownership of NOW Accounts, Schley, M. D. (1982). Banking LJ99, 196.

The currency ratio and the subterranean economy, Garcia, G. (1978). Financial Analysts Journal34(6), 64-66. Recently, the increase in the currency ratio in circulation to demand deposits was as a result of a decrease in demand deposits, not (as Peter Gutmann asserted in the November/December 1977 “Financial Analysts Journal”) by a rise in currency holdings attributed to the growth of the subterranean economy. The use of demand deposits needs an adjustment for plausible decrease and this indicates the ratio of currency is greatly the same today the same way it was in the eraly 1950s and late 1960s.

Legislative profits and the economic theory of representative voting: An empirical investigation, Abrams, B. A. (1977). Public Choice31(1), 111-119. This study’s statistical findings support the theory of the economy of representing voting. Generally, producer and consumer categories influence representative voting characteristics as it is expected. These findings advices that rational behaviors are common to legislators when faced with competition lobbying categories. The influence by the MSB share which serves to check MSB influencer that is relative to other bank groups and this shows that legislators appear to think about opportunity costs in the calculus of their decision making. Consistency was found in the findings with the hypothesis of Downs-Stigler that producer-lobbyist categories have an advantage comparatively, over consumer-voters in the marketplace for legislative profits.

Retail Fees of Depository Institutions, 1994-99, Hannan, T. H. (2001). Fed. Res. Bull.87, 1. Considering the terrain of legislative mandate, for many years, the Federal Reserve Board sponsored annual surveys of the retail amount charged by depository institutions. For the most recent six years, (1994-1999), analysis of the data shows that for the most known types of depository accounts that were surveyed, the minimum balances of the few fees changed by considerable statistical amount. The differences been narrowed, it remained statistically important after review that controlled the institution’s general location, for multistate operations – just like the situation for of the large versus small.

NOW-account strategies of depository institutions: A recent survey of goals, pricing policies, costs, and returns in New England, Kolari, J. W., Rose, P. S., & Varadarajan, P. R. (1986). Journal of Business Research14(5), 441-457.

The microeconomics of deposit rate ceilings: Inferences for NOW accounts and interest on checking accounts, Mingo, J. J. (1980). Journal of Banking & Finance4(4), 387-395. The examination of a specific set of market and product state is carried out by this paper. This state or conditions could be in favor of the theoretical argument, which is known among commercial bankers, that rate of deposit ceilings, mostly interest prohibition on account checks are beneficial to bank earnings. The conclusion arrived at was that on the basis that: (a) homogeneous goods are deposited in the bank; (b) collusive oligopsonies  are market deposit and  (c) the regulated ceiling rate is not set too far below the ceiling that would exist in an unregulated monopsony.

The Negotiable Order of Withdrawal (NOWAccount: Checking Accounts for Savings Banks, Kaplan, A. J. (1972). BC Indus. & Com. L. Rev.14, 471.

Financing Public Services Activities with Interest-Bearing Attorney Trust Accounts, Gonser, T. H., Almond, D. R., & Ziegler, F. B. (1978). Idaho L. Rev.15, 219.

Exploring an Example of Creative Legal Problem Solving: Inventing the NOW Account, Ashley, K. D. (2003). In Invited paper for the Special Workshop of the IVR World Congress. The invention of the NOW account is a  good example of the illustration of five characteristics steps to creative legal problem-solving. Taking note of the opportunity for identifying the relevant legal, creative legal problems solving, creating potential solutions probably by adapting past case solutions, commercial and technical constraints, bringing a solution into fruition and evaluating the alternatives in light of the constraints. For the purposes of adaptation, a systematic reasoning and criticizing solutions that meets the law’s requirements but not the other important areas will definitely be an issue.

Integration of Deposit Account Financing into Article 9 of the Uniform Commercial Code: A Proposal for Legislative Reform, Zubrow, L. E. (1983). Minn. L. Rev.68, 899.

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