What Is a Negotiable Order of Withdrawal (NOW) Account?
Explore NOW accounts: interest-earning checking solutions that bridge savings and checking, ideal for specific account holders.
A Negotiable Order of Withdrawal (NOW) account is a type of deposit account that combines features of both checking and savings accounts. These accounts were developed to allow depositors to earn interest on funds that were readily accessible for transactions. They emerged as a way for individuals to gain a return on liquid funds when banking regulations restricted interest payments on traditional checking accounts.
Understanding NOW Accounts
The acronym “NOW” in NOW account stands for Negotiable Order of Withdrawal, referring to the unique type of draft or check used to access funds. These accounts operate as interest-bearing checking accounts, enabling depositors to write drafts against their deposited money. The concept of NOW accounts arose as a means to circumvent specific banking regulations, particularly Regulation Q, which historically prohibited banks from paying interest on demand deposit accounts. This regulatory distinction created a need for an account type that could offer both liquidity and interest.
The initial structure of NOW accounts allowed financial institutions to offer interest on funds that could be withdrawn on demand, provided they reserved the right to require a minimum of seven days’ notice before withdrawal. While this right was a technicality to comply with regulations, it was rarely, if ever, enforced by institutions in practice. Therefore, NOW accounts effectively functioned like regular checking accounts but with the added benefit of earning interest on the balance.
Key Features
A primary characteristic of a NOW account is its ability to earn interest on the deposited balance, which differentiates it from traditional non-interest-bearing checking accounts. Account holders can write checks or drafts for transactions, providing flexible access to their funds. Many NOW accounts also offer modern banking conveniences such as debit card access, enabling point-of-sale purchases and ATM withdrawals.
Depositors maintaining a NOW account benefit from Federal Deposit Insurance Corporation (FDIC) insurance, which protects their funds up to $250,000 per depositor, per insured bank, for each ownership category. This coverage safeguards both the principal amount and any accrued interest in the event of a bank failure. While some NOW accounts may require a minimum balance to earn interest or to avoid monthly service fees, these requirements can vary significantly among financial institutions.
Who Can Use NOW Accounts
Eligibility for NOW accounts is generally restricted to specific types of entities, reflecting their historical regulatory purpose. These accounts are primarily available to individuals, including those operating as sole proprietorships. This means that an individual using their personal funds for business purposes under a “doing business as” (DBA) name can open a NOW account. The eligibility extends to certain non-profit organizations and governmental units as well.
Non-profit organizations, as described in specific sections of the Internal Revenue Code, are permitted to hold NOW accounts. Various governmental entities, including federal, state, county, and municipal bodies, are eligible. Conversely, for-profit business structures like corporations, partnerships, and associations are generally not allowed to open NOW accounts, as these accounts were not designed for their operational needs under the previous regulatory framework.
Comparing NOW Accounts
NOW accounts occupy a unique space when compared to other common banking products, though their distinctiveness has lessened in recent years. The repeal of Regulation Q in 2010 eliminated the prohibition on interest-bearing checking accounts, leading many banks to offer interest on standard checking accounts, effectively blurring the lines between these two account types. While a NOW account technically reserves the right to require a seven-day notice for withdrawals, this is rarely enforced, making it functionally similar to a demand deposit account in terms of accessibility.
When contrasted with traditional savings accounts, NOW accounts offer greater transactional flexibility, particularly through flexible check-writing capabilities. Savings accounts are primarily designed for accumulating funds and typically impose limits on the number of convenient transfers or withdrawals allowed per month. While savings accounts generally offer competitive interest rates, their primary purpose is long-term savings rather than frequent transactions, which makes them less suitable for day-to-day spending than a NOW account.
Money market accounts (MMAs) also bear interest and often provide check-writing and debit card access, making them appear similar to NOW accounts. However, MMAs often come with higher minimum balance requirements to earn their typically higher interest rates and may still have some transaction limitations, even if more flexible than traditional savings accounts. The choice among these account types depends on an individual’s specific needs for liquidity, transaction volume, and interest earning potential.