Negotiable order of withdrawal account


A Negotiable Order of Withdrawal (NOW) account is a deposit account that earns interest on the money held in the account. An accountholder is allowed to write drafts against the deposits and thus, is sometimes also called demand deposit account. However, the U.S. defines negotiable order of withdrawal account and demand deposit account separately under its banking regulations. As per Regulation Q, a demand deposit could not pay interest, though NOW account was structured to meet the terms of the banking regulation.

NOW accounts are considered as checkable deposits and therefore, are counted in M1 definition given by the Federal Reserve Board regarding the money supply. Similarly to all the other bank deposits, NOW accounts are, too, liabilities to the bank.

What is Regulation Q?

Regulation Q is a regulation from a Federal Reserve Board in the United States that sets “minimum capital requirements and capital adequacy standards for board regulated institutions”. Several amendments were made since it was introduced in the August 1933, primarily to ensure that the banks maintain sufficient funds to withstand through any economic recession.

The regulation also prohibits the banks from paying interest on demand deposit account and checking accounts and also imposed restrictions interest rate ceilings on types of bank deposits and loans. However, later in the 2008, the regulation was replaced by the Dodd-Frank Wall Street Reform Act in the wake of Global Financial Crisis in the year. With this change, banks were allowed to pay interest on demand deposits.

How NOW accounts were developed?

Due to rising competition in the financial markets, bankers wanted to find a new way to survive the competition. The CEO and President of Consumer Savings Bank in Worcester, Massachusetts, took the charge of the banks in the 1970s to be able to offer checking accounts with payable interest. This is when the idea of Negotiable Order of Withdrawal Accounts came into existence.

Impressed with the idea, the then government, in 1974, allowed operations of NOW accounts in two states – New Hampshire and Massachusetts. It was then expanded across all of New England in 1976 and by 1980, everyone in the United States was eligible to get a NOW account to earn interest on their checking accounts. The rate of interest on NOW accounts was capped to 5%.

Soon, NOW accounts became quite popular among the accountholders for the fact that they could earn interest on their checking account, even though they had to give 7 days’ notice to the bank before making any withdrawals from the account.

NOW accounts vs. Demand Deposit account

Demand deposit account (DDA) is a bank account held with any bank or financial institution, from which an accountholder can withdraw the funds from the account at any time whenever the need arrives. Savings account and checking accounts are some of the example of demand deposit account. Demand deposit account is slightly different from the term deposit account, where there are certain restrictions for accessing the funds for a predetermined period.

On the other hand, there are quite a few similarities between NOW accounts and demand deposit account that allows easy access to the funds to withdraw at any time without any waiting period and any delay. However, after the Dodd-Frank Act was introduced, NOW accounts are not used more and the key reason was that the interest-bearing benefit was no longer there.

What are Super NOW Accounts?

A Super NOW account is basically a combination of Negotiable order of withdrawal and money market account. Super Negotiable Order of Withdrawal Account typically has higher interest rate than a NOW account, but lower interest rate comparatively to a money market account.

The features of Super NOW account such as average minimum balance and interest rate may vary from bank to bank, subject to the type of offerings. This account doesn’t have any interest rate ceiling.

How Super NOW Account works?

Following a long series of amendments and modifications in the US Banking regulations beginning with the Banking Act, 1933, Super NOW Accounts were introduced. The Act restricted the banks from paying interest on demand deposit accounts. The decision was made to protect the then-fragile banks to survive in the competitive environment. Banks were offering higher interest rates in order to attract customers and this thereby potentially undermined their financial strength.

Later in the year 2011, Congress invalidated the law restricting the payment of interest on demand deposit accounts. Hence, there remains no significant difference between the functioning of NOW account and Super NOW accounts. Though, they will have different meaning and definition in the books of banks and financial institutions offering them.

However, following the number of regulatory changes in the banking regulations, Super NOW account is not that widely used as they were in the initial days.

Benefits of NOW Account:

• It requires minimum deposit of $2500 to open an account with the bank, though the minimum balance requirement may differ from bank to bank.
• An accountholder would earn interest for maintaining minimum average daily balance of $2500 in their checking account.
• Interest will be computed on monthly basis and would be deposited to the bank account every month.
• There is no restriction on writing the maximum number of cheques in the account.
• Free cheque books for accountholders aged above 50 years or as per the norms set by the bank.

Fees and charges

• Maintenance fee of $100 would be imposed in every statement cycle for not maintaining minimum average balance in the account as per the bank’s norms.
• $0.15 charges would be imposed for writing every cheque.
• In case an account has no activity for the past 12 months, a dormant service charge of $1 per statement would be levied.