A negotiable order of withdrawal account is an interest-earning bank account. A customer with such an account is permitted to write drafts against money held on deposit. The negotiable order of withdrawal account is also known as a "NOW account."

Breaking Down Negotiable Order of Withdrawal (NOW) Account

Typically commercial banks, mutual savings banks, and savings-and-loan associations can offer NOW accounts to individuals, some nonprofit organizations, and certain governmental units.

U.S. banking regulations distinguish between "negotiable order of withdrawal account" and "demand deposit account" – although similarities exist. As with demand deposit accounts, NOW accounts can quickly provide the money consumers need for daily expenses. Under Regulation Q (Reg Q), demand deposit accounts historically have not been allowed to pay interest (a hallmark of NOW accounts).

History of Negotiable Order of Withdrawal Accounts

The history of preventing depositors from earning interest on accounts dates back to the Great Depression. Significant bank turmoil marked this era in the 1930s; many viewed the interest payments-on-demand deposits as “excessive competition,” leading to diminished profit margins. (This primarily related to large New York banks.) As interest rates rose in the 1950s, many banks began trying to get around the ban. This started with non-pecuniary rewards, such as offering more convenient features additional branch offices, along with giveaways of consumer goods to attract new customers). Implicit interest also gradually gained traction. This included preferred loan rates; banks often correlated these with a customer's demand deposit balances. Banks also began to display below-cost charges for common services, such as check-clearing.

Ronald Haselton, the former President and CEO of the Worcester, MA-based Consumer Savings Bank was the first to develop the NOW account officially. This became a direct challenge to the ban on interest payments on deposit accounts. In 1974 Congress permitted NOW accounts in Massachusetts and New Hampshire, and all of New England in 1976, with a 5% interest rate ceiling.

Negotiable Order of Withdrawal Accounts and Demand Deposit Accounts

While NOW accounts have been able to circumvent interest rate bans, Regulation Q still prohibits financial institutions from paying interest on demand deposits. In lieu, a bank may offer an account holder cash or credit payments, along with merchandise when opening an account. For a demand deposit, an account holder may not receive higher than two payments annually, and the value of each payment cannot exceed $10 for deposits under $5,000 and $20 for deposits exceeding $5,000.