Negotiable Order of Withdrawal (NOW) Account

Updated July 12, 2021

What Is a NOW Account?

A negotiable order of withdrawal account (NOW) is an interest-earning bank account in which the account holder can write checks against the balance. Most mutual savings banks, commercial banks, savings and loan associations, and credit unions offer NOW accounts. Thus a NOW account, in simple terms, can be considered a checking account that pays interest.

Pros and Cons of NOW Accounts

NOW accounts pay interest on cash balances and, at the same time, offer the account holder the ability to write checks. This is an obvious perk.

Keep in mind, though, that while interest payments on a checking account are undoubtedly a benefit, those payments should be considered against the entire package of fees a bank will charge. 

For instance, a checking account that pays interest and offers free checking may seem like a good option. However, if the bank applies a minimum mandatory monthly service free, that monthly fee may end up canceling out any benefit of free checking and interest. 

Further, check writing in the US economy is in terminal decline as consumers are increasingly paying bills online or through plastic cards. Additionally, the interest rate paid on NOW accounts is very low and usually well below the interest a bank will pay on certificates of deposit.

Thus the interest paid on a NOW account is certainly in itself a benefit. However, depending on the frequency that checks are written and the amount of cash held in a demand deposit account, consumers should carefully examine all fees that a bank will charge to maintain the NOW account as well as other account options.

NOW Account Background

NOW accounts were first developed in response to The Banking Act of 1933, which decreed that no bank "shall, directly or indirectly, by any device whatsoever, pay any interest on any deposit which is payable on demand." In the 1930s, the US government sought to strengthen the fledgling banking sector and limit competition to help them profit.  

In order to level the playing field for all banks, payment of interest on checking accounts was made unlawful. A variety of laws and regulations were enacted during this period to help protect the banking sector as the entire US economy was reeling from a series of banking collapses. The belief among lawmakers at the time was that offering interest on checking accounts would eat into a bank's profit and weaken its financial stability. To stabilize competition and protect all banks, large and small, banks were prohibited from paying on checking accounts.

This prohibition on interest continued until the 1950s when interest rates became higher. Seeking to attract new depositors, banks began to feel greater incentive to get around the ban on paying interest. A variety of benefits were offered to new depositors, such as free gifts upon opening a new account or personal loans offered with very low interest. The era of the free toaster offered for opening a bank account was born.

First offered in 1974, NOW accounts were developed by Ronald Haselton, President and CEO of the Consumer Savings Bank in Worcester, MA. That year, regulators decided to allow banks to pay interest on checking accounts in a limited area for a limited time as a test case. As it became clear that payment of interest on checking accounts did not at all pose a threat to stability in the banking sector, Congress amended legislation permitting all banks nationwide to offer interest on all accounts.  

In summary, competitive interest rates are a part of our everyday banking and how large banks find customers—all thanks to the NOW account's humble beginnings.

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