Banks offer a variety of deposit accounts ranging from regular checking to money market accounts. A NOW account is a type of deposit account that has features similar to a money market account. It’s worth learning what NOW stands for in banking. Although NOW accounts are not as popular as many other types, they are a good alternative for some people.
The acronym NOW stands for “Negotiable Order of Withdrawal.” A NOW account is a special type of interest bearing savings account. In addition to depositing money in a NOW account, you can write a draft called a negotiable order of withdrawal on the account and present it to a third party.
There are two types of NOW accounts. A regular NOW account works much like a checking account, although you may have a minimum balance requirement. You earn interest comparable to a regular savings account and write NOW drafts just as you would personal checks. A Super NOW account more closely resembles a money market account. You have a higher minimum balance (usually $1000 to $2500, depending on the bank) and the interest rates are higher than regular NOW accounts.
In the 1970s small banks, particularly in the northeast, were facing stiff competition from the introduction of money market accounts by commercial banks and investment houses. Small banks weren’t positioned to create their own funds and were prohibited from paying interest on checking accounts by the Banking Act of 1933. The NOW account was developed by some Massachusetts banks to get around this prohibition. A negotiable order of withdrawal technically isn’t a check, although it works the same way. In 1981, federal banking regulations were amended to authorize NOW accounts on a nationwide basis and Super Now accounts were introduced the following year.
When you write a negotiable order of withdrawal, it’s like taking money out of your savings account. The difference is that the NOW draft is negotiable, meaning you can give it to third parties just as you would personal checks. Third parties can than present NOW drafts to your bank to get their money. The NOW account ends up being like a money market account, except that the interest rate is fixed and the funds are on deposit in the bank rather than being invested in the shares of a money market fund.
A NOW account has some advantages over a money market fund. Regular NOW accounts have lower minimum balances and you have more access to your money at most banks. However, the interest rates are lower than most money market funds. If you are able to leave a larger minimum balance in the account, Super NOW accounts have interest rates between those of savings accounts and money market accounts, but otherwise give you ready access to your money (except for that minimum balance).