Negotiable Order of Withdrawal (NOW) Account

Negotiable Order of Withdrawal Account (often shortened to NOW Account) is a type of bank account that functions like a checking account but also pays interest. Think of it as the clever hybrid child of a traditional checking account and a savings account. It offers the best of both worlds: the unlimited transaction capability and check-writing features of a checking account, combined with the interest-earning power of a savings account. These accounts were a game-changing innovation in the 1970s, born from a creative legal workaround to U.S. banking laws that, at the time, forbade banks from paying interest on demand deposits. While for-profit corporations are generally barred from holding NOW accounts, they are widely available to individuals, non-profit organizations, and government entities. They serve as a fundamental tool for managing cash, allowing depositors to keep their money liquid and accessible while still earning a modest return.

The mechanics are straightforward. You deposit money, and the financial institution (like a bank or credit union) pays you interest on your balance. You can access your funds at any time by writing a “negotiable order of withdrawal”—which is just a fancy name for a check—or by using a debit card, making online transfers, or withdrawing cash from an ATM. The key difference from its banking relatives is this:

• Versus a Traditional Checking Account: A standard checking account is great for daily transactions but typically pays zero interest. Your money sits there, convenient but unproductive. A NOW account puts that idle cash to work.
• Versus a Savings Account: A traditional savings account pays interest but comes with strings attached, often limiting the number of withdrawals you can make per month. A NOW account offers the freedom of unlimited transactions.

However, there's often a catch. Most banks require you to maintain a minimum balance in your NOW account. If your balance drops below this threshold, you might forfeit the interest for that period or get hit with a monthly maintenance fee. It's the bank's way of ensuring the account is worthwhile for them to manage.

The name “Negotiable Order of Withdrawal” sounds a bit clunky for a reason—it’s a relic of a fascinating chapter in U.S. banking history. For decades, the famous Glass-Steagall Act of 1933, through a provision known as Regulation Q, prohibited banks from paying interest on checking accounts. The goal was to prevent the kind of risky competition between banks that was thought to have contributed to the Great Depression. Fast forward to the 1970s, an era of high inflation. A savings bank in Massachusetts had a brilliant idea. The law said you couldn't pay interest on checking accounts, but it didn't say you couldn't offer a savings account from which customers could make withdrawals using a special, check-like instrument. They called this instrument a “negotiable order of withdrawal.” It was a legal loophole you could drive a truck through! This innovation spread like wildfire, and the regulators couldn't put the genie back in the bottle. Congress eventually acknowledged reality and passed the Depository Institutions Deregulation and Monetary Control Act of 1980, officially authorizing NOW accounts nationwide for all eligible institutions.

For a value investor, a NOW account is more than just a place to pay bills. It's a strategic tool for managing liquidity and analyzing financial institutions.

A core principle of value investing is patience—waiting for the right opportunity to buy a great company at a fair price. This requires having “dry powder,” or readily available cash. A NOW account is an excellent place to park this cash.

• Earn While You Wait: Instead of letting your investment capital sit in a non-interest-bearing checking account, a NOW account allows it to earn a small return, helping to slightly offset the corrosive effects of inflation.
• Ultimate Liquidity: When a bargain appears in the market, you need to act fast. Unlike Treasury bills or other short-term investments that might take a day or two to liquidate, funds in a NOW account are immediately accessible.
• The Trade-Off: The convenience comes at a price. NOW accounts typically offer lower interest rates than a high-yield savings account or a money market fund. The savvy investor must weigh the need for instant liquidity against the desire for a higher yield on their cash reserves.

When you're looking at a bank as a potential investment, you need to understand where it gets its money. Deposits are a bank's raw material, and not all deposits are created equal.

• A Stable Funding Source: NOW accounts, along with other checking and savings deposits, are considered core deposits. These are typically “stickier” and more stable than other funding sources like jumbo certificates of deposit (CDs) or borrowing from the federal funds market.
• Lower Cost of Funds: Core depositors are often less sensitive to interest rate changes than investors seeking the absolute highest yield. This means banks can often pay a little less for these funds, lowering their overall cost of capital and potentially widening their net interest margin.

In short, a bank with a high percentage of its funding coming from stable, low-cost NOW accounts is often a healthier, more resilient business. It’s a green flag for a value investor digging into the financials of a financial institution.