Why Do Banks Still Have A NOW Account?

Streamlining Deposit Accounts

There are a material amount of banks out there that still offer negotiable order of withdrawal (“NOW”) accounts. Our question is why? Why not also offer a Christmas Passbook Account while you are at it? The NOW account predates the Dodd-Frank Act and while there was little need to carry it before, there is now no cogent argument that can be made for carrying it present day. A NOW account is basically an interest checking account that technically has a 7-day withdrawal notice period that extremely few banks ever invoked and even fewer systems could even handle if management even wanted to invoke it.

 

A Brief History

 

Bankers, complaining of competition after the Great Depression, pressed their Congressional representatives to include in the Banking Act of 1933 a provision prohibiting interest on demand deposits. The argument was based on the fact that if one bank starts paying interest, then they all would and profits would shrink at a time when banks were just starting to get on their feet again after the crisis – and so it passed. While rates were low, no one really cared until the 1950’s when short-term rates were back up to the 5% range.

 

Proving again that community banks can be innovators, it took Consumer Savings Bank of Worchester, MA, to petition Congress to create a NOW account arguing that the 7 day notice period and a 5% interest cap protected banks and made it a substantially different account to not conflict with the Banking Act of 1933. Congress agreed and soon all New England banks were able to offer the product during the mid-1970’s. By 1980, banks nationwide could offer NOW accounts as well. Many banks took the regulation literally and used the account type for “preferred” retail customers to include individuals, non-profits and municipalities. The interest rate cap came off in 1986, as did any concern about only using the account for preferred retail customers. By the 90’s, banks created a workaround for commercial customers setting up an interest paying money market and sweeping into checking, thereby accomplishing the same thing (a workaround still used today).  It wasn’t embarrassingly until Dodd-Frank in 2011 when bankers/Congress finally agreed that most of Regulation Q was ridiculously antiquated and interest on all checking was permissible on all retail and commercial checking.

 

Vintage Bank Savings Advertisement

 

It Is Costing You

 

Keeping a NOW account around confuses things. Many bankers don’t have a good feel for the difference between an interest checking, NOW account and a money market account, so why should we expect the public to? In addition to being confusing and taking up cognitive space, NOW accounts have to be managed, reconciled and operated - no insignificant cost in a low-interest rate environment. There are system requirements, eligibility verification, disclosures, monitoring and reporting.

 

Banks can simply change all NOW accounts into a regular interest checking account with the same rate and terms and be totally transparent to the customer. Since you aren’t changing terms, no notice would be required, but it never hurts to provide a change of terms to your customer. The good news is that you don’t have to close then reopen a new account.

 

Put the Account to Rest

 

NOW accounts should go by way of the passbook account. Some banks not only have a NOW account but Super Now Account, Commercial NOW and Super Commercial NOW. Banking is changing and soon customers will have one omnibus account. To survive, banks need to streamline where they can and consolidating multiple interest checking, savings, money market accounts and time deposits with blurred lines is an easy place to start. Getting rid of your NOW accounts is a painless step in a more profitable direction.