Is a NOW account technically a transaction account or a savings account? I always thought they were classified as savings for reserve requirements, but in reading a couple explanations on BOL, I'm not so sure any longer. I know they are not a demand deposit account, but I'm getting myself confused.

NOW accounts (and demand deposit accounts) are classified as "transaction" accounts under Regulation D.

Back when Ken and I first started practicing banking (if doctors and lawyers can practice, why not bankers?), the only type of checking account available was the demand deposit account, which earned no interest (payment of interest on demand deposit accounts has been prohibited by law since the 1930s). NOW accounts weren't even a glimmer in a banker's eye. They originated in the 1970s as savings accounts on which Negotiable Orders of Withdrawal (NOW) could be issued, in a little savings bank in Worcester, MA then called "Consumer Savings Bank." They quickly became popular consumer interest-bearing checking account vehicles although they maintained their legal status as savings accounts. They spread to the New England states and on to New York and New Jersey before Congress, in 1980, passed major banking legislation that, among other things, allowed NOW accounts nationwide.

Sometime in the late 1970s or early 1980s banks outside the northeast created the Automatic Transfer Service (ATS) savings account that paired with a demand deposit account to pay consumers interest on their checking balances through a dual account construct.

ATS accounts have largely faded away, since NOW accounts accomplish with one account what the ATS account did two accounts. Both were creative ways to get around the prohibition on the payment of interest on demand deposit accounts.

Transaction accounts is a relatively new term that was coined in connection with the 1980 legislation. It covers demand deposit accounts, NOW accounts and ATS accounts and subjects them all to the same reserve requirements under Regulation D. NOW and ATS accounts continue to be special forms of savings accounts (there is a requirement to reserve the right to seven days' notice of withdrawal) that can pay interest.

With the July 21, 2011, elimination of the prohibition on payment of interest on demand deposits, the need for the laws specifically enabling banks to offer NOW and ATS accounts will be gone, and I wonder whether banks will streamline their offerings to eliminate them from their menus of accounts.

I guess I'm getting all wound up in the yarn. I'm trying to determine if there are any benefits to having NOW accounts after we are able to pay interest on DDA accounts next year.

After 7/21/2011, the only differences that I can see between an interest-bearing DDA and a NOW account will be the ownership restrictions which won't mean much, and the "reservation of notice" provision that currently keeps a NOW account from being a DDA. Some banks might see a value in that little distinction. Most probably will not.

Am I correct that both consumer and commercial DDA accounts, after 7/21/11, can be paid interest on DDA accounts?

You are correct. One cautionary note: The DDAs will be 100% covered by deposit insurance on that date. The FDIC plans to require you to notify affected customers (those with noninterest-bearing DDAs) of any plan to start offering interest and to remind them that any DDA account that starts earning interest will lose the 100% coverage and become subject to the FDIC's regular $250,000 SMDIA limits on coverage.

For lots of customers, that won't matter a whit. For others, in particular some business customers, it may matter a lot.

Thanks, John. I always appreciate your wisdom.