People swarm for NOW accounts, but banks are leery

The TV commercial opens as a hand, with the sleeve of a judicial robe trailing behind, raps a gavel on a bench. "The law," rumbles a magisterial voice, "says we can't pay you interest on checking."

The voice pauses, as if catching its breath. "On Jan. 1," it continues, with a hnt of a smirk, "the law changes."

The time for NOW has come. Negotiable orders of withdrawal, accounts that marry the convenience of checking with the interest-earning ability of passbook savings, will be legal nationwide for the first time on Dec. 31, though many banks won't offer them until Jan. 1.

Banks and thrifts are shrieking to attract new business, even though they don't really want to offer the accounts. Customers are signing up in packs, even though NOW's don't mean a saving for just everyone.

Are NOWs and innovative response to consumer demand, or a mass delusion that will only mess up the Federal Reserve's money-supply figures?

NOW accounts were first offered by a spunky Massachusetts mutual bank in 1972 . Federal regulatory agencies prohibited paying interest on checking, but the bank claimed customers were writing "negotiable orders of withdrawal," not checks. The state supreme court agreed.

The controversial accounts spread throughout New England. In 1976, Congress legalized them for the six-state region. In 1979, they were permitted in New York and New Jersey. This year, a provision of the Monetary Control Act of 1980 made NOWs legal nationwide.

An American Bankers Association spokesman estimates that 75 percent of America's Banks and 50 percent of its savings-and-loan associations will offer NOWs on Jan. 1. Here in Washington, a survey found that 87 percent of the area's financial institutions plan to provide them.

Banks and savings-and-loan associations used to be warehouses for money storage. Youngsters would toddle up to the window at age 10 for their first passbook, and thereafter keep squirreling away deposits for use at some future date.

But in today's consumerist age financial institutions have become mere way stations where paychecks barely have time to rest before they're marched off to settle a debt somewhere. Americans now save less than 4 percent of their money.

For many people, the liquidity of a checking account has become a necessity. And with double-digit inflation, the up to 5 1/4-percent interest paid on NOW will look tempting.

"NOW account?" Sandra Willett, executive vice-president of the National Consumer League, says. "I would say they are a limited boon."

"I'd say they're a beginning step," says Jim Boyle, a banking specialist at the Consumer Federation of America.

Consumer advocates don't wholeheartedly endorse NOWs because, once all the restrictions are added in, many people won't save any money by switching their normal checking balances to the new accounts.

Almost all NOWs require a minimum balance to qualify for interest.

In New England, it can be as low as $300. A few banks don't require one at all. But in Washington those who want to open a NOW in the new year will find they typically have to keep at least $1,000 in their account. Some banks will start toting up a per-check service charge if the balance drops lower; others will simply stop paying interest.

"Specific requirements could put the return out of reach of many people," Ms. Willet says.

Despite the thump of their advertising, financial institutions aren't too wild about offering NOW accounts, either.

"There was substantial resistance at first by both banks and savings and loans," says Ken Reich, director of funds transfer research at the US League of Savings Associations. "They tried to kill it, but it was too popular with consumers."

Commercial banks may be the big losers. Like all checking accounts, NOWs are labor-intensive and expensive to administer. Most banks believe consumers will simply switch money from their savings into NOWs -- meaning the cost of business will go up while net deposits stay the same.

"They don't bring in anything," says Larry Edwards, senior vice-president at Lincoln Trust Bank, Rochester, N.Y. "We [offer NOWs] for competitive reasons."

For savings-and-loan associations the situation is a bit different. Their interest rate on passbook savings is 5 1/2 percent, one-quarter percent higher than that allowed to commercial banks. So customers may leave S&L savings untouched and deposit new money in NOWs -- making net deposits for the thrifts go up.

And NOW accounts will probably mess up the Federal Reserve's bookkeeping. On Jan. 1 a whirlpool of shifting money will significantly affect the growth rate for the money-supply index known as M1-A (a measure of money consisting of cash and checking accounts) and M1-B (M1-A plus check-like accounts such as NOWs).

The Fed is lowering its January M1-A growth target 3 percent, and raising M1 -B1 1/2 percent to include the shift of NOW money. But some private analysts believe that's not enough.

"I think NOWs will be more popular than the Fed has assumed," Tim Howard, vice-president and senior economist at Wells Fargo Bank says.

Mr. Howard estimates that M1-A will decline 3 1/2 percent, and M1-B will increase 2 1/2 percent.

"The economic effects will be neutral," he says. "It's just a change in the public's demand for money."

Mr. Howard also points out that Fed member banks will have to keep 12 percent of the money deposited in NOWs sitting in their vaults.

The reserve requirement, he says, isn't as stringent for ATS (automatic transfer service). ATS accounts automatically transfer money, as neede, from savings into checking. ATS has been legal since 1978, but involves a nightmare of paper work and can't be advertised as "interest on checking."

Mr. Howard believes the lower initial reserve requirements (which will be scaled up by 1984) will lead most Fed member banks to promote ATS more heavily than NOW -- throwing a monkey-wrench variable into everyone's predictions of money-supply growth.

But eventually ATS will fade from the banking scene, replaced by the simpler NOWs.

"In the long run, there is no advantage to ATS," says Mr. Reich of the US League.