PATs vs. NOWs

Two 5% solutions

Some help for the inflation-weary: the nation's 4,668 federally chartered banks can now offer interest on what is, in effect, money deposited for checking, and many have begun doing so. For the first time since the Depression, consumers can get some return on funds that the banks have long been able to use for free.

Alas, checking with interest has arrived amid considerable confusion because two systems are in contention. Under a Federal Reserve Board ruling effective Nov. 1, all member banks can offer so-called preauthorized automatic transfer schemes, or PATS. Depositors keep separate savings and checking accounts and authorize the automatic transfer of funds out of savings to cover withdrawals from checking.

All deposits are held in savings, where the money earns a maximum interest of 5% a year right up to the moment of withdrawal. But banks that offer the service can charge steep fees, sometimes as much as 25-c- for every check written, plus a monthly service fee that may be as high as $5 if the savings balance drops below a preset level. Thus PAT accounts may be profitable only for depositors who write few checks and can maintain a balance of close to $1,000.

Because the PAT plans are costly and complex to run, especially for smaller banks, the future may well lie with the simpler system of negotiable order of withdrawals, or NOWS. Here a customer need only open a single savings account and when he wants to pay a bill, write a withdrawal order: a draft that looks like a check and can be used as one.

Unlike the new PATS, NOW accounts have been tried and proved by banks and other thrift institutions in the six New England states for several years, with impressive results. The region's biggest bank, Boston's First National, attracted NOW depositors from all 50 states and some 70 foreign countries. In fact, about 20% of the funds in the bank's NOW accounts come from depositors outside of Massachusetts. Says Kenneth Rossano, senior vice president at the bank: "Nationwide NOW accounts are inevitable."

Though banks in most states are still not authorized to offer NOW accounts, they will spread to the New York State market soon, as a result of an amendment that was unexpectedly passed in the hectic last days of the 95th Congress. Consequently, Citibank and Chase Manhattan have scrapped plans to offer PATS in favor of NOWs, and Chemical Bank and Manufacturers Hanover, which introduced PATS last week, plan to switch soon. Says Robert Lipp, head of Chemical Bank's metropolitan division: "NOWS are less confusing and cleaner. They are clearly the way to go."

NOWs are easier to understand, but they do not offer any great advantages over PATS. NOW accounts too are advantageous mainly to those who can maintain big balances, though the break-even point may be somewhat lower than with PATS. Under Citibank's plan, for instance, a depositor will earn 5% interest on the money he keeps in a NOW account and if he maintains a total balance of at least $3,000, pay no service fee. But if the combined balance drops below that, he must pay a charge.

Whatever system eventually prevails, interest-bearing checking will spur another round of bank competition for new business and bite into bank profits. California's Bank of America, which is offering PATS at its 1,100 branches, reckons that the interest it will pay to PAT depositors will total $30 million annually and slice about 7.5% from earnings. Savings and loan association officials are also worried about this new round of competition for the savings dollar. Many are desperately hoping they will be allowed to offer checking-with-interest accounts of their own or other services that may help curb a loss of depositors to commercial banks.

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