Since December, federal banks and credit unions have been allowed to offer savings accounts that include a raffle element, after some states have allowed accounts like these for some time. The goal of these lottery-like accounts is to encourage more people to save money, particularly those households with low and moderate incomes. This was the single provision of the American Savings Promotion Act, a bipartisan bill signed into law by the President of the United States.
How prize-linked savings accounts work.
When you open an account with a certain value, you receive an entry in the raffle. While account holders don’t necessarily earn interest, one lucky winner will receive enough interest to change one’s life. The more you save, the more chances you have at winning.
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Here is an example of how this works, based on the “Save to Win” model, organized by the Michigan Credit Union League (MCUL) in 2009, in which some state credit unions are all ready participating. If you open up a 12-month certificate of deposit within a prize-linked savings account and deposit $25 into the account, you receive one ticket (like a raffle ticket). For every additional $25 you deposit into the account, you receive an additional ticket, up to ten chances per month. With the tickets linked to CDs, keep in mind that you may be penalized for withdrawing your money before each deposit matures at the end of the initial twelve months.
The prizes are generally awarded as small monthly prices or larger annual prizes. Even the small monthly prizes would be larger than the interest you could earn in the highest of high-yield savings accounts, but there’s no guarantee of receiving it. Some of the winners have been publicized like lottery winners or charities, with big checks indicating $10,000 in prize money.
For North Carolina credit unions in the Save to Win program, on the 14th of each month, there are 3 grand prize winners every year, receiving $10,000 each; three quarterly winners each year, with prizes from $500 to $1,500 depending on the quarter, and 312 winners each month across the state, winning prizes from $25 to $100. These are the Save to Win central drawings — each participating credit union may also supplement the program with their own drawings.
The state credit unions already offering these accounts may be successful in encouraging saving behavior among individuals who may not already be saving money — at least, not saving money in a bank. The accounts may attract people who are prone towards gambling or other risky behavior. Prize-linked savings accounts have been around in other parts of the world and have been shown to be successful in attracting depositors. The question remains whether encouraging good behavior through the potential of a prize has any lasting effect on savings behavior.
If people begin to associate saving money and other behaviors that ultimately benefit a family from a financial perspective with the chance to win a prize, they may only desire to take on these behaviors when they could win something — a prize more immediate than long-term financial stability. When parents pay their children a monetary prize for good grades, those children could be associating good school work with financial gain, which may not always work out well in the end.
Parents can control how they use rewards with their children, adapting the strategy to ensure they are working hard for the right reasons, but financial institutions look out for one thing: the bottom line. Banks and even nonprofit credit unions will continue to run programs like these as long as they’re profitable, with no regard for whether customers are overall in good financial shape.
Bloomberg explains some of the history of prize-linked savings accounts:
A bank in South Africa tried this in 2005. The First National Bank’s Million-a-Month Account promised savers a chance to win 113 prizes a month, including a grand prize of 1 million South African rand (about U.S.$150,000 at the time). Within 18 months, the bank had more prize-eligible accounts than regular ones. These new customers, many of them poor, saved an extra 1 percent of their incomes, a recent study found, and boosted their overall saving 38 percent…
A prize-linked savings account won’t help raise incomes, and it won’t lower the costs of health care or housing. But it may nudge Americans to pay just a little more attention to their savings, so that an unexpected expense doesn’t become a financial disaster. At the very least it could give some lucky savers the thrill of hitting the jackpot. (Bloomberg)
People are drawn to lotteries, usually for worse, but maybe also for better. If you look at the lottery as a “tax on stupid people” or a “tax on poor people,” this is a little different. In a typical lottery, you buy a ticket and never see that money again. It’s a terrible investment, yet people, not just the stupid and poor, continue to pour money into the lottery.
While offering the chance at a financial windfall might encourage more saving, is a $10,000 windfall enough to encourage behavior? I can remember my days (not too long ago) working in a corporate office environment. When the multi-state lottery prize money was high enough, well into nine digits, a group would organize and co-workers would pool money together to buy some lottery tickets. Throw a dollar in, have an infinitesimal chance of winning enough money to buy the moon. The odds are better when you deposit $25 into a bank, but the prize is not as significant. But at least you can get your money back.
Ultimately, the prize-linked savings program in South Africa was shut down because it was determined to be unlawful. But here in the United States, states and federal governments are making way for the potential for more accounts. It might take some time, but eventually, banks like Citi, Wells Fargo, and Chase could be jumping into the game.
In theory, banks would not need to charge fees for these accounts because they will be big money-makers for the institutions. As of September 30, 2014, J.P. Morgan Chase Bank was holding $1,377,661,000,000 in customer deposits, which would include interest-bearing and non-interest-bearing accounts. The bank spent $210,000,000 in interest on deposit accounts that quarter. That’s an average annual interest rate of about 0.00375%. Banks can profit on accounts that don’t pay interest — these are basically free loans from consumers to the institutions. They can use the deposits to earn a low interest rate. With interest-bearing accounts, banks pay the profits back to consumers, but they can keep more of the profit by paying a larger amount of interest to a much smaller number of depositors.
That’s how it would work out if each bank ran its own program. But like lotteries, an outside organization could handle the management of the prize accounts, which means that like multi-state lotteries, the funds are pooled and prizes are awarded across financial institutions. That’s where Save to Win comes into play.
How to open a prize-linked savings account.
It isn’t simple today.
To open account, first, you need to be a resident of one of the states that currently offer these prize-linked savings accounts: Michigan, Nebraska, North Carolina, or Washington. Then you must be a member of a credit union that offers a partnership with Save to Win, which seems to be the only lottery service catering to credit unions so far. For the most part, you won’t be able to open an account online. First, you’ll need to become a member of a participating credit union if you aren’t all ready and if you qualify. Some credit unions allow online applications. You will almost always need to visit or call the credit union to open a 12-month CD account linked to the Save to Win program.
Programs like these will continue to expand as national banks and credit unions begin taking advantage of the new law that allows these accounts in national financial institutions, both banks and credit unions. I expect that as the programs grow, they will be accompanied by significant advertising campaigns designed to get new customers in the door, appealing to the communities that banks expect would be most likely to respond to lottery-based promotions. In other words, this could be a way for banks to make profitable entries into low socio-economic status neighborhoods, something the financial industry has avoided.
To find a participating credit union in the four listed states, visit the Save to Win website. Frequently mentioned alongside Save to Win is SaveUp, a for-profit company that offers prizes to customers who exhibit positive financial behaviors, like paying off debt. That isn’t exactly the same as prize-linked savings accounts, but it follows the theory of treating customers like children (through financial rewards) to train better financial behavior among Americans.
Do you think prize-linked savings accounts are good ideas? Would you open an account for the chance to win one a lottery like this? Or is this just another way for the financial industry to take advantage of lower-class customers?