What Are Prize-Linked Savings Accounts?
Definition & Examples of Prize-Linked Savings Accounts
Prize-linked savings accounts (PLSAs) are savings products that enable customers to enter into drawings to win cash prizes on the basis of their deposits. These lottery-like accounts can incentivize low-income individuals to save more money.
Learn how prize-linked savings accounts work, the types of PLSAs, and their benefits and drawbacks to decide whether they fit into your savings strategy.
What Are Prize-Linked Savings Accounts?
PLSAs are savings accounts, certificates of deposit (CDs), or savings bonds that accrue interest and function similarly to a traditional savings product but have the added benefit of giving customers the chance to enter into raffles for cash prizes by making deposits into the account. They're offered primarily by credit unions, though other financial institutions are federally authorized to offer them.
The lottery-like nature of the savings account gives the low-income individuals an opportunity to set aside money regularly with the promise of big winnings while holding their money risk-free in the account.
- Alternate name: Lottery-linked savings account
- Acronym: PLSA
How Prize-Linked Savings Accounts Work
An early form of PLSAs first appeared in the United Kingdom in 1694 as a means to repay military debt. Moreover, the U.K. has offered a “premium bond” as a PLSA for more than 60 years. But the concept has only been widespread in the United States for about a decade.
At the time, financial institutions were catching on the growing trend of a lack of savings among American households that has persisted to this day. The household savings rate—calculated as income minus expenses—hovered around 8% in early 2020. And yet, people in the United States spent more than $91 billion on lottery tickets in the year prior.
To boost Americans’ savings rates by leveraging their love for the lottery, in 2009, a group of eight credit unions launched the Save to Win PLSA program in Michigan. By the end of the first year, it led to 11,666 new accounts and generated $856 million in savings or $734 per depositor.
Because of laws prohibiting financial institutions from holding lotteries, the legality of PLSAs was fuzzy until Congress passed the American Savings Promotion Act in 2014, which authorized banks and credit unions to hold “savings promotions raffles.” As of July 2020, 33 states have passed legislation allowing for PLSAs.
The typical prize-linked savings account functions as follows:
- The hopeful winner joins a participating credit union or other financial institution and opens a PLSA.
- The customer makes a qualifying deposit into the PLSA that is treated as an entry into a drawing for a cash prize. The more deposits a customer makes, the more entries they gain and opportunities they have to win. The deposits generally accrue interest as they would in a traditional savings account, albeit a nominal amount.
- The credit union draws winners for smaller prizes on a regular basis and grand prizes on a more infrequent basis.
- All entrants get to keep their deposits and the interest they earned on their deposits, even if they lost the prize.
You'll have to pay taxes on your winnings, according to federal and state laws.
Types of Prize-Linked Savings Accounts
Popular PLSA programs include:
- Save to Win: Offered by 141 credit unions across 22 states, Save to Win requires a $25 deposit into a share certificate to earn one lottery entry, with a cap of 10 entries per month. Prizes range from $25 to $5,000 and are awarded monthly and quarterly.
- Lucky Savers: Administered by the New York Credit Union Association, Lucky Savers allows customers to get one raffle entry for every $25 month-over-month balance increase. Winners are drawn monthly and quarterly.
- WINCentive: Credit unions in Minnesota, Delaware, Louisiana, New York, Ohio, Montana, Wisconsin, Massachusetts, and New Jersey have partnered to create WINCentive, which offers prizes on a monthly, quarterly, and annual basis. Every $25 you save gets you one entry toward prizes, with a maximum of four entries per month.
Pros and Cons of Prize-Linked Accounts
PLSAs come with advantages and drawbacks.
They can incentivize low-income individuals to save.
Some customers will end up with a small windfall.
They offer lottery-like earnings without the risks.
They earn little to no interest.
Winnings are inconsistent.
They may discourage the transition to a traditional savings account.
The advantages of prize-linked savings accounts include:
- They can incentivize low-income individuals to save: PLSAs could encourage low- and moderate-income, asset-poor, and first-time savers to save more because of the promise of landing a big jackpot. The Save to Win program proved that a PLSA can lead to a tangible increase in the number of savers and their monthly savings.
- Some customers will end up with a small windfall: If you win a grand prize, you could pocket an amount equivalent to what you might earn as the winner of a small lottery prize. Even a smaller monthly prize could help offset the cost of a monthly expense like groceries or utilities.
- They offer lottery-like earnings without the risks: Unlike the case with a lottery, you're not gambling with your deposits into a PLSA. You keep your deposits and any accrued interest whether you win or lose a prize. And provided that the institution insures its deposits, you're at no greater risk of losing deposits in a PLSA than those in a regular savings account.
While there is evidence that prize-linked accounts can boost the overall number of people who save, there are questions as to whether banks have an incentive to move customers to accounts offering a higher return.
PLSAs aren't replacements for traditional bank accounts because:
- They earn little to no interest: The nominal interest these accounts earn means that prize-linked savings accounts won't lead to a substantial temporary boost in the income of customers who don't win any prizes.
- Winnings are inconsistent: While interest on a traditional savings account won’t net you a sizable amount, especially in a period of relatively low-interest rates, they'll at least pay interest on a regular basis based on a specified rate. If interest rates change, they will usually do so incrementally. In contrast, it's impossible to predict whether you'll win a prize for deposits into a PLSA, which can make it difficult for an individual to incorporate their earnings into their monthly budget.
- They may discourage the transition to a traditional savings account: If savers get too caught up in the prospect of winning, they may not make the switch to a savings product that generates more interest and more meaningful growth in their savings. And financial institutions may not encourage them to do so, as these accounts are often cheaper for banks than accounts that pay more substantial interest.
- Prize-linked savings accounts let customers enter raffles for cash prizes by making deposits into a savings account, CD, or savings bond.
- They're offered by credit unions and other financial institutions in 33 states.
- They're a good option for low- or moderate-income individuals who want to boost their rate of savings, but they earn nominal interest and aren't a replacement for a traditional savings account in the long run.
Federal Reserve Bank of St. Louis. "Personal Saving Rate (PSAVERT)." Accessed July 20, 2020.
North American Association of State and Provincial Lotteries. "Frequently Asked Questions." Accessed July 20, 2020.
Minnesota Legislature. "Prize-Linked Savings FAQs," Page 1. Accessed July 20, 2020.
NCSL. "Prize-Linked Savings Accounts: Offering Incentives to Save." Accessed July 20, 2020.
Commonwealth. "Prize-Linked Savings Policy." Accessed July 20, 2020.
Kellogg School of Management at Northwest University. "Using the Lure of a Lottery to Spur Savings." Accessed July 20, 2020.