What Are Prize-Linked Savings Accounts?

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From a personal finance perspective, playing the lottery is not a smart decision. Despite big headlines for million-dollar jackpots, those playing the lottery will likely spend more money on tickets than they will ever win. And yet, people in the United States have been known to spend more than $80 billion on lottery tickets in a year.

Meanwhile, Americans are doing a rather poor job of saving money, with the average household savings rate—calculated as income minus expenses—at just 6% according to the U.S. Bureau of Economic Analysis. American households are also holding more than $8,000 in credit card debt, on average. Additionally, millions of Americans don’t have a savings account of any kind.

Could it be possible to boost Americans’ savings rates by leveraging their love for the lottery? The short answer is yes. Many financial institutions have unrolled programs encouraging saving through special accounts that enter customers into a cash prize raffle instead of distributing interest payments. These “prize-linked” savings accounts (PLSAs) are designed to incentivize saving by offering the chance for customers to land a big jackpot simply by putting money into a savings account. The more they save, the more lottery chances they get.

Origins and Examples of Prize-Linked Savings Accounts

Prize-linked savings accounts first appeared overseas; one Harvard Business School study noted that these accounts were available in at least 20 countries before debuting in the United States. Banks in the United Kingdom, for example, have been offering a product known as a “premium bond” for more than 50 years. This concept has been around in the United States for about a decade.

In 2009, a group of credit unions launched “Save to Win” in Michigan, offering prizes ranging between $25 and $5,000 on a monthly and quarterly basis. In the first year, it led to 11,000 new accounts and generated $8.5 million in savings.

Other state credit unions joined Save to Win over the years and, as of 2018, the organization reported 21,000 accounts and $52 million in savings, with $2.4 million in prize money distributed. Save to Win now includes 112 credit unions from 11 states.

With Save to Win, a $25 deposit into a share certificate earns one lottery entry, with a cap of 10 entries per month.

The legality of PLSAs was a bit fuzzy until 2014 when Congress passed the American Savings Promotion Act, which authorized financial institutions to have “savings promotions raffles.” Now, 25 states have passed legislation allowing for PLSAs.

Additional examples of prize-linked savings accounts include:

  • Lucky Savers – Administered by the New York Credit Union Association, customers can open a share certificate for $25, and get one raffle entry for every $25 month-over-month balance increase.
  • WINCentive – Credit unions in Minnesota, Delaware, and Montana have partnered on this program that offers prizes on a monthly, quarterly, and annual basis. Every $25 you save gets you one entry toward prizes as large as $5,000, with a maximum of four per month. WINcentive gave out 509 prizes valued at $64,000 in 2018. It recorded nearly $6 million in customers savings.
  • Win-Win CD – Credit unions in Idaho, Oregon, and Washington state offer monthly drawings of $200 and an annual drawing of $2,500 for customers who deposit $25. There’s a limit of eight deposits each month.

Pitfalls of Prize-Linked Accounts

While prize-linked accounts could incentivize saving and some customers may end up with a large windfall, they should not serve as the only savings account a person has. That’s because prize-winning can be inconsistent and impossible to predict.

With a typical savings account, interest will pay out monthly based on a specified rate. If interest rates change, they usually do so incrementally. This makes it easy for an individual to anticipate what they will earn, and budget accordingly.

A study from the Kellogg School of Business at Northwestern University noted that PLSAs seemed to be attractive to those with lower incomes, because they offer the potential to receive more money quickly, while typical bank interest won’t net you a sizable amount, especially in this current period of relatively low-interest rates.

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, such as CDs or investment accounts.

In a video outlining the Kellogg study findings, finance professor Benjamin Iverson, noted that it costs less for banks to distribute lottery tickets than interest.

“They are getting funds very cheaply, so the challenge going forward is: how can we transition people to more standard savings products,” Iverson said in the video. “Will banks do it on their own, or do we need some sort of regulation to help people make that transition? And I think that is an open-ended question.”