By: Victoria Finkle
September 6, 2012
Your grandmother probably told you that saving money is its own reward. But a program that enters savers into a lottery for cash prizes is aiming to turn that old adage on its head.
Prize-linked savings accounts, designed to make saving sexy, are growing rapidly in states across the country. They give savers, including those who might not have developed the habit on their own, the chance to win a pot of money just for socking away as little as $25 each month.
Credit unions in Michigan piloted the program in early 2008, and it's since caught on with institutions in Nebraska and elsewhere. While federal and state gambling laws have largely kept banks on the sidelines up until now, legislation passed in Maryland this past spring could serve as a model for expanding these specialty savings accounts to banks across the country.
"There's no logical reason why this product couldn't be offered by different kinds of intermediaries, whether it's a government or a bank or a credit union," says Peter Tufano, dean and professor of finance at the SaÃ¯d Business School at the University of Oxford in England.
Tufano is also the co-founder and chairman of the Doorways to Dreams Fund, a Boston nonprofit focused on promoting asset building for low-income families. Doorways works with states to develop the savings raffles and helped launch the Michigan pilot.
The program, trademarked "Save to Win" in Michigan and Nebraska, is designed to play off of our innate motivations, says Joanna Smith-Ramani, director of scale strategies at Doorways.
"Our insight into designing the product was, even if you're low-income, people are finding small amounts of discretionary money for other things. If we could combine the desire for financial planning with "\xA6 entertainment, we could free up discretionary funds towards savings products that are both fun and good for you," she says.
The kicker is that the programs can also be attractive to the financial institutions, according to Tufano.
"There are still profitable and good niches to serve among low- and moderate-income families. This is putting them in front of you at a relatively low acquisition cost and in a way that's relatively sticky," he says.
And while it may cost an institution initially to feed the prize pool, it can also help differentiate saving products in unconventional ways, beyond the standard advertising of interest rates.
"If you're clever about how you structure the payoff pool, the odds, the ratio of small prizes to large prizes "\xA6 you can create a customer offering that's much more meaningful," Tufano says. "For the chief marketing officer of a financial institution, the idea that you can customize in a way that you haven't thought about doing could be quite exciting."
Supporters of the concept point to the success of the initial Michigan pilot, which has grown from eight participating credit unions to 58 since its launch.
The Michigan program has added over 25,000 unique accounts, amounting to savings of more than $40 million since 2009, according to data from Doorways.
"I think the evidence is all pretty encouraging. The product is selling, and if you look at who's buying it, the take-up by low and moderate-income families is very encouraging," says Tufano, while acknowledging that program data are still preliminary.
"A number of buyers, when we ask them about prior savings activities, say they had none, which suggests this isn't displacing savings - it's creating new savings," he adds.
Deposits still earn interest, and each monthly deposit of $25 counts as one entry toward one 10 prizes of $10,000 each, as well as dozens of smaller monthly drawings in the state.
More than one-third of the Michigan participants in 2011 earned less than $40,000, which Smith-Ramani says is a good mix to both help encourage savings among low-income families and keep the program sustainable.
"It's doing perfectly what we want it to do. It has a diverse set of people saving in it," says Smith-Ramani. "You're not going to be able to convince a financial institution or the industry to put time into development, time into launching it, if they don't think more than one niche of customer is going to participate. "\xA6 You need lots of people depositing reasonable amounts of money. You need a range."
The Michigan program has already spawned interest from credit unions in several other states.
Nebraska launched its Save to Win program in January 2012 with nine credit unions. As of July 2012, the program had added 1,311 accounts with $1.1 million deposited, Doorways reports. It's also added a 10th participating credit union.
Meanwhile, credit unions in both North Carolina and Washington State are also working to unveil similar programs starting in early 2013, and supporters say they were inspired by the strength of the Michigan pilot.
But even as interest around the program mounts, implementing these savings lotteries has faced opposition elsewhere. The Iowa state House last year spiked a bill to allow credit unions to develop a prize-linked savings plan, with the credit union industry shaking a finger at banking lobbyists who opposed the measure on grounds that it could provide a competitive disadvantage.
That's similar to what happened two years ago in Maryland. The state passed a law that would amend state rules to allow savings account raffles, but with an amendment requiring federal law be changed to allow banks to participate.
"We had a concern about competitive disadvantage banks would have had," says Kathleen Murphy, president and chief executive of the Maryland Bankers Association.
The effort to change federal law ultimately stalled, and last May legislators passed a new bill allowing both credit unions and banks to participate in prize-linked savings programs, provided the contests are structured as a sweepstakes, not a true lottery.
The sticking point is that the raffles must contain that ubiquitous "no purchase necessary" clause, meaning that instructions will need to be provided to those who wish to enter the drawing without opening an account and depositing monthly savings.
"What this will do is reduce some of the barriers to banks' participation just because of how complex that portion of Maryland code has been," says Murphy.
She notes that some banks in the state had already participated in short-term savings promotions that were similarly designed, but says that "this will be a less complicated way of doing that."
Both state and federally chartered banks are allowed to participate if they have branches in Maryland. State banks will have to submit their plans to the Commissioner of Financial Regulation for approval, while the Office of the Comptroller of the Currency will regulate compliance for nationally chartered institutions, according to Murphy.
If the program is successful, it could open a door for banks to start offering savings raffles more widely under the sweepstakes model. Tweaks to state law may still be required elsewhere, but the hurdles would be reduced by including a "no purchase necessary" clause, supporters say.
"We'd love to be able to have banks and credit unions offer the product in a way that suits customers," says Doorways' Smith-Ramani. "We get in conversations with banks who say, 'Wait a minute. Is this for credit unions only?' If you're happy to offer it under a sweepstakes model, there's no reason you can't do it."
The Maryland law went into effect June 1, and the planning process is now underway.
"We have a handful of interested banks and a handful of interested credit unions," says Smith-Ramani, adding that she's "optimistic" there could be a program up and running sometime in 2013.
"People are showing up for meetings, but it will be a few months before we know who puts their chips in" she adds.