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Prize-Linked Savings Accounts Strike the Deposit Psychology Jackpot

Banks and credit unions can leverage consumers’ obsession with lotteries by linking cash prizes with savings accounts. It’s a remarkably effective strategy that may already be legal in your state.

It’s no secret. Americans are horrible at saving money. All too often, the act of saving feels like sacrifice and self-denial, so it’s no wonder that when faced with a choice between saving and spending on something fun, most Americans choose fun. But imagine how habits would change if saving was an exciting game, with no risk of losing?

Stuart Butler, Ph.D., and David John, two researchers at the Heritage Foundation, say they can basically find no downside to “prize-linked savings accounts.”

As its most simple level, a prize-linked savings scheme pays accountholders little or no interest (a big plus for the financial institution). Instead, a portion of the earnings from deposits are pooled and distributed as cash prizes in periodic drawings, typically with a grand prizes and a large number of smaller prizes. The consumer’s motivation to save is not to earn a puny return on their capital, but to have the chance of winning big — with no risk.

Potent and Powerfully Effective

All indications suggest prize-linked savings accounts are powerful motivators. Introduce a prize, and people become much more interested in saving and willing to save for longer.

One study found that a 0.01% probability of winning a large prize results in savings 4% greater than another savings option with an equivalent APY.

The thrill associated with winning a prize indeed appears to be enough to induce many low- and moderate-income non-saving households — and those who do not currently play the lottery — to make the leap. Researchers say the appeal of prize-linked savings accounts is strongest among men, self-reported lottery players, and those with low account balances.

Considering how pathetic interest rates are on deposits these days, you can quickly see the appeal — to both consumers and financial marketers alike. The slim prospect of striking it rich is much more attractive to consumers than a meager $5.00 in annual accrued interest. This gives bank and credit union marketing execs a rich pool of psychological material to work with. Normally, savings accounts are among the hardest financial products to market (“It’s a pure rate game,” CFOs moan incessantly). But add all the spice, pizazz and flair involved with a “Grand Prize Lottery,” and all of a sudden it’s one of the easier products you could market.

( Read More: Savings Account Lotteries Spike Gains, Get Results )

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The idea of linking lottery-based prizes as incentives for financial products is nothing new. In the mid-1950s, Harold Macmillan, the UK’s chief finance minister, hatched an idea to boost the savings rate: instead of paying out interest each month, premium government bonds would award cash prizes. The program is still going strong today, with more than a third of all Brits participating each month to win prizes ranging from £25 up to the £1 million pound jackpot.

In October 2006, Centra Credit Union in Indiana piloted the first prize-linked savings program, which generated more than 1,000 accounts and $500,000 in deposits within five months. Three years later, the “Save to Win” program was developed for credit unions in Michigan and Nebraska, becoming the first scaled test of prize-linked savings accounts anywhere in the US. Credit unions that participated in the initial pilot demonstrated that the possibility of winning – both a large $100,000 annual jackpot and a range of regularly awarded smaller prizes – encourages people to save. 64% of Save to Win accounts rolled over from 2010 to 2011. Save to Win Michigan has grown to over 40,000 unique accounts saving more than $70 million. You can see some data from the results of their pilot test here.

Just looking at the preliminary data, it’s clear prize-linked savings accounts work. They get people saving more money, more often, and at a low cost-of-funds to financial institutions. Consider, for instance, that by the end of 2011, there were 16,200 new savers participating in the Michigan pilot, with an average account balance of $2,109. Impressive results, especially when 51% of U.S. consumers say they don’t have $1,000 in readily-accessible savings. 41% say they don’t have even have $500. People want to save more, but clearly they need help.

It’s Not Gambling, But It Sure Feels Like It

Some financial marketers might not be initially comfortable with a lottery scheme — “Lotteries prey on those who can afford it least. As a financial institution, promoting “wealth by gambling” feels reckless and irresponsible.” True, many Americans believe winning the lottery is their only path to big riches. Of the nearly $61 billion in lottery ticket sales each year, 70% of the tickets are bought by a fifth of all players. Among these chronic lottery players, the average annual cost is about $1,400.

But researchers are keen to point out that while the prize-linked savings accounts involves the same thrills as gambling, and on the surface may feel like a form of gambling to savers, it is not actually gambling. Even though the same basic psychological forces are at work, it’s completely different. A true gambler puts his capital at risk — his stake for the chance to win a larger amount. If he loses, his money is gone. With prize-linked savings, the money put up is never at risk; in fact, it’s the opposite: insured by the federal government. There are no losers in a prize-linked savings scheme. The only possible outcome is that more people wind up saving more money in their accounts. This is why these programs are called a “no-lose lottery” or “savings with a thrill.”

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Effective application of the prize-based savings concept integrates many of the “right brain” emotions and behavioral economics that lottery officials use to lure consumers. The two most powerful principles at work hinge on one of the most fundamental building blocks of human psychology: greed. Everyone wants “money for nothing” and “instant gratification.” Notoriously lazy consumers lack both the patience and discipline needed to save in the traditional manner. But the quasi-lottery feature of prize-linked savings the “quick fix” they desire.

Massachusetts residents and especially residents and members of the host communities of the three proposed Massachusetts casinos deserve a statewide PLS account program to do more than simply mitigate their negative impacts, but offer an appealing and attractive counter strategy to the fundamentally extractive or “reverse savings” design of gambling. The time is ripe to demand a specific plan for the implementation of PLS accounts, and specifically require the casino operators to fund the prizes.

Legal Soon in All 50 States?

In April, Washington joined Michigan, Nebraska and North Carolina as the fourth state to allow save-to-win style raffles. In June, Connecticut approved a law legalizing prize-linked savings. Two weeks later, the New York legislature passed a similar law, bringing the total to at least six states with savings lotteries.

interestingly, the strongest opposition to prize-linked savings programs seems to come from state lottery officials opposed to anything that might compete with their ability to suck money from consumers’ wallets. But their purely defensive and self-serving position isn’t likely to prevail. A prize-linked savings lottery is precisely the kind of feel-good, win-win program that legislators like to adopt.

That’s why Iowa, Maryland, Maine, Mississippi and Rhode Island are all toying with the idea too, with plans to either issue lottery permits to specific financial institutions or to legalize prize-linked accounts more broadly. That means savings lotteries could be available to over 65 million people in the U.S. — one in every five Americans. Soon, it will be open to everyone everywhere.

Get ready. It’s going to be fun!

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