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Prize-linked savings account

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One of the winners in Yotta Savings, a prize-linked savings program

A prize-linked savings account (PLSA) or lottery-linked deposit account is a savings account in which some of the interest payment on bank deposits or marketing dollars are distributed as prizes based on chance. They are attractive to consumers as they function both as a sweepstakes or game of chance (as there is a small chance of a large prize) and as savings vehicle (the deposit is never lost, unlike normal lotteries). PLSAs are similar to lottery bonds, except they are offered by banks, credit unions, prepaid card companies, and financial technology companies, and they can be held for a period of time determined by the consumer. Sometimes the returns are in-kind prizes rather than cash.

PLSAs have attracted customers who were previously familiar with only raffles or lotteries, but were interested in receiving guaranteed saving security as well as an attractive incentive in the form of lotteries.[1]

United States

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The first large-scale PLSA program in the United States was created in 2009 in Michigan, called "Save to Win".[2][3] It was introduced as a full scale demonstration by Commonwealth (formerly D2D Fund Inc.), Filene Research Institute, and the Michigan Credit Union League following research by Peter Tufano from Harvard Business School, who co-founded Commonwealth in 2001.[4] During this research, 56% of the participants were non-savers before the program.[1]

PLSAs have been the source of some controversy as some state-run lottery boards have claimed that PLSAs infringe upon their rights,[citation needed] although over time[when?] more and more states[which?] have authorized institutions to roll out this financial vehicle.

By 2013, eight states had authorized financial institutions to offer PLSAs.[5] The federal American Savings Promotion Act was signed into law in 2014. It removed some obstacles in federal law faced by state-authorized PLSAs. The act used the term "savings promotion raffle" to describe these accounts.

As of 2018, 33 states had passed legislation or taken legal action to ensure banks and credit unions (or in some states, only credit unions) can offer savings promotion raffles.[6]

Prize-linked savings accounts have the potential to help combat low rates of savings among Americans. They offer more incentive than a traditional savings account as an individual may be discouraged earning a low rate of return in a standard savings account. US families that play the lottery all tend to spend roughly the same amount, regardless of economic status. Because of this, those falling in the low end of the economic distribution have the potential to see true growth of personal savings through the use of a PLSA.[7]

Credit unions

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Examples of prize-linked savings include:

USA

  • Big Prize Savings[8][9] (California)
  • Lucky Lagniappe[10][11] (Louisiana)
  • Save to Win[2][12] (28 US states)
  • Saver's Sweepstakes[13][14] (Wisconsin)
  • WINcentive Savings[15][16] (Minnesota)

EUROPE and UK

  • Premium Bond Savings[8] (United Kingdom)
  • Prize Linked Bonds[10] (Ireland)

Banks

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Examples of prize-linked savings in American banks include:

  • Jackpot Savings[17] from Blue Ridge Bank in Virginia[18]
  • Lucky Piggy Savings[19] from BankFive in Massachusetts[20]

Direct-to-consumer

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Examples of prize-linked savings in direct-to-consumer financial technology applications include:

Cryptocurrency

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Examples of prize-linked savings in cryptocurrency DeFi applications include:

Around the world

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Prize-linked savings accounts have also been offered in Argentina, Brazil, Canada, Colombia, Germany, Indonesia, Iran, Japan, Mexico, Oman, Pakistan, Spain, South Africa, Sri Lanka, Turkey, United Arab Emirates, and Venezuela.[32][33]

In South Africa, the First National Bank created a program called the Million a Month Account (MAMA), aimed at increasing savings accounts among unbanked people. It was later closed after the state-run lottery sued them for infringing upon their monopoly.[34]

Economics of prize-linked savings

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The success of the prize-linked savings account can be attributed to several concepts studied in the field of behavioral economics. One such concept is the availability heuristic. Essentially, people are likely to associate and have faith in things which readily come to mind, such as winning a lottery, as lottery winners are prevalent in media. Another behavioral economic concept which contributes to the success of prize-linked savings is the sunk cost fallacy.[35] This is displayed in prize-linked savings as people who use these accounts will often save an increasing amount of money to up their odds in winning the prize, regardless of how small the odds are. The misunderstanding of small probabilities also can be attributed to the success of prize-linked savings as it is nearly impossible for any individual to fathom odds in the millions as our day-to-day lives deal with quantities going no higher than a few thousand.[36] The demand for prize-linked savings accounts is seen to be highest amongst those with relatively low savings.[37] This group of individuals is also more prone to gambling so Prize-Linked savings accounts have more potential to induce savings in this population.[37] Skewness also plays into the appeal of PLSAs as it is essentially the idea that there is some chance to win a big prize with possible odds that could be realized (although they are small).

Institutional appeal of prize-linked savings

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Prize-linked savings account have several appeals to financial institutions which other savings and investment vehicles do not offer.[38] PLSAs are not very complex in their investment strategy and typically go for risk-averse vehicles, so they often require less effort and maintenance on behalf of the institution.[38] They offer the consumer transparency and legitimacy as the institution can consistently offer the same prize through the adjustment of odds in relation to the amount of interest being made on the collective fund.[38] Finally, PLSAs can maximize the liquidity of their consumers by denying those who frequently make withdrawals eligibility to win prizes.[38]

See also

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References

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  1. ^ a b "Prize-Linked Savings FAQs" (PDF). US Legislative Coordinating Commission. Archived (PDF) from the original on 24 December 2012. Retrieved 22 May 2013.
  2. ^ a b "Home Page - Save To Win". www.savetowin.org. Archived from the original on 2021-05-13. Retrieved 2021-10-23.
  3. ^ Fahey, Mark (2015-02-11). "Banks awarding 'lottery prizes' for savings accounts". CNNMoney. Retrieved 2023-12-18.
  4. ^ Moules, Jonathan (2014-12-07). "Dean, businessman and social entrepreneur". Financial Times. Archived from the original on 2017-10-11. Retrieved 2018-05-31.
  5. ^ "Bill to Expand Prize-Linked Savings Introduced to Congress". American Banker. 2013-10-31. Retrieved 2024-01-13.
  6. ^ "House Passes American Savings Promotion Act". Business Insider. Archived from the original on 2018-09-21. Retrieved 2018-09-21.
  7. ^ Lam, Stephen J. Dubner Bourree. "Is America Ready for a "No-Lose Lottery"? (Update)". Freakonomics. Archived from the original on 2018-12-06. Retrieved 2018-12-06.
  8. ^ a b "Premium Bonds - Essentials at a glance". NS&I. 3 August 2020. Retrieved 2024-02-07.
  9. ^ Union, American First Credit. "American First CU Saver Wins $50,000 Grand Prize". www.prnewswire.com (Press release). Retrieved 2023-12-19.
  10. ^ a b "Prize Bonds". Irish State Savings. Retrieved 2024-02-07.
  11. ^ "Prize-linked savings now on the menu at Louisiana credit unions". Credit Union Journal. Archived from the original on 2018-05-22. Retrieved 2018-05-31.
  12. ^ Coy, Peter (July 28, 2023). "A Smart Way to Turn Gambling Into a Virtue". The New York Times.
  13. ^ "Saver's Sweepstakes". www.theleague.coop. Archived from the original on 2021-05-02. Retrieved 2021-10-23.
  14. ^ "Wisconsin debuts prize-linked savings for credit unions". Credit Union Journal. Archived from the original on 2018-05-14. Retrieved 2018-05-31.
  15. ^ "WINcentive Savings". Retrieved 2024-01-12.
  16. ^ "Credit union program incentivizes financial stability". kare11.com. 2020-09-22. Retrieved 2024-01-12.
  17. ^ "BRB Jackpot Savings Account | Blue Ridge Bank | Luray, VA - Harrisonburg, VA - Charlottesville, VA". www.mybrb.com. Archived from the original on 2021-08-09. Retrieved 2021-10-23.
  18. ^ "Grand Prize BRB Jackpot Savings Account Winner Announced". Yahoo Finance. 2023-01-25. Retrieved 2023-12-19.
  19. ^ "Lucky Piggy Savings Account | Massachusetts Prize-Linked Savings Account | BankFive". bankfive.com. Archived from the original on 2021-05-02. Retrieved 2021-10-23.
  20. ^ "BankFive offering prize-linked savings account". The Herald News, Fall River, MA. Archived from the original on 2019-06-08. Retrieved 2019-06-10.
  21. ^ "PrizePool". getprizepool.com. Archived from the original on 2021-10-22. Retrieved 2021-10-23.
  22. ^ Takahashi, Dean (2021-06-02). "PrizePool raises $10M to reward people who save". VentureBeat. Retrieved 2023-12-19.
  23. ^ "Flourish Savings - Get rewarded for saving money". www.flourishsavings.com. Archived from the original on 2021-05-07. Retrieved 2021-10-23.
  24. ^ Azevedo, Mary Ann (2021-03-04). "Flourish, a startup that aims to help banks engage and retain customers, raises $1.5M". TechCrunch. Retrieved 2023-12-19.
  25. ^ "Yotta - Start Saving. Start Winning". www.withyotta.com.
  26. ^ Daso, Frederick. "Neobank Startup Yotta Brings Innovation To Americans' Financial Lives Through Lottery-Style Savings". Forbes. Retrieved 2023-12-19.
  27. ^ Son, Hugh (1 June 2024). "Savings app CEO says 85,000 accounts locked in fintech meltdown: 'We never imagined a scenario like this'". CNBC.
  28. ^ "Long Game Savings". Long Game. Archived from the original on 2018-05-26. Retrieved 2018-05-31.
  29. ^ "Truist launches its standalone gamified finance app". American Banker. 2023-05-17. Retrieved 2023-12-19.
  30. ^ "Qache". www.qache.io. Retrieved 2024-07-24.
  31. ^ Inc, P. T. "PoolTogether". PoolTogether. Retrieved 2024-07-24. {{cite web}}: |last= has generic name (help)
  32. ^ Guillén, Mauro F. & Tschoegl, Adrian E. (2002). "Banking on Gambling: Banks and Lottery-Linked Deposit Accounts". Journal of Financial Services Research. 21 (3): 219–231. doi:10.1023/A:1015081427038. S2CID 145028384.
  33. ^ Kearney, Melissa S.; Tufano, Peter; Hurst, Erik; Guryan, Jonathan (2011). "Making Savings Fun: An Overview of Prize-Linked Savings". In Mitchell, Olivia; Lusardi, Ammamaria (eds.). Financial Literacy: Implications for Retirement Security and the Financial Marketplace. Oxford University Press. doi:10.3386/w16433. ISBN 978-0-19-969681-9.
  34. ^ Nyamakanga, Regis (2008-03-31). "South Africa: Million a Month Account Ruling Sets Precedent". Business Day (Johannesburg). Retrieved 2017-12-01.
  35. ^ "The Psychology of Why We Play Lotto". Psychology Today. Retrieved 2018-10-31.
  36. ^ Cameron, Michael (2016-12-28). "Sex, Drugs and Economics: The behavioural economics of Lotto". Sex, Drugs and Economics. Archived from the original on 2018-11-01. Retrieved 2018-10-04.
  37. ^ a b Tufano, Peter (October 2006). "Consumer Demand for Prize-Linked Savings: A Preliminary Analysis" (PDF). D2d Fund. z. Archived (PDF) from the original on 2018-10-24. Retrieved 2018-10-31.
  38. ^ a b c d "Archived copy" (PDF). Archived (PDF) from the original on 2018-12-06. Retrieved 2018-12-06.{{cite web}}: CS1 maint: archived copy as title (link)
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