Prize-linked savings account explained

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

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.

PLSAs have been the source of some controversy as some state-run lottery boards have claimed that PLSAs infringe upon their rights, although over time more and more states 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

Examples of prize-linked savings include:

USA

EUROPE and UK

Banks

Examples of prize-linked savings in American banks include:

Direct-to-consumer

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

Cryptocurrency

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

Around the world

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

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. 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

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

External links

Notes and References

  1. Web site: Prize-Linked Savings FAQs. US Legislative Coordinating Commission. 22 May 2013. 24 December 2012. https://web.archive.org/web/20121224201751/http://www.commissions.leg.state.mn.us/ladder/120511prizelinkedsavingsFAQs.pdf. live.
  2. Web site: Home Page - Save To Win . live . https://web.archive.org/web/20210513002441/https://www.savetowin.org/ . 2021-05-13 . 2021-10-23 . www.savetowin.org.
  3. Web site: Fahey . Mark . 2015-02-11 . Banks awarding 'lottery prizes' for savings accounts . 2023-12-18 . CNNMoney.
  4. Web site: Moules . Jonathan . 2014-12-07 . Dean, businessman and social entrepreneur . live . https://web.archive.org/web/20171011011410/https://www.ft.com/content/92ffdee2-7578-11e4-b1bf-00144feabdc0 . 2017-10-11 . 2018-05-31 . Financial Times . en-GB.
  5. Web site: 2013-10-31 . Bill to Expand Prize-Linked Savings Introduced to Congress . 2024-01-13 . American Banker . en.
  6. News: House Passes American Savings Promotion Act . Business Insider . live . 2018-09-21 . https://web.archive.org/web/20180921074447/https://www.businessinsider.com/house-passes-american-savings-promotion-act-2014-9 . 2018-09-21.
  7. Web site: Lam . Stephen J. Dubner Bourree . Is America Ready for a "No-Lose Lottery"? (Update) . live . https://web.archive.org/web/20181206235316/http://freakonomics.com/podcast/say-no-no-lose-lottery-rebroadcast/ . 2018-12-06 . 2018-12-06 . Freakonomics . en.
  8. Web site: Premium Bonds - Essentials at a glance . 2024-02-07 . NS&I. 3 August 2020 .
  9. Union . American First Credit . American First CU Saver Wins $50,000 Grand Prize . 2023-12-19 . www.prnewswire.com . en.
  10. Web site: Prize Bonds . 2024-02-07 . Irish State Savings.
  11. News: Prize-linked savings now on the menu at Louisiana credit unions. Credit Union Journal. 2018-05-31. en. 2018-05-22. https://web.archive.org/web/20180522024745/https://www.cujournal.com/news/prize-linked-savings-now-on-the-menu-at-louisiana-credit-unions. live.
  12. Web site: Coy . Peter . July 28, 2023 . A Smart Way to Turn Gambling Into a Virtue . The New York Times.
  13. Web site: Saver's Sweepstakes. www.theleague.coop. 2021-10-23. 2021-05-02. https://web.archive.org/web/20210502094317/https://www.theleague.coop/solutions/savers-sweepstakes. live.
  14. News: Wisconsin debuts prize-linked savings for credit unions. Credit Union Journal. 2018-05-31. en. 2018-05-14. https://web.archive.org/web/20180514022627/https://www.cujournal.com/news/wisconsin-debuts-prize-linked-savings-for-credit-unions. live.
  15. Web site: WINcentive Savings . 2024-01-12 . en-US.
  16. Web site: 2020-09-22 . Credit union program incentivizes financial stability . 2024-01-12 . kare11.com . en-US.
  17. Web site: BRB Jackpot Savings Account | Blue Ridge Bank | Luray, VA - Harrisonburg, VA - Charlottesville, VA. www.mybrb.com. 2021-10-23. 2021-08-09. https://web.archive.org/web/20210809232737/https://www.mybrb.com/bank/personal-savings/brb-jackpot-account.html. live.
  18. Web site: 2023-01-25 . Grand Prize BRB Jackpot Savings Account Winner Announced . 2023-12-19 . Yahoo Finance . en-US.
  19. Web site: Lucky Piggy Savings Account | Massachusetts Prize-Linked Savings Account | BankFive. bankfive.com. 2021-10-23. 2021-05-02. https://web.archive.org/web/20210502094315/https://bankfive.com/Personal/Save/Savings-Accounts/Lucky-Piggy-Savings. live.
  20. News: BankFive offering prize-linked savings account. The Herald News, Fall River, MA. en. 2019-06-10. 2019-06-08. https://web.archive.org/web/20190608230318/https://www.heraldnews.com/news/20190603/bankfive-offering-prize-linked-savings-account. live.
  21. Web site: PrizePool. getprizepool.com. 2021-10-23. 2021-10-22. https://web.archive.org/web/20211022195525/https://getprizepool.com/. live.
  22. Web site: Takahashi . Dean . 2021-06-02 . PrizePool raises $10M to reward people who save . 2023-12-19 . VentureBeat . en-US.
  23. Web site: Flourish Savings - Get rewarded for saving money. www.flourishsavings.com. 2021-10-23. 2021-05-07. https://web.archive.org/web/20210507003657/https://www.flourishsavings.com/. live.
  24. Web site: Azevedo . Mary Ann . 2021-03-04 . Flourish, a startup that aims to help banks engage and retain customers, raises $1.5M . 2023-12-19 . TechCrunch . en-US.
  25. Web site: Yotta - Start Saving. Start Winning. www.withyotta.com.
  26. Web site: Daso . Frederick . Neobank Startup Yotta Brings Innovation To Americans' Financial Lives Through Lottery-Style Savings . 2023-12-19 . Forbes . en.
  27. News: Son . Hugh . Savings app CEO says 85,000 accounts locked in fintech meltdown: ‘We never imagined a scenario like this’ . CNBC . 1 June 2024 . en.
  28. Web site: Long Game Savings. Long Game. 2018-05-31. 2018-05-26. https://web.archive.org/web/20180526161122/https://www.longgame.co/. live.
  29. Web site: 2023-05-17 . Truist launches its standalone gamified finance app . 2023-12-19 . American Banker . en.
  30. Web site: Qache . 2024-07-24 . www.qache.io.
  31. Web site: Inc . P. T. . PoolTogether . 2024-07-24 . PoolTogether . en.
  32. Banking on Gambling: Banks and Lottery-Linked Deposit Accounts . Guillén, Mauro F. . Tschoegl, Adrian E. . amp . Journal of Financial Services Research . 2002 . 21 . 3 . 219–231. 10.1023/A:1015081427038 . 145028384 .
  33. Book: Kearney . Melissa S. . Peter . Tufano . Erik . Hurst . Jonathan . Guryan . Making Savings Fun: An Overview of Prize-Linked Savings . Olivia . Mitchell . Ammamaria . Lusardi . Financial Literacy: Implications for Retirement Security and the Financial Marketplace . Oxford University Press . 2011 . 978-0-19-969681-9 . 10.3386/w16433 .
  34. News: South Africa: Million a Month Account Ruling Sets Precedent. Nyamakanga. Regis. 2008-03-31. Business Day (Johannesburg). 2017-12-01.
  35. Web site: The Psychology of Why We Play Lotto. Psychology Today. en-US. 2018-10-31.
  36. Web site: Sex, Drugs and Economics: The behavioural economics of Lotto. Cameron. Michael. 2016-12-28. Sex, Drugs and Economics. 2018-10-04. 2018-11-01. https://web.archive.org/web/20181101015710/http://sex-drugs-economics.blogspot.com/2016/12/the-behavioural-economics-of-lotto.html. live.
  37. Tufano. Peter. October 2006. Consumer Demand for Prize-Linked Savings: A Preliminary Analysis. D2d Fund. z. 2018-10-31. 2018-10-24. https://web.archive.org/web/20181024181711/http://www.hbs.edu/faculty/Publication%20Files/08-061_17c22e32-fe06-4b4a-8b5e-e09227fc8104.pdf. live.
  38. Web site: Archived copy . 2018-12-06 . 2018-12-06 . https://web.archive.org/web/20181206235015/https://www.nber.org/papers/w16433.pdf . live .

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