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Prize-linked savings accounts: Coming to your bank?

By Maggie Wirtanen

A well-funded savings account is a financial necessity. Unfortunately, few Americans appear up to the challenge of maintaining one today. The University of North Carolina reports that more than half of American households lack the savings necessary to cover three months of their basic expenses.

Enter prize-linked savings (PLS) accounts, incentive-based programs that are increasingly available through credit unions today. These accounts give consumers the opportunity to win money in much the same way they would through a state lottery -- with a ticket in hand. In Michigan, for example, consumers who make a $25 deposit in a Save to Win savings account receive a raffle ticket for a monthly drawing, or for a larger prize at year's end.

"PLS accounts differ from a traditional savings account in that each participant has the opportunity to win a lottery in the form of money or prizes instead of earning a competitive interest rate on balances," says Kate Lawton, brand manager with Filene Research Institute (FRI), a U.S. consumer financial think tank that worked with the Michigan Credit Union League and Doorways to Dream Fund to offer the first PLS in the U.S., in Michigan.

Lawton says research remains unclear on whether these accounts lead to an increase in overall net savings. But consumer interest in these accounts appears to be growing -- despite them being illegal in most U.S. states today.

"PLS accounts have been around globally for a long time, but in the U.S., the features of these accounts are considered in violation of state lottery laws and federal banking regulations," says Lawton. "We found a small wrinkle in Michigan law that allowed for credit unions to offer 'savings promotion raffles' and that's how we were able to pilot Save to Win in 2008."

What does this mean for people who live in states other than Michigan? Are they just out of raffle savings luck? Not necessarily. Here are four reasons PLS accounts could be coming to banks and credit unions across the country soon.

1. Laws are relaxing in many states

What started in 2008 as a savings account program available only in Michigan has expanded to a change in law for nine additional states. Savings promotion raffle laws have passed in Connecticut, Indiana, Maine, Maryland, North Carolina, Nebraska, New York, Rhode Island and Washington, though differences in prize incentives vary between these states.

For example, Washington state, which launched its program in 2013, offers credit union members the opportunity to win $50 to $5,000 monthly, as well as an annual prize of $5,000. The Save to Win program also launched in North Carolina in 2013 and makes monthly prizes available from $25 to $100, as well as larger quarterly prizes and a $30,000 grand-prize offering. The Carolinas Credit Union League reports such success in this program that, in 2013, 1,908 accounts were opened with an average savings of $1,246 per account, leading to more than $2 million in total savings.

2. Americans are already hooked on lotteries

Americans -- particularly those with lower incomes -- like to play the lottery. Households earning less than $29,000 spend an average of $400 a year on lottery tickets, according to FRI. The PLS programs in Michigan and other states simply leverage that desire by giving consumers with little or no previous interest in socking away money an opportunity to "win."

And, just like the payouts available in a state lottery, the incentives available in a PLS program can be substantial too. In the Save to Win program in Michigan, for example, every $25 that a consumer deposits into a savings account allots them a ticket for a monthly $10,000 drawing. Beyond that, the end-of-year raffle offers a $100,000 prize.

3. Credit unions are making it easy

Consumers are hearing about Save to Win programs through media coverage and by just walking through the front doors of a credit union. These not-for-profit financial institutions are at the heart of PLS programs since they are driven by service rather than profit, according to Dave Adams, CEO of the Michigan Credit Union League.

Adams says that these accounts, which can typically be opened with a $25 minimum deposit, were created to help people of low-to-moderate income slowly build their savings. That effort may be proving worthwhile: Research shows that as many as 7 percent of credit union members joined just so they could open a Save to Win account.

"Some credit unions help members set up automatic deposits so they save the money automatically and don't have to remember to save," Adams says. "Other credit unions cross-sell this product in combination with loans or new accounts to help develop the discipline of saving while also paying down debt."

4. Congress may soon help too

A new bill, H.R. 3374: The American Savings Promotion Act, has been introduced in U.S. Congress to allow savings promotion raffle products to be offered by all types of financial institutions across the country. Introduced by a congressman from Washington state, the bill passed through the U.S. House on September 15, 2014 and now goes to the Senate for consideration. Govtrack.us, a transparency website created to track congressional bills, indicates the bill has a 59 percent chance of being enacted. What are the implications if this bill becomes federal law?

"If passed, this type of legislation does open up the possibility of rapid adoption of prize-linked savings accounts," says George Hofheimer, FRI's chief knowledge officer. "I say this because every financial institution has a savings product and the tweaks necessary to implement PLS are relatively minor. Marketing and messaging to consumers would take awhile to ramp up, but the prospect of a rush to PLS accounts is a very real scenario."

In the meantime, credit unions across the U.S. may continue examining state laws to see whether prize-linked savings accounts can be offered in new markets.

"What we are after is financial empowerment for consumers," Adams says, "and our credit unions can all point to cases where this has happened with Save to Win."

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