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Prize-Linked Savings

  • Linda Brown Chief Administrative Officer at Service 1st Federal Credit Union
  • Mark Forsyth National Institutes of Health FCU
  • Phil Smith Chief Operating Officer at Credit Union of Colorado
  • Darin Woinarowicz President/CEO at Arrowhead Central Credit Union

According to Peter Tufano of the Harvard Business School, the average household spends $514 a year on lotteries. Imagine a scenario where credit union members deposit their $514, making them eligible for interest and prizes, preserving their initial investment, and developing life-long savings habits. 

Prize-linked savings (PLS) is the solution that adds excitement to the discipline of saving.

Credit unions can define and organize the prizes as sweepstakes (similar to promotions regularly run by major credit card companies) to avoid the gambling stigma and address legal and regulatory compliance issues. To participate, members simply deposit money into a specific PLS account and earn entries based on the amount saved.

A PLS account pilot currently underway in Michigan called Save to Win features eight credit unions collaborating to offer a $100,000 grand prize, in addition to smaller monthly prizes. The program is supported by a partnership among Filene Research Institute, the Doorway to Dreams (D2D) Fund, and the Michigan Credit Union League, with funding from the Center for Financial Services Innovation. 

Participating credit unions include Central Macomb Community Credit Union, Christian Financial Credit Union, Communicating Arts Credit Union , E&A Credit Union, ELGA Credit Union, Frankenmuth Credit Union, Lake Trust Credit Union, and Option1 Credit Union.

Tune in to learn more about how Save to Win can help credit union members from the perspective of employees and members from Communicating Arts Credit Union.

Update Feb 22 08 

Prize-linked savings (PLS) products are savings vehicles that may appeal to people with little savings and little interest in traditional savings products. PLS products offer savers a return in the form of the chance to earn large prizes, rather than in more traditional forms of interest or dividend income or capital appreciation. The probability of winning is typically determined by account balances, and the aggregate prize pool can be set to deliver market returns to all savers. 

Prize-linked assets are offered in over twenty countries around the world—including the United Kingdom, Sweden, South Africa, and many Latin American and Middle Eastern countries—but are not available in the United States, where state laws and federal regulations make the offering of prize-linked programs problematic. This working paper provides a first look into demand for a PLS product in the United States. Key concepts include:

  • PLS products are promising, despite formidable barriers to success in the United States.
  • The low income population that was studied expressed substantial interest in a savings product that provides prizes as part of its return.
  •  This product appeals to non-savers, who do not save with traditional products.
  • The product appeals to heavy lottery players, and by virtue of this fact, has the potential of turning their gambling activities into demand for savings.
  • PLS products might face an uphill battle in the United States due significantly to well-established gambling and lottery industries that might oppose PLS, and the roadblocks due to legal uncertainty and prohibitions around this new product.
  • Businesses or state treasurers might be reluctant to innovate around a product that must compete against heavily marketed alternatives.

Update July 18 09

Based on recent headlines, you might think that Americans are finally saving again. Want to bet?

In 2007, the latest year for which final numbers are available, Americans spent $92.3 billion on legalized gambling, according to Christiansen Capital Advisors; that same year, says the US Bureau of Economic Analysis, Americans saved only $57.4 billion. So, if Americans are to save more, maybe we should make saving feel more exciting than just a dull deposit into a bank account.

The BEA recently estimated that personal saving -- what is left of Americans' disposable income after all our spending -- has risen to a 6.9% annual rate. Starting in the late 1980s, the personal-saving rate began to fall from the 8%-to-10% range. By 2005, households were spending 99.6 cents of every dollar they earned. Now, however, frightened by foreclosures and menaced by rising unemployment, Americans are saving almost as much as they used to. Or are they?

Charles Biderman of TrimTabs Investment Research, an economic-analysis firm in Sausalito, CA, has studied the saving rate for years. He adjusted for one-time boosts from the stimulus package and used daily income-tax reports from the US Treasury to take the latest job losses into account. By this revised estimate, the saving rate may actually be running as low as 0.9%. (People who have been thrown out of work often can't save.) A BEA spokesman declined to dispute Mr. Biderman's adjustments, saying only "TrimTabs has a different method of calculating."

It makes sense that the saving rate might be lower than it looks; spendthrifts don't turn into misers overnight. But we would be better off as an economy and as a society if Americans spent less and saved more. The late, great investment manager Sir John Templeton warned me 20 years ago: "Those who spend too much will eventually be owned by those who are thrifty." If you wonder how China, Japan, Hong Kong and Taiwan ended up amassing $1.65 trillion in U.S. Treasury bonds, the answer lies largely in our own credit-card bills.

Today, credit cards and online shopping make deferring gratification harder than Ben Franklin ever could have imagined. And Americans are in hock up to their ears, with $10.5 trillion in mortgages and another $2.6 trillion in consumer credit. It isn't any wonder that saving feels impossible to many people. But psychologists have long known that people tend to overestimate the odds of rare events. Applying that behavioral insight, finance professor Peter Tufano of Harvard Business School has devised a clever program called Save to Win. Launched earlier this year for members of eight credit unions in Michigan, it is a cross between a certificate of deposit and a raffle ticket. Members who put $25 or more into a Save to Win one-year CD are entered into a monthly "savings raffle" for prizes up to $400, plus one annual drawing for a $100,000 jackpot. Only Michigan residents are eligible to participate.

This unusual CD is federally guaranteed by the National Credit Union Administration and pays between 1% and 1.5% annual interest, a bit lower than conventional rates. In 25 weeks, the program has attracted about $3.1 million in new deposits, often from people who have never been able to set money aside. Takisha Turner, 33 years old, is a dispatcher for the valet-parking department at Greektown Casino in Detroit. Ms. Turner doesn't gamble, but she has always struggled to save. She had only about $10 in her savings account at Communicating Arts Credit Union when she walked in a few weeks ago and heard about Save to Win.

"The teller said somebody else she told about it won," says Ms. Turner, "so I said, 'Well, you must be good luck then.' I thought it was a good idea, because earning interest means you win anyway. So I put down the minimum, $25." This past week, Ms. Turner won $400. She plowed the $400 back into her Save to Win account, getting a second shot at winning the $100,000 grand prize.

People love to gamble and hate to save. With Save to Win, says Communicating Arts Credit Union President Hank Hubbard, "You are sort of betting, but there's no losing." If we are to become a nation of savers again, we will need more innovations like this -- and the regulatory flexibility to allow them.

Update Oct 1 09 

During the first 32 weeks of Save to Win, eight credit unions have helped over 10,000 Michigan residents open a Save to Win certificate and save, on average, over $140,000 per week. The excitement is building toward a January 2010 drawing for the $100,000 grand prize. Read all about it in the project’s interim report, available for download below under Marketing Materials.

Check out prize-linked savings in the news

Update July 28 11 

In a bid to build traffic and enlarge the brand, the Michigan Credit Union League is launching a co-op radio campaign to increase Save to Win savings raffle accounts at participating credit unions. The $500,000 campaign, touting the theme “Own Your Money” and designed to build awareness, will run in all major Michigan media markets, a league spokesman said.

The league, which in 2009 pioneered the sweepstakes-type promos to build membership, particularly among low-income residents, said it now counts 42 participating credit unions with 12,000 accounts. The league pegs consumer savings at $21.6 million through June, representing a jump from the $28.2 million total for all of 2010. The prize-linked raffle idea, originally promoted by Filene Research Institute, has now caught on in several other states – including Washington, Nebraska, and North Carolina – though in some areas it has run into opposition from the banking lobby which has been effective in blocking enabling legislation on grounds the promotion amounts to gambling.

Aiding in funding the campaign is the nonprofit Doorways to Dreams (D2D) Fund which this week said that “through the generous support of the W.K. Kellogg Foundation, the Boston-based Doorways to Dreams Fund has been able to make” important improvements in Save to Win.

“In particular, Doorways to Dreams and MCUL have tested a variety of prize variations and marketing approaches to attract and keep financially vulnerable households” to continue using the product, said the foundation. Under Save to Win in the past, savers receive entries in a prize pool for each $25 CD opened.

Separately, the Michigan league said nearly 50 credit unions have now signed up for another media campaign promoting state tourism and called “Positively Michigan.” That program, which has the enthusiastic endorsement of Gov. Rick Snyder, provides a “grassroots channel” for credit union personnel to put forward “useful ideas to make Michigan a better place to live and work,” the league said.

Update July 25 19 

Save to Win, the national prize-linked savings program managed by CU Solutions Group, is marking its 10th anniversary