As of April 2011, the savings rate in the U.S. was only 4.9%. Moreover, a 2009 Federal Deposit Insurance Corporation (FDIC) survey revealed that approximately 30 million American households are either unbanked or underbanked. “Unbanked” households are those without a checking or savings account, and “underbanked” households are those that have a checking or savings account but rely on alternative financial services. The unbanked and the underbanked are particularly vulnerable to predatory practices by non-bank check-cashing services, payday loans, rent-to-own agreements, and pawn shops. Given the current economic climate, it is more important than ever for policy makers to concentrate their efforts on getting more people “banked” and saving.
One interesting proposal getting more people, particularly low-income consumers, saving are prize linked savings accounts. These accounts are bank accounts that allow savers to win cash prizes in proportion to how much they save. It is akin to buying a lottery ticket, except that one will always get back the money one has saved.
As some supporters of these types of accounts explain, if gamblers and lottery spenders allocated their funds to prize-linked savings instead, it would lead to increased aggregate savings. In 2007, U.S. residents spent around $90 billion on legalized forms of gambling. The appeal of participating in a lottery suggests that providing an incentive similar to lottery may be an effective tool to recruit more savers. Researchers including Peter Tufano of the Harvard Business School have shown that this program could work in the U.S. Tufano’s research in Indiana predicted that the unbanked would have the greatest interest in prize-linked savings. Following the study in Indiana, Tufano and his team at D2D Fund launched a larger scale prize-linked savings project in 2008 with the Michigan Credit Union League and the Filene Research Institute in Michigan. The product named “Save to Win” allowed savers the opportunity to win monthly cash prizes or a $100,000 grand prize at the end of a year for every $25 deposited. At the end of the pilot year, over 11,500 savers had saved over $8.5 million in Save to Win accounts.
While prize-linked saving programs are available in over twenty countries around the world, including the U.K., Sweden, and South Africa, they are not widely available in the U.S. due to state law and federal regulations. Current law in Michigan, Alaska, Georgia, and Arizona allow for savings promotion raffles, but options are limited in other states. That is because most states in the U.S. prohibit privately run lotteries, and prize-linked savings is considered illegal under such provision. In order to test this new idea to promote saving, Rhode Island, Maine, Maryland, Nebraska, Washington, and North Carolina have passed legislation to enable prize-linked savings programs. Although unsuccessful, legislators in Arkansas, Mississippi, Iowa, and New Mexico have also made similar attempts. However, federal law prohibiting non-credit unions from operating a prize-linked raffle complicates the legislative campaigns in various states.
Even though prize-linked savings may raise aggregate savings among low-to-moderate income families, they do not solve the problem of getting more people to use mainstream bank services that provide more protection for their funds. Moreover, we must keep in mind that one innovative idea alone will not solve the chronic problems of the U.S. economy.