On Topic: Deposit Innovations

By Melissa Kearney, Peter Tufano, Jonathan Guryan and Erik Hurst.Motivating non-savers to save.Editor's note: In December, President Barack Obama signed the American Savings Promotion Act (HR 3374), which allows banks to offer lottery prizes to customers who make deposits in designated bank accounts..For those who consider playing the lottery to be fun, a savings account with a lottery component may be more attractive than a standard savings account with stable returns..Prize Linked Savings (PLS) accounts differ from standard savings accounts in one specific way. Instead of, or in addition to, offering a fixed interest return, PLS accounts offer a randomly determined return in that depositors periodically receive a chance to win a specified (and potentially large) amount, similar to a lottery ticket..There is widespread demand in the United States for low-probability, high-prize gambling products, in particular among low-income individuals and households. In 2008, state lotteries brought in roughly $60 billion in sales or more than $540 per household nationwide. In the same year, American households spent $430 per household on all dairy products, and $444 on alcohol. We bought more lottery tickets than milk or beer..The 1998 National Opinion Research Council survey, the most recent nationally-representative survey of gambling behavior in the United States, found that lottery gambling extends across races, sex, education level and income groups..Credit unions have implemented two demonstration projects designed to test the feasibility of PLS accounts. An Indiana credit union launched a prize-based savings product in 2006. It also conducted a marketing survey of 547 consumers in Clarksville, Ind., to gauge potential consumer interest in the product. Among all respondents who completed the pre-pilot survey, 58 percent reported interest in the described PLS product; a non-saver was 70 percent more likely to show interest. Survey participants who reported spending $100 or more on lottery games during the previous six months were twice as interested as others..The credit union opened more than 1,300 accounts and amassed more than $500,000 in deposits within three months of launch even with limited marketing. Additionally, most customers maintained their deposit balances in the product following the first three months of the launch..Another PLS demonstration project was launched in 2009 in Michigan as a year-long savings promotion in eight Midwest credit unions. The project offered a prize-linked savings product with a headline-grabbing $100,000 grand prize, among other prizes ranging in value from $15 to $400..Members of participating credit unions could open a 12-month certificate of deposit with a minimum balance of $25 to enter the savings raffle. The number of entries in the raffle was capped at 10 per month. Unlike most CDs, savers could add money to their certificates over time. Only one withdrawal was allowed, however, during the 12-month period, and standard certificate early-withdrawal fees applied. The amount of interest paid on these certificates varied by credit union, but in 2009 ranged from 1 percent to 1.5 percent..In 11 months, the participating credit unions opened 11,600 accounts and generated more than $8.6 million in deposits. A survey of some 6,027 account holders found that 56 percent had not saved money regularly before opening the account; 59 percent reported spending money on the lottery in the last six months..The promotion of prize-linked savings products takes seriously the idea that potential savers place a high value on the chance to 'win big.' We speculate that there is unmet consumer demand in America for saving products that offer the (remote) prospect of changing current wealth status, rather than incrementally building wealth with certainty..Kearney is with the University of Maryland, College Park; Tufano with the University of Oxford, England; Guryan with Northwestern University, Evanston, Ill., and Hurst with the University of Chicago. This essay is an edited version of "Making Savers Winners: An Overview of Prize-Linked Saving Products," which was originally published in 2010.