Straight Talk: False Hope

Prize-linked savings accounts offer savers the chance to win cash prizes when they add to, or open, an account. Credit unions, in particular, have begun offering such accounts..In Minnesota, for example, a program offered by the industry trade group gives credit unions the opportunity to provide a savings account that offers $100 monthly prizes, $1,000 quarterly prizes and a $5,000 annual prize. Account-holders get one chance in a drawing every time they make a deposit of $25 or more. They can get up to four chances per month. In January, 12 Minnesota credit unions participated, opening 1,095 accounts with balances totaling $197,721..The Minnesota legislature passed a law last year legalizing the prize-linked savings account. Currently, such accounts are legal in 16 states, including Michigan, Nebraska, Indiana and Illinois. In February 2015, we ran a story about prize-linked accounts, citing a group of Michigan credit unions that offered chances to win a $100,000 grand prize..Something about the accounts, however, rubs me the wrong way. I don't understand the appeal of paying out less interest (or dividends, using credit union terminology) across the board so that a few lucky account-holders get a big payout. Wouldn't it be better to pay standard levels of interest to all account-holders and let those who want to gamble buy lottery tickets on their own? Promoters might argue account-holders do not have to accept reduced interest earnings. But let's face it; the prize money has to come from somewhere. If the money weren't going into prizes, it would remain available to pay out as interest or dividends to customers (or members – more credit union terminology)..Credit union managers will say they're not putting up the prize money. In Minnesota, at least, that's being done by their trade group. But, of course, trade groups are funded by their members who, in turn, are funded by their members. However you count it, customers are paying for it..One of the big trends among regulators is the expectation that financial institutions steer customers into products that are "good for them." Regulators are increasingly frowning on products that may not be in the customers' best interest, even if the market demands such products. Think of mortgages with adjustable teaser rates, for example. So while I understand there is market demand for prize-linked savings accounts, I can't see how regulators can sit back without doing anything. Surely it is not good for a financial institution to encourage customers to trade a portion of their legitimate interest earnings for the "hope" of winning big.