SECTOR SPOTLIGHT is a monthly series on FinTechtris that explores a specific sector within the expansive FinTech space by defining its history, frameworks, business model, leading companies, and outlook.

As a response to the economic downturn from the pandemic, governments around the world have lowered bank rates to 0% in order to reduce the impact. This policy move has had a ripple effects on deposit interest rates that retail banks pass to clients with savings, money market accounts, or certificates of deposits. Funds left in the bank effectively earn no interest and provide no benefit beyond FDIC insurance and access.

Despite this, consumers and businesses still have a need to set aside funds for emergency savings and to cover drops in income. Within financial services, prize-linked savings (PLS) programs are starting to increase in popularity and usage. These types of products are similar to standard savings accounts, with the added capability that accountholders are entered into drawings to win cash prizes.

At a time when overspending and lack of budgeting can lead to falling behind on rent or mortgage payments, having a savings cushion is a lifesaver. The benefit behind these newly approved accounts is to incentivize savings behaviors throughout the US, especially for low income individuals. Let’s explore the history of prize-linked savings programs, benefits and drawbacks for consumers, and top companies leading this movement.

History of Prize-linked Savings

The earliest form of PLS accounts was in 1694 in the UK as a way to repay military debt — the region had more recent experience through a premium bond program it launched over 60 years ago. For banks and individuals in the US, prize-linked savings has only been an option in the last decade. Despite the estimated $91B spent annually on playing the lottery, the savings rates remains flat at 8%.

To gamify a boost to savings in the US, various credit unions banded together in 2009 and launched the “Save to Win” lottery program in the state of Michigan. The new accounts helped raise over $850M+ across 11K+ accounts in the first year. Despite this early success, regulators and banks were not on the same page until 2014, when then the American Savings Promotion Act was passed. This allowed financial institutions to hold raffles and lotteries through prize-linked savings accounts.  There are currently 33 states in the US in which banks allow these savings promotion programs.

How PLS accounts Work

PLSA can be any bank deposit account that earns deposit interest, but most commonly its a standard savings that banks and fintechs offer. The bonus is that each customer is given entry into a drawing for cash prizes, which would be paid out in the savings account. For households that enjoy playing the lottery each week, these programs offer a similar function at no extra cost or exposure to loss of savings.

Most prize-linked savings have the a similar general structure:

• A contestant can participate by signing up with a fintech company or financial institution that offers this product;

• Upon opening their PLS account, the new accountholder deposits the required minimum — this automatically creates their entry into the savings promotion for that week or month.

  • Larger deposits would generate more entries into drawings and increases odds of winning.

  • As the deposits stay in the account, a small interest rate is also earned and paid to customers monthly.

• The financial institution would announce winners for small prizes on a daily or weekly basis, and larger prizes on a monthly or quarterly basis.

• Customer deposits in prize-linked savings maintain their complete value, even if a customer fails to win any drawing.

PROS and CONS for PRIZE-LINKED SAVINGS

PLS programs have definite upside for consumers, which include:

• Motivation to build and maintain monthly savings balances: This is especially critical for lower income households and families that struggle living paycheck to paycheck. These accounts are proven to lead to annual increases in savings over time, which improves overall financial wellness. US savings by households is close to historical lows (as seen on the chart).

• Additional boost in savings through winnings: For customers that do win prizes, there’s an innate benefit to keeping the balance in your account to maintain the odds in your favor of winning again. The largest winnings in prize-linked savings campaigns are comparable to small-scale lotteries.

• No risk of loss in deposit value: Entries into drawings have no cost and deposits in accounts are not at risk (and usually FDIC insured) — customers get the feeling of gambling without the downside. It’s basically a regular savings account attached to a drawing or promotion.

Even with these strong benefits, a few large drawbacks for prize-linked savings exist:

• Low monthly interest: As a core savings product, the interest rate is typically lower than other comparable bank offerings that have FDIC insurance. Most bank deposits have little or no interest rate to offer currently, but as rates do increase in the next 12-18 months — PLS may not be a worthwhile option.

• Prizes are random: Similar to the lottery, participants have no direct control or clear notion of when or how much they may be win. Customers can’t predict winnings into their financial planning for the year. An alternative of a high-yield standard savings account (as the economy recovers) guarantees a constant level earnings over time, which can help meet financial goals (of buying a car or home) a lot faster.

• Lack of immediate access to savings: Some programs at institutions or fintechs may have delayed access to balances in prize-linked savings. Even though standard savings accounts can be transferred at any time (usually to a checking account at the same institution), customers usually only have a standalone PLS account in a bank — they would need to initiate an external bank transfer that can take 1 - 3 business days. For low income families in an emergency, this isn’t a viable option.

TOP PLS PROGRAMS

The longest standing programs are offered by community or regional-based credit unions, but emerging FinTech startups are quickly adding their own offerings. Top prize-linked savings programs include:

• Save to Win: The original PLSA (and nation’s largest program) in the US is available in 22 states via credit unions. Each entry is $25 (capped at 10 per month for each customer) and prizes earned range between $25 - $5,000 on a monthly or quarterly basis;

• Lucky Savers: Focused in New York for customers of credit unions, entries are given for only monthly balance increases ($25 or more) — drawings are also monthly and quarterly;

• WINCentive: A program available in 9 states that offers prizes, monthly, quarterly, and annually with each entry being $25 (capped at 4 per month);

• Prize Pool: a new program created by a FinTech company in which entries are $1 each per day in the month (e.g. $100 kept in a month equals 3K entries), with no caps in the number of entries; $50K is available for winnings each month;

• Buzz Points: a platform for developing incentive programs at community banks announced earlier this year that it will start a prize-linked savings program; no details or guidelines have been disclosed yet;

As more states and financial institutions get comfortable with the program, anticipate an increase in offerings — especially from fintech companies that can quickly build the product but need a partner bank that is willing to work with prize-linked savings accounts. The risk for these banks is being unable to meet the needs of its existing retail customers with a similar offering.

Future of Prize-Linked Savings Programs in FINTECH

The new decade of 2020 started off with uncertain times due to COVID-19. The initial reaction of instability in the economy and increasing unemployment had consumers reduce spending and prioritize savings. With bank savings rates so low, individuals looked towards alternatives with potential higher returns and low risk.

Prize-linked savings has become a popular option this year, both as fintechs increase offerings throughout the US and customers seek places to keep additional funds. There’s not much to lose in parking small amounts in these programs for a chance to cash in on a large prize.

As bank rates start to rise once the economy stabilizes, consumers may flock back to traditional savings products. PLS programs would look to add additional features in the future beyond promotions to achieve longer customer relationships and retention. Savings balances can serve towards delivered secured credit cards or lines of credit, especially helpful for low-income households that struggle with building credit. FinTech companies can be helpful in creating innovative programs through gamification (as in screenshot above) that blend savings, credit-building, recommendations, and increase overall financial wellness.

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