ANNAPOLIS, Md.-Banks are working to catch up with credit unions in offering prize-linked savings accounts.

Prize-linked savings accounts, designed to make saving sexy, are growing rapidly in states across the country. They give savers, including those who might not have developed the habit on their own, the chance to win a pot of money just for socking away as little as $25 each month.

Credit unions in Michigan piloted the program in early 2008, and it's since caught on with institutions in Nebraska and elsewhere. While federal and state gambling laws have largely kept banks on the sidelines up until now, legislation passed in Maryland this past spring could serve as a model for expanding these specialty savings accounts to banks across the country.

"There's no logical reason why this product couldn't be offered by different kinds of intermediaries, whether it's a government or a bank or a credit union," Peter Tufano, dean and professor of finance at the Saïd Business School at the University of Oxford in England, told American Banker, an affiliate of Credit Union Journal.

Tufano is also the co-founder and chairman of the Doorways to Dreams Fund, a Boston nonprofit focused on promoting asset building for low-income families. Doorways works with states to develop the savings raffles and helped launch the Michigan pilot.


'Innate Motivations'

The program, trademarked "Save to Win" in Michigan and Nebraska, is designed to play off of our innate motivations," says Joanna Smith-Ramani, director of scale strategies at Doorways.

"Our insight into designing the product was, even if you're low-income, people are finding small amounts of discretionary money for other things," Smith-Ramani said. "If we could combine the desire for financial planning with ... entertainment, we could free up discretionary funds towards savings products that are both fun and good for you."

The kicker is that the programs can also be attractive to the financial institutions, according to Tufano.

"There are still profitable and good niches to serve among low- and moderate-income families. This is putting them in front of you at a relatively low acquisition cost and in a way that's relatively sticky," he says.

And while it may cost an institution initially to feed the prize pool, it can also help differentiate saving products in unconventional ways, beyond the standard advertising of interest rates.

"If you're clever about how you structure the payoff pool, the odds, the ratio of small prizes to large prizes ... you can create a customer offering that's much more meaningful," Tufano says. "For the chief marketing officer of a financial institution, the idea that you can customize in a way that you haven't thought about doing could be quite exciting."

Supporters of the concept point to the success of the initial Michigan pilot, which has grown from eight participating credit unions to 58 since its launch. The Michigan program has added more than 25,000 unique accounts, amounting to savings of more than $40 million since 2009, according to data from Doorways.

"I think the evidence is all pretty encouraging. The product is selling, and if you look at who's buying it, the take-up by low and moderate-income families is very encouraging," says Tufano, while acknowledging that program data are still preliminary.

"A number of buyers, when we ask them about prior savings activities, say they had none, which suggests this isn't displacing savings-it's creating new savings," he adds.

Deposits still earn interest, and each monthly deposit of $25 counts as one entry toward one of 10 prizes of $10,000 each, as well as dozens of smaller monthly drawings in the state.


Everything Working 'Perfectly'

More than one-third of the Michigan participants in 2011 earned less than $40,000, which Smith-Ramani said is a good mix to both help encourage savings among low-income families and keep the program sustainable.

"It's doing perfectly what we want it to do. It has a diverse set of people saving in it," Smith-Ramani told American Banker. "You're not going to be able to convince a financial institution or the industry to put time into development, time into launching it, if they don't think more than one niche of customer is going to participate. ... You need lots of people depositing reasonable amounts of money. You need a range."

The Michigan program has already spawned interest from credit unions in several other states.

Nebraska launched its Save to Win program in January 2012 with nine credit unions. As of July 2012, the program had added 1,311 accounts with $1.1 million deposited, Doorways reports. It's also added a 10th participating credit union.

Meanwhile, credit unions in both North Carolina and Washington State are also working to unveil similar programs starting in early 2013, and supporters say they were inspired by the strength of the Michigan pilot.


Some Opposition To Programs

But even as interest around the program mounts, implementing these savings lotteries has faced opposition elsewhere. The Iowa state House last year spiked a bill to allow credit unions to develop a prize-linked savings plan, with the credit union industry shaking a finger at banking lobbyists who opposed the measure on grounds that it could provide a competitive disadvantage.

That's similar to what happened two years ago in Maryland. The state passed a law that would amend state rules to allow savings account raffles, but with an amendment requiring federal law be changed to allow banks to participate.

"We had a concern about the competitive disadvantage banks would have had," says Kathleen Murphy, president and chief executive of the Maryland Bankers Association.

The effort to change federal law ultimately stalled, and last May legislators passed a new bill allowing both credit unions and banks to participate in prize-linked savings programs, provided the contests are structured as a sweepstakes, not a true lottery.

The sticking point is that the raffles must contain that ubiquitous "no purchase necessary" clause, meaning that instructions will need to be provided to those who wish to enter the drawing without opening an account and depositing monthly savings.

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