It's a lottery where you can't lose, but is it legal? A growing promotional trend being utilized by credit unions is the offering of prize-linked savings (PLS) products, which provide consumers with the chance to win prizes in exchange for the consumer making one or more deposits into a savings account. For example, Save to Win, the largest PLS program, which currently operates in four states, gives each depositor an entry into a cash prize raffle for each $25 deposit into a savings account, up to ten entries per month. While financial institutions have historically been prohibited from running raffle- or lottery-type promotions under state lottery laws and federal banking regulations, Congress and a number of states have recently amended previously prohibitive laws to legalize such promotions in the limited context of PLS accounts, in order to incentivize people to save more.
In an economic climate marked by record low interest rates, incentives to save are all the more valuable and the opportunity to win a cash prize could prove to be a deciding factor in how consumers decide to spend their income. In Michigan and Nebraska alone, more than 42,000 individuals have opened PLS savings accounts, which have resulted in savings of over $72 million. In states where PLS products have been legalized, PLS promotions are increasingly being viewed as an attractive alternative for consumers who would otherwise spend their money playing state lotteries in search of a chance to win cash prizes. Further, PLS products have been shown to appeal to consumer groups who have historically struggled to save, such as the asset-poor and low-to-moderate income groups.
Under state lottery and gambling laws, a sweepstakes in which consumers are required to pay a sum of money or purchase a product to receive an entry is illegal unless a "free" way to enter is also equally offered that doesn't require mandatory consideration (commonly referred to as a free alternative method of entry). However, PLS promotions can arguably be distinguished from traditional product purchase sweepstakes since the money that one "pays" in order to receive an entry into the prize drawing is deposited into one's own savings account, resulting in no real surrendering of consideration or net loss to the entrant (and arguably a net gain, since the individual will receive interest on the deposit from the financial institution).
Legally, one of the most significant developments to bolster the growth of PLS products is the recent passage of the federal American Savings Promotion Act (the "Act"), which was unanimously passed in both the House of Representatives and the Senate and is awaiting President Obama's signature. Under federal banking laws, banks and federally chartered financial institutions are prohibited from engaging in lotteries (although credit unions are exempt). The Act narrowly amends federal laws to legalize the use of PLS products by banks and federally chartered financial institutions by exempting such products from the definition of a lottery.
Even if the Act ultimately passes on a federal level, financial institutions interested in PLS promotions still need to address state law regulation. Also, given that credit unions have been exempt from the aforementioned federal banking laws applicable to lotteries, a handful of states have passed laws legalizing PLS products and have seen such products explode in popularity. On a statewide level, ten states currently authorize credit unions to offer PLS products: Connecticut, Indiana, Maine, Maryland, Michigan, Nebraska, New York (effective Sept. 23, 2015), North Carolina, Rhode Island and Washington.
The elements of each state law vary, but generally credit unions offering PLS products require the chance to win a prize to be dependent on an individual's deposit of a minimum sum of money as specified under the terms and conditions of the promotion or the submission of an entry where no deposit or purchase is required. Further, state laws also require credit unions engaging in PLS product promotions to include the promotion terms and conditions in any advertising materials and to post such terms and conditions in credit union locations where consumers may enter the promotion.
Launching a PLS promotion can be an effective way to entice customers who are put off by current low interest rates to save more and thus increase deposits. However, while PLS promotions and similar contests and sweepstakes are frequently a cost-efficient way to create a great deal of buzz, they are hardly trouble-free and a myriad of traps await the unwary sponsor. Promotional campaigns incorporating sweepstakes elements such as prize and chance require complex regulatory compliance on a federal and state-by-state basis, and significant legal exposure awaits the sloppy and uninformed promoter. Involving experienced legal counsel early in the planning process, developing a good set of forms and standard procedures and clearing each promotion, and engaging competent, reliable agencies to execute the promotion will help your financial institution operate successful PLS promotions while minimizing the potential risk of liability.
Jesse M. Brody is a partner in the Advertising, Marketing and Media practice group at the law firm of Manatt, Phelps & Phillips, LLP. He can be reached at firstname.lastname@example.org or 310.312.4173. Suemyra A. Shah is an associate in Manatt's Advertising, Marketing and Media practice group. She can be reached at email@example.com or 212.790.4519.