Long an issue of banks and public policy is the fact that more than half of American’s under save and 25% of households have no material savings at all. Yet, Americans spend more than $70B annually on various lotteries. The crossroads of that fact set is the reason why Congress passed legislation that in December of 2014 allows banks and credit unions to offer accounts that are eligible for randomly selected “savings promotion raffles” so long as their state of domicile doesn’t prohibit it. While only fifteen states allow prize-linked accounts (AK, AZ, CT, GA, IL, IN, MA, ME, MD, MI, NE, NY, NC, RI & WA) more might be on the way.
Popular in the UK, prize-linked accounts have a proven track record of increasing savings (but not reducing lottery spending). Under names like Gateway to Dreams, Save To Win, and Dream Savings, the handful of banks and credit unions that have tried it in the US have also reported various levels of success. The non-profit Doorway to Dreams Fund (D2D) of Massachusetts have been at the longest in helping banks set up programs and Blue Ridge Bank ($254mm total assets, VA) is the latest bank to do it under the brand of Jackpot Savings.
How It Works
While structures vary between banks, there is usually a combination of daily, monthly and annual prizes. The number of entries per account is usually one entry for $25 saved of average daily balance with a few institutions doing a dollar per one entry. Blue Ridge Savings, for example, gives away one $200 award and four $50 prizes each month and an annual prize drawing of $5,000. Other banks have chosen to do smaller daily prizes and a larger annual prize in the $10k to $50k range.
While some institutions pay nothing on balances, most pay 3 to 10 bps. Here, after research, we recommend paying a base amount of interest as it tends to further suppress interest rate sensitivity (ironically) by making accounts satisfied with a certain level of earnings. In addition, this also helps customer acquisition as it helps present a suitable downside for customers by allowing them to earn a market rate of interest even if they don’t win.
Accounts are chosen at random and results are usually audited once per year.
From a profitability standpoint, banks trade off paying a rate of interest in exchange for the opportunity to win prizes. From a structure standpoint, interest rate sensitivity is dampened so duration and convexity tend to be better in prize-linked accounts. Currently, after interest, administration and prizes, the average prize-linked account costs approximately 0.37% in this current interest rate environment with an expected beta or correlation to interest rates of 65%.
Average balances are in the approximate $1,000 to $2,100, which is impressive and the level tends to be correlated with account age. Almost equally important as account balances, the banks that are using prize-linked savings report the product is an excellent customer acquisition tool. For example, during the first year of introduction, the data we reviewed showed a growth factor of 158 new accounts per year per $100mm of total assets.
Of course, the reason to have a prize-linked savings account is to drive engagement. It has been found that more than 58% of the account holders regularly check drawing notifications thus presenting an ideal time to brand, cross-sell and enhance customer satisfaction. That is multiple times more often than you average bank customer and may be reason alone to have the account type.
Financial institutions have also been successful at using the account type to target customers during tax refund season as this is an ideal way to grab the attention and compete for dollars that would have been spent on other discretionary choices.
Finally, there is the moral/social conscience aspect of helping your communities save. Every state that has an active prize-linked program running has seen an increase in savings. Using D2D’s statistics, just looking at 4 states from 2009 to the end of 2013, $94mm was saved by over 50k account holders from 62 institutions. Of those account holders 62% to 81% were deemed financially vulnerable. Those account holders also include 3,216 winners totaling $228k in winnings.
A prize-linked account is not for every bank and not for every pricing strategy. If you are a bank that currently targets middle class and under banked households, a prize-linked account may be perfect to jump engagement and to help capture relevance. A prize-linked account lays the foundation to then layer on a heavy dose of savings and financial planning education in order to enable more Americans save for retirement or financial shocks.
Submitted by Chris Nichols on September 08, 2015