What Are Prize-Linked Savings Accounts?

Definition and Example of a Prize-Linked Savings Account

PLSAs are savings accounts, certificates of deposit (CDs), or savings bonds that accrue interest. They function similarly to traditional savings products, but they have the added benefit of giving customers the chance to enter into raffles for cash prizes. Entry is achieved by making deposits into them.

The lottery-like nature of these savings accounts gives low-income individuals an opportunity to set aside money regularly with the potential for big winnings while holding their money risk-free in the account.

• Alternate name: Lottery-linked savings account
• Acronym: PLSA

How Prize-Linked Savings Accounts Work

An early form of PLSAs first appeared in the U.K. in 1694 as a means to repay military debt. The U.K. has also offered a "premium bond" as a PLSA for over 60 years, but the concept has only been widespread in the U.S. for about a decade.

Financial institutions were just catching on to the lack of savings trend among American households that persists to this day. The household savings rate, calculated as income minus expenses, hovered around 4% in April 2022. Yet, Americans spent around $95 billion on lottery tickets in 2021.

A group of eight credit unions launched the Save To Win PLSA program in Michigan in 2009 to boost Americans' savings rates by leveraging their love for the lottery. It led to 11,666 new accounts by the end of its first year and generated $8.56 million in savings, or $734 per depositor.

The legality of PLSAs was fuzzy because of laws prohibiting financial institutions from holding lotteries. Congress finally passed the American Savings Promotion Act in 2014. This authorized banks and credit unions to hold "savings promotions raffles." As of May 2021, 34 states had passed legislation allowing for PLSAs.

The typical prize-linked savings account works like this:

1. The hopeful winner joins a participating credit union or other financial institution. They open a PLSA.
2. The customer makes a qualifying deposit into the PLSA that is treated as an entry into a drawing for a cash prize. The more deposits a customer makes, the more entries they gain and the more opportunities they have to win. The deposits generally accrue interest as they would in a traditional savings account, although just a nominal amount.
3. The credit union draws winners for smaller prizes on a regular basis and grand prizes on a more infrequent basis.
4. All entrants get to keep their deposits and the interest they earned on their deposits, even if they don't win a prize.

Types of Prize-Linked Savings Accounts

If you live in a state that allows prize-linked savings accounts, you can open one through a participating bank or credit union. You can check directly with programs that partner with banks and credit unions, such as Save To Win, Lucky Savers, and WINCentive, to find a bank or credit union in your state.

Save To Win

Save To Win is offered by more than 100 credit unions across the U.S. It requires a $25 deposit into a share certificate to earn one lottery entry, with a cap of 10 entries per month. Prizes range from $25 to $5,000. They're awarded monthly and quarterly.

Lucky Savers

Administered by the New York Credit Union Association, Lucky Savers allows customers to get one raffle entry for every $25 month-over-month balance increase. Winners are drawn monthly and quarterly.

WINCentive

Credit unions in Minnesota, Delaware, Georgia, Louisiana, New York, Ohio, Montana, Wisconsin, and Massachusetts have partnered to create WINCentive. They offer prizes on a monthly, quarterly, and annual basis. Every $25 you save gets you one entry toward prizes, with a maximum of four entries per month.

Pros and Cons of Prize-Linked Accounts

PLSAs come with both advantages and drawbacks.

Pros Explained

• They can incentivize low-income individuals to save: PLSAs could encourage low- and moderate-income, asset-poor, and first-time savers to save more because of the potential to land a big jackpot. The Save To Win program proved that a PLSA can lead to a tangible increase in the number of savers and their monthly savings.
  
• Some customers will end up with a small windfall: You could pocket an amount equivalent to what you might earn as the winner of a small lottery prize if you win a grand prize. Even a smaller monthly prize could help offset the cost of a monthly expense like groceries or utilities.
  
• They offer lottery-like earnings without the risks: Unlike with a lottery, you're not gambling with your deposits made into a PLSA. You keep your deposits and any accrued interest whether you win or a prize or not. Provided that the institution insures its deposits, you're at no greater risk of losing deposits in a PLSA than those in a regular savings account.

Cons Explained

• PLSAs earn little to no interest: The nominal interest that these accounts earn means that prize-linked savings accounts won't lead to a substantial boost in the income of customers who don't win any prizes.
• Winnings are inconsistent: Interest on a traditional savings account won't net you a sizable amount, especially in a period of relatively low interest rates, but banks will at least pay interest on a regular basis based on a specified rate. They'll usually change rates incrementally when they do so at all. It's impossible to predict whether you'll win a prize for deposits into a PLSA. This can make it difficult for an individual to incorporate their earnings into their monthly budget.
• They may discourage the transition to a traditional savings account: Savers may not make the switch to a savings product that generates more interest and more meaningful growth in their savings if they get too caught up in the prospect of winning. Financial institutions also might not encourage them to do so because these accounts are often cheaper for banks than accounts that pay more substantial interest.