Prize Linked Savings: What to Solve

By Kate Young

If you want to stir up a controversy among your colleagues across the industry, we’ve got four words for you: prize linked savings accounts. Are they the coolest thing since sliced bread? Or are they a harbinger of the apocalypse? Depends who you ask.

They’re what you get when you cross an ordinary bank deposit account with a lottery. Programs come in all shapes and sizes—but essentially, the way they work is that for each deposit of a certain amount, the account holder earns an entry into a periodic cash drawing.

Also known as PLSAs or PLS, prize linked savings aren’t exactly a new thing. In 2014, the American Savings Promotion Act cleared the way for states to allow them. And they’ve been popular in other countries for years. But if you’ve never heard of them, you can forgive yourself. At latest count, they were legal in only 20 states, including a handful of states that permit them at credit unions only.

Given the limited availability of PLS, you may be inclined to start and end the conversation with just one question: Can my bank offer prize linked savings? But that may not be the most important question. Because even if the answer is no—or not yet—you’d be well advised to consider the underlying issues, which affect every bank. So whether you love the idea or hate it, give some careful thought to these three problems you need to solve.

1. Consumers don’t always behave the way they ought to behave.

As a marketer, you know it’s easier to get people to do the things they already enjoy doing—and much harder to make them change their habits. Not only that, consumers often don’t make the choice that’s in their own best interest.

  • Exhibit A: A 2015 brief from Pew Charitable Trusts reports that one in three American families reports having no savings at all—including 1 in 10 of those whose income tops $100,000 a year.
  • Exhibit B: In 2014 Americans spent more than $70 billion on lotteries. That’s more than they spent on sports tickets, books, video games, movie tickets, and recorded music combined.

No matter how you spin it, these behaviors are very bad news for the consumer.

It would be tempting to speculate that the non-savers simply can’t afford to open and fund a bank account. But that doesn’t explain the massive expenditure on lottery tickets or the relatively affluent segment of non-savers. Social scientists have all kinds of sophisticated ways of accounting for these behaviors. But what it comes down to is this: For many people, gambling feels good, while saving money feels bad. (Remember, we’re talking about feelings here, not rational decision making.)

That’s where prize linked savings come in. Funding a PLS account may feel like gambling, because you get a chance at winning a cash prize—recently, one bank offered a $200 monthly drawing and an annual grand prize of $10,000. But as a report by the Heritage Foundation is quick to point out, PLS isn’t actually gambling. That’s because regardless of whether or not an account holder wins the drawing, they are not risking the loss of their deposits, which are federally insured. Win or lose, they get their money back.

The idea behind PLS is to trick the thrill-seeking centers of the human brain into feeling good about the mundane discipline of saving money.

So what’s the problem?

2. It’s a mistake to forget the mission and gravitas of banking.

One could reasonably argue that banks should not be in the business of tricking anyone’s brain into feeling thrilled. And even if the practice is deemed safe and benign from the consumer’s perspective, it’s important to consider the short- and long-term reputational risks to the bank.

Because for all the thrill-seekers out there, there will continue to be a significant population of consumers who take a dim view of anything that feels like gambling—especially at their bank. It’s all about perception.

Recent comments in the ABA Marketing Network discussion group brought up questions about the perceived legality of particular PLS programs, the customers’ ability to maintain balances, and the banks’ ability to turn a profit—or at least break even. These are all rational, necessary questions that any bank considering a PLS program must ask. But they throw a lens of doubt on the practice, and banks must be amply prepared to respond to doubters.

In conversation with bankers, we found that even those who were generally open to the concept sometimes tempered their enthusiasm with notes like: “doesn’t fit who we are,” and “gimmicky.”

Nick Pfeiffer, CFMP, from MidWestOne Bank in Iowa was one who didn’t mince words. “Banks should be better than this,” he said. He objected to the idea that prizes would be used as the carrot to lure consumers into saving money—as if there were something inherently undesirable about a traditional savings account. He added, “The carrot that should be dangled is safety, security, peace of mind, and a fair interest rate.”

And then there’s the risk to the industry as a whole. Lance Kessler, faculty member at the ABA Bank Marketing School and the Stonier Graduate School of Banking finds the concept troubling because of the trust issues associated with banks over the last eight years. “Although banks have been improving in being perceived as trustworthy,” he said, “accounts that are associated with the word lottery will not help build back the trust banks once had.”

3. Gamification is a concept that all banks will have to reckon with.

Prize linked savings are just one example of a much larger development—the gamification of personal finance. And even if you dismiss the idea of offering PLS at your bank, you’ll have a tougher time ignoring this larger trend. Why? Because from what we’ve seen so far, it seems to work. And if it works, your competitors will be incorporating it into their customer experience.

Several things are at play here:

  • As noted earlier, many consumers don’t do what’s best for themselves—they don’t save enough, they don’t pay down debt, and they invest as if the stock market were a horse race.
  • Most banks want to help their customers do better for themselves.
  • People perform better at tasks that feel good. Playing a game feels good. Winning feels even better.
  • Playing games also boosts engagement and learning by providing positive feedback loops.

Gamification covers a lot of ground—it doesn’t have to involve drawings, video games, or even tangible prizes. And it doesn’t have to be frivolous to be engaging. It’s simply a way of using game principles to not only reinforce desired behaviors but also to make them habit-forming. It can be as simple as awarding points for positive behaviors like paying off a bill or making a deposit into savings. Or structuring a loan application to feel less like a pile of paperwork and more like a quest.

Of course, not every gamification approach will be right for every bank. To make it work, your bank had better have a rock-solid brand identity and the tenacity to stay true it. But as a marketer, you already know that.

Kate Young is the content editor of Email: [email protected].