Garnet Capital Advisors Blog

How would you like to be paid for saving money? This is the idea that is catching on among U.S. small banks, as the popularity - and legality - of prize-linked savings accounts continues to grow.

The basics of a prize-linked account are simple. Account holders make regular deposits, just like at any other time, except certain deposits are eligible for entry into a lottery. The prizes can range from a few dollars to thousands of dollars, depending on the financial institution. 

Prizes motivates consumers
Prize-linked savings accounts are beneficial for both banks and consumers. From a bank's perspective, the prizes help attract more customers. It is a marketing trick that can help raise awareness, all with minimal risk.

The pros for consumers are obvious. They don't have to change their banking behavior at all in order to be entered to win - the banks usually set a deposit minimum, like $25, for entry - and the rewards could be in the thousands. They have a clear motivation to improve their savings and play the lottery at the same time.

This means that prize-linked savings accounts could end up increasing household savings. Lotteries are no laughing matter. In 2014, North American Association of State and Provincial Lotteries reported that Americans spent more than $70 billion on lottery tickets. The desire is there, and that bodes well for prize-linked savings accounts.

More banks turn to prize-linked accounts
These types of "lottery" accounts only became legal for banks at the end of 2014, according to American Banker. Before that, the model was more popular in the U.K., where many financial institutions there offered prize-linked accounts to consumers.

Now that it is an option for U.S. banks, these accounts are starting to pop up in certain states. One is Virginia, where Blue Ridge Bank has created an account called "Jackpot Savings," American Banker reported. A deposit of just $25 earns a ticket into the lottery, with prizes of $200 for one customer and $50 for four more per month. It's the larger trend, however, that has many in the industry talking.

"It's not every day a $254 million-asset bank gets to be at the leading edge of innovation," Brian Plum, president and chief executive of Blue Ridge Bank, told American Banker. "It's something we are really excited about."

These accounts are primarily focused on short-term savings. Consumers won't collect much, if any, interest on their deposits, but it does challenge their behavior. The goal is to get them more invested in saving money, all while positioning the financial institution as an innovator.

When looking at the instances of prize-linked savings accounts, George Hofheimer, chief knowledge officer at Filene Research Institute, told American Banker in an email that this could be an alternative to credit lines.

"If you take these examples from a behavioral perspective then you start to see these incentives as ways for consumers to replace high-cost credit," he said in the email. "So now a stable (but non- or low-interest earning) savings of a few hundred bucks starts to look pretty sweet. ... Now they have free cash flow, which enables stability."

Blue Ridge is an early adopter of this type of account. Should you have any questions regarding trends in the financial services industry, please contact loan sale advisory firm Garnet Capital Advisors for more information.