Savers Are Cashing In on a Chance to Win Big With a Prize-Linked Savings Account

If you could win thousands of dollars for keeping your cash in the bank, would you save more? That's the question that credit unions and fintech firms alike are asking. And for many Americans, the answer appears to be a resounding "Yes!" Prize-linked savings accounts, which offer a cash lottery just for depositing your money, are on the rise. What does that mean for you, and should you make the switch?

What is a prize-linked savings account?

The concept behind a prize-linked account is simple: The more you save, the better your chances of winning a large cash prize. Prize-linked savings accounts use the same social engineering principles as lotteries like the Powerball and Mega Millions, but with one big difference: savers keep their deposits.

While specific rules vary by institution, savers will usually have to grow or maintain a balance in their prize-linked account to be entered to win. For example, some credit unions in Wisconsin award lottery entries for every $25 a saver deposits in a given month. Meanwhile, one California credit union gives all savers with over $500 in their account a chance to win a cash prize. Cash prizes can range from hundreds to tens of thousands of dollars, which savers can win without buying a lottery ticket.

A major benefit of prize-linked savings accounts is that they have the potential to boost the low savings rates of some Americans. As lottery organizations know, it can be difficult for consumers to quantify small odds, and to overestimate their chances of winning a multi-million dollar prize. Substituting a traditional lottery, which typically results in an immediate loss, with a no-cost prize-linked savings account helps savers win, whether they rake in the jackpot or not.

A growing movement

Since being introduced in 2009, prize-linked savings accounts have become increasingly popular. A majority of states now allow the accounts, and some even help local credit unions to set up and operate prize-linked lotteries. However, traditional financial institutions aren't the only ones getting involved in the action.

Credit unions in Michigan kicked off the trend with the "Save to Win" program nearly fifteen years ago. The passage of the American Savings Promotion Act in 2014 opened the door for financial institutions to offer prize-linked savings accounts in other states. Currently, 34 states have passed laws allowing such accounts, with legislation pending in three additional states.

While credit unions and banks offer some of the largest prize-linked savings programs, other financial institutions are rolling out their own sweepstakes programs. Financial technology company Yotta offers daily drawings for savers using their mobile app. And in 2016, Walmart began offering a prize structure for savers using reloadable debit cards.

Is a prize-linked account right for you?

Prize-linked savings accounts offer an alternative to traditional lotteries, and have the potential to boost consumer saving rates. Instead of an almost-guaranteed loss from buying lottery tickets, such accounts offer a chance at a cash reward without having to pay to play. Savings in a prize-linked savings account are yours to keep, whether you win or not.

While there may not be an upfront cost associated with these accounts, savers should consider the opportunity cost of stashing their cash in them. Many prize-linked savings accounts offer savers a fraction of a percent in interest. Compared to high-yield savings accounts, which may offer over 5% interest, savers have a choice to make: either take the chance to win big but earn next to no interest, or earn high interest without the chance to hit the jackpot.

Prize-linked savings accounts entice savers by offering cash rewards using a familiar lottery structure. Currently, a variety of financial institutions in many states offer prize-linked or similar savings programs. While consumers won't pay an upfront cost to enter, prize-linked accounts typically do not offer competitive interest rates, which may be a deal breaker for some savers.