Governor John Carney recently signed House Bill 31, which authorizes prize-linked savings accounts in Delaware. These accounts will help people contribute more to their savings accounts and avoid financial trouble after unplanned expenses.
Prize-linked savings programs, or PLS programs, make customers eligible for a cash prize when they make a deposit into their savings account. The more deposits an account holder makes, the greater their chance of winning. Like a raffle, each deposit of a specified amount earns the account holder one entry into the prize drawing. Depending on the program, prizes may be awarded weekly, monthly, quarterly, or annually. The prize amount also varies depending on the program, but even small cash prizes are a great incentive for people to contribute to a savings account.
The program was first approved in Michigan, where one financial institution offered a chance to win a $3,750 monthly prize and a $10,000 annual prize. Every time account holders deposited $25 into their PLS accounts, they received another entry in the prize drawing. One program in San Francisco offered a jackpot of $2 million in 2015.
PLS accounts were forbidden in the United States until 2014. Before 2014, legislation forbidding private entities from offering raffles or lotteries stopped banks and credit unions from creating PLS programs. This law changed when the House of Representatives and Senate both supported a bill that removed this ban. Other countries, including South Africa and the United Kingdom, have allowed PLS accounts for years.
PLS in Delaware
Delaware recently became the 15th state to approve PLS accounts. So far, Del-One Federal Credit Union, which has 10 branches throughout the state, is the first credit union or bank to offer the program.
Del-One’s president, Dion Williams, says they will make PLS accounts available later in the summer. He says, “The program Del-One is launching provides the incentive to save. It does promote thrift… By saving money, people can break the cycle of debt.”
Lottery and Savings in the United States
According to a study from the American Association of State and Provincial Lotteries, in 2015, Americans spent over $70 billion on lottery tickets. However, 60 percent of Americans don’t have enough savings to cover $500 to $1,000 in unexpected expenses.
As the cost of living rises, it becomes more and more difficult for low-income and middle-income Americans to keep a sufficient amount of money in their savings accounts. The possibility of winning a prize is a helpful incentive, but it doesn’t cost money like lotteries or raffles. With PLS accounts, the account holder doesn’t lose money, even if they don’t win.
Melissa Schettini Kearney, an economics professor at the University of Maryland, says, “You can consider it gambling because there is a return. But in the case of the lottery or casinos, a person will lose the money they spent. With a PLS account, they will not lose the money.”
Benefits of PLS
PLS programs give people with low or moderate incomes extra motivation to deposit money into a savings account. Instead of being stressful or difficult, putting money into savings could be something exciting and motivating.
Other states that have found success with PLS accounts include:
- North Carolina
- New Jersey
In 2009, a pilot program in Michigan launched with eight credit unions. By 2012, 58 credit unions in the state offered PLS programs, and there were 15,000 account holders with an average amount of $2,000 in the accounts. When the program launched, about 43 percent of account holders were not regular savers and were financially vulnerable. However, 65 percent of these financially vulnerable individuals kept their accounts open for more than a year. They had the same success rate as non-financially vulnerable individuals. PLS programs motivate people to contribute to a savings account and keep that account open.
The programs are also beneficial for banks and credit unions. A PLS program can increase a bank’s assets and allow them to lend more money. PLS accounts don’t usually accumulate interest, and the money the banks would normally pay in interest covers the cost of the prizes.
It will only be a few months until PLS programs in Delaware launch. Many Delaware politicians and citizens are excited about this financial opportunity, and the programs will hopefully increase the number and size of savings accounts in the state.