Consumer Demand for Prize-Linked Savings: A Preliminary Analysis
Executive Summary — Prize-linked savings (PLS) products are savings vehicles that may appeal to people with little savings and little interest in traditional savings products. PLS products offer savers a return in the form of the chance to earn large prizes, rather than in more traditional forms of interest or dividend income or capital appreciation. The probability of winning is typically determined by account balances, and the aggregate prize pool can be set to deliver market returns to all savers. Prize-linked assets are offered in over twenty countries around the world—including the U.K., Sweden, South Africa, and many Latin American and Middle Eastern countries—but are not available in the United States, where state laws and federal regulations make the offering of prize-linked programs problematic. This working paper provides a first look into demand for a PLS product in the United States. Key concepts include:
- PLS products are promising, despite formidable barriers to success in the United States.
- The low income population that was studied expressed substantial interest in a savings product that provides prizes as part of its return.
- This product appeals to non-savers, who do not save with traditional products.
- The product appeals to heavy lottery players, and by virtue of this fact, has the potential of turning their gambling activities into demand for savings.
- PLS products might face an uphill battle in the United States due significantly to well-established gambling and lottery industries that might oppose PLS, and the roadblocks due to legal uncertainty and prohibitions around this new product.
- Businesses or state treasurers might be reluctant to innovate around a product that must compete against heavily marketed alternatives.
This paper reports on a small-scale survey of the potential American demand for prize-linked savings accounts, an account that awards prizes as part of the saving product's return. In October 2006, Centra Credit Union launched a prize-linked savings pilot. As part of that initiative, we conducted a mall intercept survey of over 500 people in Clarksville, Indiana, the community where the program was launched. This preliminary data suggests that low-to-moderate income Americans may have substantial demand for prize-linked savings, with a majority of survey participants expressing an interest in opening a prize-linked savings account. As predicted by theory and international experience, interest in prize-linked savings is greatest among people who do not have regular saving habits, who have little actual savings, who play lotteries extensively, and who are optimistic about their futures.