Is Saving a Game of Chance? No, but it can still be exciting. Here’s how the Filene Research Institute and a small group of credit unions are tackling Michigan’s economic woes, one deposit at a time.
The list of things responsible people are supposed to do seems manageable, but not very exciting. Floss after brushing. Eat five to seven servings of fruit and vegetables daily. Exercise six times a week. Save money for a rainy day. If only there were Wii games for dental hygiene and fiber intake, some of those New Year’s resolutions might last into February.
But as for saving, a team of financial innovators is making it all do-able and fun.
Led by the Filene Research Institute, Save to Win just launched at eight Michigan credit unions* in a pilot project testing consumer response to prize-linked savings.
New and existing credit union members compete for monthly and grand prizes by making deposits into one-year, federally-insured certificate accounts. At the end of the pilot, one fortunate credit union member will take home the $100,000 grand prize. Others will share in just under $40,000 in monthly cash prizes.
To encourage savings, account holders earn an entry with each $25 deposit, up to ten entries per month. One emergency withdrawal is allowed during the certificate’s term, but if the depositor closes the account, all entries disappear.
The Filene Research Institute is conducting the pilot in cooperation with the D2D Fund, a non-profit that helps financial institutions serve low-income families, the Michigan Credit Union League, and participating credit unions serving 273,795 members with divergent incomes. The Center for Financial Services Innovation provided a grant to help fund the project.
Michigan is a great testing ground. The state’s economy is even worse off than the rest of the country, increasing consumers’ need for savings. “It’s no secret that we are in an economic crisis, especially here in Michigan, and as an industry we have to help people with real solutions,” says David Adams, president and chief executive officer of the Michigan Credit Union League. “Save to Win aligns perfectly with the credit union mantra, people helping people, and this is what sets credit unions apart from other financial providers.”
Prize-linked savings products are relatively new. The first known program in the U.S. was introduced by Indiana-based Centra Credit Union in 2006, and less than a dozen similar programs exist at other credit unions throughout the country. Save to Win is unique for bringing several credit unions together to offer a larger cash prize, which should attract more attention and greater participation among the consumers who stand to benefit the most.
Why Americans Aren’t Saving
Annual savings rates in the U.S. dipped below zero in 2005 for the first time since the Great Depression. They have since risen slightly, but Americans still save far less than they should. For many consumers, the need to save gets short shrift when good intentions meet unexpected expenses. Incomes for a majority of households have not kept pace with increases in housing, energy, healthcare and education costs in recent decades, finds Harvard Professor Elizabeth Warren. But the dearth of savings is only partly explained by too little income and too many expenses.
“Perhaps the lack of savings in America can be attributed to the fact that savings is simply not fun, and the motivation to save has been stripped away,” observes Denise Gabel, chief innovation officer at the Filene Research Institute. “What kinds of motivation are financial institutions providing to consumers?” Interest is posted in nickels and dimes, and consumers often don’t perceive tangible rewards from saving money.
Lee Ann Mares, vice president of credit union growth solutions for the Michigan Credit Union League, notes the lack of innovation in savings products in a country that, as a whole, has abandoned the concept of traditional savings. “We have so many ways to reward you for spending and borrowing money, but fewer ways to reward you for saving your money. Regardless of income level, everyone needs to save again,” says Mares.
Yet the need for innovation may be more urgent for low-to-moderate-income households, considering the additional challenges they face. Hank Hubbard, chief executive officer for Communicating Arts Credit Union in the greater Detroit area, describes his credit union’s community as the “capital of the underserved.” “The neighborhoods that we focus on have seen traditional financial institutions close up and leave. The alternatives are payday lenders and liquor stores, which serve as check-cashing businesses. Those same stores that charge high check-cashing fees are also selling lottery tickets,” he says.
Prized-link savings programs use the thrill of the chance to win a meaningful prize to encourage the development of regular savings habits and the accumulation of wealth, especially among lower-income households.
The grand prize is the right hook for attracting consumers the credit union hopes to convert to savers, according to Heather Bade, vice president of marketing and human resources for Central Macomb Community Credit Union. “The members may look at it as a chance to win, but we’re going to use that opportunity to educate them about savings,” Bade says.
Sarah Doll, vice president of marketing for Option 1 Credit Union, says that her credit union has trained its employees to educate members about the product and the benefits of saving. “Our front line staff will talk to members who come in to cash their paychecks, but don’t put anything into their accounts,” says Doll. Staff members advise check-cashing members of the opportunity to compete for cash prizes by depositing at least $25 of their check proceeds into their accounts.
Karen Church, chief executive officer for ELGA Credit Union, is the only participant in the pilot with experience offering a prize-linked-savings product. Her credit union has offered a Sweepstakes Savings account since July 2007, reaching approximately 2,600 members with nearly $1 million in total deposits.
“Our number one objective is to help households build savings and assets,” Church says. “Low-to-moderate-income households were the original target, and the bulk of accounts are from those households. What we have found, though, is that it excites different income groups.”
A Collaboration of Innovators
The Filene Research Institute initially developed the idea for the project via an innovation team known as i3, which stands for ideas, innovation, and implementation. i3 is composed of credit union executives who volunteer for two-year terms as ambassadors for change and innovation in the financial services industry. Their prize-linked savings work was based on research from Harvard Business School professor Dr. Peter Tufano, who is also a Filene Research Fellow and founder of the D2D Fund.
In early 2008, the Filene Research Institute and the D2D Fund jointly applied for a grant from the Center for Financial Services Innovation (CFSI), a non-profit affiliate to Shore Bank Corporation, the nation’s first and leading community development bank, according to Sarah Gordon, non-profit relationship manager. “We had 133 proposals, and we narrowed it to 4, including the D2D/Filene proposal, in a very competitive process. The prize-linked savings pilot was one of the most exciting things we saw in the pool,” recalls Gordon.
CFSI’s interest in the project stems from its desire to find solutions within the financial services industry to help under-banked consumers save and build assets. Gordon notes, “One of the biggest tests that remains to be seen about prize-linked savings – combining the concept of savings with the thrill of winning a big prize – is whether it will inspire non-savers to start saving.”
From Wishful Thinking to Real Rewards
Prize-linked savings products may play an important role in supporting savings for lower income households because these consumers are more likely to use gambling as an investment strategy. “Some survey results show that low-income American families believe that they are more likely to build wealth by playing the lottery than by traditional saving,” explains Nick Maynard, director of innovation and new product development for the D2D Fund.
Americans spent $91 billion on legal gambling in 2006, the most recent year for which statistics are available, including $25 billion on lottery tickets. Lower income households spent disproportionately more on lottery tickets than higher income households and also spent a larger share of their income on lotteries, according to Maynard.
Dr. Tufano has studied extensively the innovations that encourage personal savings and published several research articles on the subject. In researching prize-linked savings programs, he’s observed how the appeal of gambling can be channeled into a desire to accumulate savings. People often overestimate their chances in low-probability events, Dr. Tufano says, which explains why playing the lottery has become a popular, yet ineffective, investment strategy. In all probability, money spent on lottery tickets will be entirely lost. With Save to Win, funds remain intact, federally insured, and earning interest, even if the depositor fails to win a prize.
“We see an opportunity to provide a savings account offering the fun, excitement and suspense that games of chance provide, but without the risk of losing principal,” Gabel says. Michigan supports a thriving gaming industry and its per capita spending on lottery tickets runs about $233 a year. Assuming that low-income households are exceeding that average in lottery ticket purchases, they could redirect several hundred dollars per year into savings.
Lauren Vance, marketing manager for Christian Financial Credit Union, says the beauty of the prize-linked product is that there are no losers. “In the end, everyone who participates leaves with an established savings account, which means they will all gain something from this experience that they did not come in with.”
Beyond Michigan
The Filene team established two major objectives for the pilot. First, to confirm that prize-linked savings can spur savings by non-savers and the under-banked, and, second, to prepare for delivery of a prize-linked savings program on a larger scale throughout the credit union industry. If the pilot is successful, future plans include expanding the program in Michigan, and taking the prize-linked product innovations to other states.
Until then, one lucky Michigan saver will hit a legitimate jackpot without buying a single lottery ticket.
*Participating credit unions include Central Macomb Community Credit Union, Christian Financial Credit Union, E&A Credit Union, ELGA Credit Union, Communicating Arts Credit Union, Frankenmuth Credit Union, NuUnion Credit Union, and Option1 Credit Union.
Comments
3
The Savings Lottery Account or Prize Linked Savings account is old hat with banks in the Middle East.
Please go a google search and you will find a plethora of such savings offerings viz. NBB, Bahrain, Al Ahli Bank, Qatar, bankMuscat, Oman, Mashreq Bank, Oman, et al.
This innovation has been copied from these regions and introduced in the U.S.
Regards, Kevin + 974 6873297
Link to this comment
Kevin,
Thank you for your post.
You’re right about the number of countries outside the U.S. who offer similiar products. See paper by Tufano, Maynard, and De Neve here.
What’s very unique about this initiative is the collaboration among multiple organizations driving two things: 1) more help to consumers and 2) the ability to offer a larger grand prize.
Today, it’s all about helping families save—and have some fun along the way.
Link to this comment
Kevin, thanks for the nice post.
Link to this comment