Put in $25, Get $10,000 Back. Your Bank Becomes a Casino

With interest rates barely above zero, the typical U.S. savings account has all the excitement of, well, waiting in line at the bank. But what if instead of marketing yet another CD or credit card, banks held raffles and gave millions away each month to savers? The local bank might feel less like the villain behind those big overdraft fees and more like a casino on the Vegas strip.

A bank in South Africa tried this in 2005. The First National Bank's Million-a-Month Account promised savers a chance to win 113 prizes a month, including a grand prize of 1 million South African rand (about U.S.$150,000 at the time). Within 18 months, the bank had more prize-eligible accounts than regular ones. These new customers, many of them poor, saved an extra 1 percent of their incomes, a recent study found, and boosted their overall saving 38 percent.

The only thing preventing a big bank from doing this in the U.S.: It's completely illegal. A bill in Congress -- which passed the U.S. House of Representatives on Sept. 16 -- would change the law. If it’s passed by the U.S. Senate in the next few months and signed by President Barack Obama, banks of all sizes could start tempting savers with "savings promotion raffles."

Prize-linked savings accounts in South Africa are illegal now, too. In 2008, the South African Supreme Court shut the bank promotion down after three years. It ruled that under South African law only the government may run a lottery. Meanwhile, the accounts are thriving in the U.K., New Zealand and Sweden.

In the U.S., federal law already lets credit unions offer prizes to savers, as long as states are okay with it. The Save-To-Win game, started in Michigan in 2009, is available at credit unions in four states. In Michigan, every $25 saved increases the chance that a customer could win dozens of monthly prizes worth up to $3,750, or six $10,000 grand prizes each year. So far, more than 50,000 people have saved more than $94 million through the game.

The fun of competing for prizes does get more people saving, the studies of the South African and Save-To-Win experiments suggest. And low-income people especially benefit from this extra cushion of cash. A quarter of Americans tell researcher they're certain they'd have no way to come up with $2,000 in the next month.

If the American Savings Promotion Act becomes law, Bank of America or Citibank won’t roll out nationwide Million-a-Month Accounts right away. Any raffles would need to comply with state laws, and some states are stricter than others. Maine, for example, won't let prizes of more than $1,000 be offered more than twice a year.

The hope is that a federal law could spur more states to loosen rules, says Timothy Flacke, executive director of the Doorway to Dreams Fund, a nonprofit that’s been pushing prize-linked savings as a way to encourage Americans to save more. Other supporters of the bill include three Senate co-sponsors: Democrats Sherrod Brown of Ohio and Elizabeth Warren of Massachusetts, and Republican Jerry Moran of Kansas.

Prizes at the bank could hurt the almost $70 billion in annual lottery sales, much of that from low-income people. State lotteries haven't organized against the bill, which passed the House without opposition. Still, passage isn't a sure thing in a gridlocked Congress. While private banks in other countries have found prize-linked savings accounts profitable, banking lobbyists in the U.S. aren't aggressively pushing for the bill. They're mostly concerned with fending off tighter regulations related to the 2010 Dodd-Frank Act.

A prize-linked savings account won't help raise incomes, and it won't lower the costs of health care or housing. But it may nudge Americans to pay just a little more attention to their savings, so that an unexpected expense doesn’t become a financial disaster. At the very least it could give some lucky savers the thrill of hitting the jackpot.

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