What Is a Prize-Linked Savings Account?

Recently, voters in Texas approved a constitutional amendment that will help citizens in a novel way: Prize-linked savings accounts. Let’s take a look at what these are, why they are good for consumers, and why you should demand them from your own state legislature.

What is a Prize-Linked Savings account?

Prize-linked savings accounts are bank accounts that have no – or close to no – interest rate on the money held within the account. Instead of receiving a pittance for keeping money with an institution and allowing it to use your money for loans, people who hold these accounts are entered into a no-lose lottery.

Essentially, the bank makes money off loaning account money and receiving interest on the loans. Rather than paying out 0.005% to the account holders on the sums they have, it pools the interest it would normally pay out to many people and awards it to a small number of winners once a month. If an account holder does not win, he or she does not lose any money. The more money held in an account also generally translates into a higher chance of winning. If each chance to win requires $25 in your account, you’d want to have as much in there to maximize your chances of winning a big(ger) prize.

In short, account holders ditch the five cents a month they earned in a traditional account and are automatically entered into a lottery which literally has no risk attached. Texas is just the most recent state to allow something like this.

Why this is a good thing

America has a savings problem. Generally speaking, our countrymen and women do not save money at all. However, we do love to play the lottery. State lotteries rake in massive amounts of cash. Tragically, those who cannot afford to figuratively throw away money are the ones spending the most on this. They are spending money and receiving nothing.

In an effort to help Americans save more, prize-linked savings accounts could offer the answer we are looking for. They are not only good for consumers, but also banks, the government, and really the economy as a whole.

Think about it this way: we already are not saving enough and much of our population is throwing money away. Even those of us who are saving money lose more of it from inflation than we gain in accrued interest. If we are going to i) throw money away and ii) lose money to inflation anyway in the current system, shouldn’t we be exploring opportunities like prize-linked savings accounts? I think they make a ton of sense. Who knows, maybe the prize payouts could even be in Bitcoin, if a bank were forward-thinking enough (more likely Ripple, considering its partnerships).

If it’s so great, then why isn’t it offered?

Technically, it’s illegal in most states

Apart from Texas and Michigan, these sorts of bank accounts are seen as lotteries, which infringe on the rights of states to have a monopoly on legal gambling. However, the recent Texas amendment shows that it can be done. Citizens’ voices can be heard, if they are persistent. I am excited to see if this decision makes waves in other parts of the country.

We all need to do a better job of saving, and prize-linked savings accounts may offer a fun way of encouraging us to do just that.

To listen to a good podcast on this topic, check out this Freakonomics podcast from back in the day.