Senate Passes Bill To Allow Banks To Offer Prize-Linked Savings Accounts

The Senate recently passed a bill that will allow banks to offer prize-linked savings accounts. These accounts offer a chance to win money or a prize based on deposit activity. The tradeoff is that these accounts pay less interest. As an example, instead of earning 0.50% on a savings account, the customer may earn 0%, but he or she would get a chance to win $1,000.

The bill, called the American Savings Promotion Act, was introduced in October 2013 by U.S. Senators Jerry Moran (R-Kan.) and Sherrod Brown (D-Ohio). It passed the House in September. In both the House and the Senate, the bill received broad bipartisan support so the President is expected to sign it.

The main intent of prize-linked savings accounts is to encourage non-savers to save. In short, the chance of winning a prize is much more of an incentive to save for many people than earning a low interest rate. According to the text of the bill:

prize-linked savings products have been shown to successfully attract non-savers, the asset poor, and low-to-moderate income groups, providing individuals with a new tool to build personal savings

This bill, if it becomes law, only amends federal laws to allow banks to offer prize-linked savings accounts (also called savings promotion raffles). States would also have to ensure state laws allow these accounts. At that time, banks would then be able to offer these accounts to customers.

Apparently the federal laws didn’t stop Michigan from allowing its credit unions to offering prized-link savings account. For the last couple of years, several Michigan credit unions have joined together in a program called Save to Win. Here’s an excerpt of the Michigan Credit Union League’s description of the program:

A provision in the Michigan Credit Union Act allows state and federal-chartered credit unions to offer prize-linked saving raffles to their members in which a savings deposit can constitute entries into a raffle drawing. Through 2013, more than 12,500 Michigan credit union members saved $33 million with the Save to Win program.

My Take

I don’t think there are any savers who would choose prize-linked savings accounts that pay little or no interest over regular savings accounts that pay higher interest rates. These prize-linked savings accounts may help some non-savers if they’re motivated to replace lottery spending and other wasteful spending with deposits into these accounts.

Most savers would prefer banks and credit unions work on offering higher interest rates rather than running these prized-link savings accounts.

Also, I think savers would like to see our representatives work on bills that would actually help savers. Unfortunately, a bill that can actually help savers would probably not get broad bipartisan support. For example, bills have been introduced to remove the Fed’s dual mandate of ensuring price stability and maximum employment. The dual mandate would be changed to a single mandate of ensuring price stability. This could make it easier for the Fed to hike rates. However, several economists and lawmakers insist that low interest rates help reduce the unemployment rate. They’re dead set against dropping the dual mandate.

Another type of bill that could help savers involves changes in the tax code. For example, during his Presidential campaign, Mitt Romney, advocated a plan that would eliminate income tax on a certain amount of interest income.

Four years ago I suggested other tax policy changes that could help savers. Unlike the American Savings Promotion Act, these kinds of policy changes affect tax revenue for the government and income tax distribution. These are very partisan issues.

Can you think of any laws that Congress could pass that could actually help savers and receive bipartisan support?