You save, you get a chance to win a prize
Iowa’s banking and credit union industries are at odds over legislation that would allow financial institutions to offer raffle prizes to entice people to open a savings account.
The idea is to encourage savings, not rolling the dice on a game of chance, said Justin Hupfer, vice president of governmental affairs for the Iowa Credit Union League, which is promoting the legislation.
A similar program in Michigan has resulted in an increase in people who open savings accounts and the amount of money they save. The Michigan program also has paid two $100,000 grand prizes to credit union members who participate in its Save to Win program.
However, establishing a link, even a thin one, between gambling and savings is drawing some criticism in Iowa.
“In principle, it’s absolutely asinine,” said Tom Coates, director of Consumer Credit of Des Moines and a fervent opponent of gambling. “I think they have really missed the boat – to point them back to any kind of game of chance; it’s the antithesis to principles that credit unions were founded under.”
For now, the Iowa program needs legislative approval before it gains any structure. Participating credit unions will be allowed to set up their programs as they see fit, Hupfer said.
The Michigan program is 2 years old. The number of participating credit unions increased to 36 in 2010 from eight in 2009, the first year of the program. The number of savings accounts that have been opened by people who pay $25 for a certificate of deposit has increased to 16,833 from 11,666 and the amount saved has more than tripled to $28.1 million.
Michigan relied on a Boston-area nonprofit organization, the Doorways to Dreams (D2D) Fund, to structure its savings program. The Massachusetts organization was established in 2000, and its mission centers on research by a Harvard University professor whose initial focus was fostering savings programs among people with low incomes.
Under the Michigan program, the $25 certificate of deposit also purchases a raffle ticket. Winnings come from funds pooled by participating credit unions and seed money from Doorways to Dreams, said Joanna Smith-Ramani, the organization’s director of strategy.
Deposits are not used to pay raffle winnings, she said.
Customers can continue to increase the value of their certificates of deposit by making additional deposits, and there is a penalty if they withdraw the funds in less than one year. They continue to draw interest as long as the savings account remains open.
Smith-Ramani said the only connection to gambling is the purchase of the ticket when a savings account is opened.
“In gambling, you put your dollar in, and if you don’t win, you have nothing,” she said. “The concept here is that you take that psychology about winning – all people like to win – you take this concept and do something that you know you need to do but that you have not been motivated to do. Now, we’re going to give you a chance to win by doing something that you know you should do.”
Jean Trainor, president and CEO of Veridian Credit Union, is an advocate of the program, which she sees as a way to encourage saving among all income groups.
“A component of a successful financial future is some type of savings. Unfortunately in recent years, many people have not been saving,” Trainor said in an e-mail. “We feel the prize-linked savings program is a good vehicle to reach out to those that may not have a savings account or even a relationship with a financial institution.
“We may be able to reach someone who has a habit of buying lottery tickets but not a habit of saving. Our hope is that we could shift that behavior with this program. They would be eligible for a prize at the same time that they would be saving. Seems like a win-win.”
Trainor pointed out that Veridian currently offers other programs to encourage savings, including a starter and add-on certificate of deposit, and savings clubs for young people.
Smith-Ramani said such programs appear to be more popular with credit unions, which have a mandate as part of their nonprofit status to promote savings and financial literacy among low-income groups.
“The Michigan pilot is now in its third year; it isn’t a promotion for them,” she said. “It isn’t an effort to get customers in the door and then walk away from them. The long-term commitments are in the credit union industry.”
Smith-Ramani said the program provides a way to encourage savings without investing tax dollars in incentive programs. The program obviously provides financial institutions with a source for new customers, increased deposit levels they would bring to balance sheets, and an outlet for other financial products, such as mortgages.
John Sorensen, president and CEO of the Iowa Bankers Association, said his organization has registered as an opponent of the legislation, which has passed out of subcommittees in both the House of Representatives and the Senate.
“We don’t think mixing raffles in a savings situation is the best thing you want to do,” he said. “We educate people to make them better savers and to understand the risks in credit cards and student loans and making financial plans generally, but we aren’t sure that a raffle is the right direction to go for a customer incentive.”
Rhode Island, Maine and Maryland have passed legislation to enable similar programs and two states have pending legislation.