The Lottery Has Held Back a More Effective Type of Savings Account for Years

Nearly half of the population of the US doesn’t have enough savings to come up with $2,000 dollars in 30 days, and in 2015 the US spent over 70 billion dollars on the lottery.

While lotteries are good for raising state money, savings rates are even more critical (saved money doesn’t just sit around). Some groups have created a sexier alternative to traditional savings accounts (and their practically 0% interest rates), an alternate form of banking that leaves your principal alone and lumps together everyone’s interest. Occasionally, it pays out those lumps of interest to some lucky saver.

This basically trading a guarantee of tiny payments for a tiny chance of huge payments. It has been incredibly successful in enticing people to open savings accounts where it has been tried, but has been held back by government regulations. They were determined to be a form of lottery, which are often illegal for private organizations to organize. The states were in no rush to change that, either, given that competition to their own lotteries isn’t something they’re eager to allow.

Still, prize-linked savings accounts are starting to build steam despite the resistance, and legislation designed to make them easier to implement have been passing through legislatures across the US.


Lawsuits from government lotteries arguing that this is technically a form of lottery have blocked them in the US so far, despite success overseas. Not that any legislatures intentionally targeted this program, but it happens to run foul of lottery laws almost by accident. Consensus is building on it, though. A federal law was passed on the federal level on 2014 and some state legislatures have taken action to pave the way.
MAMA attracted more than a million new customers to Keip’s bank. Other banks in South Africa took note — and they complained to regulators. And then the Keip’s bank heard from someone else: the South African National Lottery.
So this preference for highly skewed payoffs or, you know, the kind of payoffs that are usually present in gambling or lottery products when combined with savings turned out to be tremendously effective around the world, but it was completely absent for legal reasons in the United States.
http://freakonomics.com/podcast/freakonomics-radio-who-could-say-no-to-a-no-lose-lottery/
http://freakonomics.com/podcast/freakonomics-radio-could-a-lottery-be-the-answer-to-americas-poor-savings-rate/

 

While prize-linked savings accounts were previously legal only at credit unions in a handful of states, federal legislation passed at the end of 2014 will make the practice legal for big banks and credit unions in any state that does not prohibit it.
[…]
The bill, which flew through both houses with rare bipartisan support, removed federal hurdles across several laws and will allow institutions to copy successful programs in Michigan, Nebraska, North Carolina and Washington. At least six other states have recently passed laws explicitly allowing similar programs.
http://money.cnn.com/2015/02/11/pf/prize-savings/index.html