With financial institutions engaged in a battle for deposits, a growing number of credit unions are adding prize-linked savings programs to their arsenal as a way to boost liquidity.
The programs require participating consumers to make a minimum deposit into a savings vehicle – either a certificate or a savings account, depending on the program and institution – with each deposit counting as an entry toward a prize funded by the credit union. Winnings range from $25 to more than $1,000. Since these initiatives cost consumers money (though there is no potential for loss) and include a prize, they generally need some sort of legislative approval since they could be considered similar to a lottery.
“While it is not being used universally in credit union land as a market differentiator, [prize-linked savings] is certainly a growing strategic consideration for credit unions in need of more core deposits,” noted Dennis Dollar, a credit union consultant and former chairman of the National Credit Union Administration.
Credit unions in many states have offered various prize-linked savings initiatives for years, and the product was generally seen as a method to gamify savings and improve members’ financial habits. But as credit unions look for additional methods to fund growth – including
But its effectiveness may be limited.
“It’s not going to solve your liquidity issues but it helps. I think credit unions are certainly looking at this as one part of an overall strategy,” said Tara Krejcarek, VP of strategic partnerships at the Wisconsin Credit Union League, which created the prize-linked savings program, Saver’s Sweepstakes,
More institutions will launch the program later this year, but so far members from 32 Wisconsin CUs – about 25% of all credit unions in the state – have saved more than $1.6 million since the program began. Those institutions have awarded more than $37,000 to 269 winners.
According to CU Solutions Group, a credit union service organization which administers Save to Win, the most popular such program, 32 states currently allow some form of prize-linked savings, while a handful of other states have bills in the works to do so. Legislation to allow it in Pennsylvania recently passed the state’s House of Representatives, but must still be considered by the Senate, while former California Gov. Jerry Brown and former Ohio Gov. John Kasich signed bills permitting it in those states shortly before their terms ended.
In Indiana, 19 credit unions offer Save to Win, up from about a dozen when the program launched in early 2016. Michael Hostetler, AVP of marketing at Crane Credit Union in Franklin, Ind., said his CU has garnered more than $536,000 in deposits from 445 accounts since then. On top of that, the number of accounts last year rose by nearly 42%, from 274 at the end of 2017 to 389 at the end of 2018, with total balances rising by a little more than 11%.
For 2019, total accounts have already risen by 14%, with balances up more than nearly 24%.
“If you compare that against the rate of growth with our other deposit products, it stands up there,” said Hostetler. “We’re not talking about a large dollar amount of deposits, but looking at percentage growth it continues to be pretty strong.”
Crane entered the indirect lending space a couple years ago, noted Hostetler, and while the program has been successful, “we quickly found ourselves not over-lent but certainly lending more money than we were accustomed to. In the last two years we’ve had to shift our focus to saying, ‘OK, we really need to do our due diligence to keep getting deposits in the door for consistent growth.’”
That led not just to introducing a high-yield checking account in addition to prize-linked savings, but even converting to a state charter in order to make the credit union a preferred institution for public funds deposits – a move Hostetler said has paid off well. While Save to Win doesn’t bring in high volumes of deposits, it does help with the bigger picture and engages members “who need extra motivation to keep saving.”
Costs and benefits
But these programs are not for every credit union. Lynette McClusky, director of marketing at Heritage Federal Credit Union in Newburgh, Ind., said her credit union dropped its prize-linked savings offering in March due to lack of participation from the membership.
The credit union launched the program in mid-2016, around the same time it went live with a round-up offering.
“People chose the kind of program they wanted to participate in, and [the round-up program] tended to be the one they gravitated toward,” she said.
That program, added McClusky, was “a sure thing – they saw their efforts rewarded immediately.” Members didn’t “really [look] at [the prize-linked savings] as doing something that on a daily basis was going to help them become better savers or have more in their accounts as a result.”
The credit union is taking a more traditional approach to attracting deposits these days, including a heavy focus on certificates.
There are costs associated with the program, since participating CUs market it and fund the prize pools themselves, and Krejcarek said those costs may be one reason more institutions haven’t latched on sooner. No one CU Journal interviewed for this story had done an analysis on whether cost of funds for prize-linked savings was higher or lower than other deposit-gathering strategies.
With Ohio now permitting these programs, the league there is in the process of launching prize-linked savings, which it expects to do sometime next year. Miriah Lee, regulatory counsel at the league, said the push from CUs in the state came not as a result of needing additional deposit strategies but because the need for financial literacy is so high.
Still, Dollar suggested these programs could see ultimately increased participation not because people want to save, but as a result of shifts in consumers’ expectations for financial products.
“Rewards have worked with credit cards historically and with checking accounts over the past decade, so it is not out of the realm of reason to see this trend moving into the deposit account market as a potential differentiator for credit unions,” he said.
