Banking on luck: are prize-linked bank accounts the perfect product for non-savers?
If you needed $2,000 in a week, would you have enough savings? This scenario could easily become reality. For example, an emergency ambulance or a family’s flights, say for a funeral, could cost more.
Yet according to the BT Financial Health Index, about a third of Australian households have no savings. This is an age-old problem – under half of Australian households surveyed in 2003 could access $2,000 from personal savings in a week. Now, with record low interest rates and a gradual lift in consumer spending, the incentive to save is arguably lower than ever. It may not surprise you that in a country where a third of households are taking their chances with emergency finances, we are the world’s biggest gamblers. Over 80% of Australian adults gamble and the average household spends $785 a year on lottery tickets.
So, why don’t we, like the US, UK, Mexico and many other countries, combine our love of gambling with our need for saving? Specifically, through lottery-style bank accounts, dubbed ‘prize-linked savings accounts’.
Lottery-style accounts, savings accounts that offer the chance of a cash prize rather than interest, are not a new phenomenon in Australia. In 2010, the Bank of Queensland offered a “Save to Win” Account, where account holders would forego a 3.5% annual interest rate for the chance to win up to $30,000 each month. A minimum deposit of $250 was required, with each additional dollar deposited earning a ticket in the lottery. Despite hundreds, if not thousands, of new customers, an anti-gambling media and publicity backlash against the BoQ led to the account’s demise after two years. Yet other countries have been successfully running such schemes for decades. German banks introduced lottery-style accounts in 1952 and the British Government has offered ‘Premium Bonds’, bonds with the chance to win £1 million a month, since 1956. Whilst such accounts often provide a much lower return than your average account, they also offer an incentive to save money to those who otherwise wouldn’t; money they could need for an emergency.
While using gambling as an incentive to save money may seem paradoxical, it could be a creative solution; those who spend the most on lotteries are often the ones who save least. One study found that Californian households making $10,000 spent six times the proportion of income on lottery tickets as households making $60,000 a year. Likewise, in Australia, the lowest-income households consumed three times the proportion of their net income compared to the highest-income households in 2013. The households that depend most on lotteries are the households with no savings.
This begs the question: why would someone participate in a lottery-style bank account when the return is lower than for a normal interest-accruing account? The most common and understandable theory is that the ‘utility’ or happiness gained from the chance, however small, of winning $20,000 or £1 million in a lottery, for many, outweighs the attraction of a few dollars a month a fixed interest account could earn. One study found this phenomenon, dubbed the ‘desperation hypothesis’ – the idea that many low-income individuals view the lottery as the only way to escape poverty – to be the strongest incentive to play. This is in line with the inverse correlation between income and lottery participation rates. It could also be that many customers don’t understand the ‘opportunity cost’ of such an account. They might believe that such lottery tickets are ‘free’ as their principal savings remain untouched, forgetting that the cost of such tickets comes in the form of foregone interest on their savings. Lastly, as the actual probabilities of winning are never published, customers can never properly calculate their expected payoffs. Such customers instead focus on the ‘visibility’ of winners, that is, the frequency with which they hear about people winning the lottery, to calculate their expected odds. Lotteries and the banks that offer them use this to great effect, heavily publicizing the stories of winners to inflate customers’ perceived chances of winning, and thereby increasing their expected payoffs. Regardless of why they choose them, the evidence clearly shows that such accounts are very attractive to certain investors, many of whom would probably never otherwise save.
Regardless of whether such accounts are effective at increasing savings rates, this raises a moral question: is it right to incentivise saving through gambling? BoQ’s ‘Save to Win’ account was shut down not due to a lack of popularity but a media and public backlash against ‘promoting gambling’. I believe that if, as previous cases suggest, such accounts promote saving by current ‘non-savers’, then the peace of mind and security of a rainy day fund, despite a lack of interest earnt, will increase their overall welfare. Furthermore, such customers may substitute their bank’s lottery for one they already participate in, thus only maintaining or possibly even reducing their expenditure on lotteries. So, despite the public backlash and moral arguments that pressured a bank to shut down thousands of customers’ accounts, I fall on the side of the Bank of Queensland. Whilst gambling may be as addictive and destructive as smoking and illicit drugs, I have yet to read a report about the terrible effects of ‘savings addictions’, about families torn apart by irresponsibly high savings account balances and about a nation where most households bear the burden of an emergency savings fund. If that occurs, I’ll be ready for the pitchforks.
Image: ‘1963 Indian premium bond’ by Government of India, https://commons.wikimedia.org/wiki/File:India_1963_Premium_Prize_Bond_front_and_back.jpg. Licence at https://creativecommons.org/licenses/publicdomain/.