The owner of an auto dealership in what she calls the “real world,” Sen. Elaine Bowers said she has noticed a change in Kansas residents’ personal finances.
“We’ve been in business since 1988 and things have changed since then,” said Bowers, R-Concordia. “People just don’t have disposable income anymore or, in many cases, a savings account.”
Bowers and two other Kansas state senators think that allowing financial institutions to offer what are known as “prize-linked savings accounts” could be an incentive to push Kansans to save more of their money.
Already legal in 16 other states, prize-linked accounts offer raffle-like winnings to a certain number of depositors during a certain time period. Depending on how a program is set up, random winners could receive a few hundred dollars, or even a few thousand, while not risking any of their principal deposit.
The Kansas Senate on Tuesday voted 40-0 to pass a bill that allows for the promotions. The legislation will now move along to the House.
Sen. Rick Wilborn, R-McPherson, and Senate Majority Leader Terry Bruce, R-Hutchinson, co-sponsored the bill with Bowers.
“This is an intriguing way to try to entice people to save,” Bowers said. “In the early years of our business, a down payment for buying a vehicle was important, and more people had savings accounts, but not so much now.”
What, why and how
As the recent national frenzy over a Powerball jackpot that grew north of $1 billion illustrated, prizes and lotteries are popular in the U.S.
Prize-linked accounts, however, are less about making people wealthy and more about getting them to put something away regularly, said Solana Rice of the Corporation for Enterprise Development, a national nonprofit organization.
“About 44 percent of U.S. households don’t have enough savings to cover three months of expenses should they lose their income,” Rice said. “Millions of families are living in liquid asset poverty, and what we’ve seen is that prize-linked savings accounts are a great way to help low-income people build savings.”
According to 2013 numbers provided by the corporation, 68 percent of Kansas households have a savings account, nearly identical to the national average. By comparison, only 49 percent of households in Mississippi and Arkansas have a savings account.
About 44 percent of U.S. households don’t have enough savings to cover three months of expenses should they lose their income
Solana Rice, Corporation for Enterprise Development
Michigan, which introduced the first prize-linked account program in the country in 2009, saw account balances of “financially vulnerable” depositors increase on average by 20 percent after the first year, according to the corporation.
While hitting the Powerball could potentially set a family up for generations, winning isn’t realistic, despite the popularity of big lottery games.
With a prize-linked account, a depositor could win perhaps $1,000 – or any number of other prizes as deemed by the institution – in a regular drawing, but wouldn’t lose anything if they didn’t hit the jackpot.
Exactly how the raffles would be set up in Kansas remains to be seen. The current legislation would leave that up to individual banks and credit unions, and would call on the state bank commissioner and credit union administrator to set the rules, while following some general guidelines under state law.
Mid American Credit Union President Jim Holt said his institution is interested in potentially starting such a program, if and when it becomes legal to do so.
“We would participate, as long as it worked for our members,” Holt said. “I think this type of account has good potential for motivating some to start and maintain a savings account.”
Holt said that he would envision a program where a certain percentage of earned interest on an account would go to fund the prize, though prizes can also be funded by the institution as part of its marketing budget.
A gimmick, or a win-win?
Bruce, of Hutchinson, said the bill is a “common sense” piece of legislation. The senator added that millions have been saved in prize-linked accounts since a federal law – pushed in the U.S. Senate by Kansas Republican Sen. Jerry Moran – was changed in 2014.
The American Savings Promotion Act let banks participate in such accounts, assuming state law allows. Before the federal law change, credit unions could have a prize-linked program, but only in states that permitted it.
“These are not gimmicks – it’s a win-win for those who participate,” Bruce said. “Sen. Moran led the passage of legislation abolishing the federal ban on these types of promotions, and I am happy to push for passage of this legislation in Kansas.”
These are not gimmicks – it’s a win-win for those who participate
Sen. Terry Bruce, R-Hutchinson
While financial institutions would clearly benefit from enhanced deposits, Moran said the idea is geared toward helping Americans financially.
“It is our responsibility to pass on the American dream to the next generation,” said Moran in an email. “Economic opportunity and mobility are important aspects of that dream and both benefit from personal savings.”
Representatives from several area banks – including Emprise, Equity, Fidelity, UMB and Andover State Bank – said their institutions either weren’t likely to engage in a prize-linked program or had no comment on the legislation.
The Kansas Bankers Association and Heartland Credit Union Association – the joint Kansas and Missouri trade organization – both lobbied in favor of the bill in Topeka, Bruce said.
Darren Werth, a spokesman for Hutchinson-based Heartland Credit Union, said a prize-linked program in Kansas could potentially be set up through a trade organization – like in Minnesota – which could sweeten the pot.
“We’ve seen plans run from the association level, which could mean a much bigger prize than, say, we could put forth,” Werth said. “Each institution could also do their own prize within their member base. There are a lot of different ways to go.”
Could the lottery suffer?
Assuming the Senate bill – or a similar version – becomes law, one question would be whether state lottery proceeds would suffer.
In 1988, the same year that Bowers and her husband started their dealership, the Kansas Lottery sold nearly $66 million in tickets with $11.3 million going to the state, according to state records.
For fiscal year 2015, that number ballooned to $250 million in net sales with a record $75 million going back to the state.
Timothy Flacke, executive director of Doorways to Dreams Fund, an East Coast nonprofit organization that advocates for financially vulnerable Americans, said his organization has found no clear evidence that prize-linked programs have affected lottery sales.
Flacke added that prize-linked programs have been active overseas for years, including the United Kingdom.
“We haven’t heard any pushback from lotteries in the states where these products exist in the U.S.,” Flacke said. “We can assume that it isn’t affecting their profits significantly.
“In the United Kingdom, they have both a national (prize-linked savings) product and a national lottery, which have co-existed well for years.”
Bowers said she has heard from bankers in her area who are excited about the prospects of the legislation.
“Hopefully, this helps get people to save and, hopefully, they’re saving for a down payment on a house or a car,” Bowers said.
“If it’s not working, banks and credit unions don’t have to do it – it’s their choice,” she said.
States that allow prize-linked savings accounts
Arkansas, Connecticut, Illinois, Indiana, Maine, Maryland, Michigan, Minnesota, Nebraska, New Jersey, New York, North Carolina, Oregon, Rhode Island, Virginia and Washington.
States with pending legislation
Kansas, Missouri, Arizona, North Carolina, South Carolina, Pennsylvania and Massachusetts.
How are Kansas households at saving money?
68 percent have a savings account
23 percent with less than three months emergency savings
6 percent have no traditional checking or savings account
Source: Corporation for Enterprise Development (2013)