I want to flag this story by Anne Stuhldreher because it’s a pretty great financial innovation. From the Washington Post, Credit unions launch a savings lottery, and everyone hits the jackpot (my bold):
…But eight Michigan credit unions, including one in Highland Park, have helped build people’s savings by doing something radical: acting less like financial institutions and more like the lottery…
Some estimates suggest that more than 80 percent of lottery revenue comes from households making less than $50,000 a year — the very people who have the hardest time saving….
In January 2009, the credit unions declared that for every $25 someone saved, the saver would earn an entry into a drawing for a $100,000 prize one year later. At the same time, they gave out monthly prizes of up to $100…
Save to Win produced stunning results. More than 11,000 Michigan residents opened accounts through the contest, saving $8.6 million throughout 2009…
More than half of the participants said they hadn’t saved regularly before opening their accounts. About 60 percent admitted they played the lottery during the past six months. And 44 percent earned less than $40,000.
Highland Park’s Communicating Arts Credit Union led the charge. It had tried a lot of things to get its members to save, including offering a CD with a whopping 10 percent interest rate, but nothing worked, according to chief executive Hank Hubbard. But 15 percent of its members opened Save to Win accounts, the highest rate among the eight credit unions. “We were very surprised,” Hubbard said. “It’s a breathtaking penetration rate, especially for a new product and one focused on saving, since that’s something our members don’t do.”
Here’s a representative site of a Save to Win.
Remember, following arguments like the ones in Karelis’ Persistence of Poverty, it’s perfectly reasonable to think that poor people have an increasing marginal utility in cash – that, at the margin, having a tenth dollar is worth more than having the first dollar. So with that in mind, it can be perfectly rational for poor people to not save the first dollar and risk it on trying to get the tenth dollar with a lottery ticket.
So why not incorporate it into a savings account? Take a small interest rate cut, say a tenth of a percent, from each savings account, and then randomly give that to a few members, conditional on them saving money. I think it’s brilliant, and it doesn’t surprise me that it’s started with credit unions, where some of the most consumer friendly innovation is being tried. Where most commercial banks are looking to payday lenders for innovation, credit unions appear to be looking at cutting edge behavioral “nudge” style work for innovations to help people build their financial lives. How cool is that?
Might speed things up in the line to pay for gas at the convenience store as people put that money into savings instead of state-sponsored gambling.
But woe to the states dependent on that revenue . . . I would expect to see some push back from state gov. if something like this caught on big.
My forehead is proverbially red from the smacking it took when I read this. What a brilliant idea!
And as for the loss in state revenue due to lottery shrinkage, that’s only a good thing. We’re not exactly in need of a more regressive tax structure, so anything that can steer those lower and middle class dollars away from lottery tickets and toward something that’s beneficial to society is a double win.
The UK version of government savings bonds works like this too.
Savings/lottery mixed instruments have existed and been popular in Brazil since the mid-90s.
This has existing in Indonesia and SE Asian banks for quite a while as well.
Maybe this is too obvious, but you didn’t spell it out. I assume that these lotteries have an expectation of zero (not negative like state lotteries). So is another benefit that you could entice people away from the state lotteries simply by setting up a competing lottery with better expectation?
Mr. Kwak–You mean they’re not buying a ticket, they purchase the ticket buy saving and the money is STILL THEIR MONEY, yes?? Ya, some people would say it’s small but that’s actually a great point. Some people do lottery for the “buzz” though, like getting the sweat beads late in a close football game you bet on. Some people won’t get that from the Credit Union Lottery. And there are twisted people who like that feeling, they get a buzz EACH AND EVERY TIME that lottery number is read. I don’t think I am one of those people, but I do get a “buzz” gambling when I feel the probabilities are in my favor. Our credit union has a type of “raffle” for shareholders’ meetings. But you just show up, (no PURCHASED ticket obviously, just a number) and they give multiple gifts. Your odds are high and the big prize is like a $500 savings bond or something.
P.S. On a separate topic, which will have some people questioning my sanity, I just want to say Sandra Oh is like incredibly hot in my opinion and my favorite movie of all time is “Sideways”. Now that I’ve convinced you all I’m a complete loony, back to my usual business.
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