Credit unions employ unique savings tactic

November 29, 2010
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It’s one of the very few prize-linked savings programs in the nation, and it’s only offered in Michigan at 36 credit unions. The program, called Save to Win, seeks to encourage credit union members to sock some of their earnings away and also engage them in planning for their financial futures.

Michigan Credit Union League CEO Dave Adams said MCUL started Save to Win as a one-of-a-kind pilot program in 2009 with only eight credit unions, and in just a year, participation has multiplied to the three dozen that are taking part in it this year.

Here is how it works: Credit union members open a 12-month savings certificate to become eligible to win monthly prizes that range from $125 to $1,000, and they are also entered for a shot at the annual grand prize. Members need only deposit $25 to be eligible to win. Every $25 that members deposit gives them another chance to win; they can enter up to 10 times a month with a maximum monthly deposit of $250. Winners are chosen by drawings. Members keep the principal and interest they’ve earned from their certificates whether they win or not, regardless of how much or how little they deposit. So Save to Win means members have nothing to lose.

“More than 15,000 members so far have signed on to the program, and have nearly $19 million in deposits; $106,000 in prizes has been given out to 1,335 winners — and that’s not counting the grand prize, which will be drawn in January. It’s a $100,000 grand prize,” said Adams.

Adams also said the interest members earn on their certificates is above the market rate of similar offerings, especially when consideration is given to how little they have to invest to be part of the PLS program. “Most institutions won’t allow you to do a one-year CD for $25. It’s usually a much larger minimum. This is something that gives an above-market interest rate when you compare it to a passbook savings account that isn’t tied to a certificate,” he said.

The idea for the prize-linked savings program came from a variety of sources. Adams said one was the Filene Research Institute in Madison, Wis., which analyzes issues that affect the future of consumer finance and credit unions. Another was Doorways to Dreams in Roxbury, Mass. It tries to build financial assets for low-income families by developing and testing innovative products and programs. Also known as D2D, the organization has learned that such programs have been successful in meeting that goal.

A third source was Peter Tufano, Harvard Business School professor of financial management, who found that prize-linked savings programs have successfully motivated people to save in countries as far away as South Africa.

“They did some research and found that Michigan had a provision in its Lotto that allowed lotteries to be used for various purposes, including this one, and they approached us to see if we might want to experiment with it a bit,” said Adams of the encounter that took place in late 2008, a time when the big banks were on the verge of failing. “I think that there are one or two other states that allow it as well, but it’s a very rare thing.”

A grant got the pilot program running last year and the eight original participating credit unions made an investment to administer it and fund some of the cash awards.

“We told the credit unions that once the grant ran out in 2009, we wanted to expand this further. So we put up the $150,000 for the prizes. We did some work on the technology piece that enables the credit unions to sign people up and track business,” said Adams of MCUL and its CUcorp, a wholly owned subsidiary of MCUL that provides a host of services to its credit union members.

“So we set it up as a model where we would charge the credit unions a rather modest entry fee. We would cover the prize pool but they could supplement it with their own prizes, which most of them do. And beyond that we waived the participation fee in 2010, so really these credit unions can participate without having to fund the big prizes. They can fund smaller prizes themselves. Really, their only costs are the staff training and the work that goes into signing people up.

“I think over time what the model provides for is that the prizes will really be funded by the credit unions themselves because they will all contribute into a prize pool.”

AAC Credit Union, First General Credit Union, Grand Rapids Family Credit Union, Lake Trust Credit Union, Option 1 Credit Union and Portland Federal Credit Union are participating in Save to Win this year. All six serve Kent County.

Adams said he sees the prize-linked savings program growing over the next few years, partly because it appeals to people who buy lottery tickets, and partly because there are people who realize they need a push to set money aside. He said half of those participating this year admitted they weren’t savers, while 59 percent said they had purchased lottery tickets.

“It’s a novel idea. It encourages savings. A real key to it is it gives people what they want, which is a game of chance, and what they need, which is encouragement to save. It’s a fun way to motivate people to save. The real appeal of this to credit unions is credit unions are trying to help their members with their financial needs, but also with their financial planning. We all know that as a society we need to save more,” said Adams.

“From a macro-economic sense, our economy will do a lot better if individuals build up savings that can be spent later in the economy. When we go through a cycle like we’ve gone through, where people were not saving but were over-borrowing, there will eventually be a bust where there just isn’t consumption any longer. So programs that help provide people with incentives to save and prepare for the future is just what our economy needs.”

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