What Are Prize-Linked Savings Accounts? And Why's Kellogg So Keen on Them?

As the U.S. economy continues to recover from the Great Recession, funders are looking for ways to support good financial habits like saving money. One interesting effort along these lines is the Kellogg Foundation's multi-year investment in prize-linked savings accounts through D2D.

Since 2010, the Kellogg Foundation has been providing support to Boston-based D2D for work on prize-linked savings models as a way to help families build financial stability. With its most recent grant, Kellogg is doubling down on its last investment in this innovative financial model and adding national geographic focus to the effort. This new support of $700,000 is for three years of work on the issue.

But just what are prize-linked accounts? And what do they have to do with savings? As we all know, saving money is the foundation of any sound financial plan. But people in America tend not to do it, and the lower you go the income scale, the less people tend to save.

So what's one way to encourage saving? Hmmm, how about... gambling!

Okay, it's not called gambling in this case, but that the idea behind "prize-linked savings." These accounts work just like regular savings accounts, except that rather than accruing interest, you earn chances to win large amounts of prize money. How does the bank do this? The bank takes all of the money it would normally pay in interest and pools it, then raffles it off randomly to account holders. Most programs are set up so that the more you save, the more "raffle tickets" you get, enhancing your chances of winning.

These accounts are not widely available in the U.S. yet, but in other parts of the world, they have shown success. A study of a South African bank demonstrated that people reduced their use of real-life gambling in favor of putting money in the prize-linked accounts, and bank employees who opened prize-linked accounts increased their savings by a whopping 38 percent. Furthermore, the "buzz" around a winning account at a bank appears to drive lots of people to the decision to open an account of their own, leading to more savings in the community.

Careful regulation of these accounts is important, of course, so that banks don't get into any unethical payout schemes. And the lack of guaranteed payout of interest is another concern, since those who are cursed by bad luck may feel like they are getting nowhere. But if prize-linked accounts help people to develop saving skills, they are providing a valuable service to the community. And they are making saving into something less dreary and more fun.