Prize-linked savings the latest front in Iowa's credit union-bank battle

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Iowa bankers are opposing a bill in the state legislature that would legalize prize-linked savings accounts.

A prize-linked savings account works by entering depositors into a lottery or raffle for a cash prize when they save money. The basic idea is to tap into the thrill some people get out of gambling, but for a more constructive end. Because prize-linked savings are often considered a type of gambling, states generally need to pass a law to allow financial institutions to offer them.

But the Iowa Bankers Association says it’s a bid by the state’s credit unions to capture wealthier depositors to the detriment of the underserved population they are supposed to cater to. Prize-linked savings accounts favor higher balances and therefore put low-income Iowans at a disadvantage, said Sharon Presnall, senior vice president of government relations for the bankers’ group.

The PSL battle is the latest front in the ongoing battle between bankers and credit unions in Iowa. In 2018 bankers in the Hawkeye State attempted to move forward legislation that would have taxed CUs there, but the measure was ultimately defeated following a credit union rally in front of the statehouse that drew more than 700 advocates for the industry. After that, a member of the state’s Board of Regents successfully pushed to require credit unions affiliated with two universities to rebrand, despite those institutions having no direct connection to those schools.

Industry watchers have suggested the Iowa playbook, despite its limited success rate, could be a model for banking groups in other states.

The Iowa Credit Union League has pushed back on the bankers’ arguments regarding prize-linked savings.

Justin Hupfer, the group’s vice president for government affairs, countered that most popular prize-linked savings programs cap the number of monthly entries allowed and that the prizes are often $25 or $50 per month.

“Banks could do the same thing for their customers if they chose to, as well,” he told American Banker, Credit Union Journal’s sister publication.

Iowa bankers’ objections largely boil down to that perennial complaint bankers make about credit unions.

“That’s going to be a prize for one person, not the whole membership,” Presnall said. “Is that what that tax exemption meant for?"

Roughly two-thirds of states currently allow prize-linked savings, including Hawaii and Utah, where credit unions launched those states’ first PSL programs earlier this year, while Ohio debuted a similar offering in 2019.

As reported, some institutions have put forward prize-linked savings programs to help bolster deposits, but analysts say those programs may not draw in enough funding to provide a sizable boost to liquidity, and are best launched in conjunction with other deposit-gathering strategies.

Aaron Passman contributed to this report.

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Deposits Growth strategies Law and regulation Iowa