WASHINGTON -- Banks have given away gift cards, frequent flier miles and even toasters to lure customers. Now, with the passage of legislation sponsored by Arkansas U.S. Rep. Tom Cotton, banks can also give away big cash prizes if state law allows it.
But the election loss of the state lawmaker who tried to create the cash program for credit unions in Arkansas means some in the banking industry are looking for another legislator to carry the mantle.
President Barack Obama signed The American Savings Promotion Act into law before Christmas. It removed federal regulations that kept banks and some other financial institutions from offering prize-linked savings accounts, in which people are entered into a lottery drawing for cash prizes based on how much money they place in a savings account, certificate of deposit or savings bond.
"Federal law here was holding our small hometown banks back from offering a very innovative product that's been helpful in American credit unions and overseas in countries that allow it," said Cotton, a Republican from Dardanelle. "A lot of small-town banks ... are going to be happy with the legislation."
U.S. Reps. Derek Kilmer, D-Wash., and Niki Tsongas, D-Mass., were also original co-sponsors of the bill. Kilmer said in a statement that the new law will help increase the number of Americans with personal savings accounts.
"By allowing more community financial institutions to offer prize-linked savings accounts, we can help folks be more financially prepared for what life can throw at them -- a lost job, a medical emergency or even a broken water heater," Kilmer said. "This law provides an innovative way to encourage savings, and people cannot lose. The worst thing that can happen is that folks save more money."
The prizes are used to encourage people who may not normally save money to put some aside each month, and supporters say it could help boost the number of Americans who build their own safety net. The U.S. aggregate personal savings rate, defined as the ratio of total savings to total after-tax income, was 4.4 percent in December, according to economic research by the Federal Reserve Bank of St. Louis.
"I think it'll be very good for small hometown banks -- it'll be very good for working families; it gives them a chance to win big prizes without losing any money, as might happen if say they play the lottery," Cotton said.
Credit unions were already allowed to offer the accounts if state law permits. One program, Save to Win, operates in credit unions in Michigan, Nebraska, North Carolina and Washington. Each time a person contributes $25 or more to a savings account, he is entered into a monthly drawing for a cash prize worth between $15 and $15,000.
Prize-linked accounts are also allowed at credit unions in Connecticut, Indiana, Maine, Maryland, New York and Rhode Island. Some states, such as Maine, limit prize amounts. Several foreign countries offer similar programs, either through banks or directly through the government.
Arkansas doesn't allow prize-linked accounts.
State Sen. Robert Thompson, D-Paragould, twice sponsored legislation to allow Arkansas credit unions to offer the accounts but dropped the bills when banking advocates objected that it wasn't fair to allow credit unions to offer the accounts when banks couldn't participate under federal law.
"It seemed to me to be a healthier way for people to scratch that itch of playing the lottery than simply paying money for a ticket," he said.
Thompson lost his re-election bid in November, and he said it's not clear if any other state lawmakers will file legislation to allow the accounts.
With the new federal law in place, legislation could be written that would allow both banks and credit unions to offer the prize-linked accounts.
"I hope the Legislature pursues it, because I became convinced that it was a good idea," Thompson said.
State Rep. Mary Broadaway, D-Paragould, who co-sponsored Thompson's legislation in 2013 and is returning next year, said she wasn't sure if she would bring it back.
Cotton, who will become a U.S. senator in 2015, said he doesn't know if a state lawmaker will take up the issue, but he plans to talk with the Arkansas Banking Association about it.
"Now that we have changed the federal law, I will certainly be encouraging my friends in the Legislature and making them aware of this change, [so] they know they can move forward in Arkansas with legislation," he said.
Southern Bancorp Community Partners, a nonprofit that works with rural banking company Southern Bancorp on building up rural areas, supported Thompson's legislative push, which the group's Public Policy and Communications Manager Meredith Covington called innovative.
"I think it's one really positive tool that banks can use to really focus on a lot of Arkansans, to help build wealth and build net worth, that's the whole reason Southern was interested from the beginning," Covington said Friday. "That's really the focus, to get more low- to moderate-income people to begin better saving practices. I don't think it's the cure-all for the savings dilemma we're in; I do think it's definitely one way to help us get there."
Without Thompson to lead the legislation, the group is still deciding what to do next, Covington said.
"We have not identified another person at this time to lead any kind of legislation on it," Covington said. "At this time we're not actively pursuing any enabling legislation from the state. ... That may change within the next couple months, but at this point in time, we do not have any contact with any potential sponsor for legislation."
Metro on 12/28/2014