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‘If you understand where people fail, you can do things to prevent them’: Can prize-linked savings help people save?

  • Yotta is bringing prize-linked savings to the US.
  • But a model where how much you win is determined by how much you can spend will have its obstacles.

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‘If you understand where people fail, you can do things to prevent them’: Can prize-linked savings help people save?

In 2018, Yahoo Finance released an article listing 35 things more likely to happen to you than winning the Powerball lottery. Being attacked by a shark and winning an Olympic Gold Metal were a couple of examples.

But despite all the information out there about how unlikely it is to win the lottery, people are still buying tickets. 

According to the most recent numbers from the U.S. Census Bureau, consumers spend on average $86 a month on lottery tickets -- over $1,000 a year.

Meanwhile, while overall U.S. savings rates have risen over the course of the pandemic, the savings are pretty disproportionate. High-income households have been able to cut their spending by 17% and save more that way. But low-income households that live paycheck-to-paycheck may not have that option. They've decreased their spending by only 4%.

But there seems to be a way to hack the thrill of buying a lottery ticket to get people to save better. It’s where behavioral economics comes in.

“If you understand where people fail, you can do lots of things that will prevent them from failing,” said Dan Ariely, a behavioral economics professor and author of Predictably Irrational. “And if you understand what motivates people, you can do things that would motivate people to act in a different way.”

Prize-linked savings follows this principle. The model takes what motivates people to buy a ticket and applies it to helping them save. The idea, essentially, is that whenever a person deposits money in a savings account, that can then be used as currency to buy lottery tickets. And the lottery is repeated every week or every month, so as long as the original money the person deposited remains in the account, there is no need to repurchase a ticket.

Yotta is a one-year-old digital bank that’s built on the idea of prize-linked savings. 

“The whole idea is to use the psychology of a lottery payoff structure, and apply it to a saving scheme that makes it more instantly gratifying to save, which could really help people in the US who often struggled to save but don't struggle to play the lottery,” said Yotta’s co-founder and CEO Adam Moelis. 

Yotta has a weekly draw where users can win an amount ranging from 10 cents to $1 million.

For every $25 saved in an account, the user gets a weekly ticket. As long as the original deposit stays there, there’s no need to make a new one -- unless you want more chances to win.

40% of Yotta’s users win some cash prize every week. Even if they don’t, they get a 0.2% savings reward on their deposit. And that’s really the main appeal, said Moelis. Users are playing the lottery but without losing anything.


“Even if you don't win any prizes, you're still getting paid,” he said.

Until recently, prize-linked savings haven’t been so popular in the US. The way laws were written made the model seem like gambling.

“it wasn't that there were laws that said prize linked savings accounts are illegal. But the way the gambling laws were written made the concept kind of a legal gray area for a long time,” said Moelis.

But things have gotten a bit more flexible. In 2014, the American Savings Promotion Act was passed. The statute lets some financial institutions conduct a contest referred to as a “savings promotion raffle”. A person can purchase a ticket and take part in the raffle by depositing a certain amount into their savings account.

The new law has given a window for companies like Yotta.

Even if the law sees this model as safe for consumer use, it doesn’t mean the consumer will. That’s one challenge Yotta has been dealing with.

When the company started out, for instance, it had more of a game-vibe. And that made it hard to get the users’ trust. The fintech has since adjusted its interface so that it’s balancing the feel of both a bank and a game.

Getting that right is tricky. “Traditional banks generally have poor user interfaces. And so we don't want that,” said Moelis. “We also don't want people to be like, ‘This is like Candy Crush’.”

But if Yotta manages to tweak its way into users’ go-to choice for savings, there’s still the question of how long that trust can stick around.

Even if users may not lose anything when they don’t win in the raffle, they may not be too happy about someone else beating them just because they had more money available for storing. 

A drawing like this has to feel fair. You might not have a big chance of winning anything in an actual lottery, but you have just as much of a chance as anyone else. And that’s a comfort.

So there is still the question of whether something like this can work. According to Ariely, the logic is there, but making sure that people’s motivation to use the product continues to stick is another thing.

“I think lotteries are certainly one way to change behavior. Now, is it the best way? Probably not. Is it the only way? Of course not. Can it be effective? Absolutely,” said Ariely. 

“But it also depends on how the lotteries are created. Not all lotteries are created equal. For example, if you have a very large lottery with a very small probability, that would likely get people excited initially. But if they deposit, deposit, deposit, and nothing happens, they’d get disappointed after a while. So there are a lot of questions about the design of lotteries.”

But for Moelis, the main thing he emphasizes is that there's nothing to lose. The user most likely won't win big, but maybe they could win small -- and, at the very least, they'll have the same amount they started with.

"Even if you don't win any prize in that week, at least you're not losing anything. And at least you're building an emergency fund."

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