As humans, we’re just not wired to save money well. And over the years, creative financial institutions have figured out ways to incentivize saving with chances to win money. Prize-linked savings has been a mainstay in the UK and is the largest form of savings.
In the US, challenger bank Yotta offers periodic chances for its customers to win money prizes. The more you save, the more chances you have to win. Yotta’s co-founder and CEO Adam Moelis joins me on the podcast to talk about the mechanics of prize-linked savings and how Yotta uses this model to differentiate itself from the competition. We discuss some of the viral components the firm’s built and how it acquires new customers. We also look out into the future for the firm’s product and expansion plans.
Adam Moelis is my guest today on the Tearsheet Podcast.
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The following excerpts were edited for clarity.
Hey, I’m Adam. I’m a co-founder of Yotta, which is a neobank that makes saving money fun. So instead of giving people a tiny amount of interest on their savings, like in a traditional savings account, with Yotta, you save money and get the chance to win prizes every week through a sweepstakes.
If you look at the statistics, in the US, a lot of people have heard the stat that 40% of people can’t come up with $400 in an emergency. You’ve got a lot of people in the country who struggle to save. And so if something bad happens, they’re in a pretty tough spot. At the same time, people spend, on average, $640 per year per household on lottery tickets, which is a horrible gamble (you lose 60% to 70% of the money you put in on average). And so there’s a lot of overlap between these two groups: people playing the lottery and people who struggle to save. We’re trying to bring the instant gratification that the lottery provides to saving in order to help incentivize people to save.
The psychology behind prize-linked savings
Fundamentally, it’s the possibility of winning something meaningful that could change your life in an instant. With the lottery, people spend $10 a week, whatever it is, and they get entertainment value out of it. And the entertainment value is that for that week, they can dream and hope like I have a chance to win a life changing amount of money and get myself out of a tough financial situation. That hope and excitement provides that instant gratification — it’s fun for people.
Saving is very different, where you’re getting a tiny interest rate from your bank, if you’re getting one at all. And it’s something that pays off only after you realize you should have been doing it right. So, for 12 months, no emergency happens and you’re like, oh well, I got nothing out of that. Eventually, you might have a hospital bill, you might need the money for something. But by that point, it’s too late — you need to build that habit earlier. And so people are generally not good at doing things that pay off in the long run, but are difficult in the short run.
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Game mechanics
The way it works is, for every $25 you save, you get a ticket. It feels a lot like a lottery ticket — it’s really a sweepstakes on the back end. So each ticket, you pick numbers, and every week we reveal the winning numbers, and you can win prizes, anywhere from $0.10 to a $10 million jackpot. The second top prize is a Tesla, and there’s a $10,000 Prize. And while it’s not the same as the lottery (the lottery jackpots are in the hundreds of millions of dollars), the reality is that a $10 million grand prize is enough to be in that life changing psychological category, which people can have fun hoping and dreaming about. And in this case, even if they don’t win that jackpot, they’re not losing money. They’re actually still making money as they go.
Prize-linked savings in the U.S.
A lot of other countries have done this pretty successfully — the UK especially. It’s typically been run by governments, but it is new to the US. It was a legal gray area for many years, just the way gambling laws had been written until 2015. This idea of getting people prize linked savings would have possibly been considered gambling.
In 2015, there was actually an act passed at the federal level that more explicitly legalizes this concept as a carve out from gambling laws. It’s a little more nuanced than that. But that’s basically what happened. And the reason they did that was because of all the evidence from other programs overseas and even some pilot programs in the US that this is far from gambling — it’s actually good for people. And so they wanted to incentivize this product in the US.
Coming up with the idea
I’ve always been a huge kind of behavioral psychology nut and very into personal finance. Years ago, a friend of mine, who actually is in the UK, was telling me about the premium bond program, which is basically the government run prize linked savings program in the UK. It’s been around for 60 years and it’s the number one savings vehicle in the whole country. And I was familiar with the lottery stats in the US and how people struggled to save. I thought it was a very interesting thing, and I started looking into why this isn’t in the US. That led me to stumble upon the legislation and some other things. That’s basically how I got into it.
Starting a challenger bank
it is a lot of fun and also difficult. You deal with a lot of regulatory stuff — obviously, you’re handling people’s money. You have to be very compliant and secure from that perspective. But I also think it’s the neobanking, digital banking space that is very competitive, but also very new. And the big four or five banks in the country still dominate with over half of consumer deposits. Those companies are often pretty backward, in my opinion, from a UI perspective. So I think there’s a lot of opportunity to build, like mobile-first, clean UI type products for the younger generations. There’s a lot of opportunity.
Differentiating in a competitive market
Our main differentiator is the prize linked savings account. We also launched a debit card, where instead of giving people cash back, you get the chance to get whatever you buy for free. Here, we’re also trying to take advantage of the psychology where most debit cards don’t even give you cash back, so people are generally getting a bad deal out of that, because banks are making money on debit spend.
The reality is a lot of people don’t really care — they’ll say, you know, 1% cashback on a debit card (which is high for debit card), okay, I buy something for $500 and I get five bucks — it doesn’t really move the needle. But if every time you buy something, you have a 1% chance to get it for free, it plays into that same psychology where now it’s like, okay, I’ll use this card, and I’ll get good economic value if I get one out of every 100 things for free. So I’m actually getting that cash back benefit that I wasn’t getting before.
Yotta users
High level, it definitely skews younger, like 20 to 35. The majority of users are Millennial and Gen Z, typically lower to moderate income. This is something that helps them build that savings habit. A lot of these people are coming from big brick and mortar banks, and they’re basically being paid zero on savings. That’s our primary demo.
Copycats
We’ve already seen some companies straight up copy us. We expected if we were successful, people would copy the model. There have been other prize linked savings companies popping up, and I expect some of the more tech savvy product focused banks might also layer this on.
For us, we’re really trying to create a very social experience with it, as well, which is kind of unique from a banking perspective, since most times you don’t want your bank to be social. But for us, we want Yotta to be analogous to the lottery and that it’s more fun when you and your friends are on it because you’re all part of the same game and it’s harder to move to somewhere else because you and your friends are on Yotta, sharing tickets and winning prizes together. You’re looking forward to the nightly number drawings. Maybe you have a group text where you talk about your winnings midweek — we have a game mechanic built on top of the prize linked savings that is very social in nature.
Referrals
Our biggest acquisition channel is referrals. We have a program where you get more tickets into the sweepstakes if you refer friends. But also we see a natural referral mechanic. For example, with the debit card if you win something for free, you’re pretty likely to tell your friends about it. If you’re at a restaurant, and you’re with five friends and you get your meal for free, or you pay for everybody and you get the whole thing for free, it’s kind of a natural viral mechanic, because everyone finds out about it. Whereas, if you get five bucks cash back, you’re not telling people about it.
Similarly, if you win a big prize with us one week, you’re pretty likely to refer friends. And as I mentioned, there’s that pool play feature where you can actually share tickets with your friends and win together, which can get you to want to get your friends on board so you can have fun together.
Other acquisition channels
There’s this Ask Me Anything subreddit and we’ve done two of these now where we go on there for a day and we solicit and answer questions from people — that drove a lot of signups. I think it’s an interesting and maybe under tapped thing that other consumer companies could try. We do a lot of social media, and some paid social but not that much paid. We do some YouTube partnerships. We partnered with people on YouTube that have audiences that might be interested in Yotta.
Overseas challenger banks competing in the U.S.
I would be speculating a little bit here, but I guess I would imagine the brand recognition would be tough — it’s tough for any startup. It’s a tough problem when someone international comes to the US, if they’re not as well known as US companies. We still have that challenge where people don’t know about us, and they don’t trust us as much.
There’s always the issue whenever companies spread themselves too wide. And that there’s a different regulatory environment. There’s just a lot of new overhead and maybe different products that people expect here that are different from overseas.
And so you have to manage one product for multiple types of demographics, right? Maybe people in Europe prefer something different than in the US, and if you’re Revolut, or Monzo, you’re not going to build two different experiences. It’s often tough to build something that is universally loved, but it is easier to build something that is loved for a more targeted demo.
Going international
Eventually, but it’s not on the near term roadmap at all. We’re still pretty new in the US and have a lot of room to penetrate here. A lot more than half the population is still banking with brick and mortar banks. And I think the shift to digital banks is still in the early days. Regulations are probably the biggest hurdle to going overseas.
Engagement
We see a lot of engagement due to the game mechanic. I would say one challenge that we faced and still face is because of the game mechanic — it’s a very new experience for people. They come from a very buttoned up banking experience. And with us, there’s this gamification element, which can make people a little bit nervous or not as trusting. It doesn’t feel as trustworthy because it feels more like a game. So it can take some time for people to get comfortable with us and with a new interface that they’re not used to.
Other challenger banking products
We have been very focused on getting the table stakes. We launched a little bit over a year ago with a very, very basic product that no one could really use as a primary bank, given the feature set. Over the past six months, we’ve rolled out remote deposit capture, debit cards, more flexible spending limits, and settlement times — things that people need from a primary bank.
We just launched the debit card. And a big reason why we need all this stuff is, as you said, becoming a primary bank is a big deal. We’re very focused on continuing that and still working on fully launching a debit card, and we’re working on a secured credit card and some credit building type tools. And so in the long run, we really want to do whatever we can to help people with their personal financial lives. A big thing right now is building credit. So you kind of want to get into that space for sure.
Partners
We work with Synapse. They’re our banking as a service provider. They’re a primary partner — we launched the debit card with them, and we have the savings and checking accounts through them. The bank behind them is Evolve Bank and Trust.
Moving into B2B?
We have not really thought about B2B much yet. We’ve actually seen a prize linked savings competitor go that route, where they started B2C and moved to B2B, and now they license their gamification to banks. We feel like there’s a lot more opportunity if we can execute well to build a big business as a B2C company in terms of controlling the whole user experience, getting the margin from the products we offer and things like that. That’s really Plan A, I think that to focus on B2B or to do any sort of licensing right now would be too big of a distraction.
Biggest challenges
The biggest challenge is to get people to use this as a primary bank and overcome the feeling that it’s too gamey, or ‘this is new. How do I trust it?’ We’re still building trust in terms of anything from PR, to reviews, to testimonials, to having good experience with our current users. So getting people to trust us, that’s probably the biggest thing.
And one of the biggest challenges that doesn’t really get me pumped, but that we’re facing, is fraud. Fraud has been a big problem in the industry. You want to become someone’s primary bank and want them to be able to do all the things they can do at their primary bank. But as a startup, to offer all those services without a fraud team of hundreds or thoursands of people definitely exposes yourself to bad actors. It’s slowed us down, because we have to focus on rolling out products, and then making sure that we’re putting in the proper controls that prevent bad actors from taking advantage of it.
We’re still constantly working on that, and I think it’s been a huge challenge in the industry, especially with COVID. A lot of people in tough financial times turned to fraud. And so the whole industry is facing a lot of that. It’s a big one for us, because to become a primary bank, we need to have let people have a good experience. And to have a good experience, we need to have controls that need to be flexible. But when you’re flexible, you’re more targeted.