BankBoston Corp. is taking advantage of turbulence in the stock market by promoting its small-business certificates of deposit as investments.
Through Dec. 15, the banking company is offering six-month CDs with a 5.75% interest rate on deposits of more than $10,000. The company is promoting the product's safety with letters to customers that read, "Unlike other investments, your rate is guaranteed."
Banks typically promote CDs as savings vehicles, rather than as investments. BankBoston's offering puts a new twist on an old product.
BankBoston executives declined to discuss the CD promotion. But other bankers and analysts had their own theories on why it is trying the strategy.
One Massachusetts competitor said BankBoston's promotion is an effort to compete with nonbanks that offer sophisticated investment options subject to stock market fluctuations.
"This may be aimed at businesses that use Merrill Lynch," said Neil Mahoney, president and chief executive of Woronoco Savings Bank, Westfield, Mass.
Jeff Sucec, president of FTR, a Lombard, Ill.-based consulting firm, said sophisticated entrepreneurs will not view CDs as investments but will be attracted to the security they offer. "It's an option to give business owners peace of mind," he said.
BankBoston's offer could also be a way to grab a larger share of a small-business customer's wallet. Small-business owners typically use banks for certificates of deposit but switch to nonbank competitors for money market accounts or mutual funds.
An American Banker study of 400 business owners found that 80% use banks for CDs but only 23% use banks for mutual funds, stocks, or bonds.
By law, banks are prohibited from paying interest on deposits in small- business checking accounts, but they may pay interest on deposits in money market accounts or CDs.
To compete with nonbanks like Merrill Lynch, banks have offered options like sweep accounts, which let businesses automatically transfer checking account balances into mutual funds or money market accounts.
BankBoston promotion of CDs as investment products may be aimed at small-business customers that don't have a sweep account's $25,000 minimum.