CoreStates Financial Corp. is offering entrepreneurs a lower interest rate on revolving credit lines linked to their business checking accounts.
Last month the Philadelphia-based bank sent its first direct mail offers for $35,000 unsecured credit lines to small-business owners in its geographic territory.
CoreStates offered a variable interest rate of prime plus 1.99%. The bank sweetened the offer to prime plus 1.74% if the payments are automatically deducted from a business checking account with the bank.
CoreStates' move illustrates a push to increase the profitability of its credit lines. Although credit products attract the most attention, deposits generate more profits, because the banks do not pay interest.
The average regional bank earns a 15% return on equity from small- business loans and a 50% return from its deposits, said Brian Connelly, senior vice president of Fleet Financial Corp.
What's more, CoreStates wants to set itself apart from the clutter in small-business owners' mailboxes. The number of banks mailing credit offers jumped from almost none in 1992 to 26% last year.
CoreStates sent 30,000 offers to small-business owners in Delaware, Pennsylvania, and New Jersey. David D. Durnam, senior vice president for marketing, said the bank would be pleased with a 2% response rate.
"Our bank's strategy is very relationship-oriented, and that is part of our incentive to get the deposits," Mr. Durnam said.
Charles Wendel, president of Financial Institutions Consulting in New York, said the strategy is sound. "It gives the customer a reason to give the bank their deposits," Mr. Wendel said. "That's smart."
But he said the difference between the interest rates offered is not substantial enough to attract a large number of new depositors.
The credit lines' popularity may be hindered by its $250 annual fee, which the bank waives for the first year. Other similar credit lines have fees ranging from $25 to $50.