The response, the Topeka bank said, was overwhelming.

In an unusual effort to capture other bank's auto loan business, Merchants National Bank of Topeka, Kansas, earlier this month held a one-day "special" sale to refinance car loans at single-dig-it rates. And far from whispering, it shouted the offer as loud as it could.

More than 130 new customers filed refinance applications on the morning of Dec. 14 as part of the three-hour promotional effort that offered loans at 9.74%. The sales were strong enough to convince bank officials to extend the offer through the week.

Quality Found Good

"We're very impressed with the quality of the applications we received," said Michael Fleming, president of the bank, "and our cross-sell ration is great."

Three days into the extended promotion, Mr. Fleming was predicting that the bank would make $600,000 of refinanced auto loans. Origination fees, he projected, would more than cover the media and advertising costs - leaving the bank with a $40, 000 profit from the program in its first year of operation.

Mr Fleming, a grocer's son, is a big believer in integrating retailing techniques into banking.

Area business leaders said they have never see as great a media onslaught for a bank product as Mr. Fleming engineered for the auto refinance sale. The banker, for his part, said the auto loan "special" was in good part a hook to find new customers for other bank products.

Merchants National is still tracking its cross-sell ratio, but says it is selling an average of 2.67 other bank products for each refinanced auto loan than it is closing. New customers typically are adding checking or savings accounted and credit cards.

The incentive to open a deposit account was a high, since Merchants National took another 25 basis points off the auto loan rate if the customer agreed to make monthly payments through a direct-debit plan.

The bank, which has $225 million of assets and five offices, combined newspaper advertising with a heavy radio commercial schedule to promote the campaign. It also arranged for an on-the-scene broadcast by the city's top radio station.

'Deal of a Decade'

The ad theme was simple. If you've got a double-digit auto loan, it said, come to our West Ridge branch office - next to the area's largest shopping mall - for the deal of a decade. "Stop by 9:00 to noon . . . and see just how low your monthly car payments can go," the ads said. Merchants National, they added, has $2 million to lend to local residents.

Most of the loans refinanced had three to four years left on them. The offer - at rates about 20 basis points below those for new car loans the bank originates - applied only to 1989 cars or newer models.

Merchants National, which is owned by Kansas-City based Mid-American Corp., also offerred a loan origination fee of $50.000 half the amount on its new-car loans.

The Merchants National program auto refinance program is believed to be the first of its kind nationwide, said George Williams, senior vice president of AmSouth Corp., Birmingham, Ala., and chairman of the Consumer Bankers Association auto finance committee.

He said, however, that some credit unions have attempted similar programs.

Mr. Fleming, for his part, said he has cut into the market of that major consumer competitor.

Tapping Credit Unions

"We were surprised how much of the business came from credit unions," he said. "We often think their rates are much lower than ours, but we've been refinancing loans of 13% to 18%."

Merchants National came up with the idea of refinancing auto loans because of the "phenomenal success" it was having with home mortgage refinancings, Mr. Fleming said. He noted in a mid-December interview that the bank was in the process of closing 138 refinanced home loans.

Though car loans are much smaller than the average mortgage loan, Merchants National was eager to build its customer base with the new approach.

"We were looking for a niche," Mr. Fleming said. "It's been tough competing with the 2% loans from the captives (the finance subsidiaries of auto manufacturers)."

Though Mr. Fleming termed the car loan concept a "tough sell," he apparently made some converts. Shortly after the bank's doors opened Saturday, one customer quickly refinanced his car loan, estimating that he had saved a quick $250. He promptly told the radio audience it was the "best 10 minutes he'd ever spent on a Saturday morning."

The average customer will save $450 on the remaining life of their loans, the bank claims.

Merchants National, the third largest bank in Topeka when ranked by deposits, supplemented its promotional campaign with some behind-the-scenes work. It fed information about the benefits or refinancing consumer debt to local newspaper reporters, leading to some favorable press a few days before the "sale."

Mr. Fleming predicted that the bank would approve 60% of the applications it received. It will tell some of those who were approved that it is not worth their while to pay new closing costs because of the short maturities remaining on their loans. The bank hopes to thereby build up its image as a reliable adviser.

The bank is even making pitches to potential customers whose applications were rejected. For example, four customers who did not meet income-to-debt criteria are being offered refinancing on their home mortgages to reduce their monthly debt payments and improve their credit picture.

Merchants National's competitors have no immediate plans for similar campaigns, but they are taking note.

"We didn't experience any big payoffs on Monday" after the sale, said Onis Lemon, senior vice president of consumer lending at Commerce Bank in Topeka. "We don't expect to lose any big accounts [because] we'd meet the rate and not lose a customer."

Ms. Franzoni, a freelance banking reporter, is based in Springfield, Mo.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.