Applying an automaker-type promotion to consumer lending has paid off to varying degrees for a number of small midwestern banks.

The idea -- paying borrowers an interest rate rebate -- was inspired by the familiar auto dealer rebates.

What's different is that there aren't any strings attached to the rebate on the purchase price of a car. But the interest rate rebates developed by Hammerman & Morse, Chicago, require borrowers to make all their installment payments on time.

As a result, none of the banks trying the promotion have had to pay rebates to every borrower. What's more, even the banks whose portfolio growth was marginal says they would try the promotion again. They'd just make it more timely.

Lending Rose 3.5%

"We started our promotion last April [1993]. It ran through June, and we increased our installment lending 3.5% over the same period in 1992," says Ann McBride, director of marketing at the Indiana Federal Bank for Savings, Valparaiso. "It was less than we'd hoped it would be."

Ms. McBride adds that Indiana Federal, which holds $600 million in assets, started its promotion after NBD Bank, Detroit, had worked over the northwest Indiana market with a major advertising initiative, "Of course, to some degree," says Ms. McBride, "their campaign depressed our results."

South Holland (Ill.) Trust and Savings Bank, which tried the promotion for 90 days last year, posted a nominal lending increase -- but it also seems to have had a timing problem.

Debt Consolidation

"All the refinancing that was happening at the time probably dried up potential demand," says John Brunelle, assistant vice president of retail lending for the $500 million-asset bank. "People were consolidating their debt, and most folks prefer to have fewer notes not more, to pay off."

The first bank to try the rebate promotion -- Chicago's Cole Taylor -- had markedly different results, however. In just 45 days in 1989, the promotion issued 1,400 installment loans -- nearly five times more than its total for all of 1993.

Ed Hammerman, retained by the bank to find a way of increasing lending at the $1.6 billion-asset institution, picked rebates over six other ideas.

"We met with people who lived in their communities, and we asked for their response to seven different promotions. Five of the seven all had the same level of interest, while response to a mortgage without points or closing costs went exceptionally well. But the rebate idea tested best of all."

Timely Payments

Mr. Hammerman says it turned out that less than half of the installment borrowers paid on time -- savings Cole Taylor a bundle -- and that was about what happened at Indiana Federal, where just 58% of the borrowers were paid rebates.

Ms. McBride says that, though the lending increase wasn't a big one, there were 183 more lending applications than in the same period of 1992. "That tells you some good things about the promotion," she adds. "It does draw a lot of interest; it just didn't draw the interest from people we would normally approve."

Besides hoping to pick up lending, Indiana Federal tried the promotion in response to the growing presence of NBD.

A Way to Maintain Share

"We're one of the few independent banks left in northwest Indiana, and while our profits are growing steadily, we wanted to maintain our dominance in a couple of counties," says Ms. McBride. "We felt the rebate promotion was a nice enticement that helped us meet our customers, and we'd try it again."

The latest bank to try the promotion is a big one -- $21 billion-asset First of America Bank, which will offer the rebates at 18 of its 21 subsidiary banks. Fred Gardner, director of product development, says the bank hopes to pick up consumer lending by 20% to 25% through the promotion, which started in April and will run through June. "Early indications are that we're equaling or exceeding the target," Mr. Gardner says.

Rolland Johannsen, president of Furash & Co., Washington, thinks such promotions as rate rebates are "symbolic of the fight over a shrinking market."

Debates to Wealth Builders

"As the huge baby-boomer generation ages, instead of amassing debt, they'll be amassing wealth, so you'll see more marketing warfare and more of these gimmicks, if that's the right word. Very often, though, they are a fad, turning up in bunches. A lot of banks jump in when they see that another bank has thought up a marketing twist. But, in the long run," Mr. Johannsen adds, "it won't help the industry establish the type of market position and image it needs to establish long-term customer relationships.

"For that, the industry has to position itself as a broad provider of value-added services and information."

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