Bare-Bones Service Works for ING Direct

You cannot write checks. You cannot visit a branch. You should not call and ask too many nitpicky questions. In fact, if you want to be a customer of ING Direct, don’t expect any hand-holding at all.

“You have a relationship with a spouse, not with a bank,” said Arkadi Kuhlmann, chairman and chief executive of ING Direct U.S., the seven-month-old direct banking operation run by the Amsterdam banking giant ING Group.

The U.S. subsidiary of ING Direct, run out of a converted warehouse in Wilmington, Del., is one of several no-frills banks that ING is setting up around the world. It says the U.S. operation is the most successful yet, having pulled in $1.3 billion of deposits and 100,000 customers.

Savings accounts with high interest rates and loans with low interest rates are the main attractions, since ING Direct does not offer checking accounts — they have been deemed too expensive, and thus out of line with the company’s low-cost, low-maintenance business model.

One of ING Direct’s major objectives is to find the right type of customer for its brand of banking, rather than provide a full set of services. That has often meant closing down accounts of people ING Direct decided were not a good fit.

“I don’t want a lot of customer questions — I want the right questions,” Mr. Kuhlmann said. “There are people who get on the phone and want to carry on the same kind of conversation that they would in a branch. We’re saying, ‘No, you are not the right kind of person for a direct bank. You belong in a branch.’ ”

At INGDirect, there are no branches where customers may conduct transactions. Instead, the company is opening cafes meant as hangouts for its customers, where the people who make the cappuccino will answer a few basic questions (but won’t take deposits).

Mr. Kuhlmann is well versed in recognizing the type of customer who thrives without branches. Before overseeing the launch of ING Direct’s U.S. outfit he headed ING’s highly successful direct banking initiative in Canada, the first attempt at bringing ING’s style of direct banking to the masses. Before that he was president of North American Trust.

A 53-year-old professor of investment banking, Mr. Kuhlmann likes to paint, write poetry, and ride motorcycles. Appropriately, he leads a company whose approach to banking is not exactly conventional.

ING Direct of Canada, which started doing business in 1997, quickly defied predictions that the interest rate it was offering — more than 5% on deposits — was too high. It turned a profit in 38 months, almost two years ahead of schedule, and has amassed $3 billion of deposits and 300,000 customers.

Hans Verkoren, global head of ING Direct in Amsterdam, said he expects the U.S. outfit to be profitable by the end of its third year. His company also has operations in Spain, France, Australia, and Italy.

Mr. Verkoren attributed the healthy U.S. growth to a progressive local market. “In other cultures, people might need more reassurance,” he said. “I think Americans are more spontaneous and more entrepreneurial in acting fast if they see a good opportunity.”

ING faces intense competition from a big field of Internet players, including Juniper Bank, which is run by Bank One Corp./First U.S.A. veterans and located right down the street from ING’s Wilmington headquarters. But Mr. Kuhlmann has his scope set squarely on the big cats. “We’re trying to compete against the traditional banks,” he said. “We think we have a better value proposition for those customers.”

That proposition will be delivered alongside tea and latte at Internet cafe/merchandise stores. They have opened in Toronto, Vancouver, and Manhattan, and others are to follow in Philadelphia and Wilmington, in a former train station adjacent to ING’s headquarters.

Cafe customers can bank online or by phone and buy mountain bikes, shirts, flannel pajamas and other merchandise in ING’s signature color, bright orange. Writing a check, however, is verboten. The bank’s charter prohibits the cafes to function as branches, so employees cannot accept payments or process banking transactions.

ING Direct is promoting its cafes more as gathering places for people who feel an affinity with the company, Mr. Kuhlmann said. “If someone says, ‘Why would I go there if it’s not a branch?’ that’s old paradigm, old thinking,” he said. “This is a brand. What’s Niketown about? A brand. You can go to the cafe and just sound off and bitch about banking with other people.”

The cafes have attracted “evangelists” who are unhappy with traditional banks and wear their ING gear like a flag, Mr. Kuhlmann said. “It just drives other bankers crazy,” he said.

Richard Bell, director of e-banking at TowerGroup, laughs at the branch-as-hot-spot notion.

“That’s a great one,” he said. “I have some real bad news for folks that want to be the Hard Rock Cafe of anything that offers financial services: People don’t hang out at the bank. I know a lot of folks who are bank geeks, and even they don’t hang out at the bank. There’s a certain cachet to it, and it’s going to have some amount of uptake, but at the end of the day, what’s the real potential? While financial services are an important part of people’s lives, mostly it’s something that people ignore.”

ING Direct’s marketing/promotion mix also includes television ads in the mid-Atlantic region, newspaper inserts, coffee giveaways at train stations, and showing up at street fairs and Little League games.

The $500 billion-asset parent company, which has 100,000 employees worldwide, is spending $100 million to $200 million a year for five years on the ING Direct’s U.S. launch.

The U.S. bank expects to mitigate its marketing expenditures by keeping operating costs down. Its 80-employee call center will be used mainly for telemarketing and maintain the same staffing level regardless of how much it grows, Mr. Verkoren said. The company will encourage customers to manage their accounts online or through the company’s interactive phone service.

For all its lack of convention, ING Direct is fiscally conservative, investing in commercial mortgages and treasury bills but steering clear of riskier areas like junk bonds and subprime lending. Its spread is below the industry average, and it keeps a tight rein on costs, Mr. Kuhlmann said.

“It’s high-volume, low-margin,” he said. “Doing things cheaply is really difficult to do, but it’s something we have to do to make profits.”

ING Direct’s formula for growth is simple, he says: If customers are happy with the high-rate savings account, the bank reasons, it is entitled to cross-sell them products such as certificates of deposit, low-interest loans, and mortgages. If the market improves, the bank will probably add mutual funds and life insurance this year.

Mr. Kuhlmann contends that savings accounts are an easy sell.

“There isn’t a child, a grandfather, a single mother that couldn’t use a high-value savings account,” he said. “Everybody’s promoting consumer debt or they’re promoting consumer investment but there’s a real missed opportunity out there to help people with their savings. Everybody has said that the savings account is dead. ING Direct is saying it’s actually being resuscitated.”

ING Direct also has set a July kickoff for a children’s Web site that looks like a video game — with three-dimensional graphics and characters — but is meant to instruct. “As a society we’re not teaching kids about savings,” Mr. Kuhlmann said. “We’re teaching them about consumption.”

In the absence of an automated teller machine network, ING Direct lets customers make withdrawals by transferring funds to a checking account at another bank linked to their ING account, a process that usually takes two business days. Deposits are made by transferring funds online or by phone, through direct deposit, or by mailing a check.

Visitors to the U.S. headquarters see exposed brick walls, wood beams, and a proliferation of mouse pads, wooden tulips, and orange accents. One of Mr. Kuhlmann’s motorcycles — one that he does not ride — is displayed on a second-floor landing.

But the relaxed atmosphere belies a meticulous attention to detail, says Octavio Marenzi, a managing director at Celent Communications. ING Direct, he said, “takes cost accounting almost to the extreme, to the point where they know every penny that’s being spent.”

Mr. Kuhlmann is so hands-on that he occasionally works in the bank’s call center to keep up on day-to-day operations, Mr. Marenzi said. “That’s extremely unusual. I’ve never heard of any CEO doing that before. He’s very energetic. He’s not afraid of doing things that go against the grain.”

As an example, ING Direct offers an “opt-in” policy with things like direct mailings — they reach only those customers who agree to receive them. Most banks require their customers to “opt out” of such solicitations.

Mr. Bell said ING Direct’s rates, though not as good as those of some other Internet banks, are competitive, and that its business model as a whole is sound. “There are some customers who will buy on the basis of price and don’t really care about service, and folks like ING can attack that market,” he said.

Sam M. Ditzion, a senior analyst in the financial services group at Dove Consulting, sees ING as a niche player with a “unique offering” but says it may struggle at cross-selling if it does not sweeten the add-on products’ rates.

“These are the customers who are used to getting the ‘too-good-to-be-true’ offers,” he said. “These aren’t necessarily the customers who they can get a lot out of.”

Mr. Kuhlmann said customers are looking for value, service, and products that are just right for them, nothing more complicated than that. “This is nothing new,” he said. “This is as old as Methuselah. We’re not sending people to the moon. We’re not engineering babies in test tubes. It’s just money.”