Capital One (COF) is trying to integrate two big purchases at a time when banking regulators are paying increasing attention to consumer finance operations. That scrutiny has raised the stakes for Capital One — but even without it, the bank has a lot to juggle as it integrates ING Direct and a $30 billion HSBC credit card portfolio.
"Bank integration is like remodeling your house. It takes twice as long and costs three times as much as you thought it was going to," says Susan Ochs, a former Treasury Department advisor and a senior fellow at the Aspen Institute. "It's a heavy lift for sure. By no guarantee is this going to be a smooth ride for them."
Ochs and other industry members weighed in on five immediate integration concerns for Capital One:
1) Keep the customers — and keep them happy.
Retaining existing customers and their loyalty is one of the most important and difficult challenges during a merger. Problems can range from the technical glitches that disrupt customers' access to their money or account statements, to maintaining the service and brand identity that the purchased company was known for.
That's an especially difficult task for Capital One as it integrates ING Direct, observers say. It must try to keep the online bank's young, loyal and tech-savvy customers while eliminating the friendly, cheeky branding ING Direct became known for. (Capital One licensed the name for one year, meaning that it must convert the brand by mid-February.)
"With ING, a lot of customers expect a much higher touch, a much higher level of service. They actually have a strong affinity for the brand," Ochs says. "You have to figure out a way to maintain the level of service that these people are expecting, but also not keeping them completely hived off from all the rest of your customers."
2) Communicate, communicate, communicate.
Corporate Insight analyst Doug Miller is mostly impressed with Capital One's efforts to communicate with ING Direct customers.
"Capital One, speaking from the voice of ING Direct, has reached out several times over the past year to existing ING Direct clients," says Miller, whose consulting firm tracks how financial institutions interact with their customers. "In addition to public website resources that have been available since 2011, the firms also sent several emails to existing customers, talking about what's going on."
The one thing lacking, Miller says, is extensive information about what's next for ING Direct customers or frequent warnings about the coming name change. He contrasted that approach with Wells Fargo's (WFC) "extensive" efforts to communicate with customers while integrating Wachovia's operations.
"Everything kind of moved at a glacial pace in the transitioning of branches from Wachovia, but people always knew it was going on," he says. Capital One is "doing a nice job of putting information out there, but they just have not been as informative or as forthcoming with details as we've seen with firms in the past."
Capital One spokeswoman Tatiana Stead says in an email that the bank understands the importance of communicating with its customers.
"We have a comprehensive plan in place and already underway which is focused on consistently keeping our ING Direct customers fully informed and up to date," she writes. "We plan for them to be among the first to know about the brand change."
3) Carefully manage the name change
That brand change is "probably the biggest challenge," says Lee Kyriacou, a partner at consultancy Novantas.
He warns that some customers might switch their deposits to another online bank when the branding changes and they think, "Wait a minute, what happened? Do I want to stick around here?"
But Kyriacou also sees a big payoff if Capital One successfully converts the brand and establishes a strong foothold in branchless deposit-taking. As retail branch networks shrink and banks ready for the next generation of banking, more and more customers are likely to go online instead of to brick and mortar branches.
Banks with the online infrastructure and experience to do that smoothly will have an advantage, according to Kyriacou. "I would be very happy being Capital One in that situation," as the ING Direct purchase "gives them a national platform without having a lot of branches," he says. "I think they can figure it out."
4) Streamline your product set.
The ING Direct and HSBC purchases will duplicate to some extent products that Capital One already offers, including online deposit accounts, says Aite Group analyst Madeline Aufseeser. Eventually, the bank will have to streamline its merged portfolios, which she calls "the hardest part" of integrating similar operations.
"There's a whole decisioning process that goes on into what product features and functions are going to be kept, what products are going to be mirrored, what will be kept and what won't," she says. Once those decisions are made, banks have to assess which customers will be affected and how best to notify them of changes.
"Making those changes and then securing against the risk of losing that customer - that's one of the most difficult aspects of an integration," she says. "If an organization decides that they're going to eliminate a product and the consumer just loves that product, then the consumer is probably going to be unhappy and make a switch."
5) Staff up — and get ready to staff down.
The CFPB's arrival is causing many large banks to hire compliance personnel by the hundreds, according to bank lawyers and consultants. Capital One has the same demands, and says it is hiring across the board.
The bank has also said it is hoping to realize "synergies" by cutting costs from the merged organizations. Aufseeser says that support staff are usually hit the hardest by post-merger layoffs in "legal teams, marketing and HR departments, where there's total redundancy."
But Capital One is keeping some of the executives of ING Direct. While chief executive Arkadi Kuhlmann has become an external consultant, his chief operating officer, Jim Kelly, is now running the unit and reporting to Capital One's president of retail and direct banking.