It came in a very unbankerly, glaring orange jacket. And the words on the cover were: "Introducing ING Direct." That's the way the Dutch-owned ING Group announced its entry into the U.S. banking market last month.

It was a loud kickoff, nothing shy about it, with the chief of the Internet unit telling consumers in the New York and Philadelphia-area markets that they had been overpaying for banking services and that ING would give them Costco-style pricing.

At the other side of the continent, Britain's biggest insurer, Prudential plc, was quietly expanding its U.S. banking presence, acquiring a highly profitable thrift. The ultimate objective is to have the $1 billion-asset thrift manufacture banking products to be sold through Prudential's formidible U.S. insurance marketing unit.

Prudential plc has made a great start in its attempt to become a powerhouse in the United States. Operating here through its California-based Jackson National Life subsidiary, the U.S. already accounts for about half Prudential's total profits. Yet, Jackson National employs only 7% of the overall company's staff.

And the U.S. arm has been expanding aggressively. In November 1998, it bought the lackluster First Federal Savings and Loan Association of San Bernadino, a thrift with about $100 million in assets at the time. The insurer immediately changed First Federal's name to Jackson Federal Bank, and quickly put in new management. It upgraded the thrift's technology and branch facilities and diversified its portfolio. In the fourth quarter, it introduced commercial real estate and apartment lending.

"The new team's work established a platform from which the bank could begin an aggressive expansion strategy," according to Jackson National's annual report. And it vowed to cross-market Jackson Federal's products and services to "Jackson National Life's customer base, significantly increasing its potential market."

This year, Jackson agreed to purchase another California thrift, Highland Bancorp, based in Burbank. The acquisition, scheduled to be completed next month, would double Jackson Federal's Los Angeles-area branch network to 14 and its assets to about $1.1 billion.

A low-cost, high-yield operator, Highland ranked as the second most-profitable thrift on U.S. Banker's July ranking of the 200 largest community banks. Its return on assets averaged almost 19% in the three years ended Dec. 31, 1999.

Highland uses brokers to generate loans, and about half those loans finance multi-family residential properties while the other half finance small commercial properties. The average loan is about $300,000. D. Tad Lowery, the thrift's chairman, president and chief financial officer, says that the brokers merely bring loans to Jackson Federal's attention, but that the thrift underwrites and appraises all loans with its own people.

The thrift has nine loan officers, each of whom works with about 30 brokers. Such lending can be risky. But Stephen Rippe, Highland's current chief executive, says, "One of our advantages is we're a small company in a large market, and we can pick and choose."

Though Rippe will leave the company later this year when the acquisition is complete, Jackson Federal will retain Highland's lending team, Lowery says, adding that the company has given the members incentives to stay.

"With the acquisition of Highland, JFB will improve its product mix and increase its talent pool," says Robert Saltzman, CEO of the thrift's parent, Jackson National.

What is unusual, and perhaps daunting, about Jackson Federal is that it's not primarily in business to sell Jackson National's insurance products. Instead, it's expected to produce banking products to be sold through the parent's insurance network, says the 47-year-old Lowery.

Lowery says that compared with Jackson National, Jackson Federal has a small customer base. The reason Jackson Federal wanted to expand, he said, was to get enough scale to be able to produce the products needed by Jackson National. One of the first new products will be a certificate of deposit with returns based on movements in the stock market. "We're not selling it to our own market, but through Jackson National's," Lowery says. "It's a trial," he adds.

Lowery believes that ordinary banking customers wouldn't gravitate to the market-related CDs because the product must be "sold." Jackson National, on the other hand, has the sales force to do it, he says.

In the meantime, Jackson Federal is developing a Web site, creating another channel through which it hopes to sell its products and services. But Saltzman says the U.S. operations do not intend to make use of Prudential plc's large but money-losing Egg, a stand-alone Internet bank that does business solely in Europe.

Egg, 20% of which was sold to the public earlier this year for $355 million, has been successful in attracting customers but continues to lose large amounts of money. It reported a pre-tax loss of $117 million in the first half of the year, somewhat higher than the loss of $101 million in the comparable period of 1999. Egg, which was started in October 1998, said it gained 311,000 customers during the latest six-month period, bringing the total to 1.1 million.

Jackson Federal expects to have a more modest but fully transactional Web site in operation by the end of the year, Lowery says. But unlike Egg, it will be aimed at the thrift's limited market. "We believe we need bricks and mortar," Lowery says.

Jackson National hired Lowery in February 1999, a few months after it bought First Federal. Lowery began his career in Arkansas with a predecessor of today's Deloitte Touche accounting firm. He specialized in accounting for banks, thrifts and real estate. In the mid-1980s, he joined a local savings institution as chief financial officer, and in 1988 moved to California where he became CFO of a thrift that kept merging into larger ones. In 1990, he was made CEO of Century Federal Savings of Pasadena.

Jackson National, meanwhile, is not counting exclusively on the thrift to expand its banking connections in this country. In mid-1999, Jackson National bought IFC Holdings Inc. of Tampa, FL, from Amsouth Bancorp, which inherited the insurance and investment product marketing unit when it acquired First American Corp. of Nashville. Jackson National is said to have paid between $30 million and $40 million for the unit.

IFC is one of the nation's top 10 sellers of annuities through banks. It currently provides brokerage services to about 450 small banks. In 1998, IFC's gross revenues amounted to $168 million, and last year it is believed they topped $200 million.

While Jackson is eschewing the Internet-only approach, ING is moving boldly into that arena, with high hopes of making its orange-bedecked ING Direct a real winner.

The question, as always, is whether it will succeed. Past experience in the U.S. indicates the odds are against it. Although a number of banks and others have tried stand-alone Internet banks--including such heavy hitters as Citigroup and Bank One Corp.--none have made much headway and most have faced substantial losses. Citigroup recently closed down its stand-alone Citi f/i site.

But the mighty Dutch-based ING Group, which recently made front-page headlines when it agreed to acquire the financial arm of the huge Aetna Insurance Co. in the U.S., might pull it off. It has a good track record elsewhere in the English-speaking world, and it is adopting similar strategies here in the United States.

The schtick being used by Arkadi Kuhlmann, ING Direct's president and CEO, is to be the Ralph Nader of banking. Indeed, Kuhlmann, in a CD-ROM promotion that was included in the orange public relations package, looks a bit like Nader. Tieless with an open collar and his hair on the longish side, Kahlmann stresses over and over that ING Direct is "not for the very wealthy."

Kuhlmann clearly is appealing to consumers who are disgruntled with their traditional banks--consumers who feel that they are being "nickled and dimed," as Annette Borger, a spokesman for ING Direct in Canada, puts it. The U.S. operation is a clone of ING's Internet banking attempts in Canada and Australia, which have achieved some success.

In Canada, ING direct was started in April of 1997 and now has 275,000 customers and assets of $1.86 billion (all dollar amounts in this story are in U.S. dollars). "The market was ready for an alternative," Borger says.

ING is using the strategy it applied in Canada worldwide. When ING Direct (Canada) was initiated, it was introduced only in the Toronto area and eventually spread across the country.

In Australia, where ING Direct is celebrating its first anniversary, the Internet bank is being expanded throughout the continent. It was initially available in Sydney and subsequently expanded to include Melbourne and Brisbane. The service has now been expanded to include Western and Southern Australia. Within its first 11 months, ING Direct attracted $570 million in savings, the company says.

Similarly, U.S.-based ING Direct initially will be offered only in the New York and Philadelphia metropolitan areas. As in Canada and Australia, ING's U.S. strategy depends on a broad-based advertising campaign. It is running spots on the major networks and some cable stations. It also will use billboards and radio. Some observers put the advertising costs near $10 million.

Like other Internet-only banks, ING Direct is offering high rates on FDIC-insured savings--expected to yield 6.5% on savings accounts and to charge 9.95% on unsecured personal loans (the rates are adjustable). There are no fees or minimum balance requirements.

ING Direct accounts are required to be linked to a checking account at another bank. That could pose a difficulty if that bank were to charge for any transfers to or from ING Direct accounts. Borger says that in Canada such fees depend on whether the ING customer meets the minimum balance requirements of his or her commercial bank.

The question is whether ING's Canadian approach will work in the United States, and whether U.S. consumers have the same thirst for what Kuhlmann describes as "commodity banking."

ING has expanded its U.S. operations dramatically within recent months, and not just in banking. It paid $5.1 billion for the Reliastar insurance group and another $5 billion for Aetna's financial-services units. The purchases were designed to give ING a firm footing in the rapidly-growing U.S. market for pension products. These include 401(k) retirement plans, annuities and mutual funds. All of these can be sold through banking channels.

Like many European corporations, ING is beginning to look and act more like a U.S. than a European company. Above all, it is setting far-higher (more American-like) financial goals for itself. ING had been targeting annual increases in per-share earnings growth at 10%, but it has established a new, earnings-growth target of 12%, beginning next year. Also, it has raised its return-on-equity goal to at least 18%, from its previous target of 12%. It expects its net operating earnings this year to be at least 20% higher than the $2.91 billion reported in 1999.

As Prudential and ING show, the Americanization of European financial services companies could point to much stiffer competition from them on U.S. soil than there had been in the past.


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