Arkadi Kuhlmann has authored one of banking's most-compelling growth stories by thumbing his nose at conventional wisdom. His company, ING Direct, doesn't make acquisitions or have branches. It doesn't offer checking accounts or charge fees. The 57-year-old CEO dismisses the notion of "owning" customer relationships as presumptuous, and refuses to conduct outbound sales campaigns, even to his own customers, unless they opt-in. Better, he reckons, to win over do-it-yourselfer Americans one product at a time, with shrewd marketing and good rates wrought by the cost efficiencies of doing business online. To promote customer homogeneity and keep costs down, ING Direct won't hesitate to "fire" customers who demand too much. "We're very much zigging when the rest of the industry zags," Kuhlmann says.
Zigging has its rewards. In just five years, the Wilmington, DE-based subsidiary of Dutch financial services conglomerate ING Groep NV has gone from nothing to three million customers, $51 billion in assets and $37 billion in deposits. It's now the nation's largest standalone Internet bank-and bigger than such established names as M&I Corp. and Huntington Bancshares. Pretax profits in 2004 were $159 million, far more than its founders envisioned at this stage, while return on equity was nine percent.
That it has generated such numbers as a niche player with a limited menu of savings, adjustable-rate mortgage and home-equity line products, matters little. The online-only space "has evolved to where the player who got the price and delivery right has won, and that's ING Direct," says Alenka Grealish, a Portland, OR-based analyst with Celent Communications. "Fundamentally, they're product specialists. They're not trying to be the end-all, be-all to everyone. But they saw an underserved market of savers who cared about rates, and they were able to capitalize on it."
A thrift by charter, ING Direct's success is having ripple effects in the industry. Some brick-and-mortar companies, including Emigrant Savings Bank in New York, have launched free-standing online operations to attract deposits from rate shoppers. Internet-only players-including such now-established names as E*Trade Bank and NetBank, which employ more relationship-based strategies-are guardedly heartened by ING's results. "It shows the growth potential of Internet banking," says Gary Evans, CEO of Bank of Internet, a $530 million-asset online bank in San Diego.
Traditional banks are beginning to take notice, too. At a May industry conference, Catherine Palmieri, head of Citibank.com, reported that big banks are bleeding rate-sensitive deposits to the online-only space, and took special note of ING Direct's growth. "The big banks will say [the Internet-only banks] aren't a threat. But they're losing big money [in deposits] today, because they can't compete with the rates those banks are offering," says Cathy Graeber, an analyst with Forrester Research.
The irony is that brick-and-mortar players have helped create this monster. Five years after the bursting of the Internet bubble, online banking has achieved mass acceptance-albeit without the gushing headlines of the past. A February study by the Pew Internet and American Life Project found that 53 million people, or 44 percent of all Internet users, now do at least some of their banking online, a 47 percent jump over 2002 levels. Of all major Internet activities-including buying books and travel tickets-banking has grown the fastest, the study found.
Large banks have been the biggest beneficiaries. Bank of America alone boasts some 13 million online customers; Wells Fargo & Co. reports nearly seven million. In contrast, all Internet-only banks combined have about five million customers. But as Americans get more comfortable banking online, they're also more willing to shop for better deals. Up to 95 percent of the $1 billion new deposits ING Direct takes in each month come from other institutions. E*Trade Bank officials recently said that they're gaining $50 million in deposits monthly from top-10 institutions. "We view the traditional brick-and-mortar banks as excellent farm clubs for creating customers," says Steve Gutterman, an evp for E*Trade Financial, which boasts 650,000 banking customers and $12.5 billion in deposits.
No one is talking about big banks re-launching Internet-only subsidiaries, a la the old Bank One's Wingspan or e-Citi. But Graeber says some bankers fret that if they enable easy inter-bank electronic transfers-something customers increasingly are demanding-they'll be left only with low-balance checking accounts. She says if traditional institutions don't come up with some new tactics, such as "relationship pricing" to retain affluent customers' deposits, "people will stay with them for the convenience of a branch and an ATM network, but put the bulk of their money somewhere else."
All the hand-wringing and mimicry suits Kuhlmann just fine. The brash, ultra-competitive Canadian regularly tweaks the noses of hidebound bankers for lacking creativity and nimbleness. He calls himself an "anti-banker's banker," and has put rivals on notice that he's out to steal away parts of their business. "Arkadi's a visionary," says evp Jim Kelly. "He infuses this place with a winning attitude, and is always looking for competitors to benchmark ourselves against."
At its core, Kuhlmann says, ING Direct differentiates itself through customer empowerment and efficiency. Most bankers "look first at improving shareholder returns, and then hope some of that results in a better deal for customers," he explains. "We say, 'How can we differentiate ourselves [in customers' eyes] from other offerings?' And then we build an infrastructure to deliver that, and try to make returns."
As Kuhlmann sees it, banking is a commodity business, driven more by pricing than relationships. Unburdened by old legacy systems, ING Direct has been able to leverage technology and low-cost distribution-Web and phone only-to gain a distinct cost advantage over most rivals. The company boasts $42 million in assets per employee, versus an industry average of about $5 million. That allows it to price its simple product set aggressively. In early October, ING Direct was paying 3.4 percent interest on a savings account with no minimum balance, and 4.2 percent on a one-year CD. That compared to 2.32 percent for an average money-market account, and a 3.73 percent for the CD, according to Bankrate.com.
While cross-selling is important, Kuhlmann wants each product to survive and thrive on its own merits, not because of relationships. "There's a saying around here: 'If you want a relationship, get a dog,'" Kelly says. "This business is becoming so commoditized, there's no way you can count on a relationship to overprice in one area and get better pricing in another. ... We believe each product should be able to stand on its own."
So deep is this belief that Kuhlmann doesn't offer such standard online fare as bill-pay or account aggregation, which are intended to make relationships more "sticky." Nor will he offer checking, which most bankers regard as the centerpiece of relationships, figuring it's too paper- and fraud-intensive, and too difficult to satisfy customers. "I don't know how to create a good value proposition and make money with checking," he says. "It's the no. 1 area where you destroy goodwill from customers. Even if you offer free checking, consumers don't believe it. You ding them with late charges and fees and holds. ... They always see it as a bait-and-switch."
Many bankers-even some of the online-only players-reject such thinking, arguing that relationship selling remains the key to profitability. E*Trade, for instance, recently launched a new product, "E*Trade Complete," which allows customers to easily move money between various banking and brokerage accounts. "Creating a deeper relationship with customers ... gives us some pricing power," Gutterman says. Adds Douglas Freeman, CEO of Alpharetta, GA-based NetBank and a former head of consumer banking at BofA: "If you want to sell more products to a customer, you want to be considered their primary financial institution. That's always tied to where you have your transaction account." Freeman attributes ING Direct's growth to a simple willingness to pay up for deposits.
No doubt, ING Direct has benefited enormously from the willingness of its deep-pocketed parent to finance global growth, and from timing-and not only in North America. Capitalizing on low interest rates and slumping equity markets, the unit is now the largest standalone Internet bank in the world, with 13.5 million customers in nine countries, including Australia, Germany and France, and $213 billion in deposits globally. No geography has exceeded expectations more than the States, and analysts say the road to success is based as much on attitude as rates.
Once a manager at Royal Bank of Canada, Kuhlmann launched the first ING Direct north of the border in 1997, and was tapped to head up the U.S. effort in 2000. Back then, the ING brand was virtually unknown here. Acquisitions of Aetna's U.S. financial services business and insurer Reliastar by the Dutch parent came with a general brand awareness campaign.
Kuhlmann's team, meanwhile, set out to create its own separate identity. Orange, the colors of the Dutch monarchy, provided an early point of differentiation. "Everyone in banking is either blue or green. We saw orange as a real opportunity to stand out," Kelly says.
The color subtly defines a culture that competes hard, celebrates victories with annual black-tie dinners and holds a company "birthday party" each September. ING Direct's 1,100 employees subscribe to an "Orange code," which begins with the statement "We are new here"-a call to approach each day as "a new chance to earn our customers' business," Kelly explains.
The company's mantra is that it's teaching America how to save. The cost benefits of technology are supplemented by a simple set of products, and enrollment and security processes that make it easy and attractive to conduct business. During the enrollment process, ING Direct prompts people to sign up for regular transfers from their transaction accounts to slowly build up their balances. "This isn't hot money. These are systematic savers with $10,000 in their accounts who keep adding to it," Graeber says. "It's a very loyal group." The company also advocates consumer privacy initiatives at every turn, and solicits feedback through interactive polls on its Web site, positioning itself as a customer champion. "Most bankers misunderstand the voraciousness of consumers when it comes to protecting their privacy," Kuhlmann says.
The formula seems to be working. Fully 25 percent of ING Direct's customers have chosen to opt-in to marketing pitches. More importantly, they're willing to recommend ING Direct to their friends. Kuhlmann says 38 percent of the company's customers come from referrals. "The marketing approach is almost viral," says George Tubin, an analyst with TowerGroup.
For its mostly urban clients who like a physical presence, the company has cafes in four big cities-a figure that will jump to a dozen over the next year. They're not branches, but offer an opportunity for customers to touch base, and to buy coffee, bikes and ING-branded items such as orange soccer balls.
For all that, some customers almost certainly view ING Direct's model as customer-unfriendly. Kuhlmann says the company "weeds out" up to five percent of its customers each month, for violations like asking for statements via mail, contacting the call-center too often or demanding a better deal because they have a large sum of money to deposit. "This is a take-out window," he says. "We don't discriminate with customers, except in terms of behavior. If someone has a lot of demands, we'll say, 'This is not the right thing for you. You need to go back to your community bank, which will gladly charge you for the service you want.'"
Can this unorthodox approach continue to thrive amid rising rates and me-too competition? There are limits. Continued Fed rate hikes are taking a toll. In the second quarter, ING Direct earned $60.3 million-not much for a thrift its size-and had a razor-thin margin of 1.33 percent, down 62 basis points from a year ago. Kuhlmann concedes it will be difficult to maintain both profits and growth in this environment, and says he's inclined to pursue the latter. As ING Direct gets bigger, the law of large numbers might make even that a tough task without more products, Graeber says.
Kuhlmann and his team are noncommittal on more products. Mutual funds and other investment products that dovetail well with savings might be good add-on products, and Kelly even says that-gasp!-checking could become a core offering once imaging technologies are better developed. "The question is, at what point do we balance out the growth, risk and profit and look more like a traditional regional bank?" Kuhlmann says. Given the success ING Direct has experienced defying convention, don't count on that happening any time soon.
