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Understand ING Direct’s competitive strategy within the banking industry. Also describe factors attributed to ING Direct’s success. |
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Focused Product Strategy: ING Direct targets affluent customers by offering simple products, no or low fees, high returns on deposits, and service via call centers, the internet and mail. ING Direct offers predominantly savings accounts in all countries; in some countries it also offers products like: term deposits, consumer loans, mortgages, life insurance, brokerage and a few selected mutual funds.
Very competitive cost structure: ING Direct considers Fidelity and other asset managers as their peers, specifically in terms expense-to-asset ratio. At maximum 40 basis points, this is at least two percent lower than that at a traditional branch-bank, which typically operates at around two-and-a-half percent. ING Direct even expects their ration to go lower to somewhere around thirty basis points in 2006.
Staying away from branch-delivery: ING Direct does not offer traditional checking/current accounts, which are usually used to pay monthly bills and buy goods in stores. These accounts have a large number of transactions each month, naturally requiring a physical branch to service customers’ needs. For these types of account, ING Direct points its customers to their local banks. By encouraging customers to use low cost channels such as the internet or telephone, ING Direct managed to keep their cost really low.
Low fees, few requirements and simple rules: The problem with many traditional banks is that they move a lot of their income into the fee structure. Customers tend not to like this, especially when banks hide their fees under special rules, such as “If your balance exceeds one thousand euros your fee is reduced…”. ING Direct became very successful by getting away from the intricacies of fees by keeping them low and simple.
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2.Present your thoughts regarding technology contributions to the bank’s strategy. Was technology a crucial factor in enabling the bank to sustain its advantages? If no, why not and if yes in what way? |
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Information technology plays a really important role which is crucial in the success of ING Direct. By concentrating on the internet and the telephone for customer access, the bank established itself as a “click-only” financial service institution, rather than the more traditional “click-and-mortar” or even “brick-and-mortar” banks. |
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This strategy enabled ING Direct to sustain its advantages mainly through the following aspects: |
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As discussed above, this strategy enabled them to push down costs, which in turn helps keep fees low, savings interest rates high and credit rates low. |
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Adding customers by hundreds of thousands every month is made possible by this extensive use of information technology. Customers can simply open accounts on-line or through call centers without having to flock into bank branch offices. |
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Replication of services into new countries is made simple by relying on information technology to automatically set operations up. |
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3.Prepare your assessments on the sustainability of the strategy. Is there any barrier that may inhibit imitation (you may use the ideas presented in the assigned reading)? Describe in detail. |
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4.E-banking, a term popularly used for the way ING Direct operates, provides a very low entry-barrier for competitors to enter. Any bank can quickly duplicate ING Directs strategy and services, making imitation an easy task. In order to sustain its leading position, ING Direct should modify its strategy to cover some of its “shortcomings” to make imitation harder. Namely, it should provide a quick solution to the issues described below.
By its own simplicity, ING Direct is limiting its appeal to a certain part of the society, i.e. people who do not like complex (and thus high cost) banking services. There are however, a large section of people in many countries who do need relatively more intricate types of transaction. These people will not be entirely convinced that ING Direct is the only bank they need.
The downside to ING Direct is that the only way to transfer money between ING and your “brick-and-mortar” checking account is via inter-bank transfer. In the US this is known as the ACH (Automatic Clearing House). It is how banks -- with the exception of Fed wire -- electronically transfer money to other banks. Paper checks are also cleared this way. It normally takes 2-3 days for money to be transferred and accounts settled. Since 2004 banks could cut down the processing time to mere hours, but for the consumer, it will still be 2 day wait for accounts to settle. Savings deposits are also subject to a 5-day business day hold before it can be transferred/withdrawn out.
Another downside is that ING Direct’s savings account is for personal use only, and can be established either for one person "Individual", or two people "Joint account". The account cannot be used for business, as a pension, or have a power of attorney attached (beneficiaries). Revocable trust, bancassurance products, or other trust accounts are also not offered.
Another limitation is how ING Direct compounds interest on their certificates of deposit (CDs). ING Direct compounds interest on an annual basis, not on a daily basis like so many other banks. It's best if you do some compound interest calculations first, among other criteria on judging a bank, before committing your money for the long haul.
Access to funds by their owners, i.e. the customers, will help ING Direct to compete in societies where cash is still “king”. It would have been a great idea to allow ING Direct customers to withdraw funds through ATM machines, even those owned and operated by other banks. Unfortunately, ING Direct has no immediate plans to allow ATM access to funds.
How long could the bank enjoy its advantages considering possible fierce competition from other leading banks (Citibank, Standard Chartered Bank, etc.)? What are your recommendations regarding ING Direct future? What should they do next?
During its relatively very short lifetime, ING Direct has outgrown most if not all of its competitors in e-banking. The bank aims to pay the highest rates on savings accounts and will spend lots of money to advertise this. In 2004 it became the largest on-line bank, passing E*Trade Bank.Paying high rates while at the same time spending millions on marketing communications and keeping profits to increase are things very daunting for a bank to do simultaneously. The high-volume, low-margin business depends on using on-line efficiencies to offer a bare-bones service to low-maintenance customers. The bank’s uniqueness is what makes it difficult for traditional banks to follow. It will be a big challenge for bank like Citibank and Standard Chartered Bank to do what IND Direct did. Competition will come from start-up banks which dare to go entirely “click-only” and keep itself focused on being “retro and unique”.
Attracted by the ING Direct’s easy success, competitors in the US are crowding into the market. MetLife launched an Internet bank in late 2002 and has been heavily promoting its high rates -- now 2.5% on savings. New York's Emigrant Savings Bank opened one in January and is pushing a 3% rate. Hence, it will be quite surprising if ING Direct will remain “unchallenged” for much longer. The entry barrier into e-banking has been known to be quite low.
Rising short-term interest rates present another hurdle, even though they're likely to attract more customers. Because long-term rates aren't climbing at the same pace, income from ING Direct's loans and investments, mostly in mortgage securities, will not rise as fast, squeezing the bank's already tight profit margins. Many large banks delay hiking the rates they pay on deposits to get more mileage out of rate spreads, but on-line banks do not have that luxury.
Now that ING Direct has captured a lot of customers, the key is to cross-sell and increase customer loyalty. It will be best if ING Direct start to develop a position that allows it to serve customers as their “cash-management bank of choice”. This will mainly consist of strengthening its products and operations along 4 main services, namely: |
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1.Collections: allowing customers to transfer incoming funds into their savings account at ING Direct. This implies a vast improvement in its inter-bank transfer facilities.
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2.Payments: simplifying transactions where customers pay to other accounts, including those outside ING Direct.
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3.Loans: improving credit approvals by allowing customers to get their loan applications filled in a short time. |
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4.Investments: helping customers to place excess funds into investment-grade products, including insurance- and money-market related ones. |
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