Dutch -owned factory outlet of banking’ is growing fast

PHILADELPHIA – Depositors are sending more than $1 billion a month to ING Direct Bank, an unusual, Dutch-owned, Wilmington, Del.-based lender that offers competitive savings and loan rates, has no branches and fires customers who call for help too often.

“We’re the factory outlet” of banking, making up for small margins with high-volume sales of savings accounts and mortgages, says ING Direct’s founder and chief executive officer, Arkadi Kuhlmann, a onetime finance professor in Canada.

It’s working: ING has become the fastest-growing multibillion-dollar bank in the nation. Deposits rose 70 percent, to $22.4 billion during the 12 months ended June 30, according to the Federal Deposit Insurance Corp.

Phone, mail and Internet

That’s a lot, especially for a bank that services its two million customers by phone, mail and Internet. By comparison, expansion-minded Commerce Bancorp Inc., of Cherry Hill, N.J., amid its ambitious branch-building campaign in metropolitan New York, wowed bank-stock watchers by growing deposits by 35 percent for the year, or half as fast as ING. Total business and personal deposits at U.S. banks rose 8 percent, to $5.5 trillion.

Lots of banks have experimented with “branchless” banking; few have found it a good substitute for traditional bricks and mortar. But ING shows that at least some Americans are ready for this approach, with at least some of their money – though the bank does not offer such crucial services as checking, credit cards and bill-paying.

One of several no-frills banks that owner ING Groep NV operates in most of the world’s wealthiest nations, ING Direct opened in 2000, at the peak of the Internet bubble, which produced a crop of heavily advertised branchless banks. Most prospered more slowly than their backers hoped. Many have been sold. None is nearly as large as ING.

Doubling its profit

But ING, backed by its owner’s patient capital, has been profitable since mid-2002 and is on track in 2004 to double 2003’s $68 million profit, though that is still modest for a bank its size.

Unlike the impatient venture capitalists who backed upstart banks during the Internet boom, ING has not asked for any payback from its subsidiary, Kuhlmann said. The bank is publicly traded, but, with its European investor base, is protected from activist U.S. shareholders in search of quick profit.

To a point, ING paints itself as the small saver’s friend. “There are people who can afford high fees and big service. But most people I talk to think banking should be about two steps above popcorn purchase at a movie,” Kuhlmann said.

But if Kuhlmann considers himself the typical customer’s friend, he is not always customer-friendly: ING looks for low-maintenance depositors and home-loan borrowers who will not clog the phone lines and mail bins with requests for information they can get off their Web and quarterly account statements.

Some customers are terminated. ING figures that each call from a customer costs about $5 to answer; after-tax profit totals less than $10 per customer per month; to protect its tight margins, ING closes accounts on about 300 too-frequent callers each month.

Historically, “the customer (was) always right. But that goes on the premise that we can charge customers for everything,” Kuhlmann said. At ING, “we don’t operate on that philosophy. If you don’t have fees for everything, you can’t have customer service for everything.”

In the 1990s, big banks such as First Union (now Wachovia) and PNC hoped to be able to scale back or even eliminate hundreds of branches by relying more on call centers and the Internet. Instead, they often found themselves saddled with new expenses as customers demanded both old and new services.

ING’s profitability might seem to give renewed hope to the branchless-banking model. But because ING’s depositors are not concentrated in any one local market, and its stock is not traded apart from its foreign parent’s shares, it has escaped the attention of much of the banking establishment.

Unlike most other big banks, ING has grown without any acquisitions, but with plenty of help from a marketing campaign that has included billboard and print ads, gasoline and subway giveaways, and even ING coffeehouses in a handful of upscale neighborhoods.

The bank says it attracted $4 billion during the three months ended Sept. 30. It now ranks with MBNA Corp., Commerce Bancorp and Sovereign Bancorp Inc. as one of the biggest banks with headquarters in the Philadelphia district of the national Federal Reserve system.

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ING says it was drawn more to the region’s central location on the wealthy and populous Eastern Seaboard; it chose Wilmington over Philadelphia because better sites were available, Kuhlmann said. The bank employs 1,200, including 200 each at sites in Minnesota and California; the rest are spread among three sites in downtown Wilmington, including two renovated buildings along the city’s Christina riverfront (one designed by Philadelphia architect Frank Furness) and the former Chase Manhattan tower along Interstate 95, which ING calls Spaarpot (Dutch for “the Piggybank”).

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Though it is based in the nation’s credit-card center – across town from MBNA Corp. and other big card lenders – ING does not offer credit cards; its main products are an old-fashioned savings account, which is paying a flat 2.25 percent interest, and home mortgages. It also sells certificates of deposit, mutual funds and a few other products manufactured by other ING divisions.

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Kuhlmann says he enjoys Wilmington’s proximity to Philadelphia, with its better restaurants. But while he admires MBNA’s strong “traditional” corporate culture, he has not spent much time meeting his local peers in the financial sector. He says he does not know anyone at Commerce Bank and has never visited a Commerce branch.

But Kuhlmann does admire a Commerce rival, New York-based North Fork Bank, which is often compared to Commerce for its rapid expansion and customer-service bent, but which Kuhlmann says has done an unusually good job controlling expenses under its chairman, John Kanas.

“Sometimes, it’s hard to see how the numbers work when you’re comparing growth and profitability,” Kuhlmann said. “You need to stand the test of time.”

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PHOTO (from KRT Photo Service, 202-383-6099): PFP-INGBANK

GRAPHIC (from KRT Graphics, 202-383-6064): INGBANK

AP-NY-01-03-05 0618EST