Online Extra: ING Direct: "A Rebel With Cause"

CEO Arkadi Kuhlman discusses how the online bank keeps costs down and handles high-maintenance customers and a flattening yield curve

Attracting new deposits in an era of record low interest rates is a tough job for any bank executive. But Arkadi Kuhlmann, chief executive of ING Direct USA, a division of Dutch giant ING Group (ING ), makes it look easy.

Thanks to consistently high yields (the online bank's current offer is 2.6% on savings, while the national average is just 0.56% for bank money market accounts, according to, ING Direct has gathered $29 billion in deposits to become the fourth-largest savings institution in the U.S. in just four-and-a-half years. And thanks to its streamlined Web operations and low-margin, high-volume business model, ING Direct is also profitable, earning $250 million pretax in 2004, more than double the $110 million in income for 2003.

BusinessWeek Online's Amey Stone interviewed Kulmann for her story in the Mar. 14, 2005, issue of BusinessWeek. (she also interviewed him in 2003 for a BW Online Video View segment). Following are edited excerpts from their recent conversation:

Q: Why has ING Direct's growth been so strong, especially in the U.S.?


The financial products we have are very simple, straightforward, and easy to understand. People are looking for value, with no fees and service charges. And consumers are getting much more comfortable with direct and online banking. Also, they're really looking for an emotional link to a brand, and they like what we say about banking and savings.

Q: You sometimes compare ING Direct to a retailer. What's that all about?


In the context of Southwest (LUV ) or Wal-Mart (WMT ), there are similarities. We offer an "everyday low price," we try to have a unique approach to our industry, and we tend to be a bit more outspoken and value-driven. Basically, we're a little unorthodox compared to traditional banks. In that sense, we are a bit of a rebel with cause.

Q: Is it true that you'll actually drop customers that require too much hand-holding?


We're trying to keep costs down and offer a very simple service that appeals to customers who are self-service-oriented. Sometimes customers are used to branches, have high expectations, or require a lot of advice, so they really don't fit in. We've talked before about firing customers, but really we just explain what we do and make sure it fits into the way customers like to operate.

Q: How is ING Direct able to offer such high rates and be profitable?


Our secret is to keep operating costs at one-third the industry average. We really do have a low-cost model, so we are able to offer a better value. We run a low-margin, high-volume business. We work on a margin spread [the difference between the rate the bank pays on deposits and the amount it earns from loans and securities] of about 1.75%, while most banks work on 2.5% spread.

Q: You recently gave away gas to attract customers in Baltimore, and I myself have received several $25 checks in the mail from ING Direct trying to get me to open an account. Isn't all that marketing expensive?


There are two core competencies we have: Marketing and technology. Our marketing events in new markets have been very successful, and we've seen increases in account openings by 150% to 250%. As for the $25 check, the industry's average customer acquisition cost is around $100, so a $25 mailing isn't that much. Plus we get a lot of business by referrals.

Q: Thanks to the Fed's hiking of short-term rates, customers are now getting higher yields on their deposits. But long-term rates haven't risen by as much, so ING Direct is getting less income from loans and investments in securities. The yield curve is expected to flatten more in the months to come. Do you worry about maintaining profit growth?


The flat yield curve is one of those things that we have to work our way through. Obviously it has an impact on our profits. But we will adjust our mortgage and savings rates in line with what we need to do and the market will allow us to do. It does have an impact. I'm not saying it doesn't. But every bank, to some degree or other, will suffer through it.

Q: More direct banks are springing up now that short-term rates are more appealing. With increased competition, do you worry your customers will be drawn to other banks that might offer higher rates?


I can tell you we have half the attrition of accounts and deposits that the average bank has. That's pretty good. As rates rise, that will be put further to the test.

Q: What is the philosophy behind your branch-like savings cafés?


Branch-like is the right word. We use them as a marketing office, to talk about the products and create some visibility. We don't take deposits or conduct any financial transactions there.

Q: It seems ING Direct is facing some rising costs, such as your new headquarters (including a new savings café) and increasing head count.


High volume counteracts some of those things. Thanks to the Internet and technology, there are fewer manual paper-based processes, and we've been able to increase productivity and create efficiencies because of scale. Also, Wilmington, Del. is a low-cost environment to work in.

Q: Doesn't ING Group, your parent, have a building shaped like a sneaker? Is your new headquarters that unusual?


The building in Amsterdam has a very unique architectural design. It sits on stilts and is known as the shoe, slipper, dustbuster, and ice skate.

ING Group has been known for the avant-garde architecture of its buildings around the world. But ING Direct in the U.S. is a bit more retro. We're a low-cost provider, and our headquarters is a renovated warehouse. The theory is, if you don't have the money to do something very avant-garde and glitzy, so something very retro and unique. If you can't buy the Corvette, buy the VW and paint it pink.

    Before it's here, it's on the Bloomberg Terminal.