Regional strategies for global success

A good ten years was all that was needed to revolutionise retail banking in numerous developed markets around the globe - a very short timespan compared with the usually long tradition of the big, established financial institutions. And this is why the term "revolution" seems quite appropriate. It was triggered by a business model whose sustainability was initially questioned by many leading representatives of the classical banks: they saw direct banking, i.e. banking without branches, as a niche segment and dismissed the rapid success of direct banks as, at best, a short-lived fad - as a whim of the so-called New Economy, so to speak.

Only one or two far-sighted banking experts saw this business model early on as a forward-looking response to major challenges in retail banking. The fact that, when branchless banks were winning retail clients in large numbers, many traditional banks were focused mainly on investment banking and M&A funding, further obscured awareness of the change taking place.

Breaking out of the niche

Direct banking can no longer be said to be a niche business - either in Europe or in North America, Asia or Australia. Not only in Germany, many financial institutions are now trying to put a halt to any further client migration by extending their range of products and services to include direct banking. Current figures point to the way ahead: ING Direct, the world's leading direct banking group, of which ING-Diba is the strongest performer, has more than 21 million clients at present in the US, Canada, Australia, France, the UK, Spain, Italy, Germany and Austria. ING Direct's total client retail balances amount to around € 318 billion.

In all these countries, the direct banks belonging to the Dutch ING Group managed to acquire a large clientele within a short time and thus to take advantage of the economies of scale that are indispensable in retail business. ING Direct is one of the fastest-growing banks worldwide and plays a leading role in all the markets in which it is represented, while ING-Diba, with over 6.5 million clients, is Europe's biggest direct bank by far.

Yet the global success of direct banks cannot of course be illustrated solely by the example of ING Direct, even if this group has performed groundbreaking work in many countries. Other providers, whose business models display both parallels and differences in equal measure, also recognised the market potential at an early stage.

In Australia, AMP-Banking, which is owned by the country's largest life insurance firm, has been shaking up retail business alongside ING Direct for a few years now. In the UK, First Direct started business as early as 1989, while E-trade, the leading online financial service provider in the US, was also set up around 20 years ago. For just under ten years, the Bank of East Asia (BEA), Hong Kong's biggest independent financial institution, has been offering cyber banking, too - with remarkable success.

While some banks - like ING-Diba, for example - concentrate solely on direct banking, other international financial groups such as Citigroup and Santander are not interested in going branchless. For them, reaching clients directly is therefore not an alternative to traditional banking but an additional marketing channel.

Overall, direct banking remains a fast-growing line of business, particularly in Europe, North America and in parts of Asia. At the same time, as new competitors enter the market, individual growth rates are no longer quite as spectacular as they used to be.

Global direct banking strategy?

If direct banking has revolutionised financial institutions' retail client segment virtually all over the world, this raises two main questions: What makes this business model so widely successful? And is there a global direct banking strategy that can be implemented strictly? The answer to the first question is quite simple: direct banking ensures that there is a more or less symbiotic relationship between institutions' earnings expectations and clients' wishes and needs. The answer to the question about a global strategy, on the other hand, is an apparent contradiction: success in different markets calls for both differentiation and standardisation in equal measure.

But let us first take a look at the aforementioned symbiosis between direct banks and retail clients. There is no question that the big, tradition-rich banks have rediscovered retail business. Only a few years ago, this line of business often appeared to lead a "Cinderella existence" at some banks. Many institutions focused on investment banking, which, while promising more attractive earnings in the short term, has at the same time the drawback of being highly volatile.

In the retail banking sector, on the other hand, banks have in the past been able to earn stable profits. Experts forecast that by 2015 retail banking will grow by 3.2% annually. That may initially sound quite a modest rate, but when one considers the volumes involved in retail banking, the potential becomes obvious. According to the Boston Consulting Group, retail banking accounts for over half of all bank earnings worldwide, with two-thirds of this income generated by so-called mass-market business, which includes such simple mainstream products as savings accounts and personal loans.

So no wonder there is fierce competition on the retail market. Retail clients are being wooed worldwide. While this is both nice and advantageous for them, it puts banks' profit margins under pressure. That goes particularly for Germany, where the long overdue process of consolidation in the banking sector is still in its early stages. The growing pressure on margins is forcing banks and savings institutions to create high-performance business units in which economies of scale can unfold their full effect, since the battle for retail clients cannot be won solely via price. Permanently favourable cost structures with a constantly high quality level are important. "Cheap at any price" should not be the motto. What clients want instead is attractive and fairly-priced products and services.

The direct banks have a business model which - if implemented consistently - puts them a few steps ahead of many other institutions in this respect. Thanks to their lean product portfolio and flat structures, and naturally by doing without branches, direct banks operate much more cost-efficiently than classical banks. They also win a large number of clients within a short time and are thus quickly able to achieve the economies of scale mentioned earlier. This means that direct banks are looking for clients who no longer see banking transactions as "sovereign processes", but conduct their financial business quite pragmatically online or by telephone.

A symbiotic relationship

Retail clients today are not only more willing to switch banks, they are also increasingly using modern IT facilities to obtain information and select the right products and services - whether savings products, consumer loans, property finance or low-cost settlement of securities transactions. In many cases, clients are already a match for bank advisors in this respect. The numerous interactive tools put on the Internet by direct banks help them choose suitable products and services.

The best advertisement for direct banking is its practicality. Clients realise very quickly that it not only allows them to take care of their finances quite conveniently without worrying about bank opening hours, but also offers them attractive prices at the same time. In other words, banks' aim of creating competitive cost structures in retail business is fully in line with clients' desire to benefit from the best possible prices. So a symbiotic relationship can indeed be said to exist.

This effect does not fully unfold, on the other hand, if online banking is offered merely as an alternative distribution channel to classical branch business. In this case, online clients help their bank to cut costs, but enjoy little or no benefits themselves since, because the bank conducts branch business at the same time, its cost structures are still less favourable than those of a pure direct bank without any branches.

The direct banking principle can be applied in all developed markets around the globe - ING Direct is a good example. Yet it would be wrong to think that an identical model can be established in different countries. Admittedly, the idea sounds appealing: a globally operating direct bank offering the same products and services in Europe, America and Asia. The bank's headquarters could then be set up in a country with the lowest personnel costs and taxes. Such a bank - in theory at any rate - would be unbeatably competitive, as it would be able to exploit global economies of scale.

Such an idea remains unrealistic, however. It may initially sound paradoxical, but even in the strongly internationalised world of banking, the general rule - at least in the retail segment - is that all business is local, though it would be more correct to talk about business being regional rather than local in this connection. TVs, computers and mobile phones can be produced for global markets. But when it comes to financial and retirement products and services, widely differing client preferences and, in particular, quite specific legal frameworks still prevail at national level.

Standardisation and differentiation

ING Direct adjusted to this situation right from the start. The relatively small head office in Hoofddorp, near Amsterdam, gives the branches at the individual locations enough room to adapt to the local environment. This made it possible, for example, to tune marketing strategies to regional specifities.

Products, too, which are basically very similar, are geared to local requirements. Wherever it makes sense, branches introduce additional products, though these naturally have to fit into ING Direct's overall product portfolio. In France, for example, ING Direct offers a special retirement product and in the UK house insurance.

So the idea that global direct banking is possible from India, for example, without taking regional specifities into account is unrealistic. As much standardisation as possible and as much differentiation as necessary must therefore be the motto.

While direct bank clients are adept at handling modern communication media, many still want some level of "felt closeness". This need naturally increases according to the intensity of the relationship between clients and direct bank. If a branchless bank completely replaces their house bank, most clients find it important that the new provider is present in their own country. It is no accident that ING-Diba has invested heavily over the past few years to improve their call centres both technically and qualitatively.

While outsourcing the dialogue with clients - possibly even abroad - would be more cost-efficient, it would ultimately be counter-productive. A German bank client wants to talk to a German-speaking call centre agent, in the same way that a French or Italian client wants to have his wishes or instructions handled by a French-speaking or Italian-speaking agent. There are clear limits to globalisation in this respect.

Another thing is that not all markets appear suitable for successful direct banking. A modern, well-functioning infrastructure is an important condition. This means that mobile and landline phone networks in the host countries must be state-of-the-art. In addition, as many potential clients as possible should have fast Internet access. At least just as important is a large population including many citizens with an above-average income, a high level of savings and strong spending power. After all, around 70% of earnings in international retail banking is made in the US, Japan and the five richest European countries.

But there are at the same time direct banks that are deliberately steering a different course. Direct bank subsidiary RaboDirect, for example, focuses more on smaller markets with smaller populations such as New Zealand and Ireland. Although the competitive pressure there is not as strong as in the classical markets, growth potential remains limited. Yet most internationally expanding banks want to go where the action is - that is, where plenty of clients and plenty of money await them.

It undoubtedly suits a branchless financial institution seeking to establish itself in a new market if the banking system in the host country was previously encrusted and not exactly customer-friendly. In Australia, for example, clients used to be charged horrendous fees by the traditional banks. Since ING Direct and other low-price banks entered the market, the whole banking industry has adjusted and now offers customer-friendlier products and services.

Direct banks also adopt different market entry strategies. Often potential clients are offered attractive consumer loans on which they are charged much less interest than at traditional branch banks. This seems to make sense, as banks can make good earnings with this product within a relatively short time.

The ING Direct Group, on the other hand, opted for a different approach and gained a foothold in new markets by offering attractive savings products. In most cases, these were - like in Germany - call accounts with an above-average rate of interest. Although they are not such fast money earners as consumer loans, ING Direct's main concern is something else: establishing a strong brand that helps to strengthen customer loyalty. At a time when a steady stream of new banks and other financial institutions from home and abroad are vying for clients, this is a priceless advantage.

Brand strengthens resistance

A brand is created in people's heads. By offering savings accounts with an attractive rate of interest, ING-Diba, for example, managed to make a name for itself as a fair bank with easy-to-understand products and high-quality service. Thanks to its good reputation, it is proving quite resistant to short-term killer prices set by institutions which have their head office outside the EU in some cases. A successful direct bank should be seen by its clients as sound and competitive, but not as aggressive and cheap.

A market entry strategy based on hardselling consumer loans also harbours the risk of a loss of reputation. If, for example, an economic slowdown and rising unemployment result in clients defaulting on their loans and facing social problems, banks may very quickly come under fire from the media and consumer organisations. This is when terms such as "vampire banking" are bandied around, which ultimately harms the industry as a whole.

Developing a trusted brand built on reliability, friendliness, fairness and soundness is vital to the success of direct banks in particular, which only communicate with their clients at a distance. This is why, when entering new markets, ING Direct has always attached special importance to establishing a strong brand image.