ING Direct - a subsidiary of ING, one of Europe's largest financial services groups - has enjoyed resounding success with its "bare bones" internet- and telephone-based services. As Professor of Banking and Finance Jean Dermine details, the standard client package of a savings account, a mortgage and a selection of a mere six mutual funds has proven a palpable hit in Europe, Australia, and North America.
The online banking operation stands as a first-rate example of how a newcomer competing against a host of very well-established banks can gain the upper hand through creative applications of relatively new technology (i.e., internet services) and a basic, but widely appealing package of standard financial products. However, a complete evaluation of ING's strategy must involve a consideration of both return and risk.
The case starts with ING Direct's French operations, and how the firm made a bold and attention-grabbing strategic gambit in early 2004 by offering 5% on savings deposits, rising to 7% by year's end. This was seen as remarkable at a time when the standard rate was only 2%. More importantly, ING Direct was also offering more than the short-term market rate - a ploy that won it many new clients.
Dermine examines why ING Direct has run a mismatch of maturities, due to its investment of short-term deposits in long-term, fixed-interest rate assets. In fact, its tactics have allowed it to invest in high-yield assets in a fully monitored manner, with both an earnings-at-risk and economic value-at-risk approach that was highly recommended by the world's most respected banking authority, the Basel Committee of Banking Supervision.
The author briefly describes the similarities between ING Direct's aggressive marketing campaign and the two "deposit wars" that shook up the banking worlds of Spain and Belgium in the late 80s. The case also stands as a prime example of how -- especially for normal, middle class clients - simplicity can sell well for banking services. ING's CEO reflects on how so many competitors did themselves a disservice by engaging in "an over-investment in complexity". "We don't need to add another product to add value," he said.
The study offers an excellent risk/return insight into a contemporary case of a financial service company employing a strategy through a mismatch of maturities. The teaching notes provide the basis for a discussion involving the potential risk this strategy may have generated in four key areas: ROE; net interest margin at risk; economic value at risk, and risk mitigating factors.
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