When ING Direct set up shop in Canada 15 years ago, it offered customers what was then a radical proposition: jettison the bricks-and-mortar world of retail branches for the new frontier of Internet banking. At the time, online-only banking was so alien a concept in Canada that the company, headquartered in the Netherlands, heralded its arrival by advertising itself as unabashedly foreign, hiring a Dutch actor to coax Canadians in his thick accent to “save your money.”
Canada was the first test market for ING’s direct banking business—the term for banks that don’t have branches—and its main attraction was savings accounts that offered rates well above the major banks, which ING could afford because it didn’t have to build and staff a branch network. It was an appealing prospect for Canadians who remembered the days of savings accounts that paid seven and eight per cent and were fed up that rates among the big banks had fallen so far. The high-interest savings account, which ING followed with discounted mortgages, helped attract nearly two million Canadian customers to the upstart bank, a successful test launch for what would eventually become the world’s largest online bank.
But that was the late 1990s. Banking in Canada today is a world apart from the staid atmosphere that ING sought to shake up with its arrival. The country is now home to a dozen direct banks operated by everyone from Manulife to President’s Choice, all offering their own version of high-interest savings accounts. Even Canadian Tire offers customers a chance to earn interest on their money.
Interest rates, too, aren’t what they were when ING Direct opened its doors in 1997. These days, the bank’s investment savings account pays a mere 1.35 per cent, one of the lowest among direct banks and only slightly above some of the major banks. All this has left ING scrambling to reinvent itself at a time when Canadians are running up huge debts and simply aren’t saving their money anymore.
In an effort to shift its focus, ING Direct announced last month that after 15 years it was dropping its famous tag line, “Save your money,” in favour of something called “Forward banking” as part of a campaign to rebrand itself as a full-service bank. The gap-toothed Dutch actor has been replaced by slightly more confusing ads involving exploding water coolers and velvet-roped stanchions—icons of old-style banking. The commercials showcase the handful of branch-like ING cafés the company has opened in Vancouver, Calgary, Toronto and Montreal, where customers can go to make coffee, lounge on couches and bank on tablet computers. It’s a move the company hopes will recast its brand as a place for Canadians not simply to park some money in a savings account, but move their business into ING’s expanding product line of mutual funds, chequing accounts and RSPs. “It’s a big change for us. It’s bold in some ways,” says Peter Aceto, ING Direct’s Canadian CEO. “The time has come for us to have a new battle cry to wake Canadians up and let them know that we can be a part of their everyday lives now, not just for savings.”
But the campaign belies just how desperately firms like ING Direct need to diversify their business. Profit margins are being squeezed for all banks these days, but particularly for direct banks, who rely disproportionately on the spread between the rates they charge for mortgages and the rates they pay for deposits. Those margins have been shrinking, as has the percentage of disposable income that Canadians are socking away in savings accounts. Statistics Canada reported the amount of personal savings in Canada fell nearly 18 per cent last year.
In a February credit report, ratings agency Moody’s put ING’s Canadian operations on review for a downgrade, due, in part, to its “narrow business model, the threat posed by larger domestic players and a funding reliance on online high-interest deposits.”
The company has expanded its product line beyond savings accounts and mortgages with a slate of low-fee mutual funds, RSPs and tax-free savings accounts. It launched a no-fee chequing account last year that pays interest, with bank machine access on the Exchange network of ATMs mainly operated by credit unions. It hopes to unveil a credit card sometime next year.
ING Direct added 120,000 new customers in Canada last year and has so far signed up 100,000 for its chequing account. Aceto says the numbers exceeded expectations, but they represent a fraction of the bank’s 1.8-million customer base. “We really would like to have done more, put it that way,” he says.
But growing in an era of low interest rates, economic uncertainty and increasing competition is no easy task for a company that, no longer the scrappy upstart, now sits mid-pack among Canadian banks: it is big enough to qualify as the country’s seventh-largest bank.
Among the most aggressive of ING’s online banking competitors is Ally Financial, the new name for U.S. auto-financing company GMAC, which launched its own high-interest savings account in Canada—complete with quirky TV ads—in 2009, after purchasing a Toronto-based trust company. But Ally is on increasingly shaky ground lately as the company continues to struggle to pay off the bulk of its $17-billion bailout by the U.S. government. It cut back its two per cent rate on its high-interest savings accounts and in December announced plans to sell its $6-billion Canadian mortgage business to independent mortgage finance company MCAP.
The stiffest competition for ING Direct has come not from smaller players with higher rates, but from the Big Six banks, who moved quickly to offer their own online-only, high-interest savings accounts and low-rate mortgages, and have opened up their products to brokers.“What’s happened in the last several years is all these big institutions have all decided to compete side by side with ING,” says Carlos Cardone, senior consultant and managing director at Investor Economics.
Ultra-low interest rates have actually increased the amount of money flowing into high-interest savings accounts. Even with rock-bottom rates, such accounts appear to many people to offer less risk than investing in today’s volatile stock markets, while still paying a premium over other less risky short-term investments like GICs and money market mutual funds. When interest rates bottomed out in 2009, it unleashed a torrent of cash—nearly $230 billion—that flowed “virtually overnight” into Canadian high-interest savings accounts, Cardone says.
But while companies like ING Direct have held on to their customers and even expanded their high-interest savings accounts, the big banks have grown even faster. “The market for direct banking appears to be saturated,” says banking industry consultant David McVay of McVay and Associates. “Their problem is that their rate differential to the big banks is not enough to get customers to switch. They are able to hold their share, but they are finding it difficult to grow their share.”
ING now ranks fourth in Canada for high-interest savings accounts, behind Royal Bank, TD Canada Trust and CIBC, says Cardone, but ahead of Scotiabank and Bank of Montreal. Its growth has also been hampered by problems facing its parent company, ING Groep N.V., which is in the midst of a forced restructuring after it needed a $13-billion bailout from the Dutch government in 2009. To gain support from European regulators, the company was forced to separate its insurance and banking arms and sell several subsidiaries including ING Direct in the U.S., which was bought by Capital One for $9 billion this year. Last week, the Dutch financial giant announced first-quarter earnings that were down sharply compared to the same time last year.
The ongoing European financial crisis has made it difficult for ING’s Canadian subsidiary to compete with domestic banks that mostly escaped the financial crisis unscathed. “We’d like to grow a little more aggressively,” Aceto says. “But European-based institutions, their priority has not been on growth.”
Aceto says ING’s European owners are still committed to Canada, whose banking system proved remarkably resilient during the financial crisis. “They love Canada,” he says, adding that many of those who helped launch ING in Canada in the ’90s now run the company’s direct banking subsidiaries in other countries. He also says he welcomes the increasing competition to ING’s model of banking, since it raises awareness that there are alternatives to Canada’s major banks. “With our marketing dollars alone, it’s difficult to move 30 million Canadians,” Aceto says. “It’s an odd time to be lobbying for being aggressive and for competition, but I still think there’s room for competition in Canada.”
For the sake of a company that now finds itself under siege from the same banks whose business model it so disrupted more than a decade ago, he’d better hope he’s right.