Transaction Facilities for the Customers Particularly Through ING Direct - Research Paper Example

ING Group is the Netherlands based global financial institution, which offers banking, insurance as well as other asset management services. ING is the abbreviated form of Internationale Nederlanden Groep, which in English means International Netherlands Group. Headquartered in Zuidas in Amsterdam, Netherlands, ING operates in over 40 countries, employing over 100,000 people, and servicing over 85 million private, corporate and institutional clients. (ing.com). ING was established in the year 1991, with the merger of two major groups, Nationale-Nederlanden and NMB Postbank. Before the merger, these two groups got formed after a series of mergers and acquisitions of various Dutch financial entities. The roots of ING can be traced to two insurers named, De Nationale Levensverzekering Bank and De Nederlanden van 1845, and then to three public bank services such as De Rijkspostspaarbank, De Postcheque and Girodienst and Nederlandsche Middenstands Bank. (ing.com 2010). All these entities are only considered as the legal predecessors for the ‘founding fathers’ of ING, which is Nationale-Nederlanden and NMB Postbank Group. From those beginnings, ING developed into a global firm through various acquisitions as well as starting their own new services like ING Direct. Its first major acquisition was the Barings Bank in 1995, which increased its brand recognition around the world and strengthened its wholesale banking presence in the emerging markets. (ing.com 2010). Speaking about emerging markets, ING made its presence in India through ING Vysya Life Insurance and in China through its association with Bank of Beijing. It doubled its operations in United States through acquisitions of established institutions including Equitable of Iowa, ReliaStar, Aetna Financial Services and merchant bank Furman Selz. ING started ING Direct, a branchless online savings bank, in 1997 in Canada. Now, it has spread to around 10 countries becoming the world leader in this segment of banking. Although, its global reach has been on optimal levels, its results and profits suffered due to the global downturn in 2007 and 2008. So, during the last year and in the current year, ING is carrying out various restructuring measures to again optimize its position. External environment (PEST and SWOT) Political ING is operating in more than 40 countries, with each having their own political governments, polices and laws. With the laws applicable to the entire banking or insurance industry, ING has to reorient or reorienting its operations based on these factors. For example, while carrying out its marketing efforts in UK, it has to follow or could be impacted by governmental agencies like 'British Advertising Standards Authority'. Even in its base in the Netherlands, its functioning is influenced by the Dutch government, as it accepted a capital injection of €10bn in 2008 in exchange for core securities. In December 2009, ING completed its planned repurchase of €5bn of the Core Tier 1 securities issued to the Dutch State and its € 7.5 billion. (Karouski 2009). Thus, ING will continue to be impacted by political factors both in its home as well as in its foreign operations. Economic With world economy continuing to face the effects of global downturn and is still in the recovery phase, ING is facing maximum impacts because of this environmental factor. For example, in U.S. the recovery has still not lead to favorable results. “The US economic recovery is still too slow to bring down the country's high level of unemployment…US economy grew by an annualised rate of 2.5% between July and September. However this is not sufficient growth to allow job creation…” (BBC 2010). Thus unemployment and job losses will not augur well for ING. That is, when job losses occurs, the affected people including the customers of ING banking had to break into their savings account to sail over the tough economic times. In addition, many key banks have also brought down the interest rates to entice the customers in, thereby becoming more competitive to ING. Social Organizations have to focus on certain social issues or behaviors as part of its external environment, and those issues can optimize its functioning. This will be quite applicable to ING Direct and its online banking. Even with the high proliferation of internet and cashless banking services, there is still a mindset in the society that banks should have a physical presence in some locality. That way, the bank officials can engage the customers socially and build a strong customer base. However, with ING Direct offering only branchless online services, without physical presence and human personnel to handle them in a social setup, they have to take other steps to build customer loyalty and thereby hold on to them. To build and maintain a relationship with a customer that lacks the physical presence of bank personnel, trust must be the central factor in fostering customer loyalty. (Musiime and Biyaki 2010). Technological Even though organizations will try to fulfill all its technological needs in-house, sometimes organizations will need technological help from the external environment. ING group has to adopt that path way back in 2006, when it handed over a number of computer maintenance and support operations to a team of outsourcers, Accenture, Atos Origin, Getronics, and KPN under five-year deals worth a total of about $1.02 billion. (McDougall 2006). More than the technical reasons, ING adopted this strategy to reduce the costs. “It's hoping to cut annual operating costs by $584 million, including $292 million in yearly IT and operations spending reductions.” (McDougall 2006). With this form of technical outsourcing, ING has to depend on the outsourcers, who will be located in the external environment, to provide them with good service. However, if something goes wrong in that external environment, it could negatively impact its operations. Strength As discussed above, ING has strengthened its position through a series of mergers, acquisitions and joint ventures. One particular strength of this strategy is, it has always got associated with firms, which are established and strong in their own right. For example, in India, it got associated with a banking institution, Vysaya which has been in operation for close to 80 years, and in China, its partner Bank of Beijing is China's leading city commercial bank by market value. With strong performance all over the world, ING has acquired a strong brand and has been featured in one of the leading brand consultancies, the Interbrand list of 100 well known brands continuously. ING has some of the innovative services like ING Direct, ING unmortgage, etc, which further strengthens its customer base. Weaknesses When its above mentioned strategy of going for more mergers, joint ventures, etc is viewed from another perspective, it is clear that ING is not having organic growth or internal growth, as it mainly grows through association with others. The other weakness is ING’s request for financial help from the Dutch Government in 2008. Although, it has repurchased the securities, it has created a lot of negative publicity for it, as ING was in a satisfactory position and there was minimal need for it to go for that loan. In addition, the repurchasing also led to an increase in the loss figures. That is, ING reported a loss of 712 million euros in the fourth quarter of 2009, and this loss was more than double expectations, with it stowing away 686 million Euros in loan loss provisions. (Ockham Research 2010). This was up 19% from a year ago and has caused concern among the investors about potential weakness in the future. (Ockham Research 2010). Opportunities With internet spreading at a fast rate all over the world, ING with its ING Direct and other net based services have good opportunities to entice maximum customers. That is, by eliminating the need for physical bank branches and the associated overhead costs, ING Direct is able to provide more competitively priced products to banking customers. This factor also allows the bank to pay higher interest rates to depositors who open savings accounts, thus facilitating opportunities to bring in more customers. Then, with ING establishing in the key emerging markets of China and India, it can expect many opportunities there, as both the economies are growing at good rate. As stated by ING chief investment officer Jan Straatman, opportunities in emerging markets stem from the epicentre of world growth moving to China, India and other emerging market economies. (ingworld.ing.com). Threats The first major threat for ING will come, if the recovery of other associated sectors like housing does not get accentuated. That is, if the economy remains sluggish, the prospective ING customers could avoid spending on housing and other sectors, thereby negatively impacting ING’s growth. For example, Americans are more pessimistic about how long it will take the housing and stock markets to recover, which will directly affect ING, as they will avoid availing the ING’s services. (Rasmussen Reports 2010). ING’s outsourcing plans could also give rise to threats mainly from the customers. Earlier, ING in Britain faced protests from the customers, who were against outsourcing operations to other countries, as it will lead to job losses in their own countries. Assets Its main assets are the huge customer loans that it has given to customers across the globe. It also has € 579bn worth of well rated or collateralized loans and mortgages and € 212bn worth of investments in debt securities (95.8%) and equity shares (4.2%) (Annual Report 2009). Financial assets through profit and loss stand at €233bn at fair value (Annual report 2009). Other than these its major assets include real estate assets worth € 3.6bn, property and equipment worth € 6.1 billion, intangible assets worth € 6bn, cash and balances with central bank of € 15bn and amounts due from banks worth € 43bn. Its total asset base stands at € 1164bn approximately. Besides the above mentioned assets, its equity base stands at € 39.8bn approximately (Annual report 2009). Resources Its main resources are the investors in its mutual fund, insurance and retirement schemes. The banking division resources are the investor deposits. It earns from interest income, commissions and investments in the market and premium income. Its major resources are insurance and investment contracts worth € 241bn, customer deposits worth € 469.5bn, debt securities worth € 120bn and subordinated loans and other borrowed funds amounting to € 33bn (Annual report 2009). These are the major resources of the bank to support assets worth € 1164bn. As discussed earlier, the company had to take €10bn investment from the Dutch government to source its bad debts in subprime investment and help it weather through the financial crisis. It mitigated the impact of the financial crisis by entering into an Illiquid “Asset Back-up Facility” agreement with the Dutch Government which helped it reduce its risk weighted assets by about € 13bn (Annual report 2009). Other resources used for restructuring have been the sale of various businesses like Taiwanese Life insurance business, Asian Private Banking business, selling 50% stake in PALIC and so on (Annual report 2009) Competencies, Current strategy and global management of its operations The company’s major asset is its diversification into different fields of financial market, including different types of banking, insurance and other financial consultancy services. ING has divided its product and services into two categories, one for individuals and for businesses. Under each category, ING offers various banking options and other financial services. It further divided its Banking operations into Retail banking and Commercial Banking. It operates its retail banking services in many countries in Europe and Asia. “Retail Banking provides retail and private banking services to individuals and small and medium-sized enterprises in the Netherlands, Belgium, Luxembourg, Poland, Romania, Turkey, India, Thailand and China (through a stake in Bank of Beijing)” (ing.com 2010). In European operations, it is garnering good market reach, with it being the largest retail bank in its home market of the Netherlands, with 40% of current account deposits. In its Asian operations as well, ING in association with local partners is performing optimally. However, as pointed as one of the weakness, its total reliance on local partners in these countries, without organic growth, could not be sustainable in the long-term. In its Commercial banking operations, ING caters to corporations and other institutions. It mainly focuses on the corporations in European countries particularly Netherlands, Poland, Romania and Belgium, offering services like cash management, corporate finance options, etc. ING’s acquired Barings Bank as its first acquisition in 1995 mainly to strengthen its Commercial banking operations. However it severed ties with Barings Bank in 2005 and got associated with other commercial banking operations. Although, this move was considered risky, it did not result in any dangers to ING, and so this move regarding commercial banking will have positive effect on ING’s sustainability. One of the key components of ING banking operations is ING Direct, the branchless online wing. It operates in 9 countries, Canada, Spain, Australia, France, the US, Italy, Germany, the UK and Austria. (ing.com 2010). With no branches and even ATM or debit cards, all the money transactions are carried out through the internet. So, with no need for physical presence or personnel, ING is able to cut costs maximally, transferring major portion of those cuts to increase in the interest rates for the ING Direct’s customers. High interest rates bring in more customers and so this part of ING banking can be sustainable, with only few addition of services needed. ING insurance operates throughout Americas, Asia and Europe. Its activities are structured by region: Insurance Benelux, Insurance Central & Rest of Europe, Insurance United States, Insurance Latin America and Insurance Asia/Pacific. (ing.com 2010). Among these operations, ING’s US Insurance provides retirement services along with life insurance options, and is the third-largest provider of defined contribution retirement plans. However, according to Moody’s, “ING U.S.’s net income remains weak, due to both continuing legacy variable annuity issues, as well as above- average investment losses,” (Buhayar 2010).This weak performance in U.S. and importantly because of other issues in the combined operations of its Banking and Insurance, ING has taken a key step. That is, feeling the lack of sustainability in combined operations, ING has decided to separate its insurance businesses from its banking operations by 2013 as part of deal with European Commission. “ING agreed to split the units globally by the end of 2013 to gain European Commission approval for a bailout that included 10bn euros ($13.1bn) of state aid and the transfer of 21.6bn euros of U.S. mortgage assets.” (Gaal 2010) Another key part of ING is its Investment Management (IM) division, which provides solutions and advises business on investments, mergers and acquisitions, IPOs, management buyouts, etc. Operating in around 33 countries including in Americas, Asia particularly Middle-East and Europe, it has advised some of the key business decisions of the major corporations. It has advised the printer maker Oce in its merger with Canon for € 1.3bn, energy supplier Nuon in its sale to Vattenfall for € 8.5bn, etc. In addition, they have good presence in Russia, advising its largest mobile operator, Mobile TeleSystems’ acquisition of 51% stake in Comstar for 1.27bn dollars. To become aptly sustainable, IM has many opportunities world over including in Russia. IM could benefit from Russia's being named host of the 2018 soccer World Cup, with the steel holdings Evraz and Mechel being the key partners. (Milhench 2010). Course of action and Conclusion From the above analysis, it is clear that ING’s diversification helps it to use its existing customer base for new product introduction. This is called cross selling and so the company does not need to search for new customers for new products. Thus, diversification has been working out well for ING till now, as they provided sizable profits for ING. However, if certain key areas in its diversified operations are improved, it will lead to further growth. Firstly, the main criticism is its lack of organic growth. Although, this deficiency is not a major drawback, focusing on it will lead to better results as well as better financial image. That is, organic growth is a smart long-term strategy for any company including ING and the growth generated internally frequently results in better returns on investment, stock value improvements, lower employee tunrover and numerous other benefits. (Hess 2007). So, ING can focus more on organic growth, for example, by looking at the possibilities of going alone in future newer markets, based on the government regulations there. Its core strength lies in its innovative internet based banking transaction facilities for the customers particularly through ING Direct. Although ING Direct is working well, it can be improved further if it provides cash withdrawals in a more extensive manner. That is, with all the business transactions under ING Direct happening through the internet, without even ATM or debit cards, some customers may prefer at least cash withdrawals at specific physical locations. Although ING in its US operations of Electric Orange provides cash withdrawal facility through MasterCard debit card at Allpoint ATMs for free, it can introduce this mode in other countries as well. If they think setting up independent infrastructures will not be cost effective, like in the above case, it can associate with other providers. The main issue that needs to be addressed by ING is apt restructuring programs to face the slow economic recovery. That is, the world economy has not fully recovered from the economic turndown, with negative effects still being felt in the banking sector as well as its related sectors. So, to counter this unavoidable phenomenon, ING can restructure its operation as pointed above by separating its banking and insurance operations. As ING will get sizable aid from the European Commission through this strategy, it can optimally manage the tough economic times. So, from this analysis, it is clear that ING is performing satisfactorily, however it performance can be optimized even further, if it is able to handle some external and internal issues effectively. References BBC 2010, US economic growth 'too slow to lower unemployment, viewed on December 15, 2010 http://www.bbc.co.uk/news/business-11996435 Buhayar, N 2010, ING’s Insurance Units Credit Outlook Cut by Moody’s, viewed on December 15, 2010 http://www.businessweek.com/news/2010-12-13/ing-s-insurance-units-credit-outlook-cut-by-moody-s.html Gaal, MV 2010, ING Says Banking, Insurance Separation on Schedule, viewed on December 15, 2010 http://www.bloomberg.com/news/2010-12-01/ing-says-banking-insurance-separation-on-schedule-update1-.html Hess, E 2007, The Road To Organic Growth, McGraw-Hill, London. McDougall, P 2006, ING Group Latest To Tap An Outsourcing Tag Team, viewed on December 15, 2010 http://www.networkcomputing.com/data-networking-management/ing-group-latest-to-tap-an-outsourcing-tag-team.php Milhench, C 2010, ING Investment Management taps Korea, Russia for EM fund, Reuters, viewed on December 15, 2010 http://www.chinapost.com.tw/business/company-focus/2010/12/08/282776/ING-Investment.htm Musiime, A and Biyaki, F 2010, “Bank Clients` Perception of Information Technology Usage, service Delivery and Customer Satisfaction”, International Trade & Academic Research Conference (ITARC), London, viewed on December 15, 2010 http://www.abrmr.com/pdf/Bank%20Clients%20Perception%20of%20Information%20Technology%20usage,%20service%20Delivery%20and%20Customer%20Satisfaction%20Reflections%20on%20Uganda's%20Banking%20Sector%20-%20Fayth.pdf. ing.com, ING Annual report 2009, viewed on December 15, 2010 http://www.ing.com/group/showdoc.jsp?docid=440643_EN&menopt=ivr|pub ing.com 2010, The history of ING, viewed on December 15, 2010 http://www.ing.com/group/showdoc.jsp?docid=074177_EN&menopt=abo|his ing.com 2010, ING’s business lines: Banking, viewed on December 15, 2010 http://www.ing.com/group/showdoc.jsp?docid=092825_EN&menopt=abo|fct ing.com 2010, ING’s business lines: Insurance, viewed on December 15, 2010 http://www.ing.com/group/showdoc.jsp?docid=092825_EN&menopt=abo|fct ingworld.ing.com, Emerging Market opportunities, viewed on December 15, 2010 http://ingworld.ing.com/m/magstream/ingworld/en05/#2 Karouski, B 2009, Bancassurer ING completes rights issue and State repayment, viewed on December 15, 2010 http://www.news-insurances.com/bancassurer-ing-completes-rights-issue-and-state-repayment/016711774 Ockham Research 2010, ING Group’s Quarter and Divestiture Plans Disappoint, viewed on December 15, 2010 http://www.gurufocus.com/news.php?id=84943 Rasmussen Reports 2010, Rasmussen Consumer Index: Investor, Consumer Confidence Shows Little Change on Wednesday, viewed on December 15, 2010 http://www.rasmussenreports.com/public_content/business/indexes/rasmussen_consumer_index/rasmussen_consumer_index Read More