Markets

Hey, Capital One: Don't Mess Up Quirky ING Direct USA

By Alain Sherter

Updated on: June 17, 2011 / 7:06 PM EDT / MoneyWatch

After "synergy," the most overused word companies use in touting big mergers is "transformative." In Capital One's (COF) case, though, that may be an apt description of its acquisition last week of ING Direct USA.

The $9 billion deal instantly takes Capital One from being the ninth-largest U.S. bank to No. 6 (and as we know, size matters in banking). More important, ING Direct USA gives Capital One, which is trying to evolve from a company that focuses on credit cards into a full-fledged bank, one of the best online banking operations in the business.

Launched in 2000, ING Direct USA has acquired a loyal following of 7.7 million customers drawn to its low fees, no-frills service, Internet cafes and bright orange corporate color. Its patrons are devoted to the company, with an unusually low churn rate for banking. And did I mention its branches are orange?

If it ain't broken
ING Direct USA's quirkiness isn't incidental to the company's success. It has carved out an identity in the otherwise staid world of online banking, which most larger financial institutions view as a utility rather than a potent conduit for business. ING Direct USA patrons are mostly younger and tend to be upscale. That offers an opportunity for Capital One to cross-sell credit card and other services. Notes one banking analyst with Celent, a market research firm.

Few people do data analytics better than Capital One, and a large direct business such as that run by ING is a perfect customer pool upon which to use the analytics that they have wielded so successfully in credit cards.

In other words, Capital One's biggest challenge with ING Direct USA is to not muck it up. Growth is hard to come by in banking (unless you're plumping your bottom line with zero-interest funds from the Federal Reserve, of course). Meanwhile, most mergers end in failure.

Online banking, however, is ripe with possibility. After piling into the business during the dot-com era, banks in recent years have mostly failed to enhance their Web-based services. That has opened the door for a range of startups, including BankSimple, Mint, Strands, Square, Yodlee and Banktech.com -- which went public today in a splashy IPO -- to enter the field.

Changing channels
That niche even has its own industry buzzword -- personal financial management, referring to online and software-based tools people can use to analyze their finances, manage budgets and get recommendations. For banks, such products are a way to learn more about their customers, cross-sell and build brand loyalty. The soaring number of smart-phones and devices like the iPad also offers an important new way for financial firms to reach and cultivate customers. Says another Celent analyst, Jacob Jegher, in a recent report (no pubic link):

Online banking isn't an alternative channel any more. It's a mainstream channel. This channel, however, requires a lot of attention. If banks don't act swiftly, they risk critical customer relationships and revenue.

Judging from this acquisition, Capital One seems to get that. ING Direct customers will be watching.

Images courtesy of ING Direct USA
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