ING: Hamers draws up his European masterplan

Illustration: Britt Spencer

There is no hiding the passion with which Ralph Hamers has pursued digitalization, since his promotion to ING’s chief executive five years ago.

He has hammered home the Dutch bank’s internet-era advantages, making it stand out from the pack of European banks still struggling to find a place in the post-crisis world. From being forced to sell insurer NN Group as a condition of its 2008 bailout, now it can even contemplate Europe’s most important bank acquisition for more than a decade: Commerzbank.

How is it then that ING still trades at a discount to book value of about 25%, even though its return on equity is better than any other Europe-focused bank of its size, at about 11%? Is Hamers making a fundamental strategic error, despite the technology boom?

There is, it seems, remarkably little enthusiasm among peers for Hamers’ grandiose transformation project. Launched in 2016 and now due to run until 2022 or later, this is possibly the boldest project of its kind in European banking today and it could provide a model for the sector for decades to come. But has Hamers’ desire to be the first to realize the potential of technology gone too far?

The idea is harder to implement than to explain. He is trying to run his various country-level banks together to a greater degree than the industry has attempted to do in the past. Given the fragmented state structure in Europe, this should bring an important answer to the pressing question that banks here have long faced, namely: how closely can they integrate and thereby gain synergies from cross-border retail operations?

Over the last couple of years ING has started the migration of its Belgian operations onto its recently upgraded Dutch IT system, creating a single platform, called Unite, for its developed-market incumbent banks. At the same time, it is integrating some of its online retail banks elsewhere in Europe – in the Czech Republic, France and Italy – around its Spanish operation, called Model Bank. It has also upgraded its systems in Germany.

The next step, in the 2020s, will be to make these three into one.

Mixed reviews

Other banks give the approach mixed reviews. It doesn’t sound like many of them will follow suit soon. BNP Paribas, whose business also straddles various countries in northwest Europe, is certainly not planning to do the same thing.

Better integration between countries is about more than IT systems. It is, if anything, more about people and about avoiding multiple country-level product and operational roles that do the same thing.

But some rivals characterize Hamers’ project as an unnecessary waste of time and money that has done damage to the client franchise.

“It looks great on a PowerPoint presentation,” says the head of one peer institution in northwest Europe, who thinks the project has failed.

Nordea is the other big European bank recently to have made a similar move in terms of its core-banking systems: ripping out the old systems for its banks in the four main Nordic markets to replace them with a single and entirely new platform.

But in late June, in what might be a bad omen for Hamers, Nordea said its chief executive, Casper von Koskull, would retire next year, when he is 60. The news comes amid disappointing financial results at Nordea and investor impatience with the hoped-for financial benefits of its core-banking overhaul.

As a bank, if I have cross-border scalability, I don’t need access to these big markets anymore. Once I have Model Bank up and running in Spain, I can open up in any country in Europe – Ralph Hamers

Even BBVA – perhaps the closest to ING in terms of positioning itself as a kind of financial technology company – is still taking a more wait-and-see approach.

“The way we are doing it, it’s not so much migrating the back end but ensuring that the developments that we have are modular and reusable across geographies, even if the local back ends remain,” BBVA’s executive chairman, Carlos Torres Vila, tells Euromoney.

Nevertheless, there is still admiration in the industry for Hamers’ efforts. Clearly, ING is not the only bank that thinks it can build not just a European but a global business through easily replicable client-facing digital technology. 

The global potential of digital banking underpins BBVA’s strategy just as much as it is the basis for Hamers’ digital transformation plan.

“The routes to get there are different, but you cannot stand still,” says Torres Vila. “Eventually, we will also move the back ends, I have no doubt. I have no doubt that at the end state of this, there will be one global infrastructure serving the world.”

Thanks to being better able to reuse the basic building blocks from elsewhere in the group, it took ING just nine months to prepare for the launch earlier this year of a new mobile bank in the Philippines, according to Hamers. Now it hopes for a similarly industrialized rollout in China, where ING is developing a digital banking joint venture with Bank of Beijing, in which it holds a 13% stake.

Hamers does not discount the possibility of re-entering the US retail market at some point, which it exited as a condition of its 2008 bailout, although he says for now it would be more likely as an account aggregator, given the relatively high regulatory barriers to entering the US as a bank.

“You can challenge the US market; we did it,” he says, referring to the pre-2008 business.

If ING has really solved the conundrum of cross-border retail banking, however, it might have also solved how to build a global bank focused firstly on the political mosaic of its home continent.

“As a bank, if I have cross-border scalability, I don’t need access to these big markets anymore,” Hamers tells Euromoney, in his office in Amsterdam. “Once I have Model Bank up and running in Spain, I can open up in any country in Europe.”

Momentum

ING’s chief executive will naturally have a different view from rivals on the extent to which its Unite project – also called Orange Bridge – has hurt commercial momentum in Belgium. Figures from its annual report suggest its Belgian unit, which also includes Luxembourg, struggled in 2018, with costs rising and revenues down. There has even been some concern in the local press that the Benelux migration could result in the kind of chaos that TSB customers experienced in the UK after its separation from Lloyds.

After deteriorating in 2017, ING group’s efficiency improved in 2018, reaching an underlying cost-to-income ratio of just under 55%, partly thanks to lower costs in the Netherlands. But the departure of Roland Boekhout, who previously oversaw the Unite project, could be another challenge, as Hamers is taking over direct oversight until he finds a replacement (Boekhout is leaving to run Commerzbank’s corporate clients franchise).

Hamers says monetary policy is the main reason why ING’s shares have recently tended to trade below those of peers with similar returns, even if a Dutch fine and an Italian ban for money laundering have not helped.

“The main explanatory factor is that we’re a predominantly eurozone bank,” he says. “The economic outlook for the eurozone as a whole has deteriorated over the past year.

“Other banks are more in private banking; they’re more in asset management. The continuation of their income stream on the back of some of these businesses that are more fee income-generated is less influenced by a low-for-longer rate environment than what we have.”

But the operational overhaul is, crucially, a big part of how ING will grow and diversify its income. Low or non-existent branch costs have meant the bank can offer low fees to attract customers, but this has accentuated a reliance on interest income.

Hamers consequently believes the transformation to build cross-border platforms is crucial so that the bank can deliver more homogenous products – some not even strictly financial, earning fees as well as interest – to clients in different countries and in an agile manner.

Overall, Hamers’ thinking is that as banking becomes more commoditized, successful firms must differentiate themselves by their user experience. A single global platform should then be an efficient means of carrying a more varied and innovative suite of services. It should make the bank and its portals more valued by clients and by high-quality third-party product providers, which will also be looking for a simple and well-recognized single point of entry to mass-market cross-border distribution.

That is the theory at least.

By the end of the year we will have almost 20 million customers across these three different countries interacting with ING in exactly the same way, with exactly the same brand. It can be done – Ralph Hamers

On a more prosaic level, sympathetic analysts such as Jean-Pierre Lambert of KBW say that the bank can make important cost savings as it centralizes its operations, eventually obviating the need for duplicate corporate centre-type roles between individual countries, such as Belgium and the Netherlands, for example.

Berenberg adds that even at the level of IT spending, the decommissioning of the old Postbank’s systems cut 10% from ING’s operational costs in the Netherlands in 2016. A similar transfer – like the migration planned this year of the systems of Record Bank, which ING previously ran as a retail subsidiary in Belgium, to ING Belgium – could therefore reduce group costs by about 2%.

Hamers denies that his transformation project has been more difficult and riskier than he expected. Even so, he gives a hint of how the bank has had to row back on the project a little, at least by having less of a ‘big bang’ and more of a slower and phased migration of client accounts, keeping parts of the Belgian systems running for longer.

“These are massive programmes,” he says. “They need quite some preparation. Specifically, in the Netherlands and Belgium, there is a lot of legacy in systems, in the way we work, in different value propositions to customers. What we have decided is that rather than going for the full integration at once, we want to make sure [firstly] that the clients start to enjoy one and the same digital interaction.”

He is keen to show how soon ING can standardize the front office, or at least its app, in the Netherlands, Germany and now Belgium.

“The whole idea that we had two-and-a-half years ago – saying: ‘Guys, if Uber can deal with clients across the globe in the same way; if Facebook can do that; if they have the same interaction with consumers, regardless of the country where they are, but for the language, we should be able to do so as well, so let’s move from 13 different experiences to one’ – this is happening as we speak.”

He adds: “By the end of the year we will have almost 20 million customers across these three different countries interacting with ING in exactly the same way, with exactly the same brand. It can be done.”

How much more can be done to homogenize its international systems and services in the future?

“The app is the starting point,” he says. “You can go for 100% harmonization of the back end – like the ledgers and the account system – and the front end; in other words, the way you deliver, the way you interact and the way you provide your information… In current accounts, you can have 95% standardization and in savings accounts it’s probably 90% standardization, except for one or two elements that are more fiscal-driven in one country versus the other.”

Ambitions

Other European banks are evidently paying close attention to Hamers’ experience, even if they might criticize it. BNP Paribas is perhaps the most important of these. The two compete head on in Belgium, thanks to the French group’s post-crisis acquisition of Fortis.

BNP Paribas also harbours perhaps even greater continental ambitions as a universal lender; lately it has taken a leaf out of ING’s book in terms of its greater focus on digital channels, albeit using a greater variety of brands. But chief executive Jean-Laurent Bonnafé has taken a very different approach to cross-border integration than Hamers.

He is keen to integrate more closely BNP Paribas’ product factories, such as leasing, consumer finance and fixed income, but to keep the domestic retail banks and their core IT systems separate from one another. This is like most other cross-border banks in Europe, in fact.

BNP Paribas will probably not follow Hamers’ lead as its management believes Europe’s regulatory frameworks remain too varied (for example, even IFRS accounting standards differ between France and Belgium). Rather, the bank hopes to find cost savings by pooling things such as customer verification and parts of its payments and capital markets operations on platforms shared with other firms.

If the question is, where will we be building our nucleus of activities, it will be in many different places – Ralph Hamers

However Hamers, like Bonnafé, is realistic about the limits of bringing together country-level retail operations, especially mortgages.

“Mortgages are the most difficult product to standardize, and I don’t think it will ever happen,” he says. “You can standardize some of the components of the product, but I don’t think you can get beyond 60% or 65% standardization in mortgages, because there are always legal issues. For example, the legal concept of a mortgage exists in Holland but not in Belgium.

“In the Netherlands, mortgages generally have higher loan-to-value ratios and they will stay higher for a long time, as the interest costs are tax-deductible. In Belgium, they’re not,” he adds.

“All that determines product features – and that will always be something local. The way you display the money in the app and so on, all that can be the same. But for example, some of these steps you have to put in the process, such as going to the notary, will remain different. In some countries you don’t have to go to the notary and in some countries there’s much more cost around that.”

Now ING has taken the step of integrating its most established markets, Belgium and the Netherlands, the next step of integrating that platform with the challenger platforms in Germany and Spain could be easier, after the Unite project is completed in 2022 or 2023.

“We said before that if we want to integrate all these countries, we have to work in a similar way everywhere,” Hamers argues. “On the IT side, 45% of our resources across the globe already work on cross-border projects. If they develop an account-opening process or a digital identification process or a money-transfer process, everyone else can just take it off the shelf and use it.”

The very different profiles of these platforms – originally branch-based in the Netherlands and Belgium but effectively branch-free in countries such as Spain and Germany – will make this next stage harder. But Hamers has already taken the brave move of standing up in front of Belgian staff to explain the rationale for getting rid of a large number of their roles. The merger of Record Bank, moreover, involved closing half of ING-owned branches in Belgium.

“It will be easier because the internal culture, the external expectations of clients, are converging very quickly,” he says of the next stage of the integration project. “People see it as a very logical next step.”

He adds: “In the past year and a half or two years, specifically between Holland and Belgium, the teams have been completely integrated. They have cross-border tribes and they work in the same way, so there’s one person responsible for a specific product – like investments, payments or small and medium-sized enterprise lending – across a different country. That’s been done.”

How ING’s transformation could facilitate a merger

Ralph Hamers, ING’s chief executive, is determined to be a contender for Commerzbank, should the end of its merger discussions with Deutsche Bank earlier this year result in a takeover battle. ING’s €40 billion market capitalization puts it in a better position than the other private-sector bank that already has a large German operation, UniCredit (€25 billion).

ING has already built a base of some eight million customers in Germany, despite an almost complete lack of branches, and it is trying to move beyond the internet-based savings accounts that made its name outside the Netherlands.

“We would be looking at M&A if the technology could help us in developing a differentiating client experience, or if we could buy a portfolio or a team of people to give us the credit skills we set out wanting to develop in small and medium-sized enterprise banking in Spain and in Germany, and what have you – which is not easy to develop from scratch,” Hamers tells Euromoney.

While he says the strategy is primarily organic, he adds that an acquisition could ensure the bank still enjoys what he calls a “sustainable share” in a given market.

“If consolidation is happening in a market in which we are a large bank, you’ve always got to look at how that affects your position,” he says.

Location

As in any merger like this, however, the question of the location of the headquarters of the combined group will be critical. It would be consistent with the German regulator’s protectionist reputation – and the German government still holds 15% of Commerzbank – if it were to push for Frankfurt to be any merged bank’s headquarters, even if Commerz is the junior partner.

UniCredit chief executive Jean Pierre Mustier would, in any case, be delighted to be relatively free from Italian sovereign risk, despite the fundamentally poor profitability of German banking. That said it is unclear whether the Dutch or Italian authorities would be happier for the headquarters of their respective biggest banks to move to Germany.

Perhaps Dutch politicians’ anger at attempts to raise Hamers’ salary last year will make him less averse to a move to Frankfurt. However, ING is building a headquarters in the form of a leafy new campus in southeast Amsterdam. It will probably have a very different atmosphere to the Commerz skyscraper in the centre of Frankfurt’s financial district, although the recent move of ING’s Boekhout to run Commerzbank’s corporate clients business suggests there may be some cultural fit.

Even without Commerzbank, however, ING will face more questions about its headquarters, as it moves towards the next stage of its transformation plan: merging its own newly integrated incumbent banks (based in the Netherlands) with its challenger banks (to be based in Madrid) and its German bank. Will the single hub that survives be in Amsterdam, Madrid or Frankfurt?

Hamers’ response is that it will be everywhere and nowhere – perhaps suggesting that if regulators wanted the formal headquarters to be in Germany, it could be easier.

“Let’s look at Madrid,” he says. “We’re attracting the talent there to build a multi-country direct bank. But everything that has to do with the cloud is done from Romania and Poland, even for that project… The components that they use to develop the app may come from what they have already on the shelf in the Netherlands, so it’s very difficult to say: ‘That’s where our people sit.’

“The people in Madrid are also developing things – account opening, client identification, cheque verification – that the Philippines is now using. The system itself, the servers, are in the cloud and the software on the services is developed in different places. Everything will be more or less virtual.”

He concludes: “If the question is, where will we be building our nucleus of activities, it will be in many different places.

“We need it to be in many different places because we want to have the right talent. From that perspective, we see Madrid emerging and we see Amsterdam emerging, with the new campus we are opening here towards the end of the year. We see Germany emerging, Poland emerging, Romania and the Philippines.”