An Explanation: "Major Banks" vs. ING Direct

A post this morning by my friend Janine (@apenny4athought) got me thinking about something that I seem to be finding myself explaining more and more often at work, and in my (very bland apparently) personal life. It comes as no surprise that it is banking related, and it pertains to growing competition and comparison for the "Big Five" banks in Canada (CIBC, Scotia, TD, RBC and BMO). I get asked regularly "why do we get charged bank fees, when ING Direct has none?" The answer is actually quite simple.

Overhead. (And a very good business model).

ING has created a whole new market for itself by staying as an "online" bank rather than caving and trying to funnel more people into branches. The cost of running a branch, let alone constructing it is not cheap and a great sum of money would be needed in order to properly maintain and care for the branches. Due to the size of the large banks and the number of clients coming through their doors, the staffing needs also require a lot of money in order to be able to run them as there must be adequate staff at all of the branches to cover the customers seen on a daily basis and to maintain a quality experience for them all.

Lets do a case study for a major bank. TD Canada Trust has 11 million customers who bank at over 1,100 branches across Canada. Worldwide they have nearly 100,000 employees, with a large portion of that being in Canada. TD holds approx. $686.36B in assets.

Now lets do ING. They have 1.7 million customers in Canada who are served at 5 branches in the major hubs of the country and have approximately 1,000 employees. In 2011 they held approx. $37.6B in assets.


So you're probably wondering "Hey Keegan, where's this going? What the hell are you saying?"

What I'm trying to enforce here is that ING is running a very different business model than the major banks. In fact they are only really comparable in that they both deal with customer deposits and investments. The "Big Five" have astronomically higher costs in the number of accounts open, number of branches open and having around 100x more staff than ING. What that leads to is COSTS, and unfortunately for both sides that money does not grow on trees or come sprouting out of the government whenever needed. No, a business with tens of millions of customers putting hundreds of billions of dollars into it has to make some money in order to exist.

So how can I summarize all of this? Both work but are on very different scales! What I use as a reference is comparing green apples to red apples. They have similarities in what they fundamentally are, but they have different flavors and appearances, both of which have fans and critics. What we may be seeing the start of is an evolution in thinking that, yes, maybe one day the big banks will have to adapt to a more ING approach. But as of right now, people still don't want to trust their money to an online entity. There is a definite increase in willingness coming from my (young adult) demographic, but until the tens of millions decide they don't want to walk into a branch around the corner and have face-to-face interaction with staff there will be no change. It is nice to see a new player emerge to help evolve banking into a digital era, but there is still a long way to go until "no fees" "low expense" banking becomes the norm.

What is great is that for the first time in the financial system, there IS an alternative for those who want it. It's an exciting time to be in the banking world as both a consumer or as an employee and it will be very interesting to see where it goes from here.