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6 December 2016

Isold Heemstra interview: Branches will disappear, consultants remain

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Before coming to the Czech Republic, you worked for ING in four countries on three continents. What was your career path like?

I began my career with ING in 2002 it the retail segment in the Netherlands, and then I had the opportunity to go work in Canada. I then returned home for several years, after which I moved to Malaysia to manage the insurance business there. When the mortgage crisis was in full swing, ING abandoned the insurance sector and I was given a choice between remaining in the insurance sector or moving back to banking. I picked the second option and moved to Germany. Then recently the opportunity to manage the branch in the Czech Republic came up.

You have a large family. Was it difficult to move from continent to continent, from country to country, and form culture to culture?

When we lived in Canada and the USA we had no children, so life was simpler. In Holland we had two children, and our daughter began to talk while we were still there. When we arrived in Malaysia she began attending an international school and was terribly depressed. She didn’t understand the language and was very uncertain of herself. It was a tough period. For us Malaysia was relatively easy because most people there spoke English, perhaps the largest percentage in Asia in my experience. But cultural differences also played a role. There are Malays, Chinese, and Indians. So everything is completely different from how it is in Anglo-Saxon countries, everything from how agreements are reached and how discussions are led to how one drives. When I then returned to Germany, it was a shock. Friendly people and good weather were gone. On the other hand, customer service in Germany is substantially more comprehensive than in Asia.

So you think that competition on the Czech banking market is stronger than in Germany.

The main difference is that in Germany there are two thousand banks, mostly relatively small ones. You’ve got savings banks and landesbanks, which make up two thirds of the market. The remaining third belongs to a trio of large banks. Here it’s the opposite: five banks control up to 80 percent of the market. This is a similar model as in Belgium or Holland. In Germany, there’s a huge amount of competition in low-cost services, mainly between savings banks and landesbanks. In the Czech Republic, despite the concentrated market there is a relatively sufficient amount of competition; Czech banks have a lot of branches and a functional market keeps a number of new banks in business, which certainly have something to offer clients. The Czech market is interesting because compared to other countries it is also still relatively traditional.

In your opinion, is the banking business in the Czech Republic specific in some way?

I’ve only got a few weeks’ worth of experience, nevertheless what I consider very interesting is that Czechs can pay for practically everything contactlessly. From what I see, digitization is accepted in a significantly better manner than in other countries such as Germany or Austria, which are substantially more conservative. In this, Czechs are similar to the Dutch, for example. On the other hand, it’s a paradox that the banks here have so many physical branches, which is typical for Germany, for example. Another peculiarity is that here you have to wait two or three weeks to have a payment card issued, plus you have to visit the branch. But that’s a problem, because it’s open from nine or ten o’clock until five, so it’s actually almost impossible to pick the card up. In this area there are many other options in how to service clients.

The ING Group recently announced painful restructuring; how will this affect the Czech business.

It won’t have any effect on the Czech Republic. ING has a large network of branches in the Netherlands and Belgium, and we know that increasing numbers of people will probably not visit a branch, so it was necessary to change our business model. This is also related to the announced need to gradually reduce the workforce in these countries, in Belgium by 30mm and in Holland by 2300 employees over the next five years, and simultaneously to invest 800 million EUR into digitization. In Belgium we have three times less clients, but they are mostly from small villages. For every one branch in Holland we have on average 10 to 12 branches in Belgium, which is unsustainable. The question going forward was how to rejuvenate the bank’s business. We could have reduced interest rates, increased fees, or reduced costs. It was a very tough decision and the result was the closure of branches. There were especially a lot of discussions about the Belgian market, the government there was afraid that other banks would follow suit. In the Czech Republic, ING isn’t based on serving customers through a network of branches, and we see the country as a growing market where we intend to broaden our planned investments in coming years.

The amount of deposits in ING declined last year. Yet your savings account offers a relatively decent interest rate of 0.5 percent per annum. That doesn’t entice people?

The decline wasn’t significant, but it is nevertheless important to realize that currently we aren’t our retail clients’ primary bank, and that they see us as their other bank. They have savings accounts at perhaps to or three other banks, they have their primary bank where they have most of their banking services, and from us they simply want an attractive interest rate.

At a time of low rates, banks are becoming increasingly interested in consumer loans. You area bank in the retail sector that is focused on small clients, but you don’t offer such a product; will this change?

We are currently working on new products, and consumer loans are one of them.

Interest rates are currently declining and for example on corporate credit or on mortgages, in some countries it is possible to achieve negative interest rates.

Credit is currently being provided to three client segments. Corporate credit, when all countries are compared, isn’t at zero. But there are some banks in Sweden and Denmark that offer negative interest rates, but these are available to only a fraction of customers. This information of course appeared in the media, which elicited the impression that now it will be possible to obtain a negative interest rate form banks everywhere in Europe. Yet these were variable rates, which changed every month, and the customers to whom these negative rates applied numbered only in the hundreds.

A substantial part of your Czech business consists of mutual funds. These are generally often criticized for their relatively high fees; are you planning to offer clients some low-cost funds?

I don’t think fees are high. We offer our customers the opportunity to invest as opposed to saving, which is an alternative for them that can bring them greater returns. Putting money in savings accounts with today’s low interest rates is obviously not enough, which is why we are giving people the opportunity to invest in mutual funds. These understandably involve a greater degree of risk than for example savings accounts, and it depends on how the markets behave. Our four basic mutual funds have no front-end or back-end fees, and then we also have funds for more experienced investors for a charge of one percent.

Of course, if one invests on his own he can eliminate some fees, and pays only the broker. Or one can choose mutual funds where a portfolio manager invests and charges a fee for this. Our objective is for fees to be transparent and simple to inform oneself about.

But currently there are a number of funds where fees are around two percent. In the case of two-percent inflation and two-percent annual fees, the client has to achieve at least a four-percent yield to break even, which in the case of more conservative investments, for example into government bonds, is a big problem.

The client must consider the situation on the market and choose how he will invest via mutual funds. But he won’t achieve high yields through savings accounts, and the way to achieve them is through investment. It is of course possible to invest on one’s own, but in this case you need thorough knowledge and manage yourself so that investment is free of psychological aspects and emotions, which can be a problem. If an investor chooses the wrong shares, he may not pay up to two percent for fund management, but his investment can decline in value by even tens of percent. It’s also about the relationship between risk and yield. If one wants a ten-percent yield, one then has to accept a commensurate degree of risk.

Do you have an idea where the banking business will be in ten years? Will it be a different model than today.

I think that there will be more digitization and internet, the question is how a product like for example a mortgage will be offered. Will it be sold on Amazon, for example? I was responsible for one of Europe’s largest mortgage banks, Germany’s ING DiBa. In Germany, web sources brought us around 15 percent of our clients, while 85 percent came from brokers. So it’s possible to offer them through Amazon. The question is to what degree people will be willing to make big decisions over the internet and which ones they will always leave to a branch or consultant. I think that during the coming years a branch may not be needed, but for larger transactions clients will always want some form of consulting that will guide them through the entire process of a service that is as complicated and comprehensive as for example a mortgage.

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