Don’t miss our first OdeNow event, Rock the Bank! Financial Innovation 2.0 with ING Direct’s CEO Arkadi Kuhlmann on February 1st at 5pm PST. We will be hosting a live event in San Francisco and simultaneously web-casting the event worldwide.

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How Arkadi Kuhlmann and ING Direct are spreading the message of saving.
Jurriaan Kamp | December 2011 Issue
Where should we look for a solution to the banking crisis and the broken relationship between Main Street and the financial industry? Well, how about some of the ideas that were advanced by the prophet Muhammad? That, at least, is the perspective of Arkadi Kuhlmann, CEO of ING DIRECT, America’s largest online bank.
He and I are talking about the role of banks in society when Kuhlmann suddenly refers to Islamic— compound-interest-free—banking. “Conceptually, the Islamic interpretation of banking is from society’s perspective much fairer,” he says. Islamic banks are not allowed to make a profit from lending; Islam is, in fact, the only religion that still prohibits interest, something that was originally banned by all religions. Money is considered a resource that belongs to everyone.
In Islamic finance, banks just charge a service fee for allowing a customer to use money for a period of time. If the customer is not able to pay the money back at the agreed-upon time, the problem is not compounded. Customers don’t continue to pay year after year for the same service. If you pay back the money late, the bank takes a loss, but it doesn’t have the ability to bankrupt you. And at the other end of the compound interest spectrum, money does not keep accumulating. “Warren Buffett and Bill Gates are now pleading with wealthy billionaires around the world to please give back in the form of charity some of your money, because they have no idea what to do with it,” Kuhlmann notes.
We are enjoying a salad in a San Francisco restaurant around the corner from where Kuhlmann has just led the groundbreaking ceremony for the next ING DIRECT Café. I begin to understand why Kuhlmann once thought he would become a poet—he still writes poems—before he became a banker. There’s a twinkle in his eyes that illustrates an interest in life larger than his company’s balance sheet. So I’m less surprised that, after Muhammad, Kuhlmann refers to the Apache, a famous Native American tribe—“I found studying them insightful,” he says—as his next inspiration.
“The Apache did not believe in the principle of ownership—at least not in the ‘exclusive possession’ way we do today,” Kuhlmann explains. “They believed all things belonged to the great eternity. You come and use my horse. I take it back again when I need it. There may be some conflicts with timing, but the principle is that I can take anything from you and use it. At the same time, you are welcome to use anything I have. There’s no sense of possession. Do you think bees or ants have a problem with that concept? What is it about human beings that we live 80 years on this planet and think something really belongs to us? That’s a bizarre idea. We’re merely caretakers of things on this Earth.”
I am ready for German philosopher Karl Marx to be the next big thinker on Kuhlmann’s list, but he makes an abrupt turn, which makes me realize I’m still talking with a banker. “I am a capitalist,” he says with emphasis, putting down his glass. “And I do believe I need to be rewarded for my risk. The question is what risk am I taking?” That leads back to the role of banks. It becomes clear why Kuhlmann is charmed by the selflessness of the Apache’s view of ownership and by the Islamic concept of simply charging a service fee for the use of money.
In Kuhlmann’s vision, consumer banks are “humble intermediaries,” as he puts it. “We don’t produce anything. We don’t save children who are ill. We don’t go to the moon. We are just oil in the economic machine. A bank should act as a utility. Our primary function is to allocate money, resources within the economy. A bank bridges the time gap between when people have extra resources—money—and when they have a shortage of money.” Such a service deserves a fee, but not the huge returns that banks have been able to make before—and after—the recent financial crisis. “We have had an aberration,” Kuhlmann says. “It doesn’t make sense that banks, being basically financial intermediaries, make a disproportionate amount of profit.”
He refers to the early days of banking in the 15th century when investments were made in ships that would be away for two years and would come back with a huge return or wouldn’t come back at all. “During those two years, investors had no information whatsoever about their investments,” Kuhlmann points out. “Nowadays, investors follow their investments by the minute if not the second. We live in a really different world when it comes to equating risks.” And so, as utilities, Kuhlmann argues that banks do not—at least, should not—take big risks, because the risks of banks are the risks of their customers. “It is wrong that governments should be the backstop to banks taking undue risks,” he says.
“I understand that private equity investors make huge gains,” he continues. “They also run great risks and they lose big as well. But retail banks are not private equity investors. They deal with society at large and therefore their returns should be in line with the risks they are taking. A bank should make a moderate return of, say, 10 percent. And with that comes the perspective that there has to be a limit on the risks of banks.”
Considering that self-restraint is not a key asset of the modern economic system, the crucial question follows: Who decides when risks become too high? Kuhlmann argues that the right rules are already in place. Banks in the U.S. are required to keep a capital ratio of 10 percent, meaning they have to keep $1 on deposit for every $10 they lend to customers. “The only problem is that American banks are allowed to create synthetic leverage by putting too much off the balance sheets. European banks added debt and in turn leverage on the balance sheets,” he says, adding that the financial crisis was indeed fueled by big investment portfolios operated outside the regulatory regimes. “The authorities have to force banks to put everything on their balance sheets and reduce the leverage, the amount of debt they carry. I’m a free marketeer but we all have to play by the rules and not bend them,” says Kuhlmann.
He sees a parallel with drug policies: “You can do anything you want with drug addicts. You can educate them, you can ­police them and you can jail them. But you will not solve the problem if you don’t exert some pressure on the enablers: the producers and the distributors. I do not believe that banks should be unlimited enablers.”
In recent decades, Kuhlmann argues, banks have become more like retail marketers that aggressively push their products wherever they can. “Take on more credit” and “You can buy anything you want and we’ll give you money for it” became lending mantras. “In recent years, banks have put $3.5 billion credit card offers in every mailbox in the United States,” Kuhlmann says, suggesting the cards should come with warning labels like cigarettes. His ideal bank doesn’t have “Borrow as much as you want; we’ll lend it to you” as its credo. Instead, he says, the bank’s message should be “Save as much as possible and borrow only what you need.”
And that, of course, is the mission of ING DIRECT, the direct bank Kuhlmann launched in September of 2000 after he and his colleagues successfully tested the concept in Canada. ING DIRECT provides a radically different service. By eliminating expensive branches and other costs related to a brick-and-mortar business, the no-brick-and-mortar direct bank can afford to pay savers a higher interest rate than traditional banks. ING DIRECT doesn’t charge any fees on savings accounts; when you call the toll-free number, a real person picks up the phone and you are not forced to jump through irritating automated hoops. Perhaps even more impressive, that person does not live on another continent.
Kuhlmann likes to see ING DIRECT as a “disruptive force” that will radically change the financial sector, as Southwest Airlines, IKEA and Amazon disrupted the usual way of doing business in their industries. The response has been very good. After almost 11 years, ING DIRECT has become the largest savings bank in the U.S., with some 8 million customers and $100 billion in assets. “We focus on self-service online,” Kuhlmann says. “That means you get a little less choice, you get less customer service, but it does allow us to bring the costs down and give you a higher interest rate. We make banking cheaper and quicker and that helps people and businesses become more efficient and productive. We are changing the way people think about banking.”
He likes to compare his vision for the new banking with the introduction of fast food. “There was a time when people would never think of taking a hamburger in their car through a take-out window,” he says. “Now they do, and they have no trouble understanding that what they get at a take-out is different in quality than what they get when they sit down for a dinner in a nice restaurant. Why don’t we have that in banking? It is as simple as that. It requires that we not only re-engineer the products and the processes, but we also have to re-engineer the customer.”
That begins with a sharp focus on the one thing Americans have not been known for: saving. “Our mission is to lead Americans back to saving,” Kuhlmann says. “We are teaching our customers to save for a specific goal or purpose.” Indeed, ING DIRECT operates a popular blog, “We the Savers,” which features tips, ideas and solutions about saving. Customers also share their experiences on the site—how they turned around their lives and brought their expenses within their means or how they started saving to realize long-held dreams and ambitions. Entries at “We the Savers” receive many comments, reflecting the inspiration readers have gained from sharing their stories. It also shows that the influence of ING DIRECT reaches deeper than just providing a different kind of financial service.
“Each business has to have a calling; it has to move people in order to succeed,” says Kuhlmann, who presents himself as ING DIRECT’s “CEO of Savings.” Symbolizing the Dutch roots of his company, Kuhlmann chose an old warehouse in Wilmington, Delaware, as the headquarters. He named the converted facility Pakhuis, which means “warehouse.” The building contains many symbolic references to the history of the Dutch traders of the 17th century. (ING DIRECT is still owned by the Netherlands financial conglomerate ING, although the European Union has mandated that ING sell ING DIRECT by 2013 to improve ING’s balance sheet after it received the equivalent of a $16 billion bailout.)
Stories matter to Arkadi Kuhlmann. When we met for part three of this interview, I watched from his office as the Kalmar Nyckel, a replica of a 17th century Dutch-built warship, sailed through Wilmington Harbor. Kuhlmann could have orchestrated the coincidence. It makes sense that he stresses the Dutch roots of ING DIRECT, since the inspiration for saving comes from The Netherlands. According to Eurostat, the EU’s statistical office, the Dutch saved an average 13 percent of their incomes from 1995 to 2007, while Americans saved just 5 percent.
Despite the inspiration of Muhammad and the Apache, Kuhlmann knows he is not likely to succeed in changing the ownership laws and interest rules of today’s Western economies. Yet he is introducing a dramatically different way of banking in the U.S. A growing number of ING DIRECT Cafés, where customers can meet with a real banker or just stop by for a cup of coffee (a service provided through partnership with Peet’s Coffee & Tea) complements the bank’s efficient and inexpensive direct experience.
Was it always his mission to revolutionize banking? “I wish I had come to banking in a much nobler way to realize my dream of cleaning up the paper mountain of the financial services industry, but the reason was a broken heart,” Kuhlmann confesses. He was preparing for a master’s degree in geography when his fiancée said she wouldn’t share her life with him—because he was an aspiring professor and she wanted to move beyond the student lifestyle… immediately. “I decided then and there that if it takes money to win a woman’s heart, I was going to make money,” he says. Believing that banking offered the highest-paid jobs, he became at 33 a vice-president of the Royal Bank of Canada.
But money was not his only motivator, since he learned from his grandmother that money was not all that mattered. She introduced him to her spiritual world and even taught him to read palms. She also taught him that there are many things about our lives that we don’t know or understand. “It brings you to a place of humility, introspection and self-awareness,” Kuhlmann says. “And it makes you challenge your own self-esteem to always try to bring out a better self. We are sort of an endless book and we continue to learn.” He pauses for a moment. “I wake up every day thinking, ‘I wonder if I can do a little better.’”
At the end of the day when we leave the parking lot of the Pakhuis in Wilmington in Kuhlmann’s car, I notice a sign: “Did today matter?” Although I’m sure he is responsible for putting up this sign to challenge his employees, the challenge applies to him as well. Kuhlmann notices that I’ve seen the sign and smiles. I know what’s running through his mind: It’s been another good day for thinking outside the bank.
Jurriaan Kamp is Ode’s co-founder, publisher and editor-in-chief—and a great fan of direct banking.