As more and more people turn to the Internet to pay bills and shop for goods and services, Dutch financial services group ING has carved out a lead in what was once considered the most elusive of online services: banking.

ING Direct, the Internet banking arm of ING that operates in nine countries, is by far the world's largest online bank, boasting nearly 17 million customers and about 200 billion euros ($253.5 billion) of savings deposits.

In every country that ING Direct operates - Canada, Spain, Australia, France, the United States, Italy, Britain and Germany - it is the No. 1 online bank.

For ING Group, it is one of its main growth engines, Dick Harryvan, the ING executive board member responsible for ING Direct, said in an interview. Today we are approximately 30 percent of the balance sheet of the bank.

ING Direct has become such a key driver of the bank's earnings - profit grew 41 percent in the first half of 2006 to 359 million euros - that investors are also beginning to focus more closely on its strategy and direction.

Key questions include how quickly ING Direct will expand its product offerings in countries where it operates, and what new markets it may enter. Although ING Direct doesn't operate in its home market to avoid cannibalizing a decades-old retail network, it is eyeing new markets, most notably Japan.

The advantage they have in terms of costs is significant, said Duncan Russell, an analyst at Fox-Pitt, Kelton Ltd. They're also offering better products than their competitors.

According to ING's own data, ING Direct's operational costs excluding marketing are a fifth of that of a traditional bank branch. Investors have bid up ING's shares - they're up 36 percent his year and are trading at 10.4 times projected 2006 earnings, compared with 9.7 for nearest rival ABN AMRO.

Instead of a branch network, ING Direct relies on computers servers humming in data centers to run its online bank, where customers can sign up, authenticate and manage their accounts online. Apart from management and technology staff, ING Direct has call support staff and a few retail 'cafes' for promotion.

Typically, ING Direct will enter a country by only offering an online savings account with an attractive interest rate. After attracting customers, the online bank then expands it product offerings into areas such as term deposits, mortgages, mutual funds and loans.

In select countries, ING Direct also offers insurance, pension and checking account services.

Despite ING Direct's impressive growth - deposits grew a hundred-fold from 2 billion euros in 1999 - Harryvan said that consultants told ING that its chances of success were slim when it launched its first pilot in Canada in 1997.

McKinsey told us it wouldn't work, Harryvan said.


Ironically, few consumers in the Benelux have heard of ING Direct, which has built its brand in the United States, Britain and other markets with its splashy, orange-themed advertising.

Despite being headquartered in the Netherlands, Harryvan said that ING Direct had no plans to enter its home market or neighboring Belgium.

The main criteria for ING Direct when it enters new markets is a high Internet usage rate, a high savings rate or a willingness to move money between accounts.

We think in a market there should at least be 100 billion euros in savings, Harryvan said.

As a result, the most potentially viable new markets are Japan, South Korea, The Netherlands, Belgium, Switzerland and Sweden, said Fox-Pitts' Russell.

Japan for us is the biggest strategic decision in terms of moving forward, Harryvan said, We have researched the Japanese market already four years ago and to be frank we have a team on the ground there looking at the whole market.

Indeed, most analysts see Japan as an inevitable next step for ING Direct, with its high savings rate, a developed inter-bank payments system and a recovering economy with depositors hungry for returns after a decade of near-zero interest rates.

The world's second-largest economy has already experimented with online banking. Largest is eBank with 1.65 million customers and even consumer electronics group Sony has an online bank. Among foreign entrants, Citigroup unit Citibank also offers Internet banking.

In a country of 128 million people and nearly 7 trillion euros in deposits - the opportunities in Japan are huge, even despite the risks.

We know that Japanese consumers are absolutely brutal when it comes to quality. You've got the get it right the first time, Harryvan said.