Bigger Story This article is part of ING's Annual Review 2015. read the 2015 Annual review

Market and Regulatory Context

Three distinct trends had a major influence on ING and our competitors in 2015: the  prevailing uncertain economic conditions and low interest rate environment; increased regulatory scrutiny and costs; and continuing digitalisation and changing customer behavior. In combination, these trends are altering the competitive context in which we operate.

Macroeconomic developments

in 2015, several interrelated themes marked the year: the price of oil and other commodities, the resilience of the Chinese economy, and the timing and content of monetary policy measures in the US and the eurozone. The oil price fluctuated widely, reaching a low early in the year, then climbing, only to resume its slide in the second half of the year. This coincided with turmoil on Chinese stock markets and worldwide worries about Chinese economic growth.

These worries spread to other emerging markets. While several emerging markets did indeed see economic growth decelerate, a sharp slowdown in China did not materialise in 2015, thanks in part to government stimulus measures.

Meanwhile, the US economy continued to grow at a modest pace in 2015, despite headwinds from a stronger dollar and reduced investment in the oil industry because of low oil prices. The labour market in particular did well, with unemployment falling to levels well below the long-term average.

In the eurozone, 2015 saw further expansion in monetary policy, helping to generate broader recovery. The European Central Bank’s (ECB) quantitative easing programme, which began early in 2015, drove eurozone bond yields to unprecedented lows in the first half of the year. Exports and low oil prices supported the eurozone economy in the first half of the year, although the global slowdown started to weigh on exports towards the end of the year. The combination of low inflation and increasing employment  boosted household purchasing power, fuelling consumer confidence and accelerating consumption growth.

The persistent low interest rates in 2015 have put banks’ net interest income under pressure. ING Bank actively manages its interest rate risk exposure and successfully maintained the net interest margin on its core lending franchise in 2015. To address the challenge of interest income erosion, containing costs remains an important goal for ING Bank. We are also putting more emphasis on generating fee-based income and are reassessing our product characteristics.

Progress on regulatory initiatives

November 2014 marked the start of the Single Supervisory Mechanism (SSM), with a central role for the ECB in the prudential supervision of eurozone banks. This was a decisive moment in the creation of the European Banking Union.

ING Bank has always been a strong supporter of the SSM. As a predominantly European cross-border universal bank, we have a clear interest in the proper functioning of European financial markets and in a harmonised approach to European supervision. We believe that it will contribute to a more efficient use of financial funds across Europe which should enhance European economic growth prospects.

After the first full year of operating under the new supervisory framework, banks’ experiences are generally positive. The SSM aims to create the institutional conditions for overcoming fragmentation in supervisory practices.

As well as the SSM, 2015 saw preparations for the Single Resolution Mechanism (SRM). The SRM came into force on 1 January 2016. This aims to ensure an orderly resolution process for failing banks.

With SSM and SRM, two of the three pillars of the Banking Union have been established. Mutualisation of deposit guarantee schemes is the last remaining pillar, without which the Banking Union does not fully function. This pillar is progressing at a much slower pace.

Payment Services Directive (PSD II)

The second EU Directive on Payment Services (PSD II) was adopted in October 2015. This aims to create an EU-wide single market for payments with a modern and comprehensive set of rules. The target is to make cross-border payments as easy, efficient and secure as domestic payments within a member state. The PSD II also seeks to improve competition by opening up payment markets to new entrants, thus fostering greater efficiency and cost reduction. While implementation in national law could take several years, ING sees the PSD II as an opportunity to develop new ways of serving our customers.

Regulatory uncertainty

The large number of new regulatory initiatives and consultations concerning banks’ capitalisation continued to be a source of uncertainty in 2015. An example is the ongoing discussions in the Basel Committee about the risk weighting methodology which will guide how much bank’s must hold in capital to support their loans, as well as continuing discussions about the interest rate risk in the banking book.

Our main concern is that there is insufficient overview of the combined impact of all initiatives. Moreover, it is unclear what is the final regulatory goal that state policymakers are aiming for. This regulatory uncertainty complicates multi-year strategic planning.

In addition to more traditional financial-sector regulation, we notice increasing regulatory interest in the environmental and human rights impact associated with our business activities. There is a call on the part of the public for increased transparency and continuous debate on the matter in the EU Parliament.

Digitalisation and changing customer behaviour

Banking in future will be digital. This revolution is already well underway: customers are adopting digital channels en-masse, especially mobile. Nearly 90% of our retail customers use digital channels to contact us. And 70% of those use digital channels exclusively. The shift to mobile in retail banking is starting to be mirrored in wholesale banking, albeit at a slower pace (and probably less far-reaching).

This presents a huge opportunity for banks. Mobile users tend to check in much more often. The richness and sheer quantity of the data available to banks opens the door to more targeted, tailor-made services and to more relevant advice to help customers make smart financial decisions.

We believe we are currently one of the front-runners in digital innovation in the banking sector, but we remain alert to the competition. Customers are now well informed, they know what they want and they want it immediately. We are investing resources to ensure that we become faster and more agile, and increase our innovative capabilities.