The recent forays by global banking powers Citigroup Inc. and HSBC Holdings Plc <0005.HK> into U.S. Internet banking don't alarm the chief executive of ING Direct, which has been in that market for five years now.

I'm actually surprised it took five years, said Arkadi Kuhlmann, 58, who has led ING Direct since 1997 and introduced it in the United States in 2000. We don't worry about having a number of competitors. I think they have a real handicap -- that they are big, traditional banking institutions.

The head start has helped ING Direct, a unit of Holland's ING Group NV , become by far the largest stand-alone U.S. Internet bank.

With $60 billion of assets and $40 billion of deposits as of March 31, according to Kuhlmann, it is the fourth-largest U.S. thrift, behind Sovereign Bancorp Inc.

In an interview at Manhattan's barista-staffed ING Direct Cafe -- there are others in San Francisco, Los Angeles and Wilmington, Delaware -- Kuhlmann said ING Direct USA can double in size in five years, or less.

The company mainly targets customers in the Northeast, California and Phoenix, but plans to expand its marketing, including to Chicago later this year.

ING Direct already larger than M&T Bank Corp. , and more than half the size of such older banks as BB&T Corp. , Bank of New York Co. and KeyCorp .

Profit for ING Direct Bancorp, which consists mainly of ING Direct, rose 45 percent last year to $176.7 million, as its customer base swelled 52 percent to 3.38 million.

It is very hard for land-based banks to start an online-only bank, said Alenka Grealish, manager of the banking group at Celent Communications LLC in San Francisco.

She added: I am not surprised (ING has) followers, with rates rising and banks starving for deposits.

Citigroup Direct launched in late March with a 4.5 percent yield on savings accounts, provided that customers open linked checking accounts.

ING Direct raised the 3.8 percent rate it had been offering to 4 percent. That's still below the 4.8 percent rate at HSBC Direct , and 4.5 percent at Emigrant Direct.

KEEPING COSTS DOWN

Some Internet banks can offer higher rates because they offer fewer services, keeping costs down.

ING Direct employed just 1,134 people at year end. That helps counteract a thin lending margin. The gap between what ING Direct earns on loans and pays on deposits is just 1.1 percent, lower than most if not all major U.S. banks.

Like credit card issuers that cut off unprofitable customers, ING Direct often dumps 5 percent of its customers.

We're not into personalized service, Kuhlmann said. The average phone call for a customer costs $5.25. You don't need many of those before realizing it's pretty unprofitable.

ING Direct, nevertheless, ranked far higher than 33 other banks in a March customer survey by J.D. Power and Associates.

Where customers get annoyed with banks is fees, especially on checking accounts, Grealish said. This gives ING the ability to be the 'good guys' because it offers savings accounts. Customers then link to checking accounts elsewhere.

Kuhlmann said he loses just 4 percent of his customers a year, compared with a typical bank's 7 percent.

ING diversifies in part through real estate mortgage lending, which grew 30 percent last year to $12.9 billion.

The bank, however, offers only adjustable-rate mortgages, which have lost some of their popularity as short-term rates have risen.

Kuhlmann, however, expects 30 percent annualized mortgage growth for the foreseeable future. He is trying to add business by waiving closing costs -- typically $3,500 per loan.

ING Direct is not widely considered a merger candidate. Kuhlmann said he has not been approached as a takeover target. As a buyer, he said we do look at other opportunities, but nothing is on the horizon that we can actually talk about.

California Investment Citigroup HSBC