A STUDY OF BANKING CUSTOMER RETENTION THROUGH CUSTOMER SATISFACTION IN DHARMAPURI

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1 A STUDY OF BANKING CUSTOMER RETENTION THROUGH CUSTOMER SATISFACTION IN DHARMAPURI Mr. T. K. MANICKAVASAKAM Principal, Vishwa Bharathi Arts and Science College, Morappur Harur Taluk, Dharmapuri District Dr. A. VELAVAN Assistant Professor and Head of the Department, Department of Business Administration, Dharmapuri Government Arts College, Dharmapuri ABSTRACT Customer retention is an important element of banking strategy in today s increasingly competitive environment. Bank management must identify and improve upon factors that can limit customer defection. It includes employee performance and professionalism, willingness to solve problems, friendliness, knowledge level, communication skills, and selling skills, among others. Furthermore, customer defection can be reduced through adjustments in a bank s rates, policies and branch locations. This research examines the impact of several retention-relevant constructs that influence consumers decisions to stay with or leave their banks in Dharmapuri. These constructs were rated by customers as having strong effects on loyalty to their banks. Demographic characteristics were also assessed for their contribution to intentions of staying with or finding alternative banks. Results suggest that the most important constructs were customer satisfaction, followed by corporate image and switching barriers. There was also evidence that customers age groups and level of education contributed to explaining respondents' propensity to stay with their current banks. Keywords: Customer Retention, Customer Satisfaction, Retail Banking, Dharmapuri Banks.

2 INTRODUCTION The banking industry is highly competitive, with banks not only competing among each other; but also with non-banks and other financial institutions. Most bank product developments are easy to duplicate and when banks provide nearly identical services, they can only distinguish themselves on the basis of price and quality. Therefore, customer retention is potentially an effective tool that banks can use to gain a strategic advantage and survive in today s ever-increasing banking competitive environment. The majority of Dharmapuri banks has nondomestic owners, and is not very diversified in terms of the products and services they offer. This suggests that the Dharmapuri banking industry has reached the maturity phase of the product lifecycle and has become commoditized, since banks offer nearly identical products. This carries the danger of creating a downward spiral of perpetual price discounting fighting for customer share. One strategic focus that banks can implement to remain competitive would be to retain as many customers as possible. The argument for customer retention is relatively straightforward. It is more economical to keep customers than to acquire new ones. The costs of acquiring customers to replace those who have been lost are high. This is because the expense of acquiring customers is incurred only in the beginning stages of the commercial relationship. In addition, longer-term customers buy more and, if satisfied, may generate positive word-ofmouth promotion for the company. Additionally, long-term customers also take less of the company s time and are less sensitive to price changes. These findings highlight the opportunity for management to acquire referral business, as it is often of superior quality and inexpensive to obtain. Thus, it is believed that reducing customer defections by as little as five percent can double the profits. The key factors influencing customers selection of a bank include the range of services, rates, fees and prices charged. It is apparent that superior service, alone, is not sufficient to satisfy customers. Prices are essential, if not more important than service and relationship quality. Furthermore, service excellence, meeting client needs, and providing innovative products are essential to succeed in the banking industry. Most private banks claim that creating and maintaining customer relationships are important to them and they are aware of the positive values that relationships provide. LITERATURE REVIEW Previous studies have identified the benefits that customer retention delivers to an organization. The longer a customer stays with an organization the more utility the customer generates (Reichheld and Sasser, 1990). This is an outcome of a number of factors relating to the time the customer spends with the organization. These include the higher initial costs of introducing and attracting a new customer, increases in both the value and number of purchases, the customer's better understanding of the organization, and positive word-of- Namex International Journal of Management Research 9 Vol. 2, Issue No. 2, Jul December 2012

3 mouth promotion. Rust and Zahorik (1993) argue the financial implications of attracting new customers may be five times as costly as keeping existing customers. However, maintaining high levels of satisfaction will not, by itself, ensure customer loyalty. Banks lose satisfied customers who have moved, retired, or no longer need certain services. As a consequence, retaining customers becomes a priority. Previous research shows, however, that longevity does not automatically leads to profitability. On the other hand, Beckett et al. (2000) draw tentative conclusions as to why consumers appear to remain loyal to the same financial provider, even though in many instances they hold less favourable views toward these service providers. For instance, many consumers appear to perceive little differentiation between financial providers, making any change essentially worthless. Secondly, consumers appear to be motivated by convenience or inertia. Finally, consumers associate changing banks with high switching costs in terms of the potential sacrifice and effort involved. Harwood (2002) argued that branding, as a tool to build image, is critical in the banking industry where all firms offer about the same kinds of products. Hence, it is critical that banks have a comprehensive knowledge of customers values, attitudes, needs and perceptions of various services the bank offers and the image which customers have of the bank itself. Accordingly, bankers must be able to build and manage their bank s image in order to clearly define the differences between their bank and its competitors. Bharadwaj et al. (1993) argue that services are highly intangible and are, therefore, high in experience and credence qualities. As a consequence, brand reputation is important as a potential competitive advantage. Alvarez (2001) proposed that logic is no longer enough to sell the benefits of an intangible product or service, especially with commodity products and skeptical consumers. This situation calls for emotion or image to change the perception of the audience in any real or profound way. Customer retention improves profitability principally by reducing costs incurred in acquiring new customers. A prime objective of retention strategies must therefore be zero defections of profitable customers (Reichheld, 1996). There is, however, a distinction between customers who are simply retained and those who are loyal. The concept of consumer inertia implies that some customers are only being retained, rather than expressing loyalty. Truly loyal customers are usually portrayed as being less pricesensitive and more inclined to increase the number and/or frequency of purchases. They may become advocates of the organization concerned and play a role in the decision making of their peers or family. Satisfaction with a bank's products and services thus also plays a role in generating loyalty that might be absent in the retention situation. Customer loyalty is therefore not the same as customer retention, as loyalty is distinct from simple repurchase behaviour. Loyalty is only a valid concept in situations where customers can choose other providers. Companies thus need to understand the nature of their consumers reasons for staying and Namex International Journal of Management Research 10 Vol. 2, Issue No. 2, Jul December 2012

4 must not assume that it is a positive, conscious choice (Colgate et al., 1996). METHODOLOGY AND DATA The questionnaire gathered information on consumers perceptions of their banks, the reasons they remain with their banks, and reasons why they might switch to a rival. Likert-format items were presented with 5-point scales, where 1 = "strongly disagree," 3 = "neither disagree nor agree," and 5 = strongly agree." Respondents were selected randomly in Dharmapuri. Six hundred respondents were selected and collected their responses through personal interview. A total of 514 useable surveys were collected after eliminating the non filled detailed questionnaire. RESULTS AND DISCUSSION A profile of sampled respondents is presented in Table 1. Age was distributed bi-modally, with 41 to 50 years of age and 51 to 60 years each capturing 24.2% of the sample. Somewhat more than half the sample (51.8%) was male. Half of the sample (50.1%) reported having earned a diploma or higher educational qualification, with the remainder of the sample holding a high school or trade qualification. The family income of respondents ranged from less than Rs.10,000 to more than Rs.120,000 earnings per annum before tax. The modal category of earnings was Rs.30,000 to Rs.39,999. Though categorical, the distribution of income demonstrates a clear positive skew. TABLE No. 1 - DEMOGRAPHICS OF RESPONDENTS DEMOGRAPHIC FREQUENCY VALID PERCENT CUMULATIVE PERCENT AGE Group years years years years years years and above TOTAL GENDER Male Female TOTAL EDUCATION Level Postgraduate Degrees Bachelor Degree Diploma Upto H.S.C Upto S.S.L.C TOTAL Namex International Journal of Management Research 11 Vol. 2, Issue No. 2, Jul December 2012

5 DEMOGRAPHIC FREQUENCY VALID PERCENT CUMULATIVE PERCENT INCOME Level Less than Rs.10, Rs.10,000- Rs.19, Rs.20,000- Rs.29, Rs.30,000- Rs.39, Rs.40,000- Rs.49, Rs.50,000- Rs.59, Rs.60,000- Rs.69, Rs.70,000- Rs.79, Rs.80,000- Rs.89, Rs.90,000- Rs.99, Rs.100,000- Rs.120, Rs.120, TOTAL Financial institutions know the key to retaining customers is more than just providing satisfaction or competitive pricing. This view is confirmed by responses to the satisfaction items. Our results indicate that banks cannot rely upon price competition alone in order to be competitive; they must also strive to better inform consumers of the products and services they offer, and provide convenient, agreeable surroundings, as well as continue to emphasis the human interaction basis of service delivery. TABLE No. 2 - MEAN SCORES OF RESPONDENTS PERCEIVED SATISFACTION (α = 0.851) CONSUMERS ARE SATISFIED WITH.. MEAN SD Accuracy of banking records Accuracy of transactions Access to electronic transactions The staff who deliver the service The efficiency of customer service Physical appearance of the branches Convenience of branch locations The bank s effort to inform consumers about new products and services Pricing MEAN PERCEIVED SATISFACTION CUSTOMER PERCEPTIONS OF VALUE The customer perceptions of value construct was measured using an eightitem index. These are presented in Table 3. The overall perceived value Namex International Journal of Management Research 12 Vol. 2, Issue No. 2, Jul December 2012

6 mean was 3.54, only somewhat above the neutral centre of the scale and thus indicating moderate perceived value of banks. The variable measuring bank service efficiency (4.00) had the highest mean score while the extended banking hours (3.11) had the lowest. All of the means, however, were above the neutral point on the scales, suggesting that banking services were at least adequate for most respondents. Extended banking hours earned the lowest mean score, indicating an area of some concern. Customers want to perform transactions when, where, and how they choose. They want to minimize transaction costs and time. They want specialist advice and perhaps most of all they want to see value in their relationship with their bank. Thus, Dharmapuri bankers should ensure their availability to customers in a consistent, caring, and professional manner in order to add value to their services. These aspects of the customer-bank relationship would be complemented by extended banking hours. Many customers would welcome weekend opening, or extended hours on weekdays. TABLE NO. 3 - MEAN SCORES OF RESPONDENTS PERCEIVED VALUE (α =.838) CONSUMERS VALUE THEIR BANK BECAUSE IT HAS.. MEAN SD Efficient service Offers latest electronic products Listens and be sensitive to consumer s needs Convenient branch locations Flexible banking policies Many branch locations Fair method of setting fees Extended banking hours MEAN PERCEIVED VALUE CUSTOMER LOYALTY The index of customer loyalty was composed of six items. The mean score for the index was 3.35, implying that most of the respondents have an intention to stay loyal with their banks. It has been documented that the respondents tend to stay loyal with their service providers if they have excellent relationship with its staff. TABLE 4 : MEAN SCORES OF RESPONDENTS LOYALTY LEVEL (α =.766) CONSUMERS STAY WITH THEIR BANK BECAUSE. MEAN SD It is difficult to change banks They have excellent relationship with staff Their bank is responsive to their changing needs Their bank is efficient in handling complaints Their bank offers them rewards and benefits Other banks cannot offer the products and services they want MEAN CUSTOMER LOYALTY Namex International Journal of Management Research 13 Vol. 2, Issue No. 2, Jul December 2012

7 CUSTOMERS DEMOGRAPHIC AND CUSTOMER RETENTION RATE This study further investigates whether demographic differences impact the respondents decision to stay with or leave their banks. Demographic variables included the respondents age, gender, educational level, and income. This suggests that in order to retain younger customers, Dharmapuri bankers should introduce new products or services that young consumers value most. Financial institutions have long attempted to lure young consumers with the use of latest technology. For gender, male respondents have an average retention rate of 82.6%, whereas female respondents have a retention rate of 75.3%. However, the test results are Non-significant indicating no association between gender and the respondents intention to stay with or leave their service providers. Retention rates for different educational levels of respondents were quite similar. The mean score for retention ranged between 3.6 and 3.9. One-way ANOVA was used to test whether education had an effect on customer retention. The test results demonstrated a significant effect (F = 3.55, p=.015). This may be because more highly educated consumers tend to have greater expectations of services. More educated respondents are also more well-informed. This result has implications for staff training and servicing support to improve consumers positive experiences while interacting with the bank. Finally, the effect of respondents' incomes was examined. Retention rates for each income group were similar to one another, with test results showing a lack of association the between income and retention. A summary of these tests is presented in following Table. TABLE 5: RESPONDENTS DEMOGRAPHIC WITH REGARDS TO RETENTION ITEMS 2 TEST T-Test ANOVA Age (0.000) 3.39 (0.005) Gender (0.215) (0.134) Education 3.55 (0.015) Income (0.512) 1.04 (0.394) CONCLUSION The most important construct was customer satisfaction. The result leads to suggestions for bank managers to consider as to how they might improve customer retention in today s competitive banking environment. Results of this analysis have also shown that as the age of customers increases, so too does the propensity to stay with their current banks. In addition, respondents with higher education are most likely to switch banks perhaps because highly educated consumers tend to have greater expectations of services. Gender and Namex International Journal of Management Research 14 Vol. 2, Issue No. 2, Jul December 2012

8 income appear not to have significant association with the respondents intention to stay with or leave their service providers. Since the results of this study are based on consumers perceptions only, future research should investigate the congruence between consumers and service providers perceptions. This will help the industry to better understand whether both consumers and banks have the same perceptions regarding issues relevant to retention. While this study found that customer satisfaction alone is not effective in building customer loyalty, future research may attempt to explore the unexplored constructs that consumers would value most. REFERENCES Abratt, R and Russell, J. (1999). Relationship Marketing in Private Banking South Africa. The International Journal of Bank Marketing, 17(1), p.5. Alvarez, E. J. (2001). Your Bank's Image: Keeping it Consistent. Bank Marketing, 33(3), April, pp Baker, M. J. (1993). Bank Marketing - Myth or Reality? The International Journal of Bank Marketing, 11(6), p. 5. Beckett, A., Hewer, P and Howcroft, B. (2000). An Exposition of Consumer Behaviour in the Financial Services Industry. The International Journal of Bank Marketing, 18(1), p. 15. Bharadwaj, S. G., Varadarajan, P. R and Fahy, J. (1993). Sustainable Competitive Advantage in Service Industries: A Conceptual Model and Research Propositions. Journal of Marketing, 57(October), pp Colgate, M., Stewart, K and Kinsella, R. (1996). Customer Defection: A Study of the Student Market in Ireland. The International Journal of Bank Marketing, 14(3), p. 23. Dawkins, P. M and Reichheld, F. F. (1990). Customer Retention as a Competitive Weapon. Directors and Boards, 14(4). Gronroos, C. (1984). A Service Quality Model and Its Marketing Implications. European Journal of Marketing, 18(4), pp Harwood, M. (2002). Branding on a Budget: Building the Community Bank's Image. Community Banker, 11(4), April, pp Ioanna, P. D. (2002). The Role of Employee Development in Customer Relations: The Case of UK Retail Banks. Corporate Communication, 7(1), pp Parasuraman, A. (1997). Reflections on Gaining Competitive Advantage through Customer Value. Journal of the Academy of Marketing Science, 25(2), pp Reichheld, F. F and Sasser, W. E. (1990). Zero Defections: Quality comes to Services. Harvard Business Review, September-October, pp Reichheld, F. F. (1996). Learning from Customer Defections. Harvard Business Review, March/April, pp Rust, R. and Zahorik, A. (1993). Customer Satisfaction, Customer Retention and Market Share. Journal of Retailing, 69(2), pp Woodruff, R. B. (1997). Customer Value: The Next Source of Competitive Advantage. Journal of Academy of Marketing Science, 25(2), pp Namex International Journal of Management Research 15 Vol. 2, Issue No. 2, Jul December 2012