Research Proposal on "Economic Recession on Customer Loyalty"

Research Proposal 11 pages (4085 words) Sources: 30

[EXCERPT] . . . .

Instead, for some banking customers, interpersonal interactions continue to be of paramount importance. In fact, when examining banking loyalty, Lam et al. discovered that there were two primary drivers of customer loyalty: affective components and cognitive components (2009). In other words, customers were not only concerned about the level of service quality and their perceptions regarding whether that quality was a bargain, but also about their interpersonal interactions with bank workers (Lam et al. 2009).

What this background suggests is that switching behavior may not be motivated by positive enticements by other banks, but may be more likely to be linked to a customer having an unpleasant customer service experience with a current bank. In the context of the recession, it is possible that this dissatisfaction might be linked, not to personal experiences that the customers had with the banks, but with information that customers learned about the banks and banking practices. For example, if a bank's business practices were somehow linked to the recession, especially in way suggesting causation that bank might lose customers, even if those customers did not have any personal negative experiences with that bank, and even if none of the bank's competitors offered better services and value than the bank. Furthermore, banks that are larger and have higher profits are more likely to suffer from this type of reputational damage (Fiordelisi et al. 2013).

Therefore, when examining why respondents switched banks, it is important to look at issues beyond individual customer service and individual financial motivations. Customers may be motivated by extrinsic factors such as the bank's reputation or the bank may have been negatively impacted by recession in other parts of the globe and be unable to provide services, particularly creditor services, to customers, prompting change. In addition, it is critical to examine the other changes that were occurring in the banking industry at the time of the recession, such as the trend towards electronic banking, and see how they may have impacted customer preferences.

Empirical Review

While the role of banks has changed dramatically over the last few decades and people are banking in very different ways than they once were, it is critical to realize that service continues to be a major driver of customer satisfaction and loyalty in banks. "Service quality is one of the critical success factors that influence the competitiveness of an organization. A bank can differentiate itself from competitors by providing high quality service" (Siddiqi 2011). In highly competitive markets, banks have to be even more careful in their provision of services. "Banks have to improve the service level continuously. There is no guarantee that what is excellent service today is also applicable for tomorrow. To survive in the competitive banking industry, banks have to develop new strategies which will satisfy their customers" (Siddiqi 2011). Therefore, while banks must be adaptive to customer needs, they still must provide a certain level of service in order to retain customers.

Prior research has well established that relationships play a role in individual decisions to switch banks, and that these relationships are critical regardless of whether banking is conducted primarily in person or via other venues. Relationships are critical to loyalty because people who are happy with their banks are far less likely to switch banks than people who are unhappy with their banks. Moreover, customer happiness is focused primarily on three factors, all of which are negatively correlated with a customer's propensity to switch banks: responsiveness, empathy, and reliability (Chakravarty et al. 2004). As a result, bank relationships are considered central in customer retention. Furthermore, it is important to realize that retention is only one aspect of the loyalty perspective; banks not only want to retain customers in their current business relationships, but also groom those customers to transition into other relationships where the bank is able to meet their needs.

Against the background of the recession and how changes in economics may have motivated customers to be more conscientious about fees and value, one must also look at global changes in the banking industry that occurred just prior to and during the recession. The most notable of those changes was a transition from in-person banking services to the provision of electronic banking services. This leads to the question of whether it is possible to combine operating efficiency and service quality or whether there is a necessary trade-off between operating efficiency and service quality (Talluri et al. 2012). If there is a trade-off between operating efficiency and service quality, then one would expect the move towards digital banking to be accompanied by a decline in customer service, since digital banking has optimized efficiency. However, Ganguli and Roy identified "four generic service quality dimensions in the technology-based banking services -- customer service, technology security and information quality, technology convenience, and technology usage easiness and reliability" (2011). What they discovered was that these quality dimensions had different impacts on customer loyalty, although all of the dimensions impacted customer satisfaction and customer loyalty in positive and significant ways (Ganguli & Roy 2011).

The digital revolution has provided two avenues for banks to improve their customer relations. First, banks can use those information technology (IT) developments to help improve the customer service relationship (Marinc 2013). IT also permits banks to "exploit scale and scope economics," which impacts transaction banking and marketability (Marinc 2013). In other words, IT can help banks market to potential customers, which can have an impact on the rates at which customers switch banks.

Furthermore, while customers are showing a general trend towards preferring electronic banking services, those substituted services have not necessarily been customer-driven. Instead, Campbell and Frei discovered that "customer adoption of online banking is associated with (1) substitution, primarily from incrementally more costly self-service delivery channels (automated teller machine and voice response unit); (2)augmentation of service consumption in more costly service delivery channels (branch and call center); (3) a substantial increase in total transaction volume; (4) an increase in estimated average cost to serve resulting from the combination of points (1) -- (3); and (5) a reduction in short-term customer profitability" (Campbell & Frei 2010). In other words, many customers have only reluctantly transitioned to electronic services and, while this transition has occurred during the same time period as the recession and may be driven by economic motivators, not only for the banks, but also for the customers, it has not necessarily been something that all customers have desired from their banking services, suggesting a marketing issue. However, once the customers are acclimated to the electronic services, the provision of electronic services leads to higher customer retention rates, and this "finding holds even after controlling for contemporaneous market share, suggesting it is not simply the result of increased market power leading to the acquisition of online banking customers" (Campbell & Frei 2010).

Another factor of prime importance to customers, which is particularly relevant in online banking scenarios, is whether or not a bank protects them from fraud. So much of the recession focused on shady banking practices, which, while not necessarily fraudulent, may have made the average banking consumer more aware of the potential of information abuse by their banking institutions. Hoffman and Birnbrich found a positive association between customer familiarity and knowledge of bank fraud prevention measures and the quality of customer relationships (2012). Those relationships are then positively associated with customer loyalty (Hoffman & Birnbrich 2012). Higher customer loyalty not only means that customers are likely to continue their existing relationships with the bank, but also that customers are more likely to buy other products or services from the bank (Hoffman & Birnbrich 2012).

Furthermore, as the economic recession brought to light, it is no longer possible to examine economies as products of local geographies. Instead, there is a level of interconnectedness to finances and major financial players that means that local decision-making can have a potential global impact. For example, mortgages had traditionally been held locally, which would limit the choice of bank or mortgage service provider. However, in the years preceding the recession, this was no longer the case, and customers had the option of choosing lenders that were not geographically local (Martin 2010). These creditors may have been impacted by the recession at different times than local banks in the UK, which would have impacted their ability to lend and the stability of their assets, not only impacting the overall economic conditions in the UK, but also the ability of customers to choose those banks for future services.

The financial globalization that helped lead up to the economic recession did not exist in a vacuum. Many international banks had expanded into the UK, which meant that the UK had expanded vulnerability variations in other countries. In many ways, this was the result of a larger trend towards globalization in the financial services sector. While banks had once been assumed to follow… READ MORE

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