Customer Satisfaction

Customer Satisfaction


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. These include employee performance and professionalism, willingness to solve problems, friendliness, level of knowledge, communication skills, and selling skills, among others. Furthermore, customer defection can also be reduced through adjustments in a bank’s rates, policies and branch locations (Leeds, 1992).

Clearly, there are compelling arguments for bank management to carefully consider the factors that might increase customer retention rates. Several studies have emphasised the significance of customer retention in the banking industry (see Dawkins and Reichheld, 1990; Marple and Zimmerman, 1999; Page et al., 1996; Fisher, 2001). However, there has been little effort to investigate factors that might lead to customer retention. Most of the published research has focused on the impact of individual constructs, without attempting to link them in a model to further explore or explain retention. If retention criteria are not well managed, customers might still leave their banks, no matter how hard bankers try to retain them.

This paper examines the impact of several retention-relevant constructs that influence consumers’ decisions to stay with or leave their banks in New Zealand.

Customer SatisfactionIntroduction

The banking industry is highly competitive, with banks not only competing among each other; but also with non-banks and other financial institutions (Kaynak and Kucukemiroglu, 1992; Hull, 2002). 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 New Zealand’s banks has non-domestic owners and is not very diversified in terms of the products and services they offer (Hull, 2002). This suggests that the New Zealand 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 (Mendzela, 1999). 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 (Reichheld and Kenny, 1990). In addition, longer-term customers buy more and, if satisfied, may generate positive word-of-mouth promotion for the company. Additionally, long-term customers also take less of the company’s time and are less sensitive to price changes (Healy, 1999). 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 per cent can double the profits (Healy, 1999).

There has been little empirical research examining the constructs that could lead to customer retention. This paper examines the constructs that impact consumers’ decision to stay with or leave their current banks in New Zealand. In addition, the paper explores whether there is an association between consumers’ demographic characteristics (i.e. age, gender, educational level and income) and loyalty decisions.

  1. Literature Review

Previous studies have identified the benefits that customer retention delivers to an organisation (see Colgate et al., 1996; Reichheld and Sasser, 1990; Storbacka et al., 1994). For example, the longer a customer stays with an organisation 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 organisation. 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 organisation, and positive word-of-mouth promotion.

Apart from the benefits that the longevity of customers brings, research findings also suggest that the costs of customer retention activities are less than the costs of acquiring new customers. For example, Rust and Zahorik (1993) argue the financial implications of attracting new customers maybe 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 lead to profitability (Colgate, Stewart, and Kinsella, 1996).

Clearly, there are compelling arguments for bank management to carefully consider the factors that might increase customer retention rates, with research providing ample justification for customer retention efforts by banks (see Marple and Zimmerman, 1999; Fisher, 2001). However, there has been little empirical research that investigates the constructs leading to customer retention. Previous empirical work has focused on identifying constructs that are precursors to customer retention. Others studies have focused on developing measures of customer satisfaction, customer value and customer loyalty without specifically looking into other potential meaningful constructs. Examples of such constructs are competitive advantage, customer satisfaction, switching barriers, corporate image, and bank services characteristics. These form the basis for the present investigation. There have been few, if any, attempts to link them to customer retention.

2.1    Competitive Advantage

In a highly competitive market, the shortest route to differentiation is through the development of brands and active promotion to both intermediaries and final consumers (Parasuraman, 1997).  This is evident in the banking industry, where many banks are providing more or less identical products for nearly the same price. Unless a bank can extend its product quality beyond the core service with additional and potential service features and value, it is unlikely to gain a sustainable competitive advantage (Chang, Chan, and Leck, 1997). Thus, the most likely way to both retain customers and improve profitability is by adding value via a strategy of differentiation (Baker, 1993) while increasing margins through higher prices.

Today’s customers do not just buy core quality products or services; they also buy a variety of added value or benefits. This forces the service providers such as banks to adopt a market orientation approach that identifies consumer needs and designs new products and redesigns current ones (Ennew and Binks, 1996; Woodruff, 1997).

2.2  Customer Satisfaction

In businesses where the underlying products have become commodity-like, quality of service depends heavily on the quality of its personnel. This is well documented in a study by Leeds (1992), who documented that approximately 40 per cent of customers switched banks because of what they considered to be poor service. Leeds further argued that nearly three-quarters of the banking customers mentioned teller courtesy as a prime consideration in choosing a bank. The study also showed that increased use of service quality/sales and professional behaviours (such as formal greetings) improved customer satisfaction and reduced customer attrition.

Indeed, customer satisfaction has for many years been perceived as key in determining why customers leave or stay with an organisation. Organisations need to know how to keep their customers, even if they appear to be satisfied. Reichheld (1996) suggests that unsatisfied customers may choose not to defect because they do not expect to receive better service elsewhere. Additionally, satisfied customers may look for other providers because they believe they might receive better service elsewhere. However, keeping customers is also dependent on a number of other factors. These include a wider range of product choices, greater convenience, better prices, and enhanced income (Storbacka et al., 1994). Fornell (1992), in his study of Swedish consumers, notes that although customer satisfaction and quality appear to be important for all firms, satisfaction is more important for loyalty in industries such as banks, insurance, mail order, and automobiles.

Ioanna (2002) further proposed that product differentiation is impossible in a competitive environment like the banking industry. Banks everywhere are delivering the same products. For example, there is usually an only minimal variation in interest rates charged or the range of products available to customers. Bank prices are fixed and driven by the marketplace. Thus, bank management tends to differentiate their firm from competitors through service quality. Service quality is an imperative element impacting customers’ satisfaction level in the banking industry. In banking, quality is a multi-variable concept, which includes differing types of convenience, reliability, services portfolio, and critically, the staff delivering the service.

2.3   Customer Perceptions of Value

Today, customers are more value-oriented in their consumption of services because they have alternative choices (Slater, 1997; Woodruff, 1997). For example, Gale and Wood (1994) explained how customers make purchase decisions between competing providers. The author argued that customers buy on value; they do not simply buy products.  Thus, banks must be able to provide “up-close” personal service for customers who come with high expectations. For customers who value convenience most, banks must offer the latest product such as electronic banking, touch-tone phone account access and internet banking. Clearly, customer value can be a strong driver of customer retention.

Reidenbach (1995) argued that customer value is a more viable element than customer satisfaction because it includes not only the usual benefits that most banks focus on but also a consideration of the price that the customer pays. Customer value is a dynamic that must be managed. Customer satisfaction is merely a response to the value proposition offered in specific products/markets (Reidenbach, 1995). By this view, banks must determine how customers define value in order to provide added-value services.

2.4  Corporate Image

Today’s consumers have more choices for their financial needs than ever before. Technology, globalisation, increased competition and increased consumer mobility have dramatically changed the way people bank (Harwood, 2002). Many financial institutions are looking at branding techniques to differentiate themselves. Harwood (2002) argued that branding, as a tool to build the 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 (Kaynak, 1986a, 1986b). 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.

Alvarez (2001) proposed that logic is no longer enough to sell the benefits of an intangible product or service, especially with commodity products and sceptical consumers. This situation calls for emotion or image to change the perception of the audience in any real or profound way (Alvarez, 2001). Furthermore, both Marthur (1988) and Gronroos (1984) proposed image as an alternative to product differentiation.

2.5  Switching Barriers

Switching barriers have been used as marketing strategies to make it costly for customers to switch to another organisation. Such barriers include search costs, transaction costs, learning costs, loyal customer discounts and emotional costs (Fornell, 1992). These barriers provide disincentives for the customer to leave the current organization. Curasi and Kennedy (2002) have shown that customer satisfaction does not predict the continuation of the relationship. High switching costs are an important factor binding the customer to the service organisation. Even with relatively low levels of satisfaction, the customer continues to patronise the service provider because repurchasing is easier and more cost-effective than searching for a new provider or sampling the services of an unknown provider (Curasi and Kennedy, 2002).

Other than switching costs, cross-selling is another critical variable driving customer retention. Cross-selling is the bank’s effort to sell as many different products and services as they can to a particular customer (Daniell, 2000). One aspect of loyalty is the impact of cross-selling, which forms a critical element in increasing revenue. Profitability could, as a consequence, be threatened not only by the loss of market share but also by diminished opportunities for cross-selling (Jones and Farquhar, 2003). Furthermore, the more products or services you sell to a customer, the less likely it is that they will sever the relationship (Daniell, 2000).

2.6 Consumers’ Behavioural Intentions

To compete successfully in today’s competitive marketplace, banks must focus on understanding the needs, attitudes, satisfaction and behavioural patterns of the market (Kaynak and Kucukemiroglu, 1992). Consumers evaluate a number of criteria when choosing a bank. However, the prioritisation and use of these criteria differ across countries, and thus cannot be generalised. For example, in a study of Canadian customers in Montreal, Laroche and Taylor (1988) found that convenience is the principal reason for bank selection, followed by parental influence with respect to the status of the bank.

Social and technological change has had a dramatic impact on banking. These developments, such as internationalisation and unification of money markets and the application of new technologies in information and communications systems to banking, have forced banks to adopt strategic marketing practices. These have included offering extended services, diversification of products, entry into new markets, and emphasising electronic banking (Reidenbach, 1995; Mylonakis et al., 1998). This greater range of services and products, along with improvements in communications efficiency, could have a significant impact on customer satisfaction and consequent behavioural intentions.

2.7  Customer Loyalty

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, 1996a). They may become advocates of the organisation 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.

Changes in the industrial context of banking could also have an impact on the durability of customer-bank relationships. . In contrast, the four major banks operating in New Zealand all have histories of well over 100 years. These include the Auckland Savings Bank (ASB), the Australia and New Zealand Bank (ANZ/National), the Bank of New Zealand (BNZ), and Westpac Trust. With the exception of Kiwibank, all major banks in New Zealand are now foreign-owned.

  1. Methodology and Data

3.1   Data Collection

. 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.

The sampling procedure was based on the recommendations of Malhotra (1999) and Proctor (1997).  A total of 514 useable surveys were returned from the initial mailing, representing a useable response rate of 28%. Budgetary constraints forced the elimination of follow-up procedures.

3.2.   Results and Discussion

A profile of sampled respondents is presented in Table I. Age (Panel A) 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 (Panel B). 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 (Panel C). Panel D

Illustrates the personal income of respondents ranged from ‘less than $10,000’ to ‘more than $120,000’ earnings per annum before tax. The modal category of earnings was $30,000 to $39,999. Though categorical, the distribution of income demonstrates a clear positive skew.

3.2.1   Durability of Relationships

The length of time that customers have been with their banks was also measured. As noted above, there is a distinction between mere retention and the more desirable outcome of loyalty. However, the durability of a bank-customer relationship is a necessary indicator of both.

Length of stay (LOS) figures appears as Table 2. Two banks supply services to 68.9% of our respondents: Westpac Trust (35.2%) and ANZ/National (33.7%). A further 24.8% of the sample is provided services by BNZ (14.8%) and ASB (10%). Only 3.7% of the respondents indicated their current bank as “other”. These institutions include the TSB (Taranaki Savings Bank) and the HSBC (Hong Kong and Shanghai Banking Corporation Ltd.), along with other non-banking institutions such as credit unions and building societies.

Durability figures appear to demonstrate overall contentment with banking services. Nearly eighty per cent of the sample (78.9%) reported LOS at greater than five years. Figures for the other LOS categories are generally small, perhaps reflecting low defection rates or a small number of first-time accounts. Given the preponderance of customers in the greater than five years categories across banks, Table 2 seems to reflect strong, stable relationships.

 Bank of Respondents and Length of Stay

A somewhat different impression emerges when examining the proportion of respondents for each bank with a LOS greater than five years. In order of magnitude, the “other” category institutions suffered the lowest five year LOS proportion of the total respondents that bank with “other” banks, with 0.58. For ASB, this proportion was 0.59, the lowest of the banks. BNZ and ANZ/National were nearly equal, with 0.77 and 0.78 respectively. Westpac had the highest five years LOS proportion at 0.94.

However, this may not mean that Westpac is the best of the group in retaining its customers. Retention relevant items were measured using a five-point rating scale (where “Very Unlikely =1). When asked about the likelihood of staying with their service provider into the foreseeable future (Table 3), Westpac customers had the lowest mean, at 3.59 (s.d. = 0.684), only somewhat above the neutral hinge of the scale.

  Research Constructs

Multiple items were used to build the constructs. All items were measured with five-point rating scales, with neutral centres. Descriptive statistics were computed for responses to each item, along with a summated score for each and a mean score representing the construct of interest.

Customer Satisfaction

Customer satisfaction was measured using a nine-item index. The overall mean of perceived satisfaction was 4.02. Individually, each of the nine items had mean scores that were above the neutral pivot on the rating scale.

Respondents appear to be highly satisfied with the bank’s accuracy of records and transactions, presented in Table 5(a). This suggests that banks in New Zealand are reliable in carrying out transactions. However, respondents were relatively less satisfied with banks’ pricing. Some complained about the high fees charged and expensive account maintenance costs.

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 emphasise the human interaction basis of service delivery.

Customer Perceptions of Value

The customer perceptions of value construct were measured using an eight-item index. These are presented in Table 5(b). The overall perceived value mean was 3.54, only somewhat above the neutral centre of the scale and thus indicating a 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.

Overall, the respondents valued bankers’ efficient service. However, the respondents did not think their banks had numerous branches or convenient locations. Some respondents complained that were no bank branches located near their workplaces or their residences. Convenience is thus an issue for some customers. New Zealand banks may need to consider increasing the number of branch offices into those areas with high concentrations of current and prospective customers. Over the years, banks in New Zealand have reduced the size of their networks by closing smaller branch offices (Gerrard and Cunningham, 2001). Clearly, such a policy has also reduced convenience for many customers as they are forced to do their banking at less convenient locations.

At present, New Zealand bank managers have sought to develop other delivery techniques to increase convenience for their customers. These efforts have included increasing self-service in the form of ATMs, phone banking, e-banking, Eftpos and drive-through banking.

However, some respondents have criticised that such forms of service can only satisfy consumers’ day-to-day banking transaction-based needs. These delivery channels are not able to perform additional services such as offering financial advice or providing detailed information about mortgages, loans, and interest rates. Thus, the process by which such services are offered should be continuously monitored to guarantee that customers have access to adequate financial services at all times.

Corporate Image

Seven items were used to assess perceived corporate image (Table 5(c)). The mean of this composite index was 3.9, signifying that overall, respondents have a relatively positive impression of their bank. In general, the respondents believed that the image of their service provider is widely-known, reliable, trustworthy and stable. The offering of reliable, error-free financial transactions should thus reinforce customers’ confidence in their banks. A favourable image could also motivate customers to resist competitive offerings.

However, the respondents do not perceive their bank to be distinctive or unique compared to competitors. It might be the case that banks in New Zealand have not attempted to differentiate or reposition themselves and build positive brand equity with their customers. Indeed, banks must rise to the challenge and begin to take advantage of the brand equity that undoubtedly exists or can be developed (Bergstrom and Bresnahan, 1996). More importantly, convincing customers that they are getting high value from their bank should be a key advertising and promotion objective to create and strengthen the corporate image.

Perceived Competitive Advantage

The mean score was 3.43, revealing that respondents have a neutral positive impression of their bank’s competitive advantage.  Service quality may be the only sustainable form of differentiation in such a highly competitive and homogenous industry (Ioanna, 2002). However, bank managers should bear in mind that delivering superior service is not enough. In effect, they should deliver services that are better than consumers’ expectations in order to enhance satisfaction and maintain a positive image.

The use of the latest technology, however, raises questions.  Consumers would prefer to speak to their local branch’s representatives directly, believing they will be better able to solve their problems or provide them promptly, relevant answers. Furthermore, for safety reasons, a few banks now employ a ‘locked door’ policy. The respondents complained that such a policy is a waste of time and will indirectly reduce consumers’ willingness to go to the bank’s branches.

Switching Barriers

The switching barriers index was composed of seven items. The overall mean was 3.79, implying that these impediments have a moderate degree of influence on the respondent’s intention to stay. The individual means are presented in Table 6(e).

The strongest contributor to this construct was the banks’ ability to provide products and services that meet respondents’ needs. In addition, the respondents saw little advantage to switching, since they perceive that all banks provide the same range of products and services.

Of the switching barrier items, incentives had the lowest mean score, suggesting that they might not have much impact on switching decisions. This does not mean that incentives are not important to bank customers.

Furthermore, increased competition and on-going development of new delivery channels are leading to the commodification of bank products as these are relatively easy for competitors to copy. This might lead to a higher propensity to switch providers, as consumers may be able to purchase similar products and services for better prices elsewhere. Conversely, cross-selling may make switching an unacceptable inconvenience, as the customer must find a provider that can replace a broader range of products.

Bank Service Characteristics and Behavioural Intentions

Of the individual items, the highest mean score was for the ability to meet consumer’s changing needs. This suggests that customers want their banks to monitor change in the financial environment, and respond with products that add value to customers’ accounts. It also suggests that banks that offer new or refine current products in a proactive manner may enhance their customer relationships.

Customer Loyalty

Another crucial variable is the respondents’ perception of difficulty in changing banks. In today’s banking environment, it would not be unusual for a customer to have many automatic payment orders to a wide variety of different firms, such as electricity and telephone companies. Notification and subsequent changes to billing details or other difficulties would be time-consuming. Thus, it might not be worth the effort and inconvenience, unless the respondent had a very bad experience with the current bank. Thus, the respondents’ focus on inconvenience in changing banks is still a prevalent concern.

In this study, most of the respondents appeared happy with the services their banks have performed.  For the business, service recovery represents an opportunity to know the customer better and is a chance to impress them. If bankers are able to solve the problems customers face, then customers would derive more value from the service and thus will be more loyal to the bank.

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.

Financial institutions have long attempted to lure young consumers with the use of the latest technology (Penny, 1993). For example, ASB uses technology to attract young people. They offer online services and link these to Telecom and Vodafone to enable banking with cellphones and on-line (Oliver, 2004).

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.

Effect (F(3,475) = 3.55, p= .015). 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.


These results lead to suggestions for bank managers to consider as to how they might improve customer retention in today’s competitive banking environment.

The smaller banks thus appear to be doing some things better than their larger competitors. Thus, the large New Zealand banks may gain by benchmarking their performance against the smaller institutions.


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