Supervisor: Geir Gunnlaugsson Second Corrector: prof. dr. C.L.M. Hermes
Multi-Channel-Banking in Germany
and its impact on customer retention
Master thesis within the scope of the double degree programme
International Financial Management
of the University of Groningen and the University of Uppsala
“Through death to life.”
Table of content
Table of content...I Table of figures ... V Table of tables ... VII Abbreviations ...IX
1. Introduction ... 1
2. The German retail banking industry... 4
2.1 Multi-channel distribution... 4
2.1.1 Distribution of financial services ... 4
2.1.2 Distribution challenges... 6
2.1.3 Distinctive characteristics of financial services ... 7
2.2 Customer relationship management ... 8
2.2.1 Relationship marketing: the basis of customer relationship management ... 9
2.2.2 The economic advantageousness of customer relationship management ... 10
2.2.3 Dimensions of customer retention... 11
2.2.4 Drivers of customer retention... 12
2.2.5 Customer satisfaction: the dominant cause of customer retention... 13
2.2.6 Measurement of customer satisfaction and retention... 14
2.2.7 Conflation: integrated customer relationship management... 15
2.3 Industry and market developments ... 18
2.3.1 Changed customer behaviour ... 18
Table of content II
2.3.3 Changes of the competitive environment... 20
2.3.4 New challenges to German retail banks... 21
3. Theoretical model... 23
3.1 Existing models ... 23
3.2 The confirmation-disconfirmation-paradigm as conceptualisation basis... 24
3.3 Theoretical constructs ... 25
3.3.1 Quality of service provision ... 25
3.3.2 Expectations ... 26
3.3.3 Customer satisfaction and customer retention ... 27
3.4 Conflation... 28
3.5 Interim findings ... 29
4. The impact of single distribution channels on customer retention... 30
4.1 Stationary distribution ... 30
4.1.1 History and relevance of the stationary distribution ... 30
4.1.2 Stationary distribution: impact on customer retention ... 32
4.1.3 Self-service banking: impact on customer retention ... 34
4.2 Telephone distribution... 36
4.2.1 Important features of telephone distribution ... 36
4.2.2 Telephone distribution: impact on customer retention... 37
4.3 Online distribution... 39
4.3.1 Important features of online distribution... 39
4.3.2 History and relevance of online distribution ... 41
4.3.4 Online distribution: obstacles... 44
4.3.5 Online distribution: configuration... 47
5. Methodology, data and empirics ... 50
5.1 Online service quality dimensions ... 50
5.1.2 Operationalising online service quality dimensions... 51
5.2 Research methodology ... 52 5.2.1 Research approach... 52 5.2.2 Customer survey... 54 5.3 Discussion of results... 56 5.3.1 Demographics... 56 5.3.2 Quality Dimensions... 65 5.4 Conclusions ... 102 5.5 Limitations ... 106 6. Multi-channel-banking ... 108
6.1 Important features of multi-channel-banking... 108
6.2 Multi-channel-banking: impact in customer retention ... 109
6.3 Multi-channel-banking: efficient distribution ... 112
6.4 Multi-channel-banking: customer-oriented configuration ... 113
7. How to increase customer retention with MCB ... 118
7.1 Configuration of customer relations... 118
7.1.1 The necessity of segmentation ... 118
7.1.2 Segmentation methods ... 120
7.1.3 CRM: approaching customers individually... 122
Table of content IV
7.2 Stationary distribution: design and configuration ... 127
7.2.1 The staggered branch system: a model of differentiated stationary distribution .. 127
7.2.2 Customer-oriented branch design... 129
7.2.3 Service employees’ contribution to customer retention... 131
7.3 Customer satisfaction: maxim of action... 134
7.3.1 Quality management ... 134
7.3.2 Complaint management... 137
Table of figures
Figure 1: Research approach ... 2
Figure 2: The customer relationship chain (Ennew & Binks, 2007)... 16
Figure 3: Confirmation-disconfirmation-paradigm... 25
Figure 4: Relation between service distribution, customer expectations, customer staisfaction and customer retention ... 28
Figure 5: Sample – Age... 57
Figure 6: Sample - Educational background ... 58
Figure 7: Sample – Profession ... 59
Figure 8: Sample - Frequency of Internet usage ... 60
Figure 9: Sample - Time spent online due to financial matters ... 61
Figure 10: Sample - Frequency of virtual branch visits ... 62
Figure 11: Sample - Main reason to visit the virtual branch... 63
Figure 12: Sample - Second most important reason to visit the virtual branch ... 64
Figure 13: Sample - Main reasons to visit a physical branch... 65
Figure 14: Online service quality dimensions ranked by importance... 67
Figure 15: Quality items "privacy & security" ranked by importance... 68
Figure 16: Rating results "protection of personal data" ... 69
Figure 17: Rating results "security system transactions" ... 70
Figure 18: Rating results "security system website" ... 71
Figure 19: Rating results "privacy policy" ... 72
Figure 20: Rating results "privacy policy" ... 72
Figure 21: Mean ratings "privacy & security" ... 73
Figure 22: Quality itmes "fulfilment" ranked by importance... 74
Figure 23: Rating results "immediate confirmation" ... 75
Figure 24: Rating results "transactions performed at the first time"... 76
Figure 25: Rating results "system checks" ... 77
Figure 26: Rating results "confirmation on paper" ... 78
Figure 27: Quality items "reliability" ranked by importance ... 80
Table of figures VI
Figure 29: Rating results "virtual branch works properly" ... 82
Figure 30: Rating results "forms work properly"... 83
Figure 31: Rating results "accurcay of content"... 84
Figure 32: Rating results "links work properly" ... 85
Figure 33: Mean ratings "reliability"... 86
Figure 34: Quality itemes "efficiency" ranked by importance... 87
Figure 35: Rating results "clarity"... 88
Figure 36: Rating results "usability" ... 89
Figure 37: Rating results "celerity of login" ... 90
Figure 38: Rating results "page design" ... 91
Figure 39: Rating results "celerity of logout" ... 93
Figure 40: Mean ratings "efficiency" ... 94
Figure 41: Quality items "responsiveness" ranked by importance... 95
Figure 42: Rating results "customer care"... 96
Figure 43: Rating results "willingness to help"... 97
Figure 44: Rating results "support by relationship banker" ... 98
Figure 45: Rating results "support by telephone system" ... 99
Figure 46: Mean ratings "responsiveness" ... 100
Figure 47: General satisfaction with the virtual bank ... 102
Table of tables
Table 1: Format of questionnaire ... 55
Table 2: Quality dimensions ranked by importance... 65
Table 3: Quality items "privacy & security" ranked by importance ... 67
Table 4: Rating results "protection of personal data"... 68
Table 5: Rating results "security system transactions" ... 70
Table 6: Rating results "security system website" ... 71
Table 7: Mean ratings "privacy & security"... 73
Table 8: Quality items "fulfilment" ranked by importance... 74
Table 9: Rating results "immediate confirmation"... 75
Table 10: Rating results "transactions performed at the first time" ... 76
Table 11: Rating results "system checks" ... 77
Table 12: Rating results "confirmation on paper"... 78
Table 13: Mean ratings "fulfilment" ... 79
Table 14: Mean ratings "fulfilment" ... 79
Table 15: Quality items "reliability" ranked by importance ... 80
Table 16: Rating results "accessibility 24/7" ... 81
Table 17: Rating results "virtual branch works properly"... 82
Table 18: Rating results "froms work properly" ... 83
Table 19: Rating results "accuracy of content" ... 84
Table 20: Rating results "links work properly"... 85
Table 21: Mean ratings "reliability"... 86
Table 22: Quality items "efficiency" ranked by importance... 87
Table 23: Rating results "clarity" ... 88
Table 24: Rating results "usability"... 89
Table 25: Rating results "celerity of login"... 90
Table 26: Rating results "page design" ... 91
Table 27: Rating results "celerity of logout"... 92
Table of tables VIII
Table 29: Quality items "responsiveness" ranked by importance... 94
Table 30: Rating results "customer care" ... 95
Table 31: Rating results "willingness to help" ... 96
Table 32: Rating results "support by relationship banker"... 98
Table 33: Rating results "telephone system"... 99
Table 34: Mean ratings "responsiveness" ... 100
Abbreviations
CDM – Confirmation/Disconfirmation Model CRM – Customer Relationship Management MCB – Multi-Channel-Banking
MCM – Multi-Channel-Management RM – Relationship Marketing
1. Introduction 1
1. Introduction
For many years the acquisition of new customers had been the focus of financial services marketing. Recently however, marketing strategies were readjusted to the existing customer base. Within the scope of customer relationship management (CRM), retail banks deploy their resources predominantly to maintain and foster established customer relations. Customers’ needs are the centre of attention of this management approach. This reorientation to the existing customer base is mainly driven by the cognisance of the economic profitability of long-term customer relationships. (Ennew & Waite, 2007)
When implementing a CRM, retail banks need to take into account the changed circumstances of their business environment. These are variances in customers’ wishes and customer behaviour, technological developments as well as changed market conditions and fiercer competition. (Ennew & Waite, 2007) Recognizing that time-honoured strategies do not lead to success anymore, retail banks reacted with the initiation of multi-channel-banking (MCB). This means that banks have begun to offer their services via various parallel distribution channels. (Atkins, 2005)
Context Theory Methodology Literature Study Expert Interview Questionnaire Quantitative Analysis Causal relation distribution ↔ customer satisfaction ↔ customer retention Financial services distribution in the German retail banking industry
The research efforts are exclusively directed at the German retail banking industry. The research approach is described at a glance in figure one.
Initially, the context of this research is described. The general significance of distribution within the retail banking industry and the concept of multi-channel-management (MCM) are introduced.
Prior to commenting on the fundamental developments in the retail banking market, a conceptualization of CRM is presented. Then, a theoretical model illustrating the causal relationships between the channel of service provision, customer satisfaction and customer
2. The German retail banking industry
Considering the European retail banking market, Germany accounts for 24.2% of the total market value. This makes Germany the largest, single retail savings and investments market in Europe. (Datamonitor, 2007)
The industry has experienced continuous growth during the last five years. This has encouraged new actors to enter the arena and competition has become fiercer. The leading companies - large financial institutions operating extensive branch networks and spending billions on marketing activities – are increasingly challenged by new competitors. The increase in Internet-based retail banks in this industry indicates that a business model with lower fixed and exit cost is feasible. (Datamonitor, 2007)
Rising competitive pressures, especially exerted by direct banks, force the established retail banks to configure their distribution systems more attractively in order to retain customers.
The German retail banking industry becomes due to its international importance and its dynamics an interesting field of study.
2.1 Multi-channel distribution
Within the context of this research paper, distribution should be grasped as the sum of all decisions and actions taken to deliver financial services from service providers to service consumers.
2.1.1 Distribution of financial services
2. The German retail banking industry 5 Basically, retail banks choose stationary, mobile and direct distribution channels. Stationary distribution is comprised of the provision of financial services in branches as well as in self-service shops. A place-bound relation to a distinct market area characterises this kind of channel. Mobile distribution channels by contrast are distinguished by location-independent personal interactions between representatives of service providers and service consumers. These channels are made up of sales representatives and mobile branch offices. Remote bank-consumer-encounters come about via the direct distribution channels telephone, mobile devices and especially the Internet. (Menon, 2003) The latter one is as highlighted within the scope of the subsequent chapters due to its importance selected to be at the centre stage of this research.
Within the retail banking sector distribution is of particular importance and at the same time, due to the distinctive characteristics of financial services, it is particularly challenging.1 Despite its significance, German retail banks considered distribution as a less modifiable part of their value chain for a long time. Until the mid-1990s, distribution policy was unilaterally adjusted to service provision at local branches. In principle, this orientation met the requirement of customer proximity but neglected the enormous costs incurred due to the physical presence on high streets. (Stäger, 1999)
A few years ago, enterprises from all kinds of industries – among them the retail banks - recognized that they had to change their distribution strategies. Since then, products and services are circulated via multiple distribution channels. Nowadays, MCM is regarded as a necessity in order to persist in the fierce struggle for supremacy within today’s consumer markets. (Ennew & Waite, 2007)
1 The distinctive characteristics of financial services is dealt with explicitly in chapter 2.1.3 of this research
2.1.2 Distribution challenges
The objective of MCM is to combine the distribution channels of an enterprise to optimise sales. It is comprised of the integrated and coordinated development, configuration and control of information and product flows via different channels. MCM is intended to increase customer retention while decreasing costs of distribution at the same time. Throughout all retail industries, distribution via various channels bears specific opportunities as well as risks and is accompanied by multifaceted challenges. (Rolnicki, 1998)
At first, numerous distribution channels allow better market penetration and in consequence lead to an increase in sales, as the development of alternate channels enables enterprises to attract new clients while improving the servicing of the existing customer base at the same time. Furthermore, channel-overlapping cross-selling activities can be conducted and, ideally, customer loyalty can be increased. Additionally, distribution can be adjusted more easily to the needs of individual customer segments and to competitive pressures can be responded to more flexibly. Besides this, companies can exploit the cost decreasing potential of MCM, if they manage to shift transactions to more cost-efficient distribution channels. Finally, the reduced dependence on a single channel leads to a state of balanced distribution risks. In summary, the implementation of MCM strengthens the competitive position of the implementing enterprises. (Dent, 2008)
But, the initiation of new channels increases the complexity of the distribution system. And an augmented level of complexity aggravates the coordination of marketing activities. Furthermore, in-house conflicts may occur with different competing distribution channels. Moreover, enterprises might face the severe dilemma that the distribution of the same product or service via various channels may overstrain customers’ capabilities. (Gorchels et al., 2006)
2. The German retail banking industry 7 multiple channels. Rather, it is a question of how to coordinate the critical and disruptive reciprocity between the various channels. (Dent, 2008)
The research question that is supposed to be answered within the context of this thesis is:
How to configure multi-channel banking in order to improve customer retention?
A successfully developed MCM is characterised by a reasonable mix of distribution channels; and the distribution system as a whole is consequently aligned with customers’ needs and their respective preferred ways of interaction. If an enterprise manages to configure and to coordinate its aggregated distribution activities economically and in a customer-oriented way, it may realise competitive advantages arising from differentiation. (Rolnicki, 1998)
In the course of this thesis the individual distribution channels are subjected to closer consideration in terms of their impact on customer retention. So doing, the emphasis is as indicated before put on online distribution of financial services.
2.1.3 Distinctive characteristics of financial services
If retail banks intend to implement MCM to distribute financial services and to increase customer retention in the long-run, they need to be aware of the inherent characteristics of financial services2. (Ennew & Waite, 2007)
To begin with, financial services, like all kinds of services, are intangible. The abstract character impedes the differentiation from competitors’ services via external quality features and in turn the communication of compelling advantages to customers. (Ennew & Waite, 2007) Besides this, due to their intangibility, financial services cannot be pre-produced and laid in stock, but are produced and consumed simultaneously. Hence, the provision of relatively complex financial services can hardly be standardised and demands the
employment of a large number of service personnel. Financial services can thus be individually adjusted to customers’ needs. (Ennew & Waite, 2007)
In order to realise competitive advantages and retain customers, differentiation via superior service quality is of particular importance. (Ennew & Binks, 1999) Customers assess the quality of financial services first and foremost by evaluating increases in their individual welfare. This evaluation is a very complex task, as increases in welfare are often perceived with a considerable time lag. (Ennew & Waite, 2007) The absence of objective criteria to compare and evaluate the quality of financial services ex ante and ex post, respectively, as well as the arising contractual relationship between service provider and service consumer, which tends to be long- rather than short-term, and the perception of trustworthiness and reliability of the service provider are of particular importance. (Ennew & Waite, 2007) Thus, customers rely on performance-oriented quality indicators. The configuration of the distribution system and the motivation and qualification of sales personnel are especially relevant in this context. (Harrison, 2000) Because of their abstractness and complexity in combination with complicated contractual obligations, financial services are in need of explanation to the majority of customers. Hence, interaction with and consultation of customers is essential in the distribution of financial services. (Ennew et al., 1995)
2.2 Customer relationship management
Having given an overview of distribution in the retail banking context, CRM is subjected to closer examination within this sub-chapter.
2. The German retail banking industry 9
2.2.1 Relationship marketing: the basis of customer relationship management
In general, marketing can be regarded as market-oriented management. This orientation is expressed through a consequent adjustment of all market activities to customers’ requirements (firm-to-customer view). Accordingly, the initial task of the marketing department is to conduct market research studies systematically to identify customers’ desires (customer-to-firm view). Based on these studies, a marketing strategy is developed and the corresponding marketing mix is determined. Operative management can fall back upon four instruments of marketing policy to adjust the service offering to customers’ needs. These instruments, also known as the four Ps of the marketing mix, are product-, price-, promotion- and placement (distribution) activities. (Kotler & Bliemel, 2005)
2.2.2 The economic advantageousness of customer relationship management
The implementation of CRM needs to be economically advantageous. Hence, the positive effects of long-term customer relationships on retail banks’ bottom lines are subsequently discussed.
First of all, customer retention positively affects the yield potential of services sold. This can be traced back to the observation that (voluntarily) committed customers are more willing to accept higher service charges than uncommitted consumers, who tend to be more price-sensitive. Also, the volume of services sold can be increased. Holding close ties to customers, retail banks can sell their services more frequently and cross-selling is facilitated. (Harrison, 2000) A high level of customer-connectivity also bears the potential of reducing overall costs. Acquisition costs can be axed and in turn service charges can be reduced over time. Due to an increased turnover in combination with decreasing costs, the contribution margin of most customer relationships will be augmented. This again enlarges the economic profitability and viability of the respective retail bank. (Keiningham et al., 2005)
Another positive effect of customer loyalty is planning security. Long-term customer relationships are the basis for prospective sales. In an ideal situation, retail banks’ marketers manage to satisfy customers’ needs during their whole life. (Ennew & Waite, 2007)
As the relationship progresses, consumers’ tolerance for botched service deliveries increases. Long-term customers tend to complain rather than switch their service provider without further ado. (Kotler & Bliemel, 2005) ”Knowing customers right” also reduces retail banks’ risks. This is especially important in the case of bank lending. (Ennew & Waite, 2007)
2. The German retail banking industry 11 the respective service providers. The level of awareness will be increased and the trustworthiness from existing and potential customers’ point of view will be strengthened. (Demiri, 2004)
Against this backdrop, the establishment of long-term customer relations becomes strategically relevant; and CRM becomes the secret of success in a market environment that is characterised by fierce competition. (Ravi, 2007)
2.2.3 Dimensions of customer retention
The next step in the process of conceptualising CRM is to define customer retention, which can be distinguished by two basic points of view.
From the perspective of the service provider, customer retention is of an instrumental nature. In this context, customer retention comprises all activities intended to establish or to intensify the liaison between retail banks and service consumers. The ultimate goal is to stabilise and extend the customer relationship. These activities are frequently equated with the term CRM. (Cottey & Palm, 2006)
From the perspective of service consumers, customer retention is considered as a kind of behavioural pattern. From this point of view, customer retention is similar to customer loyalty to a distinct provider of financial services. Customer loyalty is related ex post to the previous behaviour of the customer and ex ante to its future intentions. (Demiri, 2004) The character of customer retention from this perspective can be interpreted in several ways. Scholars predominantly talk about customer loyalty based on satisfaction and free will. But it can also be seen as the bonding of customers to certain service providers, enforced by “sanctions” in the case of switching intentions. (Lees et al., 2007)
subsumed in the term CRM. However, as indicated before it is of particular importance for marketers to grasp mentally what makes customers to stick or not to stick to their provider of financial services. Hence, it is in order to give guidance to retail banks’ marketers inevitable to consider customer retention from customers’ point of view, too.
2.2.4 Drivers of customer retention
For retail banks aspiring to increase customer retention by means of CRM, it is important to be familiar with the drivers that help to retain consumers. Academic literature distinguishes several drivers of customer retention. (Clapp, 2005)
Situational causes are triggered by external factors like market structure, for instance, that lead customers to consume services of certain retail banks. If consumers are bonded to particular banks by contract, and if the switching process is at least temporarily out of the question due to the resulting contractual obligations, the drivers are of a legal nature. If the termination of a business relationship, owing to high termination and switching costs, is unfavourable to the customers, customer retention is based on economic factors. (Lees et al., 2007) Finally, customer retention can also be driven by technology. (Lang & Colgate, 2003) Customer retention on the basis of all these causes is involuntary, as consumers’ free choice is constrained. The obstacles to change are purposely installed by service providers to keep customers from switching to competitors. (Demiri, 2004)
2. The German retail banking industry 13 Indeed, customer retention is usually based on a combination of different causes. This explains why some customers are involved in business relationships with various retail banks. (Demiri, 2004) Furthermore, a plethora of additional factors influences customer retention. Type and scope of service are two of these factors. Consumers of standardised services, which do not demand intensified consultation, are more likely to switch their service provider than customers consuming complex, individualised financial services. The latter are confronted with a high level of uncertainty in respect to scope and quality of services offered by other retail banks. (Demiri, 2004)
2.2.5 Customer satisfaction: the dominant cause of customer retention
Although customer satisfaction is not the one and only driving force of customer retention, various market studies show a significant positive correlation. (Yu, 2007) Not only do scholars around the world emphasise the particular importance of customer satisfaction, marketers of retail banks gratefully embrace this indicator as well. Being aware of this causal relationship, they can develop measures to control and to fine-tune customer retention via customer satisfaction. (Ennew & Binks, 1999)
according to the traditional CDM, to customer satisfaction; while disconfirmation (perception < expectation) causes dissatisfaction3. (Demiri, 2004)
It is beyond controversy that customer satisfaction is one of the central prerequisites of customer retention. Nevertheless, it is no guarantor. (Demiri, 2004) There are various factors interfering in the relationship between customer satisfaction and customer retention. These are, next to variety-seeking, mainly the characteristics of the competitive environment. In highly competitive markets like the retail banking industry, customer satisfaction alone is, due to low obstacles to switching service providers, insufficient to bond customers. The actual relation between customer satisfaction and retention, however, is a subject of controversial discussions in the world of behavioural scientists. (Keiningham et al., 2007) It is crucial to understand the intensity of this distinct correlation in order to control customer retention by “manipulating” customer satisfaction. Only if this relation is understood can promising measures to increase customer retention in competitive markets be derived. (Ennew & Binks, 1999)
The detailed measurement of customer satisfaction and customer retention is a prerequisite for an effective management of customer relations. Hence, adequate measurement methods are needed.
2.2.6 Measurement of customer satisfaction and retention
The measurement of customer satisfaction reveals opportunities to improve the adjustment of the service offer to customers’ needs for the purpose of increasing customer retention. To do so, the measurement needs to meet some requirements. The central role within this process is assigned to the selection of adequate measurement methods. Valid results can best be determined by combining various techniques that measure satisfaction. (Casper et al., 2003) A distinction is made between objective and subjective methods. Objective techniques are based
2. The German retail banking industry 15 on indicators like the development of market shares, profits or turnover of the respective banks, as these factors are significantly correlated with customer satisfaction. Problematically, these measurement parameters are also strongly influenced by other factors. Hence, subjective methods that aim to measure customer retention directly are more appropriate. Service encounter-oriented approaches measure customer satisfaction solely in regard to a single service encounter. For a more sophisticated evaluation of customer satisfaction, various characteristic features - that reflect customers’ perception and opinion of the business relationship in greater detail - need to be taken into account. (Hill et al., 2003)
In order to control the effects of instruments employed to fulfil a business strategy, controlling of objective achievement is important. Thus, a consequently implemented CRM requires the determination of a key figure for customer retention on a regular basis. The degree of actual customer retention is ex post represented in the number of repeated incidents of service demand. Also, items like word-of-mouth recommendation or the intention to consume certain financial services again are further indicators for the degree of customer retention. Hence, these and other items are ex ante incorporated into the measurement process. (Brown & Gulyez, 2002)
2.2.7 Conflation: integrated customer relationship management
The elaboration of a strategy of customer retention comprises several dimensions that need to be determined ex ante. Initially, the stipulation of a reference point with regard to customer retention is required. A decision is needed whether a customer should be committed to a distinct branch, a certain service employee or a specific service. Generally, it is assumed that customers’ committed to certain branches, distinct service employees or concrete services are committed to the retail bank as a whole, as well. Afterwards, the clientele needs to be segmented; and it is necessary to conclude which degree of attention should be given to each segment in order to increase customer retention. (Ennew & Waite, 2007) On top of this, marketers and service employees are required to get a feel for the different phases of an individual customer-bank-relationship. Each phase has crucial points that may be relevant for a high or low degree of customer retention. (Kotler & Bliemel, 2005)
1. Prospect 3. Customer 2. Suspect 4. Repeat Customer 5. Loyal Customer 6. Advocate
4. – 6. Customer development activities 1. – 3. Customer acquisition activities
2. The German retail banking industry 17 Based on this conceptualisation and the definition of objectives, appropriate measures to control customer retention are employed. These operative measures can, like the instruments of the marketing mix, be divided into four spheres of action. (Kotler & Bliemel, 2005) First, within the context of product policy, the individualisation and quality of services are exceptionally important to satisfy customers and in turn to increase customer retention. Second, promotional efforts are aimed at establishing a continuous dialogue with customers beyond the first service encounter in order to stimulate repeated purchases of services. Third, by employing means of price policy banks offer monetary incentives in order to attract new customers, to maintain existing customer relations and to discourage clients from switching. However, to pay for customer loyalty by providing monetary incentives is a risky undertaking, as “bought” customer retention can easily be snatched away by competitors that offer better incentives. Finally, the configuration of the distribution system also provides opportunities to increase customer retention. (Fitzgibbon & White, 2005) To point out these opportunities is the purpose of this research project.
The pure enumeration of different instruments is insufficient to increase customer retention,. The same applies to the ad-hoc implementation of isolated measures that are aimed at augmenting customer retention. Rather, it is a question of a mutually aligned and combined deployment of various measures at the same time. The procedure can then be subsumed as integrated CRM. (Rennhak et al., 2006)
2.3 Industry and market developments
Among these factors are changes in consumer behaviour, changes in the competitive environment as well as technological advances. (Harrison, 2000) All of them are dealt with in the following subchapters.
2.3.1 Changed customer behaviour
During the last couple of years, customers have gradually emancipated themselves. Today’s bank clients are well informed and familiar with the consumption of financial services. The German retail banking industry has become a buyers’ market. As a consequence, customers have become more demanding and more price-conscious. Also, they are more willing to complain when their expectations regarding service provision are not met. (Dahmen, 2004) Expectations have risen and convenience has gained importance. In addition to a qualified, individual consultation bank customers demand a prompt, convenient and reliable handling of their banking transactions. (Demiri, 2004) Contemporary service consumers desire a high degree of flexibility regarding the time and place of service consumption. Hence, remote distribution channels like the Internet or the telephone are not merely accepted, but rather explicitly demanded. (Dahmen, 2004)
2. The German retail banking industry 19 Associated with this trend is the development of increasingly heterogeneous customers’ requirements. Some clients for instance put emphasis on convenience and expect basic services to be available twenty-four-seven via various distribution channels at a low price, while others demand custom-tailored, individual services offered vis-à-vis. (Schöning, 2003) Considering the increasing individualisation of customer behaviour, retail banks need to segment their clientele. In order to answer individual customers’ needs appropriately with the aim of retaining customers in the long-run, retail banks need to develop individual marketing strategies for each segment. (Ennew & Waite, 2007) However, this undertaking is aggravated by an increasingly hybrid customer behaviour. Individual service consumers have multidimensional expectations and act in a progressively non-uniform fashion. In consequence, it is difficult to predict future consumers’ behaviour and preferences (Dahmen, 2004). As indicated before, one individual customer may demand standardised services via direct distribution channels; and then from one day to the next, individual high quality consultation may become more important. (Dahmen, 2004)
All in all, bank clients are becoming “problem solvers” that do not choose their respective bank because of a distinct service offering, but rather because of the whole package of services offered in respect to their individual needs. Retail banks that manage to satisfy customers’ needs comprehensively whilst taking individual preferences into account are the ones that realise a competitive edge. (Dahmen, 2004)
2.3.2 Technological advances
industry that has altered the competitive environment significantly. (Durkin et al., 2008) Internet augmented market transparency has enabled consumers to compare service offers of different retail banks more easily. At the same time, obstacles to switching service providers are reduced since service encounters are less and less constrained by temporal and local restrictions. In consequence, customer loyalty is decreasing and some customers may switch banks, since other financial service providers are sometimes just a click away. Due to new technological opportunities, new service providers - the direct banks – have emerged and the traditional market structure of bricks-and-mortar banks has been revolutionised. (Lang & Colgate, 2003) In particularly, the meaning of customer proximity has gained a completely new dimension in the course of technological progress. A focus on physical proximity is neither essential nor sufficient to retain customers anymore. This arises from the availability of modern remote distribution channels like the Internet, which has gained importance during the last decade. (Rennhak & Zirus, 2006) Online service delivery meets the requirements of convenience and customer proximity and, on top of that, bears the potential to reduce costs and to collect customer data to improve the service offering. (Ennew & Waite, 2007)
Considering the necessity of reducing costs while intensifying customer relations simultaneously, the deployment of appropriate technology becomes a competitive factor in today’s retail banking industry. The main concern is not whether retail banks employ modern media to distribute their services, but how to manage these new channels within the scope of a purposeful multi-channel distribution system. (Tiernan, 2001)
2.3.3 Changes of the competitive environment
2. The German retail banking industry 21 providers are continuously being challenged by direct, non- and near-banks. (Rennhak & Zirus, 2006) Since these enterprises distribute their services almost solely via the Internet, they do not need to establish an expensive network of bricks-and-mortar branches. Thus huge cost advantages can be realised. (Rennhak & Zirus, 2006)
The emergence of new competitors has skewed the allocation of market shares in the retail banking industry. Due to decreasing market shares and the competitive disadvantage owing to the costly network of branches, established retail banks have been forced to reform their distribution structures. It has been recognized that distribution can be less expensive and at the same time more consumer-oriented if service provision in local branches is complemented with service provision via remote channels. (Cramer, 2006) However, this has inevitably led to a reduction of branches that have, due to their proximity to local customers, always been a competitive advantage of the established banks. (Demiri, 2004)
As a consequence of the reform of distribution systems and due to an increasingly homogeneous service portfolio - consumers can hardly distinguish between them - offered by almost all retail banks, differences between retail banks are fading away. (Rennhak & Zirus, 2006) If established retail banks with affiliated branches intend to remain competitive, they need to cope with various challenges successfully. These challenges are presented within the next chapter.
2.3.4 New challenges to German retail banks
With regard to increased consumer power, retail banks are compelled to create multi-dimensional competitive advantages that are adjusted to customers’ complex needs. A perceivable value proposition needs to be offered in order to create clear preferences on the part of the customers and to withstand competition. Thus, retail banks have to adjust their activities to the added value that is generated by the respective service offering. Customer retaining measures like offering an individualised one-stop financial service bundle, giving demand-actuated advice, addressing customers actively or employing innovative channels of distribution, are required to be taken in order to be different from competitors and to bond fickle customers. (Symonds et al., 2007)
Against this backdrop, a mono-structured distribution system for financial services is not appropriate for fostering the ever more heterogeneous customers’ needs. A multi-channel approach by contrast seems to be predestined to satisfy customers’ requirements via multiple channels in order to increase customer retention. (Dahmen, 2004)
Within the scope of this paper the issue that must now be further examined is: what contribution individual distribution channels - and afterwards an integrated multi-channel distribution system - can make to increase customer satisfaction and in turn customer retention.
3. Theoretical model 23
3. Theoretical model
This chapter deals with the construction of a theoretical model to explain the causal relationship between channel-related quality of service provision, customers’ expectations, customer satisfaction and customer retention.
3.1 Existing models
Since a decade, customer satisfaction, customer loyalty and customer retention are subject of controversial discussions in the field of marketing research. Next to the discussion of the concepts, models dealing with their antecedences as well as their consequences are constructed and tested. (Keiningham et al., 2007)
Most of the models4 dealing with customer loyalty and customer retention are depictions of causal relationships. The purpose of model construction is to present antecedences that explain directly or indirectly the characteristics of the theoretical target construct; in this case customer satisfaction and retention. Occasionally, moderating variables influencing the causal relations are incorporated into these models as well. (Koot, 2005)
As indicated in chapter 2.2.5, customer satisfaction is widely regarded not as sole but as single most important antecedent of customer loyalty and customer retention. Various scholars have proved this correlation empirically. (Yu, 2007) Researchers as well as professionals engaged in the field of financial services marketing have to find out whether customers are satisfied with the service offering respectively within the context of this paper with the way a service is provided, or not.
Although, it is beyond controversy that customer satisfaction is one of the central prerequisites of customer retention it is not agreed upon how to deal with this construct
theoretically. Thus, there is a wide range of theoretical approaches employed to conceptualise and in consequence also to measure customer satisfaction.
Until now, no universally valid theory with regard to customer satisfaction has been developed. However, the confirmation-disconfirmation-paradigm is the approach that has gained broadest acceptance and which is also selected to construct the theoretical model that guides this research. (Demiri, 2004)
3.2 The confirmation-disconfirmation-paradigm as conceptualisation basis
According to this theory customer satisfaction is the outcome of a complex psychological comparison process which comprises a variance analysis between the actual perception of the quality of services consumed and the expected quality of the respective services. Confirmation (perception = expectation) and positive disconfirmation (perception > expectation) lead, according to the traditional CDM, to customer satisfaction; while disconfirmation (perception < expectation) causes dissatisfaction. (Demiri, 2004)
3. Theoretical model 25
3.3 Theoretical constructs
Within the following sub-chapters the abstract constructs that are subsequently conflated into the theoretical model are presented.
3.3.1 Quality of service provision
Within the context of most theoretical models in this field of study quality is, although it is more difficult to define for services than for physical products, the construct that is subjected to an evaluation. (Ennew & Waite, 2007)
However, due to the distinctive characteristics of financial services many retail bank customers are not able to grasp the complexity of these intangible products. In consequence, it is probable that evaluations are rather based on the quality of service provision and the interaction with the service provider than on the intrinsic quality of the service itself. (Ennew & Waite, 2007) Within the scope of this study it is hence not service quality, but the quality of the process of service distribution respectively the quality of the configuration of the
distribution channel via which services are provided as it is perceived by retail banks’ customers. To quality in this regard can be considered as functional quality as it is mainly concerned with the way in which the service is delivered. It will cover items as customer-oriented channel configuration, service availability, interaction quality, understanding, helpfulness, etc.
In general, quality is generally recognized as an antecedent to customer satisfaction (Ennew & Waite, 2007) and in the consequence of customer retention. (Ennew & Binks, 1999)
3.3.2 Expectations
This research follows the most common view that quality is subjective. It is based on customers’ perception of to which extent the process of service provision via a certain distribution / interaction channels meets customers needs and expectations. In other words, quality is what customers perceive it to be. (Ennew & Waite, 2007)
In consequence, and this is why it is sometimes inevitable to switch from firm-to-customer view to customer-to-firm view, it is mandatory for marketers attempting to manage the quality of service distribution to gain an understanding of how customers evaluate service provision and which elements they perceive to be the most important within this process. Then, these perceptions need to be transformed into customer-oriented measures that need to be taken by the retail banks in order to ensure a high level of quality.
3. Theoretical model 27 service provision is below expectations. (Koot, 2005) It is marketers’ task to configure service provision in a way that customers’ expectations are at least met or even exceeded.
As the perception of quality is assumed to be subjective, expectations are consequential subjective too. Expectations arise from the characteristics that define who customers are, where they live, the kind of people they are, the kind of lifestyle they lead and the views they hold. (Ennew & Waite, 2007) However, with these demographic, socio-economic, geographic and psychographic is dealt within the scope of the theoretical discussion but they are not considered as independent moderating theoretical construct.
3.3.3 Customer satisfaction and customer retention
To manage customer relationships successfully it is crucial to ensure that customers make good experiences when consuming a service or in this context when they are provided with a service, that they evaluate this experience positively and in turn have good cause to maintain the relationship with their service provider and to conduct further service purchases prospectively. (Harrison, 2000)
As the theoretical construct quality of service provision in this context is considered specifically, quality can be regarded as an antecedent of customer satisfaction and customer satisfaction, in turn, is seen as a determinant of customer retention. (Ennew & Binks, 1999) In other words, if retail banks manage to deliver a high quality of the service provision process, customers are likely to be satisfied and in turn more likely to be retained and to be loyal. (Ennew & Waite, 2007)
3.4 Conflation
It is important to realise that retail banks can improve their overall performance by taking a customer-to-firm view of its business and focussing on the delivery of customer satisfaction. As explained, satisfaction is regarded as being an important evaluation of the service experience and as determinant of customer retention. (Koot, 2005)
Customer satisfaction is concerned with the degree to which a service is able to deliver against customer expectations. As with service quality, customer evaluations of satisfaction are important to the development of relationships with providers of financial services. (Ennew & Waite, 2007) Dissatisfaction on part of the customers needs to be avoided as it is a potential reason for terminating the financial services relationship.
The causal relations between quality of service provision, customer expectations, customer satisfaction respectively dissatisfaction and the level of customer retention in consequence that were described within this chapter are subsumed in the subsequent figure.
Customer Expectations
Confirmation Disconfirmation
Branch Self-Service Devices
3. Theoretical model 29 The causal relations as they are regarded within the scope of this model are top-down and unidirectional.
3.5 Interim findings
This chapter illustrated that the quality of service provision is increasingly important to financial services, as it provides a source of competitive advantage. Next to improving the overall profitability high quality can increase customer satisfaction and hence customer retention. (Ennew & Binks, 1999)
It was shown that quality depends on customers’ perception of what is delivered. The confirmation-disconfirmation-paradigm was used to illustrate that the evaluation of quality is based on a comparison of the expected and the actual quality. In consequence, retail banks need to pay considerable attention to configuring service delivery and ensuring that customers experience a high quality.
4. The impact of single distribution channels on customer retention
Initially, the different distribution channels are subjected to consideration in isolation. The elementary characteristics as well as their impact on customer retention are presented. Those factors that are responsible for an increase in customer retention shall be derived. The hypothesis that no distribution channel on its own is able to satisfy customers’ needs and to retain consumers in the long-term, is tested within the subsequent chapters theoretically and in the case of online distribution empirically, too.
Afterwards, reasons for the superiority of multi-channel banking are discussed, since it should be proved that only a combination of distribution channels delivers the quality that customers expect.
4.1 Stationary distribution
The traditional way of providing services in the retail banking business is stationary or branch distribution. A branch can be defined as a banks’ business unit that is legally dependent but operates locally detached from its headquarter in regional markets. (Lasserre, 2003)
4.1.1 History and relevance of the stationary distribution
4. Multi-channel-banking 31 and in turn the key to success in the retail banking business. A broad network of branches served the purpose of market penetration. Physical customer proximity was considered to be of particular importance in order to parry customer alienation by competitors. Retail banks had the agenda of providing customers with all services needed and desired via the branch in order to exploit cross-selling potentials, and thus compensate for the increases of distribution costs. (Bacher, 2002)
A region-wide branch network was deemed to be a worthy instrument of customer acquisition and customer retention for many years. However, during the last couple of years, its importance was, due to the high costs - going hand in hand with a lower profitability -, questioned. A broad network of branches is today even considered to be a competitive disadvantage. Emerging, new competitors like the direct banks rely on remote distribution channels instead of the costly branch network. Hence, they are able to conduct business at a higher degree of cost efficiency. (Bughin, 2003) Due to technological advances more and more service encounters are shifted to remote distribution channels. It is no longer necessary to enter a branch in order to consume the majority of basic financial services. The frequency of vis-à-vis service encounters in the branch has decreased significantly and a wide branch network thus seems to be almost obsolete. Undoubtedly, banks have recognised these developments and consequently altered the structure of their distribution systems. Unprofitable business units were closed down; between 1995 and 2005 the total number of branches was reduced by more than one third. (Bundesverband deutscher Banken, 2006)
Nevertheless, scholars agree that stationary distribution is and will be a particularly important interface for bank-consumer interactions. Various surveys illustrate that customers appreciate and demand the opportunity to consume financial services in a branch. (Cramer, 2006)
4.1.2 Stationary distribution: impact on customer retention
The crucial advantage of the branch is its local and personal proximity to customers. Service employees are enabled to gather first hand information about consumers’ behaviour and preferences by means of personal interaction. This allows them to adjust the service offering to individual consumers’ needs and bears the potential to realise cross-selling opportunities. (Engelhardt, 2005) Customers benefit from face-to-face consultation in the branch as service employees react instantaneously on customers’ demands. (Ennew & Waite, 2007)
Assuming that service clerks are adequately trained, they are able to anticipate and eliminate customers’ uncertainty regarding service characteristics and service quality. This increases customers’ confidence and in consequence, their emotional commitment to the respective retail bank. (Menon & O’Connor, 2007)
The importance of a service employee who is both locally and emotionally close to customers is unchallenged and will continue to occupy a central position with regard to customer retention in the future, as well. (Jung, 2005) Nevertheless, branch distribution is not unconditionally advantageous when it comes to increasing customer retention.
4. Multi-channel-banking 33 positive emotional commitment on the part of the customers. In consequence, dissatisfied customers may switch to a service provider that they assume will take better care of their individual needs. Against the background of a decreasing number of face-to-face service encounters in the branch, customer-retaining measures need to be shifted into the focus of marketers’ activities in order to prevent customer migration. (Kaufmann, 2004)
The business hours of branches are often not adjusted to customers’ needs. The temporally constrained availability of financial services in the branch does not meet customers’ requirements in terms of convenience anymore. Among other things, that is why alternate distribution channels which are available all day long are becoming ever more important. (Xue, et al. 2007)
Another weakness of stationary distribution is the high costs associated with the maintenance of the branch network. The high fixed costs in particularly are a burden to banks’ overall financial performance. (Ennew & Waite, 2007) Furthermore, the increasing popularity of convenient remote distribution channels affects the cost-benefit ratio of the branch network negatively. If a constant number of service encounters is assumed, a shifting of transactions from stationary distribution to alternative channels leads to an even lower branch utilization rate than before. In consequence, the expenditures for the branch network become a yet larger burden as decreasing revenues face a constant block of fixed costs. (Stermann, 1998)
customers’ regional and emotional commitment and increases clients’ preferences for alternative distribution channels. (Duttenhöffer & Keller, 2005)
A reform of the branch network focussing only on cost reduction is no way out of this vicious cycle. Rather, it runs the risk of squandering customers’ commitment. Consequently, it is always crucial to ponder the measures taken within the restructuring process from the perspective of customer retention, as well. (Duttenhöffer & Keller, 2005)
4.1.3 Self-service banking: impact on customer retention
Another instrument of customer retention within the scope of stationary distribution is the deployment of self-service banking devices.
Barclays Bank introduced the first automatic teller machine in 1967. However, the automation of financial services didn’t gain momentum until the introduction of IBM’s Cash Point in the year 1972. In Germany, self-service banking was initiated during the late 1970s. The extension of the network of self-service devices began haltingly; nationwide coverage was finally achieved by the early 1990s. Since then, self-service terminals have established themselves as a cost-efficient distribution channel. (Heine, 1995)
Scope and usability of self-service banking devices have been constantly advanced. Today, customers have the possibility to withdraw money, to deposit cash, to conduct money transactions and to retrieve product information. In the meantime, almost all basic financial services are available in self-service areas. (Heinonen, 2004) Besides, retail banks have installed self-service devices in many places – like shopping centres or bar districts - where customers demand proximity but where the establishment of branches would be unprofitable. (Heinonen, 2004)
4. Multi-channel-banking 35 customers. (Stäger, 1999) Customers appreciate self-service devices as they allow them to consume basic financial services on their own at anytime at many places close to their homes. Thus, the frequency of service encounters at self-service terminals is still increasing. (Jung, 2005) However, due to the relatively narrow service offering, self-service machines are not suited to be operated as a sole distribution channel. Rather, they are a reasonable and necessary addition to branch and direct distribution channels. This implies that the branch network can be extended but not replaced by self-service terminals. (Prendergast & Marr, 2004)
The risk that the increasing automation of financial service delivery may affect the relationship between retail banks and customers negatively and that customers’ commitment may consequently decrease, is relatively low. Customers use self-service devices primarily for simple money transactions that they generally want to conduct quickly, conveniently and on their own. Nevertheless, marketers need to develop a feel for detecting potential resistance on the part of the customers with regard to the augmented level of automation of financial services. (Durkin et al., 2003)
4.2 Telephone distribution
Within this chapter financial services distribution via telephone is discussed in greater detail. Again, the impact on customer satisfaction and retention is in the focus of interest.
4.2.1 Important features of telephone distribution
During the early 1990s, a new distribution channel was established in the German retail banking industry, telephone banking. It paved the way for MCB. After a short period of time, telephone banking became a generally accepted channel for consuming standardised financial services. Since then, retail banks have been continuously investing in the setup and extension of call centres as well as their integration into the range of established distribution channels. Modern call centres are operated independently of banks’ business hours and provide financial services twenty-four-seven. In general, customers have the opportunity to choose whether they want to conduct telephone banking actively or passively. (Hartmann, 2006a) If the bank takes the initiative, telephone banking is referred to as active telephone banking. Service employees approach customers to determine their individual needs in order to exploit cross-selling potentials by selective sales measures. (Stäger, 1999) If customers are already familiar with the respective service employee, active telephone banking is more likely to be accepted, customers’ requirements are more likely to be communicated and business transactions are quite likely to be processed. Furthermore, a well acquainted service employee can increase customer retention through individual consultation by telephone. However, banks often employ so-called telephone teams centrally. These teams are focussed on advertising certain services and arranging appointments financial advisers rather than handling service encounters themselves. (Stäger, 1999)
4. Multi-channel-banking 37 transfer services, for updating customers’ personal data as well as for receiving customers’ complaints. This so-called inbound service delivery can also be regarded as a measure to increase customer retention. This personal but not place and time bound distribution channel is a reasonable complement to local and temporally restricted branch distribution as well as to the complicated distribution channel Internet, which is considered to be insecure. (Ahmad & Buttle, 2002)
Among scholars and practitioners there is some dissent on the question of the profitability of telephone banking. Some authors proclaim the profitability of telephone banking because it enables retail banks to save transaction costs while releasing capacities for selective customer consultation at the same time. (Hartmann, 2006a) Their opponents are of the opinion that telephone banking is unprofitable since it demands a high level of investment in infrastructure as well as an intensive deployment of human resources. (Stäger, 1999) Nevertheless, banks should not focus narrow-mindedly on cost minimisation, but rather on the exploitation of the potential to augment the level of customer retention that telephone banking bears. (Durkin & Howcroft, 2003)
4.2.2 Telephone distribution: impact on customer retention
In comparison to service provision in the branch, telephone banking extends spatial and temporal availability of financial services and increases customer proximity in consequence. As total telephone network coverage in Germany has been accomplished, telephone banking fulfils the customers’ requirement of conducting banking transactions without the bonds of any local or temporal restrictions. (Stäger, 1999)
front and back office in order to fulfil customers’ wishes appropriately. (Durkin & Howcroft, 2003)
However, it is often contended that telephone banking causes progressive anonymisation which in turn leads to a lower degree of customer retention. Hence, additional, improved customer care in the local branch becomes a necessity for deterring customers from switching to other providers of financial services. This implies that telephone banking cannot be regarded as an independent distribution channel detached from branch distribution. In fact, both channels need to be adjusted to each other. (Rolnicki, 1998)
The relationship between online and telephone banking is worthy of being considered in more detail. Some marketers state that telephone banking is being displaced by online banking because the latter is better suited for standardised bank transactions. (Hartmann, 2006a) Nevertheless, the statistics speak for their selves. Despite the increasing popularity of online banking, a wide range of customers stick to telephone banking. Fifteen to 20 percent of all German bank customers use telephone banking on a regular basis. These customers generally do not have the time or the possibility to visit a local branch, but want to conduct their banking transactions by word of mouth and are reluctant to use the Internet. (Hartmann, 2006b)
4. Multi-channel-banking 39 Although expert opinions regarding telephone banking are divergent, it can be noted that telephone banking is, especially in times of fewer and fewer customers approaching service personnel in the local branch, an important instrument for generating new business, for staying in touch with customers and consequently strengthening their commitment. Thus, telephone banking must not be neglected when defining the distribution strategy, since it has become a crucial element of MCB. (Hartmann, 2006b)
4.3 Online distribution
The Internet is the distribution channel that meets customers’ expectations regarding the quality of service delivery best. Online service provision especially meets customers’ needs in terms of convenience, proximity and unrestricted availability. But on top of that it also enables retail banks to reduce overall costs and to gather customer data with little effort, as highlighted in chapter 2.3.2.
As the importance of this sales medium will due to ongoing technological advances and competitive pressures continue to gain in importance, it is selected to be the main theme within the research process on the impact of individual distribution channels on customer satisfaction and retention. In contrast to the mainly literature-based treatise of the other distribution channels, online service provision is also approached empirically to gain a better understanding of the contribution this channel can make to retain customers.
4.3.1 Important features of online distribution
