Into Retail Bank Loyalty: The Role of Service Quality, Value, and Satisfaction (The Case of Central Sulawesi)

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1 Into Retail Bank Loyalty: The Role of Service Quality, Value, and Satisfaction (The Case of Central Sulawesi) P. Ponirin * and Elimawaty Rombe ** Faculty of Economics, Tadulako University at Palu, Central Sulawesi, Indonesia * ppaidjan@gmail.com and ** elimawaty.rombe@yahoo.com Abstract This paper is presented to provide the role of service quality, perceived value and customer satisfaction in determining customer loyalty of retail banking in Central Sulawesi, Indonesia. The study involved customers of national retail banks, Islamic banks, and a local government owned bank in this area. Five hypotheses were developed for empirical testing on a sample of 225 banks customers. The results indicated that customer satisfaction was significantly influenced by both service quality and perceived value, while customer loyalty was significantly influenced by both customer satisfaction and perceived value. It is also revealed that perceived value was significantly influenced by service quality. Introduction Banking is one of the most competitive industry in Indonesia, there are many banks operated in this country either state owned banks, private banks, local banks as well as Islamic or syariah banks. Almost all banks in Indonesia operate nationally, they serve customers in all provinces in Indonesia, even some of them not only have branches at the provincial level but also serve customers in the districts level. They also serve their customers by providing ATM machines in strategic places or joining to common ATM that enable their customer to access other bank s ATM with no charge. Some of banks also provide Internet banking that enable customers to do banking anywhere and anytime 24/7. Indeed, it becomes increasingly important to gain their customer loyal. Research in customer loyalty indicated that many aspect should be considered in other to increase customer loyalty (e.g. Tellis, 1988, Dick and Basu, 1994, Brady et al., 2002, Churchill and Surprenant, 1982). Studies found at least there were three factors that affecting loyalty directly and indirectly namely service quality, value and satisfaction. Findings from empirical works revealed from several service industries that were not directly examine banking industry. Especially in research in customer loyalty in banking in eastern Indonesia is still very limited. Central Sulawesi is one of 34 provinces in Indonesia, with about 1.7 million populations; this province has relatively small population. Nevertheless, it is facing

2 rapid economic growth in the last decade that was able to invite more investors to make investment in the region. Despite the prospective economic growth banks have a big challenge to serve their customers to keep their customer loyal. Hence, research in loyalty banking industry especially in this region is becoming relevant. Literature Review Companies believe that loyal customers bring many benefits to their firms. The possible advantages of customer loyalty include a continuous stream of profit, reduction of marketing costs, growth of per-customer revenue, decrease in operational costs, increase in referrals, increase in price premiums, and development of switching barriers for loyal customers who will then not easily surrender to competitors promotional efforts (Reichheld and Teal, 1996). Loyalty has been defined as repeat purchasing frequency or relative volume of same-brand purchasing (Tellis, 1988) or an intended behaviour towards the service or company (Andreassen and Lanseng, 1997). It includes the likelihood of future renewal of a service contract or the probability of a change in patronage (Andreassen and Lanseng, 1997), and how likely the customer is to provide a positive word-of-mouth recommendation (Andreassen and Lindestad, 1998). It has also been defined as a relationship between relative attitude and repeat patronage (Dick and Basu, 1994). Customer loyalty however, is determined by the strength of the relationship between relative attitude and repeat patronage, and includes both attitudinal and behavioural relationships (Dick and Basu, 1994). Oliver, Rust, & Varki (1997) have defined loyalty as a deeply held commitment to consistently re-buy or re-patronize a preferred product or service, thereby causing repetitive same-brand or same brand-set purchasing, despite situational influences and marketing efforts having the potential to cause switching behaviour. In brief, customer loyalty was believed to be both an attitude of customers and their behaviour towards goods or services. This research will explore the phenomenon of customer loyalty in retail banking industry in Central Sulawesi Indonesia. Service quality can be defined as a consumer judgement or perception of an entity s overall excellence or superiority, often as a result of comparing expectations with perceived performance (Parasuraman et al., 1988). Nonetheless, there is no agreement on this definition. Other researchers conceptualized and measured service quality as an attitude (Brady et al., 2002, Churchill and Surprenant, 1982, Cronin and Taylor, 1992). Based on the models that have been developed, belief in the concept of what constitutes service quality can be divided into at least five schools namely, Disconfirmation of Expectations (Oliver, 1980, Oliver, 1993); the Nordic Model (Grönroos, 1984); SERVQUAL Model (Parasuraman et al., 1985, Parasuraman et al., 1991); the Three Component Model (Rust and Oliver, 1994), and Service Performance/SERVPERF (Brady et al., 2002, Cronin and Taylor, 1994, Dabholkar et al., 1996). This study employs definition of service quality as the overall customer evaluations and judgements regarding the excellence and quality of bank s service delivery.

3 Zeithaml (1988) proposed a definition of perceived value as the consumer s overall assessment of the utility of a product based on perceptions of what is received and what is given. Others defined perceived value as the customer s overall appraisal of the net worth of the service, based on the customer s assessment of what is received (benefits provided by the service), and what is given (costs or sacrifice in acquiring and utilising the service) (Hellier et al., 2003). Value can also be simply defined as the ratio or trade-off between quality and price (Sweeney, 2003). Satisfaction has long been subject of research (e.g. Hunt, 1977, Oliver, 1981, Oliver, 1993, Spreng et al., 1996, Kaura, 2013). A definition of customer satisfaction was offered by Howard & Sheth (1969). They suggested that satisfaction was the buyer cognitive state of being adequately or inadequately rewarded for the sacrifice undergone. Another early definition suggested that satisfaction is a consumer s post purchase evaluation of the overall service experience (process and outcome) (Hunt, 1977). It is an affective (emotional) state or feeling or set of reactions in which the customer s needs, desires, and expectations during the course of the service experience have been met or exceeded (Hunt, 1977). In summary it was concluded that satisfaction was an evaluation as to whether the (product) experience was at least as good as it was supposed to be, in effect, an evaluation of an emotion (Hunt, 1977). Oliver (1981) defined satisfaction as a summary psychological state resulting from when the emotion surrounding disconfirmed expectations is coupled with the customer s prior feelings about the consumption experience. Churchill & Surprenant (1982) defined satisfaction as a post-consumption evaluative judgement concerning a product or a service. Zins (2001) conceptualized satisfaction as an overall postconsumption affective response by the customer Moreover Hellier et al. (2003) defined satisfaction as the degree of overall pleasure or contentment felt by the customer, resulting from the ability of the service to fulfil the customer s desires, expectations and needs in relation to the service. This study utilizes definition of satisfaction as it was defined by Churchill & Surprenant (1982), satisfaction as a post-consumption evaluative judgement concerning a product or a service. Developing the Research Model and Hypotheses Based on previous discussion, this section presents model of the study as it indicated on Figure 1. Hypotheses are developed based on previous empirical works done by many researchers. Studies in customer value and service quality indicated that value was positively affected by service quality (e.g. Andreassen and Lindestad, 1998, Zeithaml, 1988). I was found that service quality has positive significant impact on perceived value (Zeithaml, 1988). Another research done by Andreassen and Lindestad (1998) also confirmed significant relationship between service quality and perceived value. More recent study also confirmed the significant effect of service quality on perceived value (Chi et al., 2008). Furthermore the study proposed first hypothesis as follow: H1: Service quality has a positive effect on value. Relationship between service quality and customer satisfaction has long been evaluated, and empirically it was found that service quality has positive effect on

4 customer satisfaction (Carpenter et al., 2005, Chi et al., 2008). Further research also confirmed that service quality played significant role in determining customer satisfaction (Kassim and Abdullah, 2010). Hence, the study posited second hypothesis as follow: H2: Service quality has a positive effect on satisfaction. Previous studies found that there was a significant impact of customer value on satisfaction (Sirdeshmukh et al., 2002). A positive relationship between customer value and customer satisfaction was also discovered by Yang and Peterson (2004). Most recent studies also confirmed that customer value determined customer satisfaction (Hsieh, 2012). As a result this study utilized the third hypothesis as follow: H3: Customer value has a positive effect on satisfaction. Research found that customer with higher perception of value will lead to loyalty (Sirdeshmukh et al., 2002). Further study also confirmed that customer value has significant impact on customer loyalty (Yang and Peterson, 2004). Moreover, Hsieh (2012) also revealed positive impact of customer value on customer loyalty. As result fourth hypothesis was proposed: H4: Customer value has a positive effect on loyalty. Most empirical studies in the relationship between satisfaction and loyalty found positive effect of satisfaction on loyalty. Churchill and Surprenant (1982) found that customer satisfaction positively determined customer loyalty. Other study found that satisfied customers are more likely become loyal customers (Cronin et al., 2000, Cronin and Taylor, 1994). Study done by Hallowell (1996) also produced similar result that customer satisfaction has significant and positive effect on customer loyalty. More study also confirmed the findings about relationship between customer satisfaction and customer loyalty (Butt, 2013, Amin, 2013, Kassim and Abdullah, 2010). Finally, the study employs the last hypothesis as follow: H5: Customer satisfaction has a positive effect on loyalty. Population and Sample Design Population of the study is all clients or customers of all retail banks, in Palu as the capital city of Central Sulawesi, Indonesia. There are many banks that are operated in the city, but mostly are national banks either private and government owned banks. Islamic banks are also operated as well as local government bank. The study employed cluster sampling method based on sub-district of the city. Palu has four sub-districts and based on the current conditions the study chose East Palu as the cluster sample. Reasons in choosing East Palu based on the two relevant conditions that all main bank branches are located in East Palu and this subdistrict is the most populated area in the city. Sample size was 500 that are randomly chosen and further screening of the 321 responses received yielded 225 qualified and completed responses suitable for further analysis. This sample size was eligible for structural equation modelling (SEM), which requires a sample size between 150 and 500, but not exceeding 500 (Hair et al., 2006, Hair et al., 2010). Most of respondents were male (55 percent), about 45 percent of respondents were high school graduates, and 35 percent held bachelor degree. Majority of them (68 percent) were between 21 and 40 years old. Approximately, 70 percent reported an annual household income of IDR 24,000,000 48,000,000.

5 Table 1. Respondents Characteristics Frequency Percentage Gender Male Female No answer Total 255 Age < > No answer 1.4 Education Secondary School High School Diploma Bachelor Master No answer 1.4 Household Income (IDR) <2,000, ,000,001 4,000, ,000,001 6,000, ,000,001 8,000, ,000,001 10,000, ,000,001 12,000, >12,000, No answer Data Analysis and Model Testing The results of SEM confirmed that each of the five constructs is unidimensional and that all items used to operationalise a particular construct loaded on to a single factor. As shown in Figure 1, each of the five factors emerged with no construct loadings under 0.5, indicating good discriminant validity. SEM was used to test the hypothesised relationships. The tested model with significant standardised coefficients is presented in Figure 1. A good fit to the data was found: GFI= 0.906; AGFI= 0.874; TFI= 0.951; CFI= 0.959; RMSEA= 0.06; and SRMR=.0514.

6 Figure 1. Standardized Loadings of Structural Model eser1 eser2 eser3 eser4 ek1 ek2 ek3 ek4 SER1 SER2 SER3 SER4 K1 K2 K3 K4,85,80,79,68,75,82,89,73 Service Quality,35 Satisfaction,80,44,51 esat eloy eim Value,35 Loyalty,64,87,87,64,69,77,81,84,52 I7 I5 I4 I1 L2 L4 L5 L6 L7 ei7 ei5 ei4 ei1 el2 el4 el5 el6 el7 An examination of the significance and size of the standardised path coefficients for the model summarised in Table 2. Table 2. Summary of model results in relation to research hypotheses Hypotheses Direct effect Indirect Mediating Direc- Std Sig. effect std. No. Association variable tion Coeff. lev. coeff. Finding H1 Service Quality - Value Accept H2 Service Quality Value Accept Satisfaction H3 Value Satisfaction Accept H4 Value Loyalty Satisfaction Accept H5 Satisfaction Loyalty Accept The result indicates to accept H1 that stated that service quality has positive effect on customer value, with.80 standard coefficient and sig. level of.000 showed that service quality has significant effect on customer value. This result is in line with previous findings found by Zeithaml (1988), Andreassen and Lindestad (1998) as well as Chi et al. (2008). Service quality was also found to be positively and significantly affect customer satisfaction so the result indicates to accept H2. This finding is consistent with prior studies (Andreassen and Lindestad, 1998, Bloemer et al., 1998, Chi et al., 2008, Cristobal et al., 2007, Jamal and Naser, 2002). The model also accepts third hypothesis (H3) namely customer value has a positive effect on satisfaction. This finding is consistent with previous research done by scholars such as Cronin, Brady, and Hult (2000), Yang and Peterson (2004), Chi et al. (2008), and other. Hypothesis (H4) suggested that customer value has a positive effect on loyalty. The results show significant and positive relationship between customer value and loyalty, hence H4 is accepted. Furthermore this empirical study also

7 supports previous research on relationship between the two factors (eg. Chi et al., 2008, Kassim and Abdullah, 2010, Moliner et al., 2007, Ruyter and Bloomer, 1999, Sirdeshmukh et al., 2002). In examining relationship between customer satisfaction and customer loyalty as hypothesized in H5, which stated that customer satisfaction has a positive effect on loyalty, the structural model analysis suggests to accept this hypothesis. This result similar with most of studies that previously done by many scholars (eg. Andreassen, 1994, Javalgi and Moberg, 1997, Andreassen and Lindestad, 1998, Bloemer and de Ruyter, 1998, Drake et al., 1998, Selnes, 1998, Ruyter and Bloomer, 1999, Sivadas and Baker-Prewitt, 2000, Bowen and Chen, 2001, Zins, 2001, Jamal and Naser, 2002, Madu and Madu, 2002, Olsen, 2002) Apart from the five hypotheses that have been proposed, this study also found that there is a role of customer value as mediating variable on the relationship between service quality and customer satisfaction. Another finding in this study also suggested a role of customer satisfaction as a variable that mediates the relationship between the customer value and customer loyalty. Discussions and Conclusion This paper outlines an empirical validation of existing theories customer loyalty in banking industry within Central Sulawesi, Indonesia. The study investigated the direct and indirect effects of three antecedents (service quality, value, and satisfaction) on loyalty. Our results suggest that each of these three antecedents is a separate construct, which determines loyalty. Satisfaction exerted a stronger influence on loyalty than value. It is also found that value plays a substantial intervening role in the relationship of service quality and satisfaction. It is found that service quality has more substantial effect on value rather than on satisfaction. Another indirect effect also take into account: Satisfaction mediated the value relationship with loyalty. Several implications for customer loyalty management in the banking context arise from these findings. Firstly, as acknowledged by scholars and practitioners in banking industry, managing customer loyalty in the banking service industry is no straightforward matter. Achieving loyalty requires an appreciation of the complex interplay of service quality, value, and satisfaction. Secondly, in managing loyalty of their customers, banks should consider how to manage value more effectively as well as to serve their customer with excellent service quality. Customers that perceive better value as the impact of better service quality tend to increase satisfaction. Hence more satisfied customers as the result of service quality and value can boost customer loyalty. The posited model may be valid for a range of cultural environments. Although this loyalty model was developed with reference to concepts and theories from the Western consumer context, it was mostly upheld in the local Indonesian consumer context more specifically in the local context, Central Sulawesi. This suggests that consumer behaviour is more similar across different cultures. Nonetheless, seeking to understand customer behaviour in a national cultural context is beneficial for banks to deliver their best efforts to maintain customer loyalty.

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