Customer retention in British and Canadian retail banks: Lessons for South Africa

Transcription

1 Customer retention in British and Canadian retail banks: Lessons for South Africa Chantal Rootman Nelson Mandela Metropolitan University (NMMU) South Campus PO Box Port Elizabeth South Africa Tel: (+27) Madéle Tait Nelson Mandela Metropolitan University (NMMU) 2 nd avenue Campus PO Box Port Elizabeth South Africa madele.tait@nmmu.ac.za Tel: (+27) Gary Sharp Nelson Mandela Metropolitan University (NMMU) South Campus PO Box Port Elizabeth South Africa gary.sharp@nmmu.ac.za Tel: (+27) Le Meridien Hotel, Mauritius, August

2 Customer retention in British and Canadian retail banks: Lessons for South Africa Paper type: Research paper Abstract Purpose: The purpose of this study was to identify the variables influencing customer retention in retail banks both from clients and bank managers perspectives in South Africa, Britain and Canada. Research design: Primary data has been collected from retail banking clients and bank managers. Convenient sampling was used to select the sample which consisted of 35 banking clients and 22 bank managers. The research instruments were two structured questionnaires in the form of a 7-point Likert-type scale, one distributed to banking clients and the other to bank managers. The computer programme Statistica Version 9 was used for the quantitative statistical data analysis to provide descriptive statistics and to assess the reliability of the research instrument by means of Cronbach Alpha reliability coefficients. The data has been subjected to a confirmatory factor analysis (CFA) and linear modelling was performed. Findings: The empirical results show that the personalisation of banking products and/or services and banking fees influence customer retention. Research limitations: The sample size of this pilot study was very small. Therefore only qualitative research could have been undertaken to analyse the viewpoints of the bank managers. Originality of the study: This study is unique as no comparative study of this nature has been done. The study is also of significant value to South African retail banks to consider the customer retention strategies of British as well as Canadian retail banks, as these banks are well-known for their successes in customer retention. Managerial implications: It is important that banks develop practical strategies to personalise their offerings and ensure the justification of their banking fees in order to increase their customer retention levels. Keywords: retail banks, personalisation, banking fees, customer retention Le Meridien Hotel, Mauritius, August

3 Introduction and problem statement Service industries have a major impact on national economies and are expected to continue to develop and grow at an accelerated pace in the future. This pattern is also evident in South Africa, as the contribution of the services sector to the country s Gross Domestic Product (GDP) has increased from 45.6% (1980) to 65.9% (2000) to a very high 74% (2008) (Appel, 2008 and South Africa, 2003). The continuous inflow of service firms result in these firms having to operate in competitive industries. This can also be seen in the case of retail banks. Retail banks have been identified as key role players within the service sector of a country. However, banks often operate in highly competitive industries in developed countries, for example in South Africa, Britain and Canada (Metcalfe, 2003; Figueira, Nellis & Parker, 2007:38 and South Africa Yearbook, 2008/09:230). Specifically in South Africa, the banking industry is dominated by four major banking groups, namely Amalgamated Banks of South Africa (ABSA) Group Limited; FirstRand Holdings Limited (FNB); Nedcor Limited (Nedbank) and Standard Bank Investment Corporation Limited (Standard Bank). These groups collectively held 85.1% of the total assets (approximately R2 168 billion) of the banking industry at the end of 2007 (South Africa Yearbook, 2008/09:230) and compete fiercely to increase their client numbers. As being part of the financial services industry, these banks also contributed approximately 20% of South Africa s GDP (Profiles Stock Exchange Handbook, February May 2010). It is evident that the success and survival of banks play an important part in the stability of the country s economy. Due to competitive banking industries, such as in South Africa, banks need to focus on maintaining their existing clients (customer retention). Customer retention may be influenced by different variables pertaining to banks client relationships. Previous research, more of a theoretical nature, focuses mainly on the benefits of proper client relationships and customer retention, without highlighting strategies available to banks to improve customer retention. The primary objective of this study was to identify the variables influencing customer retention in retail banks, both from banking clients and bank management s viewpoints in South Africa, Britain and Canada. The two countries abroad were chosen, because research has shown that these two countries are on the forefront with regard to customer retention strategies (Ptak, 2001). It was envisaged that South African retail banks could learn certain lessons from the retail banks in Britain and Canada. Therefore, the Le Meridien Hotel, Mauritius, August

4 problem statement of this study can be formulated in the form of the following question: Which lessons can be learned from retail banks in Britain and Canada by identifying the different variables that have an influence on customer retention? Purpose and objectives Following the introduction and problem statement above, it can be stated that the primary objective of this study was to identify and investigate the variables influencing the customer retention of retail banks in South Africa, Britain and Canada. Specifically, the primary objective was attained by gathering the perceptions of both banking clients and bank managers. In order to assess the variables influencing banks customer retention, the following secondary objectives were pursued: to investigate literature on South African, British and Canadian retail banks; to investigate literature on variables possibly influencing customer retention; to perform an empirical investigation among banking clients and bank managers; and to give recommendations to banks on how to maintain and increase their customer retention levels. Literature overview Based on the objectives stated above, a literature overview was conducted concerning retail banks in South Africa, Britain and Canada as well as variables possibly influencing customer retention in banks. The Registrar of Banks in South Africa stated that financial stability serves as a precondition for the growth of the economy of any country (Kemp, 2002:2). In other words, the success of South African banks influences the economic condition of the country. As mentioned before, the South African banking industry is highly competitive with four major banking groups, namely ABSA, FNB, Nedbank and Standard Bank dominating the industry. Financial service firms listed on the Johannesburg Securities Exchange (JSE), the stock exchange of South Africa, represented more than 16% of the total market capitalisation in 2009 and the four major banking groups alone accounted for 8.91% of the total market capitalisation in The financial services industry also employs 7% of the total working population in South Africa with the four major banks employing approximately people. (Financial Services Industry in South Africa 2003:1; Profile s Stock Exchange Le Meridien Hotel, Mauritius, August

5 Handbook 2004; Profiles Stock Exchange Handbook February May 2010 and Metcalfe, 2008:11). However, despite their importance to the economy, South African banks face many challenges including challenges arising from globalisation, an increasingly competitive industry, devaluations of banks shares, government intervention in banking operations and new technology affecting the industry. Banks partnerships with other firms, competition for the large un-banked segment of the South African population, changing client behaviour, and enquires about the fairness of banking fees are also challenges faced by South African banks. South African banks operate in a highly competitive industry and therefore comparisons with successful international banks in terms of customer retention will be useful. The Canadian banking industry host 14 local banks, 33 foreign bank subsidiaries and 20 foreign bank branches (Canada s Banks, 2002). The Canadian banking system is mature, sophisticated and, however, highly competitive. In terms of services marketing, including customer retention, some Canadian banks are regarded as leading the field. Since 1997, The Royal Bank of Canada has many successful marketing stories (Ptak, 2001:38) and is the country s largest bank. The Royal Bank of Canada serves over 10 million clients internationally (Khirallah, 2001:2). Due to its marketing successes, The Royal Bank of Canada s customer retention strategies should be considered by South African banks. The British banking industry is dominated by a small number of large banks providing services both nationally and internationally. Figueira et al. (2007:38) mentions that the British banking industry is often regarded as one of the most efficient and competitive industries in Europe. Considering this, as well as the fact that South African banks have strong relationships with British banks, for example Barclays owns 58.8% of ABSA (Mittner, 2009:24), it is necessary to consider the customer retention strategies of British banks. This may assist to identify effective customer retention strategies that South African banks can implement. The above discussion shows that it is important to identify ways of improving the success rate of banks, specifically South African banks. Le Meridien Hotel, Mauritius, August

6 Studies by Jones, Mothersbaugh and Beatty (2000) and Colgate, Stewart and Kinsella (1996) have shown that firms keeping their existing client bases significantly improve their success rate. This means it is important for firms, including banks, to maintain relationships with their existing clients and make sure these clients do not defect to competitors. When a firm maintains its customers and/or clients, it means the firm has a good customer retention rate or level. In a service industry, customer retention refers to the longevity of a client s relationship with a service providing firm (Menon & O Connor, 2007:157). A service firm with a good customer retention level implements effective customer- service and retention strategies that result in clients staying with the firm for future service deliveries. A firm focus on customer retention leads to many advantages for its clients, for example recognition, personalisation, power, risk reduction, status and affiliation. A client feels more valued when recognised in person by firm employees. As a firm is more knowledgeable about retained clients, the firm may personalise (customise) its products and/or services for its retained clients. Retained clients may feel they have power in demanding special products and services, through relationships with a particular firm. Due to their established relationship with a service provider, some retained clients may feel their risk of acquiring, maintaining or making use of a particular product and/or service is reduced. Firms often assign a higher client status level to retained clients. Finally, retained clients feel a strong affiliation with the specific service provider. (Buttle, 2004:26-27). Through successful customer retention strategies firms can be assured of clients support (as they receive benefits) (Peppers & Rogers, 1999), leading to higher profits and success rates for the firm (Bergeron, Roy & Fallu, 2008). In addition, with proper customer retention, a firm can expect advantages in the form of cost savings, word-of-mouth marketing and an increase in revenues and profits. Customer retention leads to cost savings for a firm as acquiring a new client costs more than retaining an existing one, thus the firm s marketing costs decrease (Brink & Berndt, 2008:43 and Buttle, 2004:17). Retained clients often provide word-of-mouth recommendations to potential clients of a firm as they convey their satisfaction with the firm s services. This may also result in the firm being able to charge premium prices for its services. In addition, Reichheld and Sasser (1990:105) also state that client defections (when a firm loses its clients instead of retaining them) can have a large negative impact on the profits of a firm. In effect, this shows that customer retention may lead to additional revenues for a firm (Karakostas et al. 2004:855). Le Meridien Hotel, Mauritius, August

7 The literature review on customer retention led to the identification of specific bank related aspects as variables which can possibly influence banks customer retention. These variables include, among other, the empowerment of bank employees, the personalisation efforts of banks and banking fees. Empowerment in a bank will result in bank managers giving bank employees the authority to make decisions or take actions affecting the firm, on their own (Longenecker, Moore, Petty & Palich, 2006:362). In a bank personalisation will take place when banking products and/or services are adapted in a unique way to the preferences of clients (Berndt, Herbst & Roux, 2004:36). A bank s fees refer to its charges or costs to clients for the bank services delivered. As this study s purpose is to identify and investigate the variables possibly influencing the customer retention of banks in South Africa, Britain and Canada, it is important to empirically consider the influence of variables on banks customer retention, from the perspectives of both banking clients and bank managers. From the literature overview above, it is evident that the focus on customer retention can be useful for retail banks and South Africa can possibly learn customer retention lessons from British and Canadian banks. It is necessary to investigate the customer retention of banks in South Africa, Britain and Canada in more detail. Therefore, the empirical investigation of this study aims to provide insight into clients and bank managers viewpoints on customer retention in retail banks in order to improve banking service strategies for clients and improve customer retention levels for banks. Research methodology This study aimed to identify and investigate the variables influencing the customer retention of retail banks in South Africa, Britain and Canada. The positivistic as well as the phenomenological research paradigms were used in this study, in order to complement each other. The positivistic paradigm was used to test the clients perceptions, whereas the Le Meridien Hotel, Mauritius, August

8 phenomenological research paradigm was used to gain more insight into the managers perceptions. Both primary and secondary resources were used in the study. Secondary sources were used to collect information on banks in South Africa, Britain and Canada as well as customer retention aspects. Secondary sources included books, articles from academic journals and websites. The primary research was conducted by means of an empirical study. Primary data has been collected from banking clients as well as bank managers of retail banks. Convenience sampling will be used to select the final sample of 800 banking clients and 200 bank managers in the follow-up study. For the exploratory (pilot) study, on which this paper is based, the samples of 35 banking clients and 22 bank managers were selected by means of convenience sampling. The research instruments were two structured questionnaires, one distributed to banking clients and the other to bank managers. These questionnaires were self-developed, selfadministered and structured. The empirical investigation was conducted in English, and the questionnaire consisted of two sections. Items in section A were constructed through information gathered from the literature overview and statements revolved around selected variables possibly influencing the customer retention levels of banks. Section A used a sevenpoint Likert-type scale ranging from strongly disagree (1) to strongly agree (7). Section B gathered biographical data of the respondents (banking clients and bank managers). The validity of the measuring instrument was ensured as experts in the fields of customer relationship management and customer service as well as bank managers assisted with the questionnaires designs. The computer programs Microsoft Excel and Statistica (Version 9) were used to statistically analyse the collected data. Statistical data analyses were performed in three phases as the following statistics were calculated: descriptive statistics, Cronbach alpha correlation coefficients and linear modelling. Firstly, descriptive statistics were calculated to summarise the sample data distribution. The purpose of descriptive statistics is to provide an overall summary of a large amount of data (Struwig & Stead, 2001:158). Secondly, in order to evaluate the internal reliability and consistency of the measuring instrument items, a confirmatory factor analysis (CFA) was performed to compute Cronbach Le Meridien Hotel, Mauritius, August

9 alpha correlation coefficients. A test should have a Cronbach alpha correlation coefficient greater than 0.70 (Hair, Babin, Money & Samouel, 2003:172). A measuring instrument and its items are more reliable if the Cronbach alpha correlation coefficients are higher than 0.7. In the third and last data analysis phase linear modelling was performed to identify the influence of selected variables on the customer retention of banks. Multiple regression analyses, a multivariate analysis of variance (MANOVA) test and structural equation modelling (SEM), used for the testing and estimation of relationships between seven independent, one intervening and one dependent variable, will be performed in the follow-up research. Empirical results From the three phased statistical data analysis, the following section elaborates on the empirical findings of the study. The discussion of the empirical results follows the same sequence of the data analysis phases. First, the descriptive statistics are described, including the biographical data of the banking client and bank manager respondents. Following the descriptive statistics, the reliability of the measuring instrument is tested through the calculation of Cronbach alpha coefficients. Finally, the results from the linear modelling are provided. Descriptive statistics With regard to the descriptive statistics, the only significant finding related to the age of the respondents. Therefore Table 1 illustrates the descriptive statistics regarding the age of the respondents and Figure 1 is a box plot depicting the relationship between the age of the respondents and customer retention. Table 1: Age data of banking clients Items Age category Frequency Total 35 Between years 3 Between years 10 Between years 11 Le Meridien Hotel, Mauritius, August

10 Between years 5 Between years 4 65 years or older 1 missing 1 Total 35 Figure 1: Age and customer retention relationship 7.0 Categ. Box & Whisker Plot: Retention Retention B4 Median 25%-75% Min-Max The box plot shows, very interestingly, that older clients are more likely to switch to another bank. In other words, older clients are more prone not to be retained by banks. Reliability of the measuring instrument through Cronbach alpha coefficients The results illustrating the internal reliability of the measuring instrument, as measured by the Cronbach alpha coefficients, are shown in Table 2. Table 2: Cronbach alpha correlation coefficients Factors Cronbach alpha Le Meridien Hotel, Mauritius, August

11 Empowerment Personalisation Banking fees Customer retention As evident from the table above, excluding a single factor, all the factors obtained Cronbach alpha coefficient scores above the recommended The factor with a Cronbach alpha coefficient below 0.70 was the factor empowerment, with a poor Cronbach alpha of As this was a pilot study, it was necessary to re-examine the original questionnaire items for empowerment. Significant changes were made to the questionnaire items measuring this factor. The new items for empowerment will be used in the follow-up research. As the Cronbach alpha coefficients indicate the reliability of the questionnaire items and the complete measuring instrument, it can be said that after the relevant changes have been made to the questionnaire items on empowerment, the measuring instrument is reliable and can be used for future studies. Customer retention, the important aspect in banks being investigated in this study, had a high Cronbach alpha of , in other words, the items measuring customer retention can be regarded as reliable. The most reliable factor thought to influence customer retention was banking fees with a Cronbach alpha coefficient of Only one of the stated banking fees questionnaire items did not load onto the factor. Linear modelling Table 3 illustrates the results from the linear modelling performed to identify the variables influencing customer retention. Table 3: Linear modelling results Factors p-value Empowerment Personalisation Banking fees Le Meridien Hotel, Mauritius, August

12 The p-values were calculated in order to assess and quantify the strength of the relationship between each of the identified factors and customer retention. Table 3 shows that personalisation and banking fees have significant positive relationships with customer retention at the 90% confidence level. The p-value of identified the strongest relationship between banking fees and customer retention. An insignificant relationship was found between empowerment and customer retention with a p-value of for empowerment. In addition to the above results, the linear modelling indicates that, with a R 2 = , the selected variables explain approximately 64% of the variance in customer retention. This result shows that there are also other variables, not considered in this study, which can influence banks customer retention. Considering the above empirical results, one can conclude that personalisation and banking fees have a great impact on improving banks customer retention levels. The study shows that the empowerment of bank employees has no significant influence on the customer retention levels of banks. Bank managers survey results As mentioned, as this is a pilot study with a small sample size, the survey results of the bank managers responses were analysed by considering the means of the factors as well as general comments provided by managers. Generally, bank managers were very positive towards the current banking services that their bank employers provide to clients. This can be seen by looking at the means of the selected variables in Table 4. Table 4: Means from bank managers Factors Means Empowerment 5.15 Personalisation 4.03 Banking fees 4.65 Customer retention 4.94 Le Meridien Hotel, Mauritius, August

13 The means in the table above indicate that the managers agreed (a mean value of approximately 4) or strongly agreed (a mean value of approximately 5) that their employees empowerment levels, their personalisation efforts and their banking fees are acceptable and meet the expectations of clients. In addition, with a mean of 4.94 for customer retention, bank managers stated that their banks customer retention rates are currently at acceptable levels. However, selected issues that bank managers mentioned as being a concern for them in their bank s service delivery are: bank employees should address clients by their first names, banks should attract new clients with special fees and banks should decrease their switching cost to attract more clients. Contribution of the study This study has been of significant value to South African retail banks to consider the customer retention strategies of British and Canadian retail banks, as these banks are well known for their successes in customer retention. The international nature of the study makes it unique and the study differs from previous research as it identifies the variables influencing customer retention while considering the viewpoints of both banking clients and bank managers. Thus, it is foreseen that this study will contribute to the services marketing discipline through the provision of theoretical and empirical knowledge on customer retention in international banking industries, but specifically in South Africa. Conclusions and managerial implications This study provides insight into the customer retention of banks in South Africa, Britain and Canada. More specifically, the study provided insight into the variables influencing banks customer retention levels based on the viewpoints of both banking clients and bank managers. The empirical findings of this study have established that the personalisation of banking products and/or services and the careful consideration of banking fees are areas of concern for banks wanting to increase their customer retention levels. The study indicated that Le Meridien Hotel, Mauritius, August

14 empowerment is not necessarily a concern for clients and is not the main aspect for banks to concentrate on when focusing on their customer retention. The empirical investigation led to a number of recommendations which can be provided to banks with regard to their customer retention and the variables influencing their number of retained clients. Suggested customer retention strategies as a result of this study have already been implemented in South African retail banks in order to ensure higher levels of customer retention important for clients and pertinent for the survival and success of banks. Strategies related to banks personalisation efforts, banking fees and customer retention methods are highlighted and a detailed discussion of these strategies is hereby provided. In terms of personalisation banks should aim to: coach bank employees to address important clients by their first names, as this will ensure that clients feel valued; customise its product and/or service offerings to suit clients specific needs; and focus on older clients to ensure they are retained, through, for example providing special products and/or services to retired clients. In terms of banking fees it is important for banks to note that it is not necessarily high banking fees that is of concern or unacceptable for clients. The study showed that clients require that fees are reasonable, in other words, the banking fees charged for a product and/or service should be justifiable. If clients view banking fees as reasonable, clients will be more easily retained. To specifically increase customer retention banks should: attempt to retain clients by providing them with incentives; offer more and new banking products and/or services to clients; and build strong client relationships through effective communication with clients. As it was evident from the empirical investigation, older clients are more likely to switch to another bank. This means that older clients are more prone not to be retained by banks. This might be because older clients often have more accounts and therefore prefer to make use of more than one bank. When these clients experience improved service levels at one bank they might decide to move more accounts to this particular bank with better services Le Meridien Hotel, Mauritius, August

15 and therefore it is more difficult for banks to retain their older clients. Following this conclusion, it is recommended that banks need to focus on their service delivery to older clients to ensure that they are satisfied with the bank s services and that they will not defect to another competitor bank. Banks could develop banking products and/or services packages for older, retired clients to ensure that these clients are satisfied, feel valued and that they will remain a client of the bank. The effective implementation of these mentioned strategies could lead to increased customer retention levels for banks and this may lead to more successful banks and a stronger economy. Therefore, this preliminary study concludes that banks should focus on the personalisation of their offerings and the justification of their banking fees to increase their customer retention and overall success in order to positively contribute to their country s economy. References Appel, M. (2008), South Africa: Finance, construction lead SA s service sector, available at: (accessed 20 July 2009). Bergeron, J., Roy, J. & Fallu, J. (2008), Pleasantly surprising clients : A tactic in relationship marketing for building competitive advantage in the financial services sector, Canadian Journal of Administrative Sciences, Vol. 25, pp Berndt, A.D., Herbst, F.J. & Roux, L. (2004), Customer relationship management implementation within a retail banking environment: a South African perspective, Southern African Business Review, Vol. 8, No. 2, pp Bosch, J.K., Tait, M. & Venter, E. (2006), Business Management: An entrepreneurial perspective, Lectern Publishing, Port Elizabeth. Brink, A. & Berndt, A. (2008), Relationship marketing & customer relationship management, Juta and Co Ltd, Landsdowne. Colgate, M., Stewart, K. & Kinsella, R. (1996), Customer defection: A study of the student market in Ireland, International Journal of Bank Marketing, Vol. 14, No. 3, pp Figueira, C. Nellis, J.G. & Parker, D. (2007), Challenges facing the Polish banking industry: An comparative study with UK banks, Managing Global Transitions, Vol. 5 No. 1, pp Financial Services Industry in South Africa, (2003), available at: africa/profile/overview.shtml. (accessed 12 May 2004). Le Meridien Hotel, Mauritius, August

16 Hair, J.F., Babin, B., Money, A.H. & Samouel, P. (2003), Essentials of business research methods, Leyh Publishing, USA. Jones, M.A., Mothersbaugh, D.L. & Beatty, S.E. (2000), Switching barriers and repurchase intentions in services, Journal of Retailing, Vol. 76, No. 2, pp Karakostas, B., Kardaras, D. & Papathanassiou, E. (2004), The state of CRM adoption by the financial services in the UK: An empirical investigation, Information & Management, Vol. 42(2005), pp Kemp, S. (2002), Banks still facing new challenges, available at: (accessed 24 February 2004). Khirallah, K. (2001), CRM case study: The analysis that power CRM at Royal Bank [of Canada], TowerGroup, USA. Longenecker, J.G. Moore, C. W., Petty, J.W. & Palich, L.E. (2006), Small business management: An entrepreneurial emphasis, Thomson South-Western, China. Menon, K. & O Connor, A. (2007), Building customers affective commitment towards retail banks: The role of CRM in each moment of truth ", Journal of Financial Services Marketing, Vol. 12 No. 2, pp Metcalfe, B. (2008), Strategic and emerging issues in South African banking, PricewaterhouseCoopers, Johannesburg. Metcalfe, B. (2003), Strategic and emerging issues in South African banking, PricewaterhouseCoopers, Johannesburg. Mittner, M. (2009), Kenners maan oor gerugte dat Barclays Absa wil smous, Die Burger. 26 January, p. 26. Peppers, D. & Rogers, M. (1999), The one-to-one manager, Currency Doubleday, New York. Profile s Stock Exchange Handbook. (February 2010 May 2010), Profile Media, Pretoria. Ptak, L. (2001), Measuring client value. CMA Management. June, pp Reichheld, F.F. & Sasser, W.E. (1990), Zero defections: quality comes to services, Harvard Business Review, Vol. 68(September October), pp South Africa, (2003), available at: (accessed 24 January 2005). South African Yearbook. (2008/09), Government Communications (GCIS), Pretoria. Struwig, F.W. & Stead, G.B. (2001), Planning, designing and reporting research, Pearson Education, Cape Town. Le Meridien Hotel, Mauritius, August

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