The Determinants of Brand Loyalty in the Online and Offline Banking Sectors

Orose Leelakulthanit, Ph.D., NIDA Business School, National Institute of Development Administration, Bangkok, Thailand Boonchai Hongcharu, Ph.D., NIDA Business School, National Institute of Development Administration, Bangkok, Thailand

ABSTRACT This study adopts a comprehensive customer value approach in determining brand loyalty. Multiple regression results reveal that online customers loyalty is driven positively by the func tional value of service variety, the functional value of convenience, the functional value of the internet, the emotional value of trust, and the corporate value of reputation, whereas the negative driver is the functional value of price. The positive determinants of brand loyalty for offline customers are the functional value of quality, the corporate value of reputation, and switching cost, while the negative determinant is the functional value of establishment. Societal value works positively for referral and against repurchase for offline customers. Keywords: brand loyalty, customer loyalty, customer value, banking INTRODUCTION In the more demanding market of the banking industry these days, banks can hardly survive with the old way of product orientation. They are supposed to be market driven by forming a long-term relationship with their customers. A stable customer base is a core business asset. The essence and nature of relationships and their business value are encapsulated in the concept of customer loyalty. The significance of brand loyalty is manifold. Surveys show that it is up to six times as expensive to recruit new customers as it is to retain existing customers (Rosenberg & Czepiel, 1993). Retail banks have discovered that increased customer retention rates can have a substantial impact on profits, since an increase in a banks retention rate by 5 % could lead to an 85 % increase in its profits (Reichheld & Sasser, 1990). Furthermore, loyal customers are assumed to be less price sensitive (Krishnamurthi & Raj, 1991) and the presence of loyal customers provides the firm with valuable time to respond to competitive actions (Aaker, 1991). Seybold (1998) described the economics of customer loyalty based on a profitability model developed by Reichheld (1996). According to Seybold, the elements to achieving higher revenues via customer retention are: (1) base revenue the longer you retain customers, the more money you make; (2) cost savingsthey cost you less to serve; (3) price premiumthey pay more for your products, (4) acquisition costs they cross-sell and up-sell themselves; and (5) they generate referrals. Personal recommendations are often very influential in customers selection of service providers (Murray, 1991) as well as in banking (Reichheld & Kenny, 1990). On average, bank customers recommend the bank to 5.55 others (Gremler & Brown, 1999). This study intends to contribute to the marketing literature in three main ways: First, the loyalty effect will be studied in the detailed components of repeat purchase and positive word-of-mouth. Second,

the multichannel issue is addressed by comparing the customer values that lead to brand loyalty in online banking and traditional branch operations. Finally, customer values in the banking sectors will be reconceptualized to capture the two schools of thought, which are the benefit versus sacrifice perceived by the customers, and the multidimensional approach. The next section of the paper presents a review of related research. Then, the studys method is described. The results of the survey are presented, and the paper ends with a discussion of the results and the conclusion. LITERATURE REVIEW Previous research indicates that customer value, which is the essential result of marketing activities, is seen to be an element of the first order within relationship marketing (Peterson, 1995; Huber et al., 2001). The advantages that the company obtains from the relationship are linked to the loyalty of the customer. A faithful customer will generate more income than a customer that abandons the relationship. At a general level, two major approaches to the conceptualisation and dimensionality of perceived value can be identified. The rst denes the perceived value as a construct congured by two parts, one of benets received (economic, social and relational) and another of sacrices made (price, time, effort, risk, and convenience) by the customer (Cronin et al., 1997; Gale, 1994; Zeithaml, 1988). The second approach is based on the conception of perceived value as a multidimensional construct (De Ruyter, Wetzels, & Bloemer, 1998; De Ruyter, Wetzels, Lemmink, & Mattsson, 1997; Mattsson, 1991; Sheth, Newman, & Gross, 1991a, 1991b; Sweeney & Soutar, 2001; Woodruff, 1997). According to a denition by Zeithaml (198 8), value for the consumer results from the personal comparison of the benets obtained and the sacrices made. Therefore, it contains a component of benets and another of sacrices. The benets component, or what a consumer receives from the purchase, would include the perceived quality of the service and a series of psychological benets (Zeithaml, 1988). To assess service quality, the original SERVQUAL, which consists of five service dimensions, does not seem to fit the model of customer value in relation to brand loyalty (Parasuraman et al., 1988). In this study, a more parsimonious service quality component of the GLOVAL scale of measurement of perceived value, developed by Sanchez et al. (2006) for the tourism sector, has been adopted. These service quality components are referred to as the functional value of establishment, the functional value of contact personnel, and the functional value of quality. The key service quality factors in the traditional banking environment deal with the interaction between employees and customers. On the other hand, the main service quality factors in internet banking have to do with the interaction between customers and computers. Internet banking has only one dimension of service quality, which is adapted from the study of Al-Hawari, Ward and Newby (2009), and this is called the functional value of the internet. The sacrifice component, or the switching cost, is the customers perception of the magnitude of additional costs required to terminate the current relationship and to guarantee an alternative one; such perceived costs prevent the customer from shifting to a competitors offers (Yanamandram & White, 2006). Switching costs encompasses not only those that can be monetarily measured, but also the psychological effect of becoming a customer of a new provider (Dick & Basu, 1994). The measures of switching cost in this study are adapted from the research of Matos, Henrique & Rosa (2009). According to the multidimensional approach, besides service quality, customer value is conceptualized here as consisting of several other dimensions, including the functional value of service variety, the functional value of convenience, the functional value of price, the emotional value of feeling, the emotional value of trust, societal value and the corporate value of reputation. Service variety is a kind

of portfolio that enables the company to better serve the customers various needs. It also allows the banks to engage in cross-selling by promoting additional products and services to existing customers in addition to the ones a customer currently has (Butera, 2000). Cross-selling is widely spread in the banking sector because of its advantage in reducing the money spent on customer acquisition and leads to a price advantage over competitors (Reichheld & Sasser, 1990). Moreover, the customers knowledge of the service providers service delivery processes lowers her/his resistance to the providers cross -selling propositions. The rm also has a lower risk and liability exposure due to its knowledge of the customer. Finally, the more products and services a customer buys the longer s/he is likely to stay with the rm (Reinartz & Kumar, 2003). A distribution channel has been described as the exchange relationship between the organization and its customers that creates customer value in acquiring and consuming products and services (Pelton et al., 1997). The use of a number of distribution channels by organizations is becoming widespread (Frazier, 1999), as increasingly organizations add new channels and communication methods, providing an opportunity to extend market coverage cost effectively (Moriarty & Moran, 1990). Physical locations, such as branches, remain highly used by customers and can be seen to be an important source of competitive advantage for many financial services providers (Bekier et al., 2000). However, online banking allows customers to access their accounts and conduct financial transactions with their respective banks from homes and offices (Bauer et al., 2005; McMahon, 1996). The role of price as a purchasing determinant as well as in post-purchasing processes is well recognized. In a qualitative study focusing on switching behavior in services, Keaveney (1995) reported that more than half of the customers switched because of poor price perception (compared to competitors). Varki and Colgate (2001) arrived at similar results in their study of the banking industry; particularly that price perception directly inuences customer satisfaction, the likelihood of switching, and the likelihood of recommendation to others. This signifies the functional value of price in relation to brand loyalty. Successful service brands derive from carefully-nurtured relationships, which develop staffs and consumers respect for certain functional and emotional values of the brand (de Chernatony and DallOlmo Riley, 1999). The affective dimension that is formed by an emotional component, relating to internal emotions or feelings, is called the emotional value of feeling, and the feelings towards the firm practices is referred to as the emotional value of trust. The measures of this functional value of feeling are adapted from the GLOVAL scale (Snchez et al., 2006). Trust is logically and experientially a critical variable in relationships, as has been hypothesized and borne out in the marketing literature (Moorman et al. , 1993; Morgan & Hunt, 1994). The importance of trust in explaining loyalty is also supported by authors such as Chaudhuri and Holbrook (2001), Garbarino and Johnson (1999), Lim and Razzaque (1997), Singh and Sirdeshmukh (2000), and Sirdeshmukh et al. (2002). In this study, the measures of emotional value of trust are adapted from the research of Ball, Coelho, and Machs (2004). Social responsibility is marketings function to society to advance life and the general welfare of consumers through value-creating marketing activities. A 1994 study by Walker Research and Analysis found that 88 percent of consumers claimed they were much or somewhat more likely to buy from a firm which is socially responsible and a good corporate citizen if quality, service, and price are all comparable to those of competitors, while 92 percent said they would be much or somewhat less likely to buy from a company that lacks social responsibility (Smith, 2001, p. 155). A 1997 Cone/Roper survey revealed that 76 percent of consumers claimed they would switch brands or stores that seem concerned about the community (Jones, 1997). This societal value creates brand loyalty.

The companys reputation provides easy access to the evoked set of stimuli with the target group. Andreassen and Lindestad (1998) argued that corporate image part of reputationis an antecedent to customer loyalty. Later, it wa s concluded that reputation may be loyaltys strongest driver (Andreassen, 1994; Ryan et al., 1999). Moreover, Rogerson (1983) showed that a high reputation increases the likelihood that consumers will provide a recommendation. Therefore, the corporate value of reputation is likely to lead to brand loyalty. Gremler and Brown (1996) defined loyalty as the degree to which the client performs a re-buying behavior from a service supplier, presents a positive attitudinal disposition toward it, and considers it as the only choice when making a decision. For example, an indicator of positive attitude is recommendation or positive word-of-mouth (Sivadas & Baker Prewitt, 2000). For some authors (e.g., Bloemer & Kasper, 1995; Oliver, 1999), this perspective defines true loyalty. It follows that loyalty is composed of repurchase behavior and positive word-of-mouth. From the aforementioned literature review, it can be hypothesized that the functional value of service quality, the functional value of service variety, the functional value of convenience, the functional value of price, the emotional value of feeling, the emotional value of trust, societal value, the corporate value of reputation, and switching cost have a positive relationship with both re-buying behavior and positive word-of-mouth. METHODOLOGY Questionnaire Design Generally, the design of the questionnaire content in this study was based on the measures of previous related research, except the measures of societal value. Many of these were measured on multiitem scales. However, several constructs were measured by single item scale. These include the functional value of service variety, the functional value of convenience, the functional value of price, the corporate value of reputation, repeat-buying behavior, and positive word-of-mouth. The questionnaire content was divided into five sections. The first section dealt with banking consumption behavior. The second section contained all of the determinants of brand loyalty in the banking sector according to t he authors conceptualization. The third section had to do with brand loyalty towards bank. The fourth section concerned satisfaction or dissatisfaction and complaining behavior. The fifth section contained demographic information on the respondents. The questionnaire was pretested with fifteen executive MBA students. After that, personal interviews with 37 convenient samples of eligible respondents were conducted. These eligible interviewees were those that currently had savings deposits with banks. They had to be at least 18 years of age and have at least 4 months experience in using the banks services. The questionnaire was reworded for clarity of terms based on the feedback received from both groups. Sampling Method There were two population groups for this study; namely, online and offline bank customers. The researchers adopted convenience sampling for both groups. The online group consisted of those that used online banking as their major transaction medium with their most often-used banks, unlike the offline group, who used branches as the mode of conducting transactions with their most often-used banks. For the online group, two hundred and nine eligible respondents were interviewed in nineteen departments and discount stores spread over Bangkok. Similarly, for the offline group, two hundred and sixteen eligible respondents were interviewed in eighteen departments and discount stores in Bangkok. The response rates for the online and offline groups were 77% and 69%, respectively. Because some

respondents did not have saving deposits with their most often-used banks, a total of six samples were dropped from the analysis. That is to say, the usable respondents for the online and offline bank customers were 206 and 213 respectively. Factor Analysis and Reliability In order to investigate that each multi-item scale construct was unidimensional, a principal component factor analysis was performed on these constructs. It was found that the extracted eigenvalue was more than 1 and the factor loadings were more than +0.70 (see Table 1). According to Hair et al. (2006), loadings exceeding +0.70 are considered indicative of well-defined structure and are the goal of any factor analysis. In addition, good measures should be reliable. Nunnally (1978) views that reliability over 0.7 implies relatively high reliability. Cuieford (1965) also indicated that a Cronbach alpha of more than 0.7 suggests high reliability. When it is less than 0.35, it should be rejected. Thus, the measures used in this study were found to be highly reliable since it was at least 0.7 for each construct in this study. Table 1: The results of the factor analysis and reliability of customer values Factor and item description Factor loadings Eigenvalue Cronbach Factor 1: Functional value of establishment 2.42 0.88 The installations favor the privacy of dealings. 0.87 It seems tidy and well organized. 0.93 The installations are spacious, modern and clean. 0.90 Factor 2: Functional value of contact personnel 3.64 0.90 The personnel know their job well. 0.87 The personnels knowledge is up-to-date. 0.88 The personnel provide fast service. 0.81 The information provided by the personnel has 0.85 always been very valuable to me. The personnel have knowledge of all of the services 0.86 offered by the bank. Factor 3: Functional value of quality 3.15 0.91 The service as a whole is correct. 0.86 The quality has been maintained all of the time. 0.90 The level of quality is acceptable in comparison 0.90 with other banks. The results of the service received were as expected. 0.90 Factor 4: Functional value of internet 4.29 0.89 Availability of information 0.74 Easy to use 0.77 Secure 0.76 Error-free transactions 0.82 Attractive website 0.77 Up-to-date information 0.84 Responsiveness 0.79 Factor 5: Emotional value of feeling 4.42 0.93 The personnel give me positive feelings. 0.86 The personnel dont hassle me. 0.84 You feel good with the service you get. 0.88 You feel relaxed. 0.87 You feel confident. 0.85 In general you feel at ease. 0.87

Factor 6: Emotional value of trust The information provided by the bank is clear and transparent. When the bank suggests that you buy a new product it is because it is best for your situation. The bank treats You in an honest way in every transaction. The bank often keeps its promise. Factor 7: Societal value The bank does the business not only for profit. The bank creates employment. The bank treats the customers equally. The bank treats the customers fairly. The bank generates benefits for the society. The bank takes part in creating well-being for the society. The bank helps with environmental conservation. Factor 8 : Switching cost You have no time or you are not willing to purchase services provided by another bank. You believe that in case you switched to another bank, it would be unpleasant or difficult to get used to or to adapt to the services provided by it. You would not be willing to lose the benets accumulated to date. You are not willing to pay for the costs associated with changing banks. RESULTS

2.76 0.82 0.77 0.86 0.87 4.76 0.79 0.77 0.83 0.85 0.86 0.86 0.82 2.59 0.77 0.79 0.84 0.81

0.85

0.92

0.82

Characteristics and Behavior of Online and Offline Respondents From Table 2, it can be seen that as compared to offline respondents, online respondents are more inclined to be males. Additionally, they tend to be married and hold a bachelors degree, whereas the offline group is more inclined to be advanced degree holders. The majority of both groups are employed, although there are more students in the offline group. Online respondents are far outweighed by white collar workers, while offline interviewees tend to be professionals and high-ranking executives. However, online respondents have a higher income of 35,340 Baht per month as compared to offline respondents, with an income of only 24,336 Baht per month. Table 2: Characteristics of online and offline customers Online Characteristics % mean % Gender Male Female Age (years) Marital status Never married Married Widowed 45.6 54.4 31.24 72.8 25.7 0.5 78.4 20.2 0.5 39.4 60.6 29.96

Offline mean

Divorced Separated Highest education attained Less than lower primary school Lower primary school Upper primary school Lower secondary school Upper secondary school Some college College graduate Advanced degree Employment status Employed Unemployed Retired Housewife Student, not employed Occupation Administration or professional Government officer except those specified earlier Employee in a private business or bank or big store Merchant Own business Skilled or semi-skilled laborer Others Monthly income (Baht)

0.5 0.5 0.5 0.5 0.5 0.5 1.5 3.9 73.8 18.9 88.8 1.5 1.0 1.5 7.3 14.1 6.8 46.6 6.8 9.7 1.9 3.4 35,340.51

0.9 0.0 0.0 0.0 1.4 0.0 1.9 8.0 62.9 25.8 76.5 2.8 1.9 1.9 16.9 24.4 3.8 31.0 4.7 5.6 1.9 4.7 24,336.27

On average, the number of banks used by both groups were three; namely, Bangkok Bank, Siam Commercial Bank, and Kasikorn Thai Bank (Table 3). The most often used bank for online interviewees was Siam Commercial Bank, while that of the offline interviewees was Bangkok Bank. Online respondents tended to be longer users of the bank services than their counterparts. Specifically, they have used the bank services for 87 months, whereas the offline respondents used the bank services for 68 months. Both groups put their money in savings deposits for the prime purpose of emergency cases. Almost half of the online customers were only credit card holders while abroad a quarter of offline ones did. Online customers are more satisfied with their most often-used banks than offline ones. Both groups tended to switch banks when they were dissatisfied, especially the offline customers. When dissatisfied, online customers are likely to complain with the bank employees, whereas offline patronages tend to complain with other customers. Table 3: Behavior of online and offline customers Online Behavior % mean % Number of banks used 2.36 Banks used Bangkok bank 59.7 56.3 Kasikorn Thai bank 54.4 49.3 Siam commercial bank 55.8 54.5 Krung Thai bank 25.2 30.0

Offline mean 2.42

Bank of Ayudhya Thai Military bank Other banks Most often used bank Bangkok bank Kasikorn Thai bank Siam commercial bank Krung Thai bank Bank of Ayudhya Thai Military bank Other banks Length of time used (months) Purpose of saving Emergency Investment Sick Buying assets Wedding Education Retirement Interest Safety Travelling Others Types of services used Saving Time deposit Cheque Credit card Home loan Personal loan Car insurance House insurance Life insurance Mutual fund investment Others Frequency of transactions (times/month) Amount of savings deposit Satisfaction with most often used bank Action when dissatisfied Change to use other banks Complain with other customers Complain with other organizations Complain with bank employee Do nothing Never dissatisfied Issues of dissatisfaction Wait too long Too few branches Too few ATMs Others

18.0 10.7 12.6 30.6 26.2 31.1 5.8 2.9 2.4 1.0 86.81 67.5 31.1 18.4 39.3 6.8 25.2 18.0 23.8 34.0 20.4 3.4 100.0 36.9 8.3 43.2 11.7 2.9 7.8 4.4 16.0 10.2 1.5 4.61 107,256.74 5.25 34.5 28.2 5.3 30.1 24.8 13.6 63.1 9.2 18.4 6.3

19.2 11.3 21.1 29.1 21.1 21.6 12.2 6.1 2.8 6.6 68.30 72.3 32.4 21.6 30.0 5.6 27.7 10.8 22.5 28.6 19.2 2.3 100.0 27.7 5.2 26.3 7.5 6.1 7.0 3.3 17.8 8.0 1.4 2.91 119,966.48 4.88 40.4 34.7 5.6 24.2 21.6 16.9 51.2 13.6 13.6 17.4

Determinants of Repurchase for Online and Offline Customers In order to find out whether the functional value of service quality, the functional value of service variety, the functional value of convenience, the functional value of price, the emotional value of feeling, the emotional value of trust, societal value, the corporate value of reputation, and switching cost have a positive relationship with re-buying behavior, these independent variables were regressed on repurchase behavior. The service quality construct is different for the online and offline customers. For the online customers, the functional value of service quality is simply the functional value of the internet, while the functional value of service quality for the offline customers is composed of the functional value of establishment, the functional value of contact personnel, and the functional value of quality. The results of these two multiple regressions are shown in Table 4. For the online customers, the values of standardized beta coefficients suggest that the emotional value of trust is most positively related to repeatbuying, followed by the corporate value of reputation, the functional value of convenience, and the functional value of price. The functional value of price is negatively related to repurchase, which will be an issue of discussion later. For the offline customers, the positively significant determinants of repurchase are the corporate value of reputation, the functional value of quality, and switching cost. The negatively significant determinants of repeat-buying are the societal value and functional value of establishment. Determinants of Positive Word-of-Mouth for Online and Offline Customers Similarly, in order to investigate whether the functional value of service quality, the functional value of service variety, the functional value of convenience, the functional value of price, the emotional value of feeling, the emotional value of trust, societal value, and corporate value of reputation have a positive relationship with positive word-of-mouth, these independent variables were regressed on positive word-of-mouth. The switching cost was irrelevant to positive word-of-mouth for either group. Therefore, it was dropped from the multiple regression for both the online and offline groups. The results of the two multiple regression analysis for online and offline customers are illustrated in Table 4. Positive word-ofmouth of online patronages is determined by the corporate value of reputation the most, followed by the functional value of the internet and the functional value of service variety. In the case of offline customers, the most important factor affecting positive word-of-mouth remained the corporate value of reputation, followed by societal value. Table 4: The results of the multiple Regression of the determinants of brand loyalty Repeat purchase Positive referral Customer values Online Offline Online Offline Standardized Standardized Standardized Standardized Service Variety 0.156** Convenience 0.212*** Price -0.183*** Establishment NA -0.157* NA Personnel NA NA Quality NA 0.344*** NA Internet NA 0.165* Feel Trust 0.408*** Societal values -0.206** 0.170* Reputation 0.317*** 0.402*** 0.334*** 0.240***

Switching cost R square Adjusted R square

*** Significant at 0.01 ** Significant at 0.05 * Significant at 0.10 NA = Not applicable

0.412 0.385

0.178*** 0.401 0.368

NA 0.434 0.411

NA 0.325 0.292

DISCUSSION Since brand loyalty consists of repeat-buying and positive word-of-mouth, this section attempts to bring together the results of the factors affecting both repeat-buying and positive word-of-mouth. Taken together, the determinants of brand loyalty for online customers are the functional value of service variety, the functional value of convenience, the functional value of price, the functional value of the internet, the emotional value of trust, and the corporate value of reputation. However, the determinants of brand loyalty for offline customers were the functional value of establishment, the functional value of quality, societal value, the corporate value of reputation, and switching cost. In the case of banks, the functional value of price consisted of the relative interest earned by the savings depositors as compared to the competitors. It is noteworthy that the functional value of price was the only factor which was negatively related to repurchase for online customers. This suggests the online customers perception of the high interest rate offered by banks as a signal of the hidden costs that the consumers have to pay in some fashion. In terms of offline patronage, the functional value of establishment was negatively related to repurchase. This may be because the spacious and modern bank buildings lead the offline customers to think about the unnecessarily high investment of the banks. On the other hand, societal value works like a double-edge sword. The bright side of societal value occurs when it yields positive word-of-mouth, whereas the dark side of societal value happens when it withholds repeat-buying. The reason is that offline customers may like to let other people know if the banks are doing well by taking corporate, socially responsible actions with others. However, they themselves may not like to continue to use the banks if the banks are not performing properly. CONCLUSION Each market segment has its own customers values according to the groups that the customers belong to. In order to create brand loyalty, whether it be repeat-buying or positive word-of-mouth, marketers should be aware of these unique sets of customers values. These values, which work positively in terms of creating brand loyalty for the online customers, are the functional value of service variety, the functional value of convenience, the functional value of the internet, the emotional value of trust, and the corporate value of reputation. For the offline customers, the positive customer values are the functional value of quality, societal value, the corporate value of reputation, and switching cost. However, marketers should also be cautious about the customer values that work against brand loyalty. The sole customer value that falls into this category for online customers is the functional value of price or interest rate for savings deposits. The negative determinants of brand loyalty for offline customers are the functional value of establishment and societal value. Societal value works positively in terms of generating positive word-of-mouth but works against repeat-buying. This signifies the importance of delivering the functional value of quality correctly; otherwise it might backfire when societal value is implemented. Moreover, the corporate value of reputation is likely to be the prime driver of brand loyalty

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