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Customer Switching Behavior in the New Zealand Banking Industry 2007

Customer Switching Behavior in the New Zealand Banking Industry 2007

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Banks and Bank Systems, Volume 2, Issue 4, 2007

Michael D. Clemes (New Zealand), Christopher Gan (New Zealand), Li Yan Zheng (New Zealand)

Customer switching behavior in the New Zealand banking industry

Global deregulation of the banking industry that began in the early 1980s has contributed to increased customer switching. This situation is also evident in the New Zealand banking industry. However, limited research has been published in academic marketing journals focusing on switching behavior in the banking industry. This study identifies and examines the factors that contribute to bank switching in New Zealand from the customer’s perspective. Data for this study were obtained through a mail survey sent to 1,960 households in Christchurch, New Zealand. Logistic regression is used to analyze the data and determine the impact the factors have on customer switching behavior in New Zealand. The logistic regression results confirm that customer commitment, service quality, reputation, customer satisfaction, young-age, and low educational level are the most likely factors that contribute to customers’ switching banks.
Keywords: customer Switching behavior, New Zealand banking industry, Logit Choice Model. JEL Classification: G20, M30.

Introduction Traditionally, banks have dominated the financial service sector for many years due to government regulation, the high cost of entry, and the physical distribution networks (Reber, 1999). During the 1980’s, the international banking sector coped with the international level of deregulation. More recently, banks have been confronted with increased competition from both financial institutions and non-banks institutions (Hull, 2002). New competitors, such as non-bank institutions, have entered the market as cross-border restrictions have been lifted. New technologies, such as the Internet, have also boosted the entrance of new competitors during the last few years and banks now must compete with new types of products created through the Internet (Gonzalez and Guerrero, 2004). The deregulation and the emergence of new forms of technology have acted to create highly competitive market conditions and consumers are now more price and service conscious in their financial services buying behavior (Beckett, Hewer and Howcroft, 2000). Many of the changes in the international banking environment are also evident in the New Zealand banking industry. The banking industry in New Zealand was one of the first industries to feel the effects of competition and an open-market philosophy when New Zealand deregulated its economy in 1987. Colgate (2000) suggests that the New Zealand banking industry has been subject to a free market entry with no price controls, and few restrictions on product offerings since 1987. The banking industry has experienced considerable change in response to deregulation, technology, and a more sophisticated and demanding customer (Ashill, Davies, and Thompson, 2003). In addition, traditional lines of demarcation have largely disappeared and several institutions compete more aggressively over a wider product range.
© Michael D. Clemes, Christopher Gan, Li Yan Zheng, 2007.

Therefore, New Zealand banks are not only competing among each other, but also against non-banks and other financial institutions (Hull, 2002). To date, only one major New Zealand bank (Kiwibank) is locally owned, while the other four (ANZ Banking Group Ltd./National Bank of NZ Ltd., Westpac Banking Corporation, ASB Bank, and Bank of New Zealand) are Australian owned. Furthermore, increased competition, funding restraints, and the adoption of new technologies have reduced the number of bank branches and increased the use of automatic teller machines and other electronic transaction mechanisms (Denys, 2002). Many New Zealand banks have employed customer retention strategies to compete aggressively in a more competitive banking environment. Customer retention is logical as the longer a customer stays with an organization, the more profits the customer generates (Reichheld and Sasser, 1990). Long-term customers tend to increase the value of their purchases, the number of their purchases, and produce positive word of mouth (Carole and Ye, 2003). In addition, from a cost perspective, retaining an existing bank customer costs less than recruiting a new one. New Zealand bank customer behavior has also changed over several decades due to deregulation, more intense competition, and new technology (Ashill et al., 2003). Colgate (1999) found that the New Zealand banking industry had an annual switching rate of four percent, however at any one time, 15 percent of personal retail banking customers claimed they intended to switch banks. Similarly, Garland (2002) employed a Juster scale to estimate a total defection rate of ten percent from a customer’s main bank in one geographic region in New Zealand. Research related to the insurance and banking industries in New Zealand determined that the percentage of customers who seriously considered switching service providers but remain with their current provider was 22 percent in the banking


1993). 1990). pricing issues (fee. Mollenkopf. service failures. inserarability. customer commitment. it is important that banks not only know the number of customers they are retaining and losing. and demographic characteristics. and Davis. These incidents were: inconvenience. hetrogeneity. However. The additional factors are: effective advertising competition. there has been little empirical research focused on the factors that have impact on bank switching behavior in the New Zealand banking industry. unprofessional). 2000). Therefore. Colgate and Hedge (2001) identified three general problems. Keaveney’s (1995) switching model does not accurately assess the relative weight of these issues on a customer’s decision to switch service providers (Colgate and Hedge. ethics. 1. it does not necessarily mean that the problem will be an important influence on a customer’s eventual decision to switch banks. service encounter failure. consumer switching behavior may be different because services are distinguished from goods based on five special characteristics: intangibilty. inaccessible. 1996) and switching behavior importance (Mittal and Lassar. Zeithaml. 1996). 1990. perishability. and involuntary switching. 1996. and attraction by competitors. and denied services (denied loan. even though a problem may occur frequently and cause switching in some service industries. 1995. 1999. previous studies have highlighted that service quality and satisfaction are related to service switching (Bitner. Instead. Although it is acknowledged that service quality and customer satisfaction are important drivers of service switching. Mittal. other researchers. In addition. Previous research on switching behavior Bass (1974) initially applied brand-switching models to analyze market share in the goods market. competition. but also understand the underlying factors influencing their customers to switch banks. 2001). Although many international studies emphasize why customers switch service organizations (Keaveney. The purpose of this research is to identify and examine the factors that contribute to bank switching in New Zealand from the customer’s perspective. such as Lewis and Bingham (1991) and Colgate. and services issues. This research focuses on these factors that are supported in the literature and includes additional factors that have been identified in focus group sessions.These special characteristics usually result in the absence of a tangible output in services and they distinguish services from goods (Gronroos. and ownership (Clemes. additional research is necessary to ascertain the applicability of Keaveney’s (1995) generalized switching model to the banking industry. 51 . Issue 4. However. Gerrard and Cunningham (2000) also identified six incidents that they considered to be important in gaining an understanding of switching between banks. and Kinsalla (1996) have summarized reasons why customers switch banks. Berry. 2001). and Parasuraman. service encounter failure in the retail industry (Kelley. reputation. pricing. Service switching is a growing research area in marketing. thus these studies’ contribution to the development of switching behavior was limited. service quality. inflexible. The model includes eight factors influencing service switching: pricing. responses to service failure. attitude or knowledge of staff. Furthermore. Ross. Therefore. Stewart (1998) suggested four types of switching incidents that relate to how customers were treated: facilities. 1998.Banks and Bank Systems. 1996). For example. events and non-service factors that may cause service switching (Levesque and McDougall. and Baldasare (1998) indicated that the unique characteristics of switching behavior in specific service contexts such as banking may be masked when generalized models are directly applied. unacceptable behavior. Zeithaml. In addition. and Sasser. emphasis is being placed on classifying the specific problems. The factors have been based on a thorough review of the literature and additional information obtained from focus group interviews. and Parasuraman. Stewart (1998) and Gerrard and Cunningham (2000) have studied customer switching behavior in the banking industry. Keaveney (1995) uses a generalized model to examine consumer switching behaviour across a broad spectrum of service providers including banks. the authors investigated a range of matters associated with the banker-customer relationship. However. The factors that are identified and supported in the literature include price. effective advertising competition. no advice) that contributed to customers’ switching banks in New Zealand. inconvenience. service failures (mistake. Berry. 1995). for services. and Burn. provision of information and confidentiality. Volume 2. Hoffman. Reichheld. Levesque and McDougall. Zeithaml. service products. core service failure. and Parasuraman. involuntary/seldom mentioned incidents. response to service failure. charges. interest rate). 1987). researchers have emphasized the need to shift away from a sole focus on these broad evaluative concepts of service. customer commitment. Stewart. demographic characteristics. and involuntary switching. and perceptions of quality in the banking industry (Rust and Zahorik. Several studies have revealed that the following factors contribute to customer switching: dissatisfaction in the insurance industry (Crosby and Stephen. customer satisfaction. Berry. 2007 industry (Colgate and Lang. 1990).

except demographic. This finding suggests that unfavorable price perceptions may have a direct effect on a customer’s intention to switch. 1998). Colgate and Hedge (2001) empirically confirmed that pric- . in the context of banking. Issue 4. 2007 2. 2004). Price factors. Volume 2. but also impose interest charges on loans and pay interest on certain types of accounts. Demographic characteristics have a positive or negative relationship with switching behavior as they are indeterminate factors.Banks and Bank Systems. Factors influencing customer switching behavior All of the factors in this study.1. Banks charge not only fees for the services. that contribute to customer switching behavior show negative relationships (see Figure 1). Price (-) Reputation (-) Responses to service failure (-) Service quality (-) Customer Satisfaction (-) Switching behavior Binary variable Service products (-) 1 = Switched banks 0 = Did not switch banks Customer commitment (-) Demographic characteristics (+/-) Effective advertising competition (-) Involuntary switching (-) Independent variables Fig. For example. 52 Dawes (2004) empirically demonstrated that price increases were associated with increasing defection rates in automobile insurance. Similarly. price is something that must be given up or sacrificed to obtain certain kinds of products or services (Zeithaml. Pricing. Theoretical research model 2. in a qualitative study of customer switching among services. 1. From a customer’s cognitive conception. has additional components. thus pricing has a broader meaning in the banking industry (Gerrard and Cunningham. switching banks is considered as a negative customer behavioral outcome. Keaveney (1995) reported that more than half the customers had switched services due to poor service/price perceptions.

1994). 2001). customer satisfaction serves as an exit barrier to help an organization retain its customers and lower its switching rate (Fornell. Stewart (1998) argued that dissatisfaction in relation to a particular problem or incident may not be sufficient to cause a customer to exit. Singh (1990) referred to the voluntary termination of an exchange relationship. and Radi. if recovery efforts are poor. Customer satisfaction factors. 1992). Customer switching. Gounairs. 1998) and there is growing evidence that many banks are concerned with their reputation and its effect on market behavior. However. 2007 ing had the most impact on customer switching in the New Zealand and Australian banking industries. management effectiveness or some combination of these various factors that appeal in one way or another to a bank’s multiple customers. or the service failures may be so bad that even a good service recovery will not change the customer’s decision to switch banks (Colgate and Norris. is often the result of a customer complaining and then experiencing the bank service provider’s recovery efforts (Colgate and Norris. in the banking industry. For exit. Oliver (1997) offered a formal definition that “satisfaction was the customer’s fulfilment response and it was a judgment that a product or service feature.3. it is an evaluation rendered that the experience was at least as good as it was supposed to be” (p. 2001). especially in the retail banking industry. or by having the customers interact with the bank’s automatic teller machines (ATM). The exit is likely to be promoted when the customer remembers prior instances or when the same problems have emerged. These situations may result from a perceived lack of exit barriers by the customer. Keaveney (1995) empirically confirmed that responses to service failure were a factor contributing to customer switching behavior.4. service failures are inevitable because the bank-customer interaction is influenced by many uncontrollable factors (Stefan. 2004). 2. In addition. 1990. where quality cannot be evaluated accurately before purchase (Nguyen and Leblanc. or the recovery may not fully compensate unfavorable incidents that bank customers have experienced. 459). Customers who gain satisfaction from services are inclined to repeat purchase. Researches suggest that bank reputation is regarded as an important factor in customers’ bank selection decisions (Erol. Financial services are often provided at a service counter with direct contact between a bank’s employees and the customer. and even leave. Thus. or by telephone.2. Customers may become more dissatisfied. In the banking industry. Hunt (1977) stated that “satisfaction is not the pleasure of the experience. the author also stated that tolerating a problem on one occasion does not mean that the problem “dies” as a lack of response to service failures may also exaggerate the circumstance and increase the likelihood of a customer switching banks. 2003). 13). 1995). or complaining formally to third parties in order to help seek redress. Lo. In contrast. Rao (1994) suggested that bank reputation was a function of financial performance. Churchill and Surprenant (1982) conceptually considered satisfaction as “an outcome of purchase and use resulting from the buyer’s comparison of the rewards and costs of the purchase in relation to the anticipated consequences” (p. Based on previous definitions. Although banks try to provide error free services. The first historical phase in the study of corporate reputation was from the 1950’s to the 1970’s (Balmer. Volume 2. and Hui. Reputation factors. Customer satisfaction is often recognized as a main influence in the formation of customers’ future purchase intention (Taylor and Baker. The authors argued that a good reputation may enhance customers’ trust and confidence in banks. and 53 . Many researchers have provided different definitions of customer satisfaction. Yue and Tom. Responses to service failure factors. Gerrard and Cunningham (2004) investigated switching incidents for Asian banks and empirically demonstrated that bank reputation was one of the primary factors that contributed to customers switching banks. Issue 4. provided a pleasurable level of consumption-related fulfilment” (p. complaining to acquaintances (negative word of mouth). Simultaneity in delivering and receiving a service is a common characteristic in the banking sector. Customers may also be satisfied with the recovery they have received but still exit. Gerrard and Cunningham (2004) also referred to bank reputation as the integrity of a bank and its senior executives and the bank’s perceived financial stability.Banks and Bank Systems. whereas an unfavorable reputation tended to strengthen a customer’s decision to switch banks. Athanassopoulos. Service failures may lead to customer dissatisfaction. Ahamad and Kamal (2002) found that dissatisfied customers contributed to an increase in the switching rate. Bank reputation plays an important role in the determining the purchasing and repurchasing behaviors of customers (Wang. Hirschman (1970) demonstrated that service failures could provoke two active negative responses: voice and exit. 2. or the product or service itself. Day and Landon (1977) described the notion of voice by explaining that voice can be complaining to the service provider. 2. 2001). Kaynak. 493). Customer loyalty is similarly enhanced. production quality. service quality.

price. 2. courtesy. The service quality dimensions used in this research to analyze the relationship between service quality and bank switching behavior are based on an extensive literature review and the results of focus group sessions. and targets. Gronroos (1984a. Service quality factors. Zeithaml. vice delivery. Kamilia and Jacques (2000) suggested that perceived service quality resulted from the difference between customers’ perceptions for the service offered by the bank (received service) and their expectations from the bank that provided such services (expected service). in a study of an Australian trading bank. service specifications. 1991). plus additional specific features. Several studies revealed that the wide range of bank service products offered to customers was one of the most important .Banks and Bank Systems. 2002). and reliability. 2000). in the context of banks. and Berry’s (1988) SERVQUAL measurement in order to gain insights into service quality from the customers’ perspectives and to improve the understanding of the determinants of customer satisfaction. Philip and Bart (2001) found that bank customers had high expectations about the staff that deliver the service. reliability. Bahia and Nantel (2000) identified six perceived service quality dimensions in the banking industry: effectiveness and assurance. alternatively.6. Issue 4. If a bank promises to do something by a certain time. 2007 Stathakopoulos (2001) investigated the relationship between customer satisfaction and switching behavior in the Greece banking industry. 1988.5. may be represented in a number of ways (Parasuraman. efficiency. and staff that deliver services. Zeithaml. SERVQUAL as a measurement instrument. For example. that customers were concerned about staff appearance. and knowledge. Parasuraman. The authors argued that the inconvenience dimension was negatively associated with customers switching banks. they engage in unfavorable behavior responses (e. The SERVQUAL methodology has also been used in assessing banking service quality. access. For example. The inconvenience dimension includes two aspects: geographical inconvenience and time inconvenience (Gerrard and Cunningham. Colgate and Hedge (2001) and Gerrard and Cunningham (2004) have empirically confirmed that inconvenience was an important factor that influenced customers to switch banks. the bank should provide the customer with its decision within the specific time frame. In the context of banking. communication. Ennew and Bink (1996) used factor analysis to identify three banking service quality dimensions in the United Kingdom: knowledge and advice offered. Wymer. Service products factors.g. Zeithaml. and Berry (1988) employed the expectation-perceptions gaps definition of service quality to define perceived service quality as the degree of discrepancy between customers’ normative expectations for the service and their perceptions of service performance. Reliability has a time component. and access to teller services. and Chen. The authors empirically confirmed that the perceptions of high customer satisfaction are negatively related to switching behavior. switching banks). Keaveney (1985). Bahia and Nabtel. personalization in the ser54 2. when bank customers have inferior perceptions of customer satisfaction. Many banks have employed the quality of service as a sustainable competitive advantage because products offered by most banks are almost identical and are duplicated easily. Rust and Oliver (1994) suggested that service products include a core service. performing poorly on the reliability dimension prompted customers to switch banks. identified four valuable service quality dimensions: staff conduct. tangibles. 2004). Colgate and Hedge (2001) and Gerrard and Cunningham (2004) empirically demonstrated that an unfavorable experience with the staff that deliver the service was a principal factor that caused customers to switch banks. and the five SERQUAL dimensions identified by Parasuraman. as a service quality dimension. and Berry (1985. 1984b) suggested that the perceived quality of a given service was the outcome of an evaluation process where consumers compared their expectations of the service with the service that they experienced in the service encounter. the bank should do so. Volume 2. Reliability. They represent a customer’s overall impression of his/her banking service experience. Levesque and McDougall (1996) adapted a selection of service quality items from Parasuraman. In this scenario. Service quality has become an increasing important factor for success and survival in the banking industry. Good perceived quality was achieved when expected service quality was at least equal to experienced service quality. credibility. Avkiran (1994). The former refers to either the nearest bank branch or automatic teller machine (ATM). and general product characteristics. have been used in the banking industry (Zhu. The three dimensions are: inconvenience. Colgate and Hedge (2001) found that. Zeithaml and Berry. 1985. in particular. while the latter refers to shorter opening hours. service portfolio. a bank customer may have applied for a loan and the bank’s guidelines mandate that the customer will be advised of the outcome within forty-eight hours of the loan application.

In a relationship marketing context. Customers’ demographic characteristics have been widely used to distinguish how one segment of customers differs from another one (Kotler. East. Gordon (2003) empirically confirmed that committed customers were less likely to switch than consumers who lacked commitment to an organization. normative commitment bound the customer to the service provider out of perceived obligation.8. Involuntary switching is. The attitudes of customers toward advertising professional services had become more positive with greater expected customer benefits and customers still favored increased usage of advertising to guide their purchasing. Kamal. for the most part. Therefore. Ahmad.Banks and Bank Systems. high-income customers and customers with a higher education. 1982). From a customer-basis. and Taylor (2004) extended Allen and Meyer’s (1990) model to a customer setting where commitment is conceptualized as a force that binds an individual to continue to purchase services (i. From the organizational behavior literature. 1995. In a banking context.. and normative commitment may mediate the relationship between satisfaction and intention to leave (Clugston. In a three-component model. the authors also suggested that affective commitment bound the customer to the service provider out of desire. There is evidence from the marketing literature that supports the contention that commitment mediates relational exchanges (Garbarino and Johnson. Customer commitment factors. which in turn. In terms of assessing customer switching in the context 2. 2000). 2. Blanchard and Galloway (1994) argued that advertising created a sterile image. In addition. Volume 2. Allen and Meyer (1990) defined three commitment constructs: affective commitment. Balmer and Stotving (1997) suggested that advertising. and to help make services more tangible (Lovelock. There is also evidence in previous research that supports the contention that additional demographic characteristic such as gender. not switch) from a service provider. income and education may have an effect on customers switching banks. This exploratory study treats commitment as a single construct as measuring it at the particular psychological state that underlies the construct would add substantially to length of the questionnaire. including switching behavior. regardless of their level of commitment. and Narain (2001) defined involuntary switching as an unwilling behavior by customers. Involuntary switching is measured in this study as the in55 . and Khalid. and continuance commitment bound the customer to the service provider out of need. Devlin (1997) has suggested that effective advertising should add value in the eye of the customer. Colgate and Hedge (2001) empirically examined Australian and New Zealanders’ banking behavior and found that switching banks was more common with younger customers. Patterson. 2. customer commitment was seen as an attitude that reflects the desire to maintain a valued relationship. race. Bansal. and Narain. continuance. 1998). 1996. could contribute to customer switching.7. demographic characteristics. East. The authors also empirically demonstrated that involuntary switching could force customers to switch service providers in the service sector (Keaveney. 1999). Lomax. Lomax. 2001). 1995). Similarly. beyond the control of marketers but is included in many switching behavior models (Keaveney. was blamed for reinforcing the similarity of financial service providers. Ogilvie (1997) empirically determined that a lack of service products for bank customers was a major factor that caused bank switching. to educate customers about service features and applications. In particular.9. to reduce risk. The authors also suggested that involuntary switching could be attributed to a customer moving house and to a service provider opening and closing facilities. research supports that affective. such as age. Dube and Shoemaker (2000) suggested that there is also a need to understand switching behavior from a relationship marketing perspective. continuance commitment. the author proposed that effective advertising competition could provide bank customers with more opportunities for their purchasing choices.e. Issue 4. who suggested that banking products appeared to be central to customer behavioral intentions. 2.10. 1999). Effective advertising competition factors. are less likely to switch banks than those customers who lack any commitment. Involuntary switching factors. rather than differences. In a service context. 2007 criteria for customers when they select a bank (Levesque and McDougall. Hite and Fraser (1988) suggested two significant consequences for customers’ attitude changes toward advertising professional services. such as banks. of banking. to establish or redefine a competitive position. and Walker. advertising is most commonly used to create awareness and stimulate interest in the service offering. Demographic characteristics factors. Irving. and occupation have an impact on customer switching behavior in the banking industry. as a means of marketing communication. The contention is that committed customers. and normative commitment. Ogilvie’s (1997) finding was also supported by Kiser (2002).

Pin = P (Uin 56 Ujn ) i. which is represented as: Uin = Vin + in (3) i Jn and Jn = {0. . (1) where f is the function relating the observed data to the choice probabilities specified up to some vector of parameters. For example. 1993). The choice probability can be specified as a parametric function of the general form: Pin = f (zin. 1985. Train. if it is assumed that the random term is normally distributed. By labeling the vector of all relevant characteristics of person n as rn and the vector of all characteristics of alternative i chosen by person n as xin. j Jn and i j.0. and deriving functions for the choice probabilities (Ben-Akiva and Lerman. sn. Jn. Volume 2. and sn are the observable characteristics of decisionmaker n. A logit model was used in this research because of the binary nature of the approach. given data observed by the researcher. j Jn (5) 3. Qualitative choice models designate a class of models. Qualitative choice model of customer switching behavior. ). zjn. rn) U (xjn. The consumer’s utility associated with switching bank is denoted as U1n. In addition. a systematic component that depends only on the factors that the researcher observes and another that represents all factors and aspects of utility that are unknown or excluded by the researcher. Estimation of parameters to maximize the probability of the choice Yi = 1 by use of a linear probability model and ordinary least squares (OLS) is not acceptable due to the return of probabilities outside the unit interval. U (xin. 1993. and the differences between the two models are slight (Maddala. = positive scale (6) Under relatively general conditions.1. i. Pin = 1 / ( 1+ e [Vin-Vjn] (2) i. and the utility associated with staying with the current bank is denoted as U0n. However. j ). j Jn and j i). which attempt to relate the probability of making a particular choice to various explanatory factors and calculate the probability that the decision-maker will choose a particular choice or decision from a set of choices or decisions (Jn). Thus. such as logit and probit. for (i. Uin = U (xin . summarized as Vin. Greene. Different qualitative choice models are obtained by specifying different distributions for the unknown component of utility. Methodology and Data hence. the use of a linear probability model results in heteroscedastic errors and as a consequence.Banks and Bank Systems. rn ) for all i in Jn . (7) where Zin are the observed attributes of alternative i. jn - in) i. 1985. To specify the choice probability in qualitative choice models. asymptotically efficient and asymptotically normal. the maximum likelihood estimator is consistent. The utility from each alternative depends on various factors. a clear meaning of the choice probabilities emerges from the derivation of probabilities from utility theory. including the characteristics of the alternative and the characteristics of the decision-maker. t-tests of significance are not valid. Their choice can be said to be deterministic and they will choose i (i Jn) if U (xin. If the random term is assumed to have a logistic distribution. Probabilities must be between zero and one. consumers who are considering switching banks are faced with a simple binary choice situation: to switch to a new bank. the utility can be expressed as a function of these factors. the decision-maker therefore choose the alternative from which they derive the greatest utility. in. This choice probability (Pin) depends on the observed characteristics of alternative i (zin) compared with all other alternatives (zjn. Qualitative choice models are used to predict probabilities of choices being made and they attempt to relate the probability of making a particular choice to various explanatory factors. rn). sn ) + in. the choice probabilities can then be expressed as Pin = e Vin / j Jn e Vjn parameter. Uin = U(xin . (4) The consumer will choose to switch to a new bank if U1n > U0n and the utility of each choice depend on the vector of observable attributes of the choices and the vector of observable consumer characteristics. rn) for each i in Jn is decomposed into two sub functions. Issue 4. the set of alternatives. Thus.. then the above represents the standard binary logit model. then the model becomes the binary probit model (Maddala. 1986). rn ) = V(Zin . Pin = P (Vin-Vjn and i j. For these reasons it is preferable to use either a logit or probit model. for all j in Jn and j i) and on the observed characteristics of the decision-maker (sn). Ben-Akiva and Lerman. or to stay with the current bank. labelled in . 3. > 0 or. The model is estimated by the maximum likelihood method used in LIMDEP version 7. All unobservable and excluded . 2007 clusion of the construct aids in identifying all of the factors that contribute to bank switching behaviour.1}. 1990). Based on Marshall’s consumer demand theory of utility maximization. By relating qualitative choice models to utility theory.e.

A profile of sample respondents is presented in Table 1.49 Non-switching banks Frequency (No.32 185 50. 3. two focus groups (each consisting of 10 bank customers who had recently switched banks) were conducted under the guidelines suggested by Hair.960 households in Christchurch. EDU. a pretest. 2007 attributes and consumer characteristics are represented by the error term. The dependent variable is based on the question asked in the mail survey: “Have you switched banks in the last five years?” SBANK = 1 if the respondent has switched banks. ETH. CS (-) = Customer Satisfaction. GEN.44 45 50. SP (-) = Service Products. For the value of dummy variables. designing the layout of the survey instrument.56 89 100.68 365 100. SBANK.74 15 4.960 mailed out surveys resulting in a useable response rate of 23. while 80. Bush. The respondents answered the statements in the questionnaire and were requested to comment on any questions that they thought were ambiguous or unclear. New Zealand. IS (-) = Involuntary Switching.96 30 8. Some minor rewording of the statements in the questionnaire was required as a result of the pretest. the literature that contributed to switching banks. of respondents per option) % Gender Valid Female Male Total 18-24 25-30 31-35 36-40 41-45 46-50 51-55 56-60 61-65 224 49. RP (-) = Reputation. A total of 454 useable surveys were returned within 14 days from the 1. AGE.91 34 7.34 230 50. measures an individual who has switched banks.2.96 28 7. Data. In switching banking decision. conducting the focus group interviews. the vector of observable attributes of the choices and the vector of observable consumer characteristics are represented in the following parametric functional form: SBANK= f (PR. that is assumed to be independently and identically Gumbel-distributed.00 29 6. From the total of 454 useable questionnaires.66 454 100. 0 otherwise. The participants were also asked to discuss those factors that they considered to be the most influential in their decision to switch banks. CC.00 9 10. IS. In order to develop a suitable questionnaire.36 7 7. PR (-) = Price. The questionnaire design involved operationalizing the factors contributing to switching banks.39 29 6. Table 1. A seven-point Likert scale was selected for the questionnaire. INC. SP.62 4 4.48 16 4. of respondents per option) % 44 49. SQ (-) = Service Quality.67 40 10.68% males.6% (89) of the respondents switched banks during the last five years. Participants in the focus groups were asked to discuss all of the factors identified in 3. A pretest of the questionnaire was conducted from a random sample comprising 30 customers who had previously switched banks.71 45 9.39 15 3. they were encouraged to identify and explain any additional factors that were not previously identified in the literature but may have contributed to their switching behavior.3. EAC.32 40 10. RSF.11 8 8. RP. Questionnaire development.6%.32% females and 50. The sample respondents were comprised of 49.49 Switching banks Frequency (No.Banks and Bank Systems. (8) where the discrete dependent variable. of respondents per option) % 180 49. Consequently.22 Age Valid 57 . The choice probability of U1n > U0n is given as P1n = Prn (U1n > U0n) = 1 / (1+ e .87 5 5. EAC (-) = Effective Advertising Competition. and the development of the final survey instrument. Data for this analysis were obtained through a mail survey sent to 1. DC. and Ortinau (2000).30 24 5.[V1n-V0n]).61 5 5. The names and addresses for the mail survey were randomly drawn from the 2005 Christchurch Telephone Book. RSP (-) = Responses to Service Failure. Issue 4. Research by Schall (2003) has determined that a seven-point Likert scale is the optimum size when compared to five and ten point scales. the questions used a standard sevenpoint Likert-type scale ranging from Strongly Disagree (1) to Strongly Agree (7). In addition.11 34 9.23 35 7.25 51 11.11 13 14. in. CC (-) = Customer Commitment. = Error term.4% (365) of respondents did not switch banks. ). DC (+/-) = Demographic Characteristics.99 11 12. Volume 2. Profile of respondents Variables N Total respondents Frequency (No. SQ. see Appendix 1. where > 0.29 42 9.61 9 10. OCC.38 10 2. 19.00 20 5.

11 17 19.56 9 2.75 11 3.000 $10.29 365 100.01 36 9.000-$49.000-$89.22 5 5.04 49 10.12 35 9.37 27 5.15 65 17. of respondents per option) % 7 7.60 46 12.59 12 3.03 13 3.15 29 6.98 8 1.76 4 0. was used and the results indicate that there is no evidence of a late response bias in this study.37 1 0.00 85 23.39 2 0.000-$29.27 7 1.05 32 8.92 14 3.00 Switching banks Frequency (No.79 16 3.00 Education Valid Occupation Valid Income Valid 4.85 1 0.999 $40.56 82 18.12 3 3.75 37 10.74 454 100.62 5 5.49 89 100.00 21 23.30 6 1.84 365 100.74 3 3.000-$39. the means scores across the first 110 respondents who replied in the first week were compared with those of the last 110 respondents who replied in the second week.99 89 100.999 $20.12 19 21.60 70 19.19 7 1.14 74 20.74 5 5.35 5 5.77 22 6.88 454 100.34 7 1.54 2 0.25 1 1.00 8 2.10 15 16.86 17 3.000-$19.24 3 3.48 21 23.00 1 1.85 1 0.61 6 6.74 57 12.60 14 15.99 89 100.11 24 6.000 $120.99 13 14.999 $80.96 56 12.999 $30. Profile of respondents Variables N Total respondents Frequency (No.35 23 5.20 35 7.96 9 1.69 454 100.78 91 20.33 58 12.999 $60. The majority of the questionnaires were returned during the stated two week period.68 64 17.37 89 100.999 $90.00 365 80.00 0 0.62 0 0.95 18 3.00 50 11.77 40 8. Issue 4.74 44 9.00 6 6.84 46 12.71 4 0. However.19 5 1. Volume 2.07 37 8.03 2 2.27 365 100.52 454 100.74 8 8.63 21 5.00 11 12.Banks and Bank Systems. Empirical analysis All of the items in the questionnaire used to measure each construct were subjected to reliability tests using a Cronbach’s Coefficient Alpha cut-off value of 0.58 23 6.24 26 5.01 76 16.85 6 6.24 12 13.37 10 11. as suggested by Armstrong and Overton (1977).19 99 27.80 44 12.00 65 73.00 9 1. 1979).12 4 4.47 8 2. Extrapolation.59 14 3.000-$69.00 300 82.88 160 35.86 365 100.64 3 0.74 2 2.000-$120.49 1 1.39 8 1.81 82 18.76 13 2.36 12 13.000+ Total 28 6.82 141 38.81 18 3.00 106 23.62 6 6.27 25 6.27 36 100.48 9 10. of respondents per option) % 21 5.44 10 2.06 454 100.000-$99.12 18 20.98 117 25.00 Non-switching banks Frequency (No.44 29 6.73 4 4.000-$79.29 15 4.999 $50.999 $70.18 35 9.37 8 8.17 40 8. 58 .25 1 1.73 17 3.000-$59. 2007 Table 1 (continued).00 38 8.92 25 6.49 10 11.37 89 100.999 $100.62 4 4.53 48 13.00 39 10. of respondents per option) % 66-70 71-75 76+ Total Ethnic background Valid NZ European NZ Maori Pacific Islander European North American South American Asian Others Total Primary education Secondary education Fifth form Bursary Trade qualification Diploma Bachelor degree Postgraduate degree Others Total Professional Tradeperson Student Clerical Labor Unemployed Retired Sale/Service Home maker Others Total Under $10.60 8 8.06 59 13.87 3 3.60 (see Table 2) as suggested for newly developed questionnaires (Churchill.

30.749 Cronbach Alpha = 0. 37. Table 2. 33.g. The service products offered did not satisfy my specific needs. The bank was financially unstable. 17. 7.902 Cronbach Alpha = 0. The bank was untrustworthy. Service products 27. 2. Bank branches in my area were closed. 26. credit cards). The bank branch locations were inconvenient.861 Items Reliability test Cronbach Alpha = 0. 12.856 Cronbach Alpha = 0. loans. The bank charged high fees. 25. Bank staff did not have the competence to solve problems. together with the demographic characteristics the logit equation was estimated. 20. 34. The bank provided services that were not as promised. You wanted to continue a relationship with the bank. 2007 The scores of the items representing each construct were totalled. 15.839 Cronbach Alpha = 0. The bank provided low interest rates on savings accounts. Banks staff did not understand my specific needs. and a mean score was calculated for each construct. Cronbach Alpha = 0. You intended to remain a customer of the bank. Responses to service failure 8. 9. I moved to a new geographic location.860 Cronbach Alpha = 0. The bank was unreliable. Bank staff were unwilling to help me. Staff that deliver services 19. 4. Effective advertising competition 29. 22. The bank did not inform me of changes in services. 11. mortgages. Bank staff did not make me feel safe when doing transactions. The reliability test for the measures of switching banks Constructs Price factors 1. The bank’s opening hours were inconvenient. 28. Volume 2. Accessing automatic teller machines was inconvenient. 3. Reputation factors 5. I was not satisfied with my banking experience. 36. The bank corrected mistakes slowly. Bank staff did not make any extra effort to solve problems. 14. The bank did not offer a wide range of service products (e. 6.891 Cronbach Alpha = 0. Bank staff were slow to provide services.861 59 . Customer satisfaction 10. Customer commitment 32.. I will not stay with the bank as a customer.634 Cronbach Alpha = 0. I would not recommend the bank to others. Bank staff did not readily respond to my requests. The competing bank’s advertising humor influenced my decision to switch banks. Using these means.861 Cronbach Alpha = 0. The competing bank’s advertising words influenced my decision to switch banks. 23. The bank charged high interest for mortgages. The bank charged high interest for loans. Involuntary switching 35. 18.Banks and Bank Systems. Bank staff were impolite and rude. 21. Service quality dimensions Convenience 13. My bank account was administrated incorrectly. You were very committed to the bank. 31. Reliability 16. The bank moved to a new geographic location. Bank staff were not professional. 24.952 Cronbach Alpha = 0. Issue 4. The estimated results are presented in Table 3. The competing bank’s advertising content influenced my decision to switch bank.

374 0. creating an obligatory relationship. 2004) or developing a level of trust that helps to enhance customer commitment (Berry and Parasuraman.042* 0. and low educational level. and Taylor. through increasing customer commitment may also reduce the number of customers who switch to other banks. The results of the empirical analysis identified that the following factors: customer commitment. Marginal effects of customers’ switching behavior Variables Customer commitment Service quality Reputation Customer satisfaction Low-education levels Young-age groups Constant Marginal effect -0.67% probability that customers will switch banks.47% probability that customers will switch banks. Based on the results of the marginal effect. poor service quality. Similarly.126 27.0219 0.397 1. A unit decrease in the service quality score results in an estimated 4. such as subjective norms (Bansal.234 0.998 S. Volume 2. 0. bank management should develop the strategies that encourage commitment among their customers.001* 0.153 0.56% probability that customers will switch banks.880 1. 2007 Table 3. 5.05 level.048 9. 5.000* 0. The results confirm that a bank with a bad reputation is more likely to cause customers to switch banks. A unit decrease in customer satisfaction score results in an estimated 4. such as those with a primary education. young-aged group. Service quality has the second highest impact on switching behavior. Irving. the marginal changes in the probability for reputation indicates that a unit decrease in the reputation score results in an estimated 3. gained in part. The fourth most important factor is customer satisfaction. The research model and the empirical findings of this research have some practical implications for bank managers.Banks and Bank Systems.181 0. young-aged group. This research reveals that a lack of customer commitment had the strongest influence on a customer’s decision to switch banks. For example. Discussion The marginal effect suggests that a unit decrease in customer commitment score results in an estimated 5. In Table 3. customer satisfaction.416 -0. bursary.E.000* 0. reputation is the third most important factor contributing to custom60 .786 33. customer satisfaction.128 13.0367 -0. For example. and low educational level are significant at 0. However. Hence. Table 4 also shows that the probability of switching banks increases by 2. the coefficient values for the other factors are not significant. or trade qualification.1. lack of customer commitment. young-age group (18 to 40 years). or do not switch banks.146 0.0258 0.590 -0. customer commitment.0547 -0.05 level. reputation. Managerial implications. low education and youngaged group rank as the fifth and sixth most important factors influencing the switching behavior. Issue 4. and low-education have the highest probabilities associated with switching the banks.733 -0.56% probability that customers will switch banks.588 8. service quality. the coefficient values for reputation. The logit model used in this study may also provide managers with an insight into an empirical methodology that will assist them in their primary research when they analyze the reasons their customers switch.19% for lower educated customers.000 Note: * Significance at the . service quality. customer commitment is the most important factor that has impact on switching behavior when compared to all of the marginal effects shown in Table 4. or do not switch banks.0456 -0.002* 0.0122 0. 0. Logistic regression results Variables Reputation Customer satisfaction Service quality Customer commitment Yong-age group Low-education level Constant B -0. Bank managers may use the research model of switching behavior developed in this research as a framework to investigate the reasons why their customers switch. Achieving higher levels of customer commitment should result in more favorable behavioral intentions and should reduce the number of customers switching the banks.727 Wald 10. Table 4.788 8. Additional information on switching behavior is obtained through the analysis of the marginal effects.560 Rank 1 2 3 4 5 6 ers switching banks.879 1.005* 0. This is also the case for poor customer satisfaction.967 4. A higher bank reputation. 1991).130 df 1 1 1 1 1 1 1 Sig. Thus.

Bank managers also need to ensure that they have the technology in place that provides accurate recordings of all transactions between customers and the bank. Nguyen and LeBlanc. For convenience. 1990. The demographic findings of this research are also consistent with some of the research results of Colgate and Hedge (2001) conducted on Australia and New Zealand banks. starting a new job. Poor service quality may also have a negative impact on customer satisfaction (Brady. Bank management should conduct the research on this segment to determine the type of service products that may help to satisfy this segment. Conclusions The findings of this research are consistent with the research results of Gerrard and Cunningham (2004). managers need to ensure that all domestic and international transactions are secure and accurate. Zeithaml. 1995. Zeithaml and Bitner (1996) and Gronroos (1984a. and also provides the technological support required by their employees. 2001). regardless if they are high or low contact staff. This may require bank managers to develop specific people strategies for this segment so employees can improve their understanding of this segment’s specific needs and offer suitable technical advice and appropriate services. In particular. bank managers should operationalize the following strategies. Previous research has suggested that a high price (e. and switching behavior. and Stathakopoulos (2001). high education and customers’ switching behavior. and assisting with any transactions associated with the changing circumstances and needs of this segment.. The authors found that switching behavior was most common with younger-aged and less educated customers. high and low income. bank charges. getting married or starting a family. customer commitment. and Brand. solving service prob- lems promptly. the results do differ from some of the findings of Colgate and Hedge (2001) who also determined that there were significant relationships between older-aged. Gordon (2003). 1984b) suggested that employees are of prime importance in service organizations because they are the service organization in the customer’s eyes. This is particularly important for the New Zealand banking sector as it will be operating in a changing financial environment during the coming decade. 2000. they are all part time marketers. 2001). interest charges on loans) and low interest paid on accounts have an impact on customer switching behavior (Keaveney. service quality. Cronin. For reliability. This research has also found that respondents with lower educational accomplishments are inclined to switch banks. renting or buying a house. dealing effectively with dissatisfied customers. These authors found significant relationships between reputation. 2002). Therefore. and Keaveney (1985). encouraging loyalty programs for younger consumers. The results indicate that bank reputation is the third most important factor that influences customers’ decisions to switch banks. Colgate and Hedge (2001). The findings also suggest that young-aged customers are more likely to switch banks. In order to improve a bank’s performance on the dimensions of service quality identified in this study. Managers should ensure all instructions to customers are clear and easily understood and they should use human resource strategies and internal marketing programmes to hire and retain capable employees. Vendelo (1998) suggests that reputation was a highly visible signal of an organization’s capabilities and that reliability provided information about future performance. Athanassopoulos. customer satisfaction. 2007 The findings also confirm that a higher level of service quality is important as poor service quality influences customers to switch banks (Bitner. However. Bank managers should seek to develop customer satisfaction strategies that focus on some of the drivers of satisfaction such as meeting customers’ desired-service levels. and Parasuraman.g.Banks and Bank Systems. Volume 2. It is logical that younger customers have a higher likelihood of leaving their bank as they often must adjust to substantial changes in their lives. such as leaving school. Gounairs. 1996). Bank management should offer youngaged customers attractive opportunities to remain with their bank such as providing ample information about other branches in different geographic areas. Gounaris. moving to different locations. preventing service problems from occurring. This study identified customer satisfaction as the fourth most important factor contributing to customers switching banks. Berry. bank managers may seek to improve the accessibility and delivery of their service products such as offering more geographically dispersed automatic teller machine (ATM) and making phone banking and electronic banking more user-friendly. and Stathakopoulos. bank management needs to strive to maintain the reputation of their bank and that of national brand at the highest level to help improve customer retention. and confronting customer complaints positively to enhance customer satisfaction and encourage favorable behavior intentions (Athanassopoulos. Colgate 61 . Issue 4. a good reputation helps to increase sales and exploits profitable marketing opportunities (Miles and Covin. Waterhouse and Morgan (1994). and they drive success in the service quality dimensions.

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2007 83.g. Income Level 2. London. Under $10. Zeithaml. 1 if respondent completed high education (e.A.. 1 if respondent is high incomer level (e. Econometrics. Unemployed. 85. pp. 1 if respondent is white-collar (e. Taylor. T. 120-37. 1. Pacific Islander. 0 otherwise..g. 89. 0 otherwise. 1 if respondent completed Diploma. Age group 3. Bachelor Degree. International Studies of Management and Organization. INC (+/-) = Dummy variables for annual income levels: Income Level 1.P. A. Issue 4. 0 otherwise. 0 otherwise. pp.999). “Narrating Corporate Reputation”. 90. 70. (1994). “Using research to help to keep good customers: understanding the process of customer defection and developing a strategy for customer retention”. Y.A.. Vol. and Chen. (2002). 1 if respondent age is from 61 to over 75 years old. 4.. International Journal of Service Industry Management. primary. 88. and Tom. Zhu.A. F. Vol. Vol. 3. 0 otherwise. L. New Zealand Mario. K. OCC (+/-) = Dummy variables for occupation status: Occupation status 1.000 and over). Tradesperson. Sales). 91. Zeithaml.V. Vol. W. Ethnic background 2. Journal of Retail Banking. (1996). 31-46. Qualitative Choice Analysis – Theory. Journal of Retailing. 0 otherwise. Postgraduate Degree). 1 if respondent is a student. “The Behavioral of Consequence of Service Quality”.g. 84. 13. and trade qualification). (1986).g. G.X.L. H. 219. I. XVI. S. “IT-Based Services and Service Quality in Consumer Banking”. Vol. Educational qualification 2. 0 otherwise. 163-78. (2003).. No. 22. Income Level 3. No. 86. V. 1 if respondent is middle income level (e.G. and Baker. “How the Chinese Select their Banks”. Appendix A Value of dummy variables for gender to income GEN (+/-) = Dummy variables for gender: 1 if respondent is a male. 0 otherwise. Berry. No. Lo.. V. (1994). 0 otherwise.g. Train. (1995).. 87. labour. and Parasuraman. 1 if respondent is blue-collar (e. 1.. Educational qualification 3. Occupation status 3. 7 pp. (1998). Vendelo. Home Maker). Retired. M. AGE (+/-) = Dummy variables for age group: Age group 1. Vol. No.g. and Binks M.Banks and Bank Systems. Vol. Age group 2. Y.. Clerical. bursary. “An Assessment of the Relationship between Service Quality and Customer Satisfaction in the Formation of Consumers’ Purchase Intentions”. Marketing & Research Today. No. 69-90. McGraw-Hill. fifth form. 0 otherwise.(1996) The Impact of Service Quality and Service Characteristics on Customer Retention:Small Business and Their Banks in the UK". Occupation status 2. $60.L. 1 if respondent ethnic background is New Zealand European.230. Jr. 181-94.T. ETH (+/-) = Dummy variables for ethnic background: Ethnic background 1. Waterhouse. Yue. Winter No.J. pp. 0 otherwise. Ennew C. and Bitner. $30.. Managing Service Quality. British Journal of Management. 60. pp..g. and an Application to Automobile Demand. EDU (+/-) = Dummy variables for educational qualifications: Educational qualification 1.g. New York.g. (1996). pp. 1 if respondent completed low education (e. Services Marketing. Vol. Asian). Wang. 0 otherwise. 72-83. 92. 3. pp. Occupation status 4. and Morgan. 1 if respondent age is from 40 to 60 years old. 0 otherwise. 0 otherwise. Wymer. Massachustts: MIT Press. 0 otherwise. 13. “The Antecedents of Service Quality and Product Reputation: Evidence from the Banking Industry in China”. 1 if respondent age is from 18 to 40 years old. M. Cambridge. South American. A. 1 if respondent is low income level (e. Journal of Marketing. secondary. professional. K. North American. 2.000-$59. and Hui. farmer). H. 1 if respondent ethnic background is Others (e. 1 if respondent is Others (e. 28.999). Volume 2. 0 otherwise. 65 ..000-$29.

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