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Relationship Marketing: the

Importance of Customer-Perceived
Service Quality in Retail Banking
Maria Holmlund

The Service Industries Journal

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Relationship Marketing: The Importance of
Customer-Perceived Service Quality in
Retail Banking

MARIA HOLMLUND and SOREN KOCK

During the last couple of years relationship marketing has been

introduced within services marketing since more efficient,
profitable and long-term marketing can be achieved by focusing on
present customers instead of concentrating on attracting new ones.
Retail banks have in this respect had a unique position as they have
a well-developed system of local offices that enable them to be
close to and to establish relationships to their customers. A
prerequisite for a bank that wants to establish long-term customer
relationships is satisfied customers who want to remain customers.
In other words, the service quality as perceived by the customers
must at least meet their expectations. Otherwise there is a
possibility that a dissatisfied customer starts searching for another
bank offering similar services, resulting in a break in the
relationship with the bank, with which he was dissatisfied.

LONG-TERM RELATIONSHIPS
In the traditional marketing mix model [McCarthy, 1960] the focus of
marketing activities is primarily directed towards attracting new customers
instead of keeping present ones and the underlying assumption is that the
market consists of a very large number of customers. The model is based on
the assumption that the customers and their needs are more or less
homogeneous and that defecting customers can be replaced with new ones.
Consequently, the transactions are admitted to be short-term. The
predominant marketing theory is placed within this marketing management
paradigm.

Maria Holmlund is at the Swedish School of Economics and Business Administration,

Department of Marketing and Corporate Geography, PO Box 479, FIN-00101 Helsingfors,
Finland.
Soren Kock is at the Swedish School of Economics and Business Administration, Department of
Marketing and Corporate Geography, PO Box 287, FIN-65101 Vasa, Finland.

The Service Industries Journal, Vol.16, No.3 (July 1996), pp.287-304

PUBLISHED BY FRANK CASS, LONDON
288 THE SERVICE INDUSTRIES JOURNAL

However, a marketing paradigm based on long-term relationships has

arisen as the traditional marketing mix model, i.e., product, price, place
and promotion making up the 4 Ps, does not fully take into account the
characteristics of services, which compared to goods are more
heterogenous, abstract processes where consumption, delivery and
production take place simultaneously and where there is no ordinary
transfer of ownership [Gronroos, 1990]. Parallel to this development
within services marketing and management also industrial marketing has
witnessed a shift of focus since the 1970s towards interactions,
adaptations, exchanges, commitment, long-term orientation and industrial
networks. [IMP Group, 1990; Morgan and Hunt, 1994]. Services
marketing as well as the interaction and network theory stress the
important of long-term relationships between customer-service provider
and industrial buyer-seller, respectively. In addition, both approaches are
built on interactions taking place within long-term relationships between
customers and sellers.
A firm can through long-term relationships with customers get access to
detailed and useful knowledge about the customer and because of this
knowledge be able to develop a core group of satisfied committed
customers. Also Kotler [1991b] states that we now see a shift of paradigm
emerging within marketing theory as focus in the future will be on long-
term relationships instead of on short-term exchange transactions. The
purpose of relationship marketing can be defmed as [Gronroos, 1990: 138]:
[similar defmitions of relationship marketing can be found in Jackson,
1985; Gummesson, 1990]. 'Marketing is to establish, maintain, and enhance
... relationships with customers and other partners, at a profit, so that the
objectives of the parties involved are met. This is achieved by a mutual
exchange and fulfilment of promises.'
Unfaithful customers cause firms considerably losses every year
[Treutiger, 1993]. Furthermore, the number of unfaithful customers is
increasing because of the present recession and price activities. In other
words companies have tried to buy customers from their competitors by
offering discounts. The consequence is that the customers have not been
faithful to a specific product or firm. They have switched whenever they
have got lower prices or charges. There has not been any encouragement or
advantage for the customers to stay with a product or a firm. To put a stop
to this switching behaviour the companies are now implementing activities
to retain their customers. The strategies can be to build databases for direct
marketing, to issue membership cards, to give discounts when exceeding a
certain amount, to decrease the general price level, to have the same
commission for a seller instead prolonging an old contract as for acquiring
a new customer.
CUSTOMER-PERCEIVED SERVICE QUALITY IN BANKING 289

Relationships in Service Firms

Service firms have started to identify their customers, which enables them
to be more focussed in their marketing. They have membership cards, or
cards for regular customers. In the USA the insurance company USAA has
achieved a 98 per cent retention rate [Reichheld, 1993] in the auto insurance
field. The base consists of a stabile, but very mobile segment of military
officers. USAA created a centralised database and telephone sales force.
The customers have access to the sales force anywhere in the world. When
a customer moves he does not have to get in contact with a new local sales
representative, and USAA does not have to transfer information about the
customer from one local office to another.
Airline companies are another category that has been using cards for
frequent flyers for a long time. By using the same airline a customer can
collect points accumulate. When (s)he has a certain amount of points he can
exchange them for a fiight or a stay at a hotel, or for renting a car.
The shift towards keeping existing customers is associated with three oft-
cited rules of thumb from service management [Barnes and Cumby, 1993;
Liswood, 1989]: '[1] it costs five times more to attract a new customer than
to keep an existing one, [2] it takes 12 positive service experiences to
overcome a negative one, and [3] 25 to 50 per cent of the operating expense
of a company can be attributed to poor service quality - to the cost of not
doing it right the first time.' These rules are not yet empirically tested, but
they are, of course, illustrative rules of thumb when setting quality goals in
service firms.
Gummesson [1995] has developed 30 Rs to replace the 4 P mix in service
firms. The 30 Rs are different firm internal and external relationships
derived from the purpose with the relationship. He stresses the importance
of choosing which customers to have relationships with and the importance
of examining costs and revenues associated with every relationship. Barnes
and Cumby [1993] suggest that 3 Rs, i.e., Relationships, Retention and
Recovery, should be the guidelines for creating and maintaining long-term
relationships for service firms.

Relationships in fndustrial Firms

The interaction and network theory illustrates how stability of relationships
between buyers and sellers arises by introducing the construct bond, which
ties the firms together in ways that both create opportunities and constraints.
The bonds are outcomes of adaptations and investments made by the
interacting partners aiming at higher efficiency and more cost effective
exchanges. The bonds are usually divided into five categories
[Hammarkvist, HJkansson and Mattsson, 1982]:
290 THE SERVICE INDUSTRIES JOURNAL

L Technical bonds implying that the products have been adapted for
specific uses, for example credit cards, that only can be used in one
bank's teller, and thereby bind the customer to that specific bank.
2. Planning bond indicates, e.g., that the customers are restricted by the
bank's opening hours.
3. Knowledge bonds arise when interactions take place, as information is
exchanged and the bank and it's customers learn about each other and
each other's capabilities.
4. Social bonds emerge among individuals as they become acquainted with
each other, e.g., during playing golf in their leisure time.
5. Legal and Economic bonds emerge when contracts and other agreements
are signed and when payments are made.

Relationships in Retail Banking

In retail banking legal and economic bonds between the bank and its
customers are very strong as customers usually have to sign a contract when
lending money or making other fmancial agreements with the bank. The
contracts determine in detail many ofthe commitments that that parties have
to fulfil. Social bonds between the customer and the management or other
employees in the bank can also be strong, because of the trust, and
knowledge developed during both formal and informal face-to-face
contacts. Finally, technical bonds and planning bonds are present if the
customer has no option regarding bank or geographical location but has to
become and stay customer in the one and only bank available. If the
customer is dissatisfied a shift of bank can be impossible if: there are no
perceived or real alternatives available; or the bonds, particularly the
economic and legal bonds, function as high exit barriers. In these situations
the relationship between the customer and the bank can be long-term, not
because the customer is satisfied with bank but because he is forced to stay
with the bank. Many times when the customer is dissatisfied he can not even
use voice [Hirschman 1970], because the bank dominates the relationship
and dictates the conditions. If for instance a new bank enters the market or
if a contract expires, the customer will probably immediately change to the
new bank or behave differently next time a contract is negotiated.
The purpose of this article is to discuss the concept of relationship
marketing within bank services marketing and how it is affected by
customer-perceived service quality. Empirically a mail survey was carried
out in a specific small tovra area, where two retail banks dominate in market
share. The aim of the survey was to obtain information related to the
relationships between the banks and their customers as well as to find out
how satisfied the customers were with the bank services and what problems
the customers experienced with the banks and their services.
CUSTOMER-PERCEIVED SERVICE QUALITY IN BANKING 291

CUSTOMER ORIENTATION

Relationship marketing differs from the traditional marketing mix model as

the main emphasis is on maintaining long-term relationships to customers.
Furthermore, it is more advantageous and profitable to develop new
products for present customers instead of trying to find new customers for
present products. This is illustrated by Entenmann's bakery [Reichheld,
1993], which sought to find reasons for declining sales. The primary reason
was a change in consumer preferences: as they grew older and became more
aware of their health, customers began to to prefer non-fat and non-
cholesterol bakery products. Entenmann's consequently decided to develop
bakery products which met these new needs and were thus able to maintain
their customer relationships and probably create new ones.
Firms generally consider themselves producers of goods whereas the
customers acquire means to satisfy their needs and wants [Kanter, 1992]. To
the buyer a good is simply a resource that enables him to satisfy a need; for
instance, Nike sells shoes whereas the shoe buyer buys tools for carrying
out sport activities, and a bank handles financial transfers and a bank
customer fulfils his/her 'dreams'. Correspondingly, a washing machine
represents [Gummesson in Edvardsson and Thomasson, 1991] a 10-year
package of washing services.
Customer-oriented service processes and a service-minded personnel
must function as bases for the firm's marketing activities in order for the
firm to succeed with a marketing-oriented approach focusing on customer
needs. In the 'Core Concepts of Marketing' the starting point for marketing
is the customers' needs, wants and demands [Kotler, 1991b]. However,
often the marketing-oriented approach extends only to a slogan and in its
business the firm continues to focus on itself and its internal efficiency. The
firms believe that they are marketing-oriented when seeking customer
opinion of current products, whereas the customer believes that a firm is
market-oriented when their opinions guide the design of products. In other
words, it is essential for a market-oriented firm to focus on the customer's
needs in the first phase of the developing process. Japanese car
manufacturers surpass their competitors in introducing products such as
small-sized cars, and technical solutions affecting security and comfort
which car buyers world-wide appreciate and are prepared to pay for.
Also within retail banking the customer's needs have not always been
uppermost, although the banks like to say so. Quite often banks, especially
in the Nordic countries, have introduced credit cards, which have made
cheques more or less obsolete. This kind of change was not requested, or
even desired by the customers, it was the need for the banks' internal
efficiency which shaped the way people are paying for their purchases.
292 THE SERVICE INDUSTRIES JOURNAL

Retail banks do most of their product development centrally at the

headquarters, which is situated far away from most ofthe regional offices.
The headquarters generate, analyse, develop and test new services, which
later will be offered by all offices belonging to a banking group. Despite the
fact that some banks are locally ovmed, they offer the same bank services as
every office belonging to the particular banking group.

CUSTOMER-ORIENTED SERVICE PROCESSES

An important issue for service firms is how to standardise the services and
how to produce them efficiently, i.e., how to industrialise service
production. There are a large variety of internal programmes which assist in
developing efficient production processes. Unfortunately, these
programmes tend to stress internal processes and internal efficiency and
largely ignore elements like customer-perceived service quality or external
quality. For example, computer systems are too often designed to support
the internal efficiency, which means that external customers have
difficulties in reading and understanding invoices and documents that have
to be filled out, as well as time-consuming and complicated procedures.
The production system of service firms consists of two parts: a supportive
and an interactive part [Gronroos, 1990]. The supportive part comprises
systems support, management support and physical support, enabling the
employees to produce the services. Although this part is invisible to the
customers it does not mean that it cannot be designed with the customer in
mind. The customer encounters the interactive part of the production
system, i.e., personnel, systems, operational resources, physical resources
and, of course, other customers when he buys, orders, uses and consumes
the services.

Service-Minded Personnel
The personnel of a service firm is responsible for delivering a service that
meets the needs and the expectations ofthe customers. Many ofthe contact
personnel are not titled marketers but can rather be called part-time
marketers [Gummesson, 1990] as they are highly responsible for creating
and developing relationships with the customers but are not employed in the
firm's marketing department. If, for example, a customer calls to ask about
an invoice, it is crucial that the person who takes the call treats the customer
in a market-oriented way, regardless of in which department this person is
located. A satisfied customer will further act as a firm's part-time marketer
when (s)he tells friends about the good service ofthe firm.
For employees acting as part-time marketers it is not enough to smile, but
rather to be fair and to take responsibility for their actions. An essential
CUSTOMER-PERCEIVED SERVICE QUALITY IN BANKING 293

prerequisite for this is that the management gives the personnel power to
carry out their duties and to make the customers satisfied. In retail banking
personnel empowerment has been implemented and the employees are
constantly trained to become team workers, customer oriented and to learn
about the bank services. The banking groups regularly arrange internal
competitions among the bank offices and the prize sum is granted the office,
not a single person.

CUSTOMER PERCEIVED SERVICE QUALITY

Too often there is no or little congruence between the image of the service
communicated by the service firm and the service actually delivered. This
leads to unmet customer expectations and probably to dissatisfied lost
customers, who have lost their faith in the firm and its ability to keep their
promises. Within the service sector this is quite common. For example,
travel agencies often promise more than they can deliver, which damages
their reputation and results in complaints, dissatisfied and lost customers
and bad word-of-mouth publicity affecting their bottom line since resources
are spent on correcting mistakes and trying to develop new promises and
ways to attract customers.
The importance of measuring service quality was recognised in the
beginning of the 1980s and thereafter much attention has been devoted to
the issue. Quality measurement in manufacturing firms has a long tradition
but the focus has mainly been on internal quality and statistical quality
[Juran, 1982; Deming, 1986] Measuring quality in service firms can not be
done using the same methods since services substantially differ from goods.
Service quality has to focus primarily on external quality, i.e., on total
perceived service quality by customers.
Customers have expectations of services they are going to consume based
on earlier experiences, communication, image, word-of-mouth and the
customer's need. In the consumption phase the customer compares his/her
experiences to their expectations regarding a technical and a functional
dimension of the service. The technical dimension refers to 'What' the
customer receives, or what he has left after the interaction is over. The
functional dimension refers to 'How' the service is received, or social fit,
systems, atmosphere and so on. The image of the service firm acts as a filter
between the experienced services and the two service quality dimensions. If
the customer is dissatisfied he can to some extent overlook the
dissatisfaction and regard it a temporary failure that will not repeat itself
[Gronroos, 1990]. Within industrial marketing one additional dimension has
been found equally important to the consumer, namely an economic
dimension [Holmlund and Kock, 1993, 1995]. The economic and quality
294 THE SERVICE INDUSTRIES JOURNAL

dimension refers to the value that a customer receives in a relationship, and

comprises elements like profitability and productivity. The consumer has to
feel that he 'gets' something from the relationship if the relationship is to be
continued. Perceived value can be defined as the ratio of perceived benefits
relative to perceived sacrifice [Monroe, 1991].

THE MAIL SURVEY

The survey was carried out in autumn 1991. The population consisted of
residents living in a certain area of a smaller town in western Finland.
Beside two local retail banks' head offices, three additional banks are
located in the area. The situation corresponds to the rest of the country,
which has five major banking groups. A sample of 200 respondents was
randomly drawn from a register and they received a letter of introduction
and the questionnaire by mail. A week later a letter reminding them of the
survey was sent out and the respondents could also take part in a lottery if
they filled out a coupon. The prize sum was a US$100 cheque. The response
rate was 56.5 per cent, which is satisfactory in this kind of survey dealing
with a subject that is relatively sensitive to the respondents.
We used a Problem Detection Study [PDS] to measure service quality,
which is particularly suitable for quality surveys. The questions are stated in
a negative form because the assumption is that it is easier for customers to
criticise and that it highlights issues not found in questionnaires with a
Likert or Osgood scale. A PDS questionnaire consists of two columns, in
the first the respondent is asked to note 'How large is the problem' and in
the second 'Is it important for you to get an improvement.' A five-point
scale was used, ranging from 4 to 1 and 0 as does not know, a higher number
implies a larger problem and more important for the customer to get an
improvement, i.e., a more acute problem for the management to solve.
The quality problems in the questionnaire were generated from: earlier
empirical studies conceming service quality in retail banking; discussion
with customers; and discussions with the management and employees in
one of the local banks. Discussions with customers, employees and the
management helped in finding and generating existing quality problems to
be studied. Employees in daily contact with the customers are particularly
well acquainted with the quality problems a customer may perceive. Finally,
open-ended questions were used in order to find out additional quality
problems as perceived by the customers not included in the study. Very few
respondents answered the open-ended questions, but a few had some
comments and clarifications regarding the quality problems in the
questionnaire.
CUSTOMER-PERCEIVED SERVICE QUALITY IN BANKING 295
Empirical Results
The results are shown in three columns containing the average importance-
of-problem score, the average need-to-improve score, and the average of the
previous score called 'Quality Problem Score'. The results are ranked so the
highest quality problem score comes first.

TABLE 1
QUALITY PROBLEMS IN RETAIL BANKING

How large is Is It important Quality

the problem lor you to get an Problem
improvement? Score
1. The bank does not have an ATM 3,3 2.7 (3.0)
2. The bank charges too much for changing currency 2.6 2.6 (2.6)
3. The bank should be open longer one evening every week 2.5 2.5 (2.5)
4. The bank does not arrange evenings lor information 2.3 2.6 (2.4)
5. The bank should focus more on the customer 2.2 2.7 (2.4)
6. It is difllcult to change bank when all my loans are in my
present bank 2.2 2.4 (2.3)
7. The bank ties the customer to him and then starts charging
different fees 2.0 2.6 (2.3)
8. The bank charges too much when I pay bills 2.0 2.4 (2.2)
9. The bank does not inform about different services 1.8 2.5 (2.1)
10.The bank does not hand out enough marketing gills 2.0 2.1 (2.1)

The result from the PDS survey (Table 1) show that no quality problem
score exceeds 3.0, the maximal quality problem score amounts to 4.0. The
highest quality problem score is 3.0, which can not be regarded a highly
acute problem. We have chosen to account for the highest ranked 10 quality
problems that received a quality problem score of over 2.0. The
questionnaire included a total of 41 quality problems, divided into five
different categories named access, charges, information, barriers and
customer orientation.
The first category, access, consists of quality problems indicating that it
difficult for the respondents to get access to bank services. The problems
are: lack of ATM, early closing hours (quality problems Nos.l and 3). The
lack of an ATM causes many problems for the customers because they
cannot obtain cash 24 hours a day. Bank customers are used to a very
widespread net of ATMs and that they are open around the clock.
Furthermore, the banks' opening hours are from 9 a.m. to 4 p.m., making it
difficult to get cash or to take care of banking business for those who work
between 8 a.m. and 4 p.m.
In the second category, the common problem is that the banks charge too
much for their bank services (quality problems Nos.2, 8, and partly 7). In
296 THE SERVICE INDUSTRIES JOURNAL

the mid-1980s the banks began to charge for services. The customers have
not been very happy about this and have not fully accepted this new system.
Obviously they do not feel that they receive value for money. From the
bank's point of view the motive for charges is that it is difficult to become
profitable without charging for bank services and that those who tise the
services should also pay for them.
The third category, lack of information, refers to the fact that customers
feel that the banks should provide more information about their services
(quality problems Nos.4 and 9). Another way for banks to raise their profile
is to sponsor children's cultural and sporting events. In our stirvey we asked
the respondents what they knew about different banking services and on
average they were familiar with what services the banks provided. They did
not, however, know that the banks provided insurance and that it is possible
to have accounts in foreign currencies.
The fourth category, exit barriers built by banks (quality problems Nos,6
and partly 7), were accepted to some extent because there is a
power-dependence side of the relationship. Some of the respondents felt
that they were trapped by their bank because ofthe barriers, which made it
more or less impossible to switch to a different bank, A customer who has
loans from a bank generally finds it difficult to move to another bank,
because the loan contract binds not only the loan accounts but also other
accounts held by the customer. In other words, a customer is forced to
continue the relationship because of high exit barriers, not necessarily
because of satisfaction with the bank. Many customers feel that banks create
these exit barriers and when the customer is looked up then the bank starts
charging for bank services.
The last category is that the banks are not sufficiently customer-oriented
(quality problems Nos.5 and 10). Accordingly, the respondents feel that
banks too often focus on their own profits and internal processes instead of
the customer's needs, and that internal systems are not built with the
customer in mind.
The market studied is more or less divided between the two banks. Bank
A has 47 per cent of the market share, measured in terms of number of
customers, and bank B 43 per cent. Market share according to loans is
equally even, bank A has 49 per cent and bank B has 49 per cent. Finally,
market shares according to which bank the respondents regard their main
bank, bank A has 47 per cent and bank B has 51 per cent.
Customer-bank relationships are long-term, the majority ofthe customers
having been with the same bank for more than 20 years, in some cases more
than 60 years. Table 2 shows the relation between the respondents' age and
the length of the customer-bank relationships. In the first group,
respondents born in the 1920s, the average length ofthe relationship is 36,5
CUSTOMER-PERCEIVED SERVICE QUALITY IN BANKING 297

years. The variance is between 11 and 60 years. Among those bom in the
1930s the interval ranges from 16 years to 50 years. The difference between
respondents bom in the 1920s and 1930s is small. Respondents bom in the
1940s have remained with the same bank from between 1 and 30 years, the
average is 19.4 years. This group is close to those which follow: namely
those bom in the 1950s and 1960s. The averages in these groups are 18.8
years and 18.7 years, respectively. In all the three groups only a few
customer-bank relationships have been shorter than 10 years. The average
in the last group, children of the 1970s, is 15.3 years. In other words, the
relationships seem to be stable and long-term as the customers continue to
use the same bank year after year.

TABLE 2
THE LENGTH OF CUSTOMER-BANK RELATIONSHIPS

The length of the Customer bom in

relationship 1920s 1930s 1940s 1950s 1960s 1970s Total
< 5 years 2 2 2 6
5-10 years 8 2 10
11-20 years 3 3 8 6 5 5 30
21-30 years 6 5 5 4 14 13 5
31-40 years 7 4 3 14
41-50 years 4 2 6
51-60 years 2 2
Respondents 22 14 15 21 23 8 103

Table 3 shows that almost 50 per cent of the respondents have been
customers in many banks simultaneously, meaning that it is common among
the customers to use two or more banks, having parallel bank relationships.
Primary bank refers to the main bank of the respondent, i.e., where his/her
major loans are and the bank (s)he has regular contacts with, for instance
when paying bills. Secondary bank refers to a bank where the respondent
has an account that is occasionally activated or a bank office (s)he
occasionally visits.
Bank A is a dominating bank in the area, which the respondents consider
either their primary or secondary bank. Many of the respondents considered
bank B their secondary bank, because many opened an account with it in
kindergarten or at school, in connection with events arranged by the bank,
and have not closed it even if they are no longer active customers. Bank C
had been the only financial institution handling state tax refunds. The high
ratings won by bank B and bank C as a secondary bank show a general
reluctance to close accounts that are no longer used, and this leads to a great
deal of passive customers, and idle relationships for the bank.
298 THE SERVICE INDUSTRIES JOURNAL
TABLE 3
SECONDARY BANKS OF THE RESPONDENTS

Secondary Customer
bank bom in

1920s 1930s 1940s 1950s 1960s 1970s Total

Bank A 6 4 0 2 3 1 16
Bank B 5 3 4 3 8 0 23
BankC 4 4 3 5 4 1 21
Respondents 15 11 7 10 15 2 60

In a follow-up question the respondents who have changed bank were

asked to state their reason for doing so. The reasons for the change were
mainly the concentrating of banking business to one bank, high rates of
interest, or low rates on deposits,

MAINTAINING RELATIONSHIPS

It is more or less impossible for a service firm to maintain relationships to

all potential customers. Instead the service firm must be selective and
establish and maintain relationships in accordance with costs and revenues
attached to customer relationships. Consequently, the service provider must
know the customers' buying behaviour and buying pattern. Appropriate
combinations of qualitative and quantitative research methods can be used
for this purpose. Methods that purely measure market shares are not very
helpful, because they cover historic data, do not tell much about the
underlying reasons for the situation and can contain a large amount of
unprofitable customers.
Since the 1980s the traditional cost accounting systems have been
questioned. They do not provide the management with an accurate picture
of costs associated with relationships. Service firms with large overhead
costs especially suffer from this kind of problem [Hussain and Kock, 1995],
Activity-Based Cost [ABC] [Cooper and Kaplan, 1991] systems have been
developed and implemented as ways of measuring the costs for different
activities. Service firms in particular can benefit from ABC because ofthe
extensive amount of indirect costs, A firm that wants to achieve long-term
profitability has to remember that it can only do so with the help of satisfied
customers, not by achieving a large market share alone. Furthermore, a cost-
oriented firm will often focus on high-marginal products and cut out low
marginal products. The obvious problem is that hereby the customers' needs
are forgotten, Johnson [Edenhammer, 1993] points out that it is important to
measure continually how satisfied the customers are. It is better to have
CUSTOMER-PERCEIVED SERVICE QUALITY IN BANKING 299

fewer customers who buy more at a profit than many customers who buy a
little, with high associated handling costs. Within industrial marketing this
assumption has been shown to be important, and, in fact, usually 80 per cent
of the sales come from 20 per cent of the customers. Some researchers make
the assumption that 20 per cent of the customers generate 225 of the profits.
Particularly manufacturing firms implementing ABC have come to this
amazing conclusion. Manufacturing companies implementing ABC instead
of a traditional cost accounting system have profits from individual orders
varying from between minus 179 per cent to plus 65 per cent, 40 per cent of
the customers are profitable, generating together 250 per cent of the profit
[Cooper and Kaplan 1991].

Activities to Retain Customers Must Be Implemented

The service firm has to develop different programmes in order to retain the
customer relationships, to know how satisfied the customers are, and to
build customer databases. The banking sector in the Nordic countries has
become deregulated and consequently the banks must ask themselves if
they have any unique competencies or competitive advantages compared to
other firms, mainly foreign banks, supplying substitutes [Urwitz, 1993].
The answer may be that over a long period of time the banks have built
long-term relationships with their customers. The well-developed system of
local offices has facilitated the closeness, individual service, good contacts
and flow of information between the banks and their customers.
Banks as well as other firms have started to notice that a customer-seller
relationship must be maintained several years before it becomes profitable.
Reichheld [1993] states that in the United States it takes up to four years
before break-even can be reached owing to high initial costs, e.g., costs for
advertising and personal selling.
An important issue regarding relationship marketing is the importance of
relationships built between individuals, the service firm's employee and the
customer. If the turnover among the employees is high then it is difficult to
build long-term relationships because generated knowledge about
customers will disappear as the employee leaves. The process of
establishing relationships will have to start practically all over again.
Generally, in retail banking each office has a database of customers and
what kind of bank service they have consumed. Consequently, a bank can
send out information to a certain category of customer, for example fanners,
informing them about new services targeted at this segment or inviting them
to various events. Furthermore, different bank charging conditions are valid
depending on the customer's amount of deposits in the bank, as are different
programmes according to the life-cycle of the customer.
300 THE SERVICE INDUSTRIES JOURNAL

Recovery of Quality Failures

When a quality failure emerges it is very important that it is dealt with in a
proper way so that the customer feels satisfied, accepts the mistake and
stays with the firm. For the firm is essential that the focus is not on the extra
costs of correcting single quality failures. Instead the focus must be on the
total costs caused and revenues generated from maintaining the customer
relationship. That is, the focus has to be on consequences for the
relationship from a long-term perspective and on preventing the problems
from occurring again.
Fomell [1992] uses the term defensive marketing when stressing the
importance of maintaining existing relationships instead of aggressively
chasing new customers. Customer satisfaction is the key to success and the
maintenance of long-term relationships. With the help of long-term
relationships marketing can be cheaper and more selective. Kordupleski,
Rust and Zahorik [1993] state that quality can have both an offensive and a
defensive effect. The offensive effect is achieved when satisfied customers
communicate a positive image by word-of-mouth and thereby attract new
customers. They define the defensive effect in the same way as Fomell.
The difficulty in standardising services lies in their heterogeneity and
intangibility, which require different quality systems to reach a specific,
necessary and acceptable level of quality. Another important aspect is how
the employees are trained, and how able and willing they are to correct
quality failures experienced by the customer. When correcting a failure an
interesting issue is whether the customer should receive more than just a
correction of the service. The Scandinavian airline company SAS has, for
example, implemented a guarantee that applies to passengers who have
confirmed a flight but cannot be offered a seat. Between Scandinavia and
America the guarantee is US$200 or a SAS cheque for US$300 if the delay
is up to four hours. When the delay is more than four hours the cash
guarantee is US$400 or a SAS cheque for US$500. The aim is, of course, to
have a satisfled customer although something in the service production
process has failed.
In retail banking, service recovery is limited to the value of the failure. If
the bank forgets to pay an invoice and the customer is billed interest for late
payment, the bank pays the interest because the fault was theirs. The bank
does not pay or give the customer anything more.

CONCLUSION
The purpose of this study has been to offer a general background to
relationship marketing which during the last years has developed as an
CUSTOMER-PERCEIVED SERVICE QUALITY IN BANKING 301

alternative way of handling marketing in service firms [see for example

Christopher, Payne and Ballantyne, 1991; McKenna, 1991; and Gronroos,
1994]. The traditional marketing paradigm has not been able to provide us
with an understanding of and tools for handling and developing customer
relationships. However, service marketing and management as well as the
interaction and network approach within marketing are based on the
assumption that long-term relationships are the basis for firms wanting to
satisfy their customers and thereby do profitable and productive business.
Consequently, a service firm has to act in a market-oriented fashion, start
from what the customers need and be able to deliver the service quality
expected. A satisfied customer is the prerequisite for a long-term
relationship.
Our survey shows that the relationships have a long-term character and
that the oldest, exceeding 60 years, are found among respondents bom in the
1920s. The average length of the studied customer-bank relationships was
24 years. No major quality problems occurred in the study, only minor ones
related to the access of bank services.

TABLE 4
TYPE OF QUALITY PROBLEM

Type of Quality Problem Quality Dimension

Technical/Functional/Economic

1. The bank does not have an ATM Functional

2. The bank charges too much for changing currency Economic
3. The bank should be open longer one evening every week Functional
4. The bank does not arrange evenings for information Functional
5. The bank should focus more on the customer Functional
6. It is ditTicult to change bank when all my loans are in one
bank Functional
7. The bank ties the customer to him and then starts charging
different fees Economic
8. The bank charges too much when I pay bills Economic
9. The bank does not inform about different services Functional
10. The bank does not hand out enough marketing gifts Functional

In Table 4 we have applied each specific perceived quality problem to the

three dimensions of quality discussed earlier. We can see that the quality
problems in this study can be divided into two dimensions: functional and
economic. None of the quality problems belonged to the technical quality
dimension. The economic dimension is new in the quality models and has
previously been dealt with mainly within industrial services. The economic
quality problems have to do with how much the banks charge for different
302 THE SERVICE INDUSTRIES JOURNAL

services and the customer's feeling of being trapped by exit barriers and
therefore forced to pay the fees which the bank charges. An interesting issue
is how much these economic quality problems affect the customer's total
perceived service quality. It is, however, not a good sign for the bank and its
quality programme if customers are dissatisfied with the value they receive
in the relationship with the bank. Despite the perceived dissatisfaction the
customers seem to stay with the bank and do not disrupt the relationship.
The customers seem to become used over time to issues that caused
dissatisfaction previously, for instance the recently introduced fees caused
much anger at the beginning but the customers seem to have accepted them
now.
The functional quality problems consisted of a lack of an ATM in the
area, short opening hours, lack of information and the banks' inability to
focus on the customers and their needs. The vast majority of these quality
problems concem access to bank services. Without access to an ATM or the
banking personnel the customers can hardly use the bank's services,
particularly if they are informed about other bank services. The functional
quality problems, however, again seem to be a minor part in the customers'
total perceived service quality. Further studies are needed in order to detect
how important different quality problems are in the customers' total
perceived service quality model before we know more about the level of
dissatisfaction that causes the customers to disrupt a relationship. Some of
the quality problems are very difficult to solve because costs, particularly in
connection with an ATM, and the extended opening hours are higher than
expected revenue.
It is difficult to generalise the results because the sample is small. Some
implications, however, can be drawn. According to our study we can
conclude that long-term customer-bank relationships seem to be common
in rural areas where the banks are local, A major reason for the long-term
relationship is the exit barriers in the form of loans and other financial
arrangements between customers and bank. In order for the customer to
disrupt a relationship some rather critical negative incident has to occur,
e.g., a refusal to grant a loan, or extreme dissatisfaction with the services.
Relationship marketing is more than just sending out letters using the
customer's first name and introducing cards for frequent users. Relationship
marketing has to be seen as a management philosophy starting with
customer orientation, continuing with creating satisfied customers and,
finally, activities to maintain profitable long-term relationships.
CUSTOMER-PERCEIVED SERVICE QUALITY IN BANKING 303

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