Customer loyalty to UK banks before and during the 2008 economic recession

¶ … Economic Recession on Customer Loyalty to Banks in the United Kingdom

The global economic recession has had a number of various effects on economics in the United Kingdom, including how people in the UK conduct their banking. While it is impossible to argue that the economic recession has been positive for consumers, it is undeniable that the recession has had some positive impacts on consumer behaviors. Because of recession-driven economic difficulties, costumers have had to make changes in how they choose their service providers, including banks. Furthermore, because of the recession some banks may have changed long-standing policies and programs in order to recoup losses from other areas. As a result, it is possible that the economic recession has had an impact on customer loyalty to banks in the United Kingdom.

This study will focus on four primary research questions. For the purposes of these questions, the five years prior to the recession will be considered from October 2003- October 2008, and the recession will be considered from October 2008- October 2013. 1). Based on consumer self-reports, have consumers changed banks with greater frequency during the recession than they did in the five-year period preceding the economic recession? This question will focus on asking consumers how many times they changed banks within the five-year period preceding the recession and during the five-year period since the beginning of the recession. 2). Have consumers changed lender banks with greater frequency during the recession than they did in the five-year period preceding the economic recession? This question will be multi-dimensional. It will focus on how many current lenders consumers have and compare the number of current lenders to the number of lenders the consumers had in the five years prior to the recession. Lenders will include lenders for both secured and unsecured debt. The research question will also focus on the number of times consumers changed lenders, with a change being indicated not by opening an additional line of credit, but by opening credit coupled with closing an existing account. 3). What factors motivate consumers to change banks for traditional banking services? 4). What factors motivate consumers to change banks for lending purposes? Furthermore, the survey questions will be developed in order to help mitigate potential self-selection effects, which Gensler et al. identified as potentially significant (Gensler et al. 2013).

Section 2: Theoretical Framework

The traditional role of the bank has changed dramatically over the last several decades and this role change has impacted how consumers initially select banks as well as their long-term loyalty and decision to change banks, either as primary service providers or when looking for additional services. "Banks have traditionally played the key role in the financial system by acting as financial intermediaries between ultimate savers and borrowers. As asset transformers, they have accepted deposits with one set of characteristics and created assets with a different set; in particular, they have engaged in maturity transformation with debt contracts on both sides of the balance sheet. They have also been the central mechanism within the payments system" (Llewellyn 2009). In fact, it was as recently as 1980 that Fama argued that, absent banks playing a role of numeraire in a monetary system, banks would be self-regulating and there would be no need to control either deposit creation or security purchasing activities (Fama 1980). Because banks acted largely as intermediaries between savers and borrowers and held a substantial percentage of wealth that belonged to those who are not wealthy, they were considered a protected class of institution, so that steps were taken to ensure that they could not fail.

However, in the time period leading up to the recession, there was a significant shift in the nature of banking business; banks began to engage in an increasing level of financial services, which shifted them out of their traditional role as intermediary an into more speculative businesses (Llewellyn 1999). Furthermore, because of the expansion of what was considered banking business, a number of organizations that are not precisely banks began to get involved in the banking business. In fact, many of the new financial markets were directed at banks and other intermediaries rather than at individuals or firms (Allen & Santomero 1997). As a result, "It is no longer clear precisely what a bank is, what business it conducts, or what should define appropriate business for a bank. What a bank is no longer clearly-defined" (Llewellyn 1999). This lack of definition helped contribute to the economic instability that ushered in the recession, because banks were intimately involved in financial services. It also created a scenario where banks are not providing only basic transactional services to clients, and thus, led to a situation where costumers have more options when selecting a bank.

Furthermore, the change in the traditional banking model has also changed how banks make money. Banks previously used deposits to make loans and made profit on those loans. Now, banks are transitioning away from directly held assets and to other types of ownership, such as pension funds and mutual funds. However, banks have managed to retain their relative financial position by changing their own business structure, moving towards fee-producing activities (Allen & Santomero 2001). As a result, many activities that were once free are now fee-based, and this increase in fee-based activity has been an impetus for many customers who may have previously been satisfied with their banks service to look for alternative bank service providers.

For service providers, such as banks, customer loyalty has traditionally been an important component of business sustainability. Moreover, historically many customers have failed to exercise the degree of choice in selecting banks for both consumer banking needs because it is inconvenient to change banks. The small immediate cost savings associated with switching banks has not seemed beneficial when compared to the inconvenience of changing banks. In fact, while consumer loyalty has been a focus for bank marketers, recent research demonstrates that the risk factor that is assumed to drive many consumer banking choices may not be the best predictor of loyalty. Instead, variety seeking and resistance to change predict both current behavior and future behavior better than risk (Baumann et al. 2011). What this suggests is that consumer loyalty may not be based on the financial services offered, but on the fact that switching banks is considered inconvenient. Therefore, determining whether the economic changes that occurred as a result of the recession where sufficient to overcome the inertia associated with the inconvenience of change is an important factor because it will help determine whether there is a critical point at which consumers will change banks despite the inconvenience.

One important factor for consideration is whether the promise of future convenience on its own can ever be sufficient inducement for a person to switch or if the promise of future convenience needs an additional financial incentive in order to motivate customers to switch their banks. While the ongoing economic recession forms the background of this research, it is important to keep in mind that, at the same time, digital banking was becoming more and more significant. Digital banking offers customers convenience, but the convenience comes at a cost; the loss of human interaction. While this may simplify daily activities, it can make it far more complicated and frustrating when a customer is faced with an issue that is not routine and is seeking help from an actual human being.

Internet banking differs from traditional banking in that it is a "predominantly goal-directed service" (Cruz et al. 2010). Because it is goal-directed, customer concerns differ from those using more traditional teller-based bank services. As a result, the flow experience has become a critical determinant in customer service measures for some bank customers (Cruz et al. 2010). What this suggests is that there may be very different measures of loyalty depending on how a customer utilizes the bank, and these factors must be considered given that the rise in internet banking co-occurred with the economic recession.

In fact, just prior to and during the recession, different banks were offering different online banking programs, so that the promise of convenience at one bank might have been a sufficient inducement to switch banks. Moreover, this change to digital banking did not appear in isolation; in many circumstances banks encouraged the switch to digital banking in two ways. First, those who switched to digital banking were rewarded for that behavior with reduced fees, particularly for transactions that once would have occurred in person. Second, banks began to increase rates for those who did not switch to digital banking. For example, banks have traditionally sent paper statements, and those statements were not charged to the customer. However, once digital banking became the industry norm, many banks made paper statements an opt-in option and charged a fee for them. Therefore, banks provided a negative incentive for people to switch to digital options, which not all customers appreciated.

Furthermore, even though digital banking has become an industry norm and is far less expensive for banks than having teller transactions, one must keep in mind that not all customers prefer the convenience of digital interactions. Instead, for some banking customers, interpersonal interactions continue to be of paramount importance. In fact, when examining banking loyalty, Lam et al. discovered that there were two primary drivers of customer loyalty: affective components and cognitive components (2009). In other words, customers were not only concerned about the level of service quality and their perceptions regarding whether that quality was a bargain, but also about their interpersonal interactions with bank workers (Lam et al. 2009).

What this background suggests is that switching behavior may not be motivated by positive enticements by other banks, but may be more likely to be linked to a customer having an unpleasant customer service experience with a current bank. In the context of the recession, it is possible that this dissatisfaction might be linked, not to personal experiences that the customers had with the banks, but with information that customers learned about the banks and banking practices. For example, if a bank's business practices were somehow linked to the recession, especially in way suggesting causation that bank might lose customers, even if those customers did not have any personal negative experiences with that bank, and even if none of the bank's competitors offered better services and value than the bank. Furthermore, banks that are larger and have higher profits are more likely to suffer from this type of reputational damage (Fiordelisi et al. 2013).

Therefore, when examining why respondents switched banks, it is important to look at issues beyond individual customer service and individual financial motivations. Customers may be motivated by extrinsic factors such as the bank's reputation or the bank may have been negatively impacted by recession in other parts of the globe and be unable to provide services, particularly creditor services, to customers, prompting change. In addition, it is critical to examine the other changes that were occurring in the banking industry at the time of the recession, such as the trend towards electronic banking, and see how they may have impacted customer preferences.

Section 4: Methods

This research project will use a questionnaire, developed by the author, to survey customers on their propensity to switch banks in the five years since the beginning of the recession and the five years preceding the recession. The survey is not based on any survey observed in the literature, but will use variables that have previously been examined and linked to bank switching such as convenience, fees, and customer service, as well as additional variables that may be specific to the recession, such as the bank's reputation. The survey will be administered through the site surveymonkey.com, which allows for both audience-specific targeting and general targeting of the survey audience. Through the use of social media, it should be possible to get sufficient survey participation to make qualified conclusions about the results, and the initial goal for survey respondent is 200 people. The targeted age group for the survey will be adults 30+ years in age, so that they would have been eligible to open their own bank accounts before the five years prior to the recession.

It will be a mixed-methods research design. In many ways, the survey will be quantitative. For example, it will ask respondents to list the number of accounts that they have at banks, including credit accounts, along with the total number of banks at which they have accounts. It will also ask for historical data for this information. Respondents will be asked to indicate whether they have switched banks in the past five years, and, if so, how many times. They will also be asked to indicate the same information for the five years preceding the recession. Furthermore, the survey will target information about what types of accounts were changed (checking, saving, secured credit, or credit card account) and utilize a Likert scale with several different variables to determine why the changes were made. The variables on the Likert scale will include: convenience, fees, reward programs, customer service, prior relationship, advertising, ability to interact with a person, and location of local bank branches. The questionnaire survey has previously been used to analyze customer attitudes towards their banks and how those attitudes impact loyalty (Chu et al. 2012). The results will then be examined for statistical significance using a t-test to see if any of the variables are significantly correlated with customers indicating that they switched banks since the beginning of the recession and prior to the beginning of the recession. Then the group prior to the recession will be treated as a control group and a t-test will be used to determine whether there is a difference between the two groups on each of the individual factors. In other words, is there a difference between how the control group ranked the importance of convenience in comparison to how the recession group ranked convenience. Those differences will then be analyzed to determine how the recession impacted how people view their banking choices. For all of the two-sample t-tests, because variance will be assumed to be unequal, the basic equation used will be Welch's t-test, which is t=(X1-X2) / s (X1-X2). Because t-tests are being used, Microsoft Excel can be used for statistical calculation.