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RETAIL BANKINGACADEMYCourse Code 107 - Customer Service Quality

107.Customer Service Quality

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Course Code 107Customer Service Quality

Introduction

As was emphasised in the Marketing module, banking services (as opposed to products) are intangible and hence the delivery (i.e., customer experience) is more important than it would be for traditional businesses that deal in tangible products. A predominant issue in retail banking (as in all service industries) is summarised as follows:

It is not only what is delivered but also how it is delivered and by whom.

As asserted by Chowdhary and Prakash (2007)* the academic literature has yet to arrive at a consensus on a clear definition of customer service quality. A common definition, proposed by Parasuraman, Zeithaml and Berry (1985)† is that customer service quality is the difference between the bank’s performance as perceived by the customer and the level of performance that the customer expected.‡

There are two implications of this definition: firstly, service quality does not necessarily mean ‘best in class’ but only quality performance with respect to customer expectations; second, as pointed out by Poll and Boekhurst (2007)§, quality for customers in one market segment does not mean the same for another. In the consideration of the family life cycle, there is evidence that expectations of service quality vary by segments.

What the senior citizen sees as excellent service may lie in the form of high-touch branch personnel with whom they feel comfortable asking important financial questions such as with product experts, yet to the young adult or student, excellent service may lie in the form of mobile banking access and online chat with a service provider.

* Nimit Chowdhary, Monika Prakash, “Prioritizing service quality dimensions” Managing Service Quality, Vol. 17 Iss: 5, pp.493 - 509 (2007).

† Parasuraman, Zetthami and Berry, “A conceptual model of service quality and its implications for future research”. Journal of Marketing 49 (Fall): 41-50 (1985).

‡ This is commonly called ‘disconfirmation’, a concept that implies customers psychologically interpret the discrepancy between the expectation and actual perceived performance.

§ Poll and Boekhorst, Measuring quality: Performance measurement in Libraries. 2nd revised ed. (Muchen: K.G Saur, 2007).

Course Code 107 - Customer Service Quality

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Customer segments which are based on current or potential profitability can also differ in what they consider quality service.

High-value clients tend to classify excellent service quality based on their access to a high-touch relationship manager and professional assistance, where the mass market consumer client would define service quality as having access to the most convenient locations and lowest price. Within the small business segment research we find similar differences.

The measurement of excellent service quality to the SOHO (Small Office Home Office) client can be in the ease of online access or consolidation of the business and personal accounts, where the larger small business may consider the availability of a relationship manager that knows their business as a minimum requirement of service quality. The professional literature has documented several benefits to the bank for providing a high level of customer service quality, (e.g., Dabholkar, Shephard and Thorpe, 2000,* Zeithaml, 2002†). These benefits include:

• Customer retention leading to repeat business

• Customer advocacy in the form of referrals and hence customer acquisition

• Avoidance of price competition since customer service quality becomes a differentiation strategy

• Employee engagement since there is evidence of a feedback loop from satisfied customers to engaged employees

• Cost reduction and hence increased profitability since increased productivity is associated with lower average costs.

The rest of this module is organised as follows:

Chapter 1: A Brief Historical Journey – Customer Service in Retail Industries in the US and Europe

Chapter 2: Drivers of Customer Service Quality

Chapter 3: Linking Customer Service Quality to Customer Satisfaction

Chapter 4: Linking Customer Satisfaction to Customer Loyalty

Chapter 5: Resolution of Customer Service Failures – The GAPs Model

This module concludes with a summary and review questions.

In order to place customer service quality in retail banking in context, we take a historical journey into the evolution of customer service in retail industries to ascertain what lessons can be learned.

* Dabholkar, P. A, Shepherd, CD, Thorpe, D, “A comprehensive framework for service quality: an investigation of critical conceptual and measurement issues through a longitudinal study”. Journal of Retailing 76(2), 139-173 (2000).

† Valarie A Zeithaml, “Service excellence in electronic channels”, Managing Service Quality, Vol 12 Iss: 3, pp.135 - 139 (2002).


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Chapter 1: A Brief Historical Journey – Customer Service in Retail Industries

The emergence of customer service as a key differentiator can be traced back to the last third of the 19th Century in Chicago, where a city grew out of the ashes of a devastating fire that had levelled it in 1871. One of the industries that most benefited from the revitalised city was retailing. There were households to be re-established and homes to be redecorated and modernised.

An entrepreneur by the name of Marshall Field, then a young but hardy veteran of retailing in Chicago, understood that most of his sales were to the women in Chicago who were spearheading the revitalising of local households – an early recognition of the value of knowing your customer. Field had already founded a multiple-line retail establishment, and forged a new path in retailing, purveying a sense of service in addition to an impressive array of clothing and home furnishings.

Field apparently told employees at his eponymously named establishment that ‘the customer is always right’, and created a consumer-friendly environment. That saying became legend throughout the retailing world, and a way of life among shoppers in Chicago and the American Midwest. The approach endured for more than 125 years, through three acquisitions and several financial panics and disruptions.

There was tremendous uproar in Chicago in the early 21st Century when, after all those iconic years as the city’s leading retailer, its latest purchaser, Macy’s, (ironically another long-term, self-named American retailer) decided to change the Marshall Field’s name to its own.

Later, Harry Selfridge, who worked for Marshall Field, found himself managing Field’s dry goods department. Some have credited Selfridge with coining the phrase ‘the customer is always right’; in any event the emphasis on customer needs took shape. Selfridge left for London and in 1909 founded a retail store that still thrives today, urging his staff to ‘assist’ customers, with a commitment to serving its customers’ retailing needs better than any other department store.

César Ritz took a different path on the broader service road, first as a restaurateur and ultimately as a hotel owner. The hospitality business in the late 19th and early 20th Centuries was, in many ways, similar to the industry in the late 20th Century. The key difference was that there were many more providers, with proximity to transportation centres often being the only real differentiating factor among them. Ritz saw additional opportunities for material change, and his success with his namesake establishment in Paris paved the way for chances in other markets.


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Ritz opened The Ritz hotel in London, and imported his winning slogan – ‘Le client n’a jamais tort’ (the customer is never wrong) – in 1906. His legacy of luxury hospitality and a knack for knowing how to please his guests has survived for more than a century, and The Ritz-Carlton Hotel Company has developed an extremely successful ancillary business: customer service training for a variety of industries, including banking.

Several banks around the world have instituted The Ritz-Carlton service quality training programme. In fact, a few require every staff member to complete the training. During this training, employees learn how to ‘never say the word no’. There is always a way to turn a negative into an option for the customer. Another training point is to ‘show the customer to their destination, you never point them to their destination’. Whether it was the hotel mechanic or housekeeper, if a customer asked for directions to a point in the hotel, you would find them escorting the customer. This seems like a minor detail in the world of banking, but the results in the eyes of a customer are rewarding.

In 1963, Carrefour (founded by Marcel Fournier and Louis Deforrey) opened the first so-called hypermarket, combining a supermarket with a department store. That meant huge footprints, usually in suburban areas, a recommitment to customer service and attention to new elements of service – parking and what was called spectacle. Echoing the calls of the merchandising guru Bernardo Trujillo, Carrefour management became experts at siting their stores and delivering against the expectations of their customers.

As the Fournier-Deforrey combination was perfecting its service delivery, at first in France, and then around the world – in San Francisco, the Bank of America was also entering the fray. Bank of America, which was one of the few large banks that actually served retail banking customers relatively well, had noticed the increasing credit card activity among retailers in the US, and the growing success of the Diner’s Club charge card, which had been introduced in 1950.

Bank of America had lending experience and felt that there wasn’t a need for balances to be repaid each month, like Diner’s Club, but that the interest charges on revolving monthly balances could be quite profitable. The bank also believed that it could trade on the market value of its brand and convince local merchants to accept its new BankAmericard for purchases by its card-holders. Of course, the success of this new type of lending product would at least in part depend on getting the card into the wallets (and hands) of as many customers as possible.

Bank of America was correct on almost every front – except the last one. Its large-scale introduction of the new card in Fresno, California, in 1958 went well at first, with many customers using the card. The bank had failed to educate the market adequately about how the service worked, though, and that lack of understanding by card users led to widespread defaults over the initial offering term. When the bank relaunched the refined BankAmericard in 1966, it was ready, and the new bank credit card became a tremendous success.

Bank of America licensed its new sensation in several overseas markets, including Canada, where it was known as Chargex; France, where Carte Bleu became a hit; and the United Kingdom, where Barclays mimicked Bank of America’s approach and incorporated its bank name into the card – Barclaycard.

Soon after Visa’s conglomeration, another new retail-financial concept was introduced, but unfortunately this solution as service did not originate at a retail bank. Harking back to a generation earlier, Merrill Lynch took the lead in melding a transaction account, an investment account and a convenient payment vehicle for its customers under the auspices of the Cash Management Account, or CMA.

The CMA was a breakthrough, providing true ease of access to funds that CMA customers deposited with Merrill Lynch. A current (checking) account was the basis of the service, and customers could sweep excess funds from that current account to an investment account. CMA users could write cheques to access their funds, or use an ATM card to withdraw cash. They also had a choice of investments and over the years Merrill Lynch enhanced the service through debit cards, home mortgages and other consumer-lending vehicles.


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Today, CMAs are accessed via online banking, completing a service approach that is the equal of most banking solutions. This early entrant in broad retail-financial products/services was a favourite of enlightened retail customers, but even though it had the potential to significantly disrupt traditional banks’ relationships with their customers, it didn’t.

Standout retailers that have embraced the ‘customer service quality’ paradigm include the following:

Amazon.com

New technology companies were the most obvious models in the virtual, web-based world. And perhaps the best example of a new-technology success story was Amazon.com. The company had debuted early in the online age, incorporating in 1994. It sold its first book in the US in 1995 and in the UK in 1998. It garnered a strong and loyal following from its earliest days, and displayed its technology confidence as it developed, especially as it related to anticipating customer needs. Employing fuzzy logic that interpolated customer purchases into available titles that a purchaser may find of interest, Amazon.com advanced its model to sales of nearly US$13 billion in the fourth quarter of 2010 alone. Sales in the fourth quarter of 2013 totalled US$21.27 billion.

An interesting twist that Amazon.com employed was a predictive-purchasing model, which integrated information that visitors supplied – namely the titles of the books they were seeking on the Amazon site. Whether or not the prospective customer purchased a title, another option that featured the same subject matter as the first title requested was presented for consideration.

Singapore Airlines

Singapore Airlines was expert at recognising that superior service delivery defines success in the airline business. The explosive economic growth of Singapore and its emergence as a financial hub of the Asia-Pacific region created huge demand for convenient air travel and the decision to make its flight attendants the collective face of its business meant Singapore Airlines was on its way to success. Of course, it certainly helped that Singapore Airlines relentlessly delivered on its ‘excellence in service’ promise. Setting a high bar and clearing it every time is essential in a service-based business, and Singapore Airlines followed its customers and added new routes as those flyers propelled Singapore’s message and promise around the world.

Singapore Airlines employees take to heart the challenge of making each interaction with a customer the one that customer will remember as the best flying experience they’ve ever had.

What lessons can be learnt from this historical journey?

Retail banks started to view superior customer service quality as a key differentiator. Case studies show that the operating model was based on four components:

• Information that permits the bank to identify customers’ needs

• Products that meet customers’ financial needs and deliver a fair return to the bank’s bottom line

• Delivery that seamlessly places the bank’s products and services at convenient contact points within the bank

• Experience that is consistently excellent from the customers’ perspective, and that is repeatable from the bank’s perspective

In addition, it is imperative to track, measure and reward bank employees for delivery of superior customer service. Some banks have gained a reputation for this proactive service quality strategy.

For example, at Umpqua Bank in Portland, Oregon, the Culture department was formed to


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oversee these tasks while reporting directly to the President. Service quality at Umpqua is tracked on a monthly basis covering not only every branch, but also every bank department. Every month each branch is measured through new account surveys, transaction surveys and in lobby customer comment boxes.

The results are tabulated as to the quality of customer responses and a report is produced that provides the customer service score, from the best to the worst. These scores are then used to support the monthly incentives for the branch offering a multiplier for the best branches and a penalty for the worst. Likewise, each branch rates the bank departments, or back offices, that support their efforts in providing excellent customer service. These scores are reviewed monthly by the president and senior executives to determine where improvement is necessary.

Finally, social media, whether in the form of Twitter, Facebook, blogs, YouTube or other online communities has become commonplace in our world. Instantly, news from around the world can be made public through these new and expanding communication channels. Consumers are quick to reference a service situation that they have experienced, good or bad, and within minutes their message can be witnessed by thousands of followers.

Several banks have established either in-house or outsourced personnel to follow social media to watch for comments about their institution. Responding to good messages with a thank you, or delving into a posted service issue immediately to rectify the problem, this form of service quality tracking must be followed. When a service complaint is addressed and corrected, the next message normally offers a positive comment about the responsiveness of their institution.

Given this brief historical account, we consider the main drivers of customer service quality in Chapter 2.


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Chapter 2: Drivers of Perceived Customer Service Quality

We now consider the drivers of service quality as perceived by customers. This is important for the formulation of a customer service strategy that will give the bank a competitive advantage over its rivals.

The academic and professional literature on the drivers of customer service quality gained momentum with a seminal paper by Parasuraman et al (1985)* which produced ten attributes of customer service quality. These were later refined and reduced to five dimensions and have become widely cited and researched. (Parasuraman et al, 1988)†. We can categorise these five dimensions into a core dimension and a relational dimension.

The Core Dimension: Reliability

The first dimension is reliability of customer service and this is regarded as a core dimension. It is outcome-oriented. Reliability of service creates a customer expectation that the delivery and quality are both dependable.

As was emphasised in Operations I, fast delivery that is accurate and consistent is one of the hallmarks of operational excellence. But this dimension is not just based on modern IT infrastructure.

It is also, more crucially, dependent on staff quality and having the right person with the right behaviour in the right job. Recall that one of the important attributes of services that was emphasised in the Marketing module is heterogeneity. This refers to the fact that services are delivered by people.

Hence, service delivery times and quality will both have a degree of variability. The imperative for the bank is to minimise the variability of both delivery times and quality of service.

The other four dimensions, in combination, are categorised as ‘relational’. Relational dimensions

* Parasuraman, Zetthami and Berry, “A conceptual model of service quality and its implications for future research”. Journal of Marketing 49 (Fall): 41-50 (1985).

† Parasuraman, Zeithaml, et al. “SERVQUAL: A Multiple-Item Scale for Measuring Customer Perceptions of Service Quality.” Journal of Retailing 64(1): 12-40 (1988).


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have to do with the customer-bank staff interaction and hence with customer experience.

Tangibles

This dimension refers to the appearance of the physical surroundings (e.g., bank branch) where the service is being delivered, or the user-friendliness of technology for alternative bank channels. It is not surprising that banks have invested in modern and user-friendly branch designs that incorporate the most recent technologies such as iPads, touchscreens, LCD walls and augmented reality.*

Allen International, a global branch design expert reported that it has implemented “the very latest in banking technologies to enhance and improve the in-branch experience for customers for DBS Bank at their new headquarters branch in the Marina Bay Financial Centre Tower in Singapore. The resulting branch design utilises a motion-sensitive interactive digital welcome wall, quick service stations for fast transactions and the installation of teller assist units in the semi-private consultation pods. The branch also comprises a 300-seat auditorium and the first in-branch television studio for Channel News Asia.” †

It is noted that tangibles also include the quality of communication materials as well as appropriate dress code for bank staff.

It is also noted that tangibles bring some physical existence to the intangible products and services that the bank provides.

Assurance

The third dimension is assurance. This refers to the personal disposition of bank staff in terms of competence, courtesy and credibility. Actually, credibility of bank staff is absolutely necessary for a trusting relationship with the customer; competence as reflected in functional knowledge is required to gain customer credibility. Simply put, customers want to be assured that they are dealing with bank staff that are knowledgeable and ethical and will serve customer needs first and foremost.

Empathy

The fourth dimension is empathy. This means that the bank employee must make every effort to act solely in the interests of the customer. It is interesting that when assurance and empathy are combined we see that customers want professional bank staff that are courteous who act on their behalf and respect them. Some academics propose that the quality of the customer-bank staff interaction as reflected in the combination of assurance and empathy is crucial for customer service quality. While outcome matters, it is this interaction that will create long-term benefits for the bank. For example, Chebat et al (1994)‡ support the notion of a ‘halo effect’ which means that while outcome is important, the service delivery process itself is dominant.

The final relational dimension is:

Responsiveness

This dimension refers to the promptness and helpfulness of bank staff as perceived by the customer. The combination of reliability and responsiveness is interesting and shows that customers want a service that is of a high standard and is delivered without errors on a timely basis.

* See an article in afritorial.com for such innovations by the largest four banks in South Africa.

† Allen International website, <www.allen-international.com>.

‡ J. C. Chebat, P. Filiatrault, C. Gelinas-Chebat and A. Vaninsky, “Why am I waiting? Effects of consumer mood on the attribution of waiting time and perceived quality of services”, Proceedings of the Third International Research Seminar in Service Management, LaLonde, (1994).


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We present some indicators of the five dimensions of service quality outlined above*, to get a better understanding of each dimension in a retail banking setting.

Indicator Dimension of Service Quality

Bank employees show real concern in solving my problems with bank operations

Reliability

The bank staff completed my loan approval process without undue delay and as promised

Reliability

Over the last years, I observed that my waiting time in the call centre line is much shorter

Responsiveness

Bank employees show that they understand my needs Empathy

I have trust in the bank staff I deal with since I believe that they are very competent in banking issues

Assurance

The bank branch is well-designed and very welcoming Tangibles

The bank’s brochures are attractive and easy to read Tangibles

107.1: Five dimensions of customer service quality (table)

We can summarise these dimensions of customer service quality as follows:

s

Intangibles Made Visible by Tangibles (Physical Elements)

107.2: Five dimensions of customer service quality (graph)

Open Question #1

“If a bank experiences significant complaints about service quality, the solution could be to place more empathetic employees at customer contact points with the bank.”

What is your opinion about this statement with respect to improving customer service quality?

* Barbara Culiberg and Ica Rojsek, “Identifying Service Quality dimensions as Antecedents to Customer Satisfaction in Retail banking”, Economic and Business Review, Vol.12, No.3, 151-166, (2010).


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We close this section with a reference to studies that evaluate the relative importance of these five dimensions for customer service quality in banking.

• Levesque and McDougall (1996),* in a study of bank service quality, suggested that there are two dominant dimensions of service quality – core dimension (i.e., outcomes) and relational dimension (i.e., the customer bank interaction process).

• Jabnoun and Al-Tamimi (2002),† in a study of commercial banks in the United Arab Emirates, found that human skills, tangibles and empathy are important dimensions of customer service quality.

• Avkiran (1999),‡ in a study of customer service in branch banking, found that staff conduct is an overriding dimension.

• Culiberg and Rojsek (2010),§ in a study of retail banking in Slovenia, found that all five of the dimensions of service quality influence customer satisfaction and therefore banks cannot ignore any of these dimensions. Importantly, the largest effect on the variability of customer satisfaction is attributable to staff conduct.

The next important question is: Does customer service quality lead to customer loyalty?

In response, we now consider the potential link between the dimensions of customer service quality and customer satisfaction.

* T. Levesque and G. McDougall : “Determinants of customer satisfaction in retail banking” International Journal of Bank Marketing, Vol. 14, No 7, p. 12-20 (1996).

† Naceur Jabnoun, Hussein A. Hassan Al-Tamimi, “Measuring perceived service quality at UAE commercial banks”, International Journal of Quality & Reliability Management, Vol. 20 Iss: 4, pp.458 - 472 (2003).

‡ Necmi K. Avkiran, “An application reference for data envelopment analysis in branch banking: helping the novice researcher”, International Journal of Bank Marketing, Vol 17 Iss: 5, pp.206 - 220 (1999).

§ Barbara Culiberg and Ica Rojsek: “Identifying Service Quality Dimensions as Antecedents to Customer Satisfaction in Retail Banking”, Economic and Business Review, Vol 12, No.3, 151-166, (2010).


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Chapter 3: Linking Customer Service Quality to Customer Satisfaction

Customer satisfaction is typically defined in terms of the customer’s actual experience with a product or service relative to whether it has met their needs and expectations.

Following, Parasuraman et al (1994)*, consumer satisfaction is determined in terms of perception (P) relative to expectation (E) of customer service. In particular:

• if P > E, then customers experience a high level of satisfaction.

• if P = E, then customers are satisfied that the service quality is equal to the level that is expected.

• if P < E, then customers are dissatisfied.

Importantly, customer expectations that serve as service quality benchmarks are typically set in two ways. First, through promotion (e.g., advertising) and word of mouth from customers who have experienced superior customer service with the bank and have become willing advocates. The second source of customer expectations is derived from previous encounters with the bank or from personal experiences.

The important question is: does superior service quality lead to customer satisfaction? If the answer is in the positive, then a proposed link should be as follows:

* A. Parasuraman, V. A. Zeithaml, and L. L. Berry, “Reassessment of expectations as a comparison standard on measuring service quality: implications for further research”, Journal of Marketing, Vol. 58 No. 1, January, pp. 111-24 (1994).


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ReliabilityTangiblesAssuranceEmpathy

Responsiveness

Customer ServiceQuality

Customer Satisfaction

107.3: The link between customer service quality and satisfaction

This model leads to the following hypothesis:

The five dimensions of customer service quality should relate to customer satisfaction in a positive way.

There are several studies that established a positive relationship between the drivers of customer service quality and customer satisfaction in retail banking. We list a few:

• Jamal and Nasser (2002)* show that a positive and significant link exists between all five drivers of customer service quality and customer satisfaction.

• In a Turkish study, Yavas et al (1997)† provided evidence that tangibles, responsiveness and empathy are predictors of customer satisfaction.

• Reliability, responsiveness, empathy and tangibles predict customer satisfaction for Greek Cypriot customers, as found by Arasli et al (2005)‡.

• Chakravarty (2003)§ found for American banks that when the five dimensions of customer service quality are enhanced, there is less tendency for customers to abandon the bank. The resulting lowering of the bank’s attrition rate has important implications for the bank’s profitability.

* A. Jamal, and K. Naser, “Customer satisfaction and retail banking: an Assessment of Some of the Key Antecedents of Customer Satisfaction in Retail Banking”. International Journal of Bank Marketing, 20(4),146-160 (2002).

† U. Yavas, Z. Bilgin and D. J. Shemwell, “Service Quality in the Banking Sector in an Emerging Economy: A Consumer Survey”, International Journal of Bank Marketing, Vol 15. no. 6 pp. 217-223 (1997).

‡ H. Arasli, S. Turan Katrircioglu, S. Mehtap-Smadi, “A comparison of service quality in the banking industry: Some evidence from Turkish – and Greek – speaking areas in Cyprus”, International Journal of Bank Marketing, Vol. 23, No. 7, pp. 508-526 (2005).

§ S. Chakravarty, “Relationships and individual’s bank switching behavior.” Journal of Economic Pyschology 507-527 (2003).


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Open Question #2

It is often said that bank staff are the key to customer service quality and customer satisfaction. Many experts recommend the following strategy for people management:

• Hire the right people

• Enable these people

• Motivate and energise your people

How would you accomplish these three tasks in a retail bank?

Open Question #3

Voss et al (2004),* for example, find that “employee satisfaction directly affects both service quality and customer satisfaction”.

Do you agree?

We now complete the model by considering the potential link between customer satisfaction and customer loyalty.*

* C. Voss, N. Tsikritis, B. Funk, D. Yarrow, J. Owen, “Managerial choice and performance in service management – a comparison of private sector organisations with further education colleges”, London Business School OTM Working Paper No 04-020 (2004).


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Chapter 4: Linking Customer Satisfaction to Customer Loyalty

The final link in the model of customer service quality is the potential relationship between customer satisfaction and customer loyalty. The full model may be illustrated as follows:

ReliabilityTangiblesAssuranceEmpathy

Responsiveness

Customer ServiceQuality

Customer Satisfaction

Customer Loyalty

107.4: Relationship between customer satisfaction and loyalty

Recall that customer satisfaction is measured as the difference between customer perceptions of service quality (i.e., their experience) and customer expectations. This is more emphasis on single interactions with the bank. Customer satisfaction is necessary to do business. (We will show in Chapter 5 that customer satisfaction is measured by transactional Net Promoter Score.)

As defined by Zeithami et al (1996)*, loyalty is the likelihood that a customer expects to do business with the bank in the future and is willing to engage in word-of-mouth referrals about the bank’s customer service.

Customer loyalty is about an emotional bond between the company and the customer. The

* Zeithaml, V A, L L Berry, et al, “The Behavioral Consequences of Service Quality.” Journal of Marketing 60 (April): 31-46 (1996).


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emphasis is on the relationship. It is necessary for the company for long-term growth. (We will show in Chapter 5 that customer loyalty is measured by relational Net Promoter Score.)

This is not to diminish the role of customer satisfaction. It is more than just a first step to creating customer loyalty. Indeed, Coldwell (2001) reported on an analysis carried out by Growth Strategies International who found that:

• A Totally Satisfied Customer contributes 2.6 times as much revenue to a company as a Somewhat Satisfied Customer

• A Totally Satisfied Customer contributes 17 times as much revenue as a Somewhat Dissatisfied Customer

• A Totally Dissatisfied Customer decreases revenue at a rate equal to 1.8 times what a Totally Satisfied Customer contributes to a business*

Customer satisfaction matters for the bank’s bottom line.

But what is the connection between customer satisfaction and customer loyalty and the subsequent beneficial effects on revenue growth and overall brand value?

Here are some studies that find evidence of such a connection:

• Yongyui (2003)† has presented a model for the relationship between service quality and bank’s reputation that plays an important role in the determination of repeated purchases and customer loyalty.

• Nearly 45 percent of changes in customer loyalty can be attributed to changes in service quality (Mosahab et al, 2010)‡.

• Bloemer et al, (1998)§ present research findings that show service quality in banks influences loyalty both directly and indirectly (through satisfaction).

• “In the Indian banking sector, human aspects are more important than technical and tangible aspects of service quality that influence customer satisfaction and promote and enhance customer loyalty.” (See Lenka et al, 2009)¶.

• Boulding et al (1993)** found positive relationships between customer service quality and customers’ repurchase intentions and their willingness to recommend the company to others.

• Karatepe et al (2005)†† demonstrated that customers of retail banks with favourable perceptions of service quality had higher satisfaction.

* Harkiranpal Singh, “The Importance of Customer Satisfaction in Relation to Customer Loyalty and Retention”, UCTI Working Paper, WP-06-06, (May 2006).

† W. Yonggui, “The Antecedents of service quality and product quality and their influences on bank reputation: evidence from the banking industry in China”. Managing Service quality, 13(1), 72-83, (2003).

‡ R. Mosahab, O. Mahamad and T. Ramayah, “Service quality, customer satisfaction and loyalty: a test of mediation”, International Journal of Business and Management 3(4): 72-80 (2010).

§ J. Bloemer, “Investigating derivers of bank loyalty: the complex relationship between image, service quality and satisfaction”. International Journal of Bank Marketing, 16(7), 276-286 (1998).

¶ U. Lenka et al: “Service Quality, Customer Satisfaction, and Customer Loyalty in Indian Commercial Banks”, Journal of Entrepreneurship March 2009 vol. 18 no. 1 47-64.

** W. Boulding, A. Kalra, R. Staelin, and V. A. Zeithaml, “A dynamic process model of service quality: from expectations to behavioral intentions”. Journal of Marketing Research, 30, 7-27 (February, 1993).

†† O. M. Karatepe, U. Yavas and E. Babakus, “Measuring service quality of banks: scale development and validation” Journal of Retailing and Consumer Services 12(5): 373-383, (2005).


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• Siu and Mou (2005)* also found that service quality dimensions in internet banking enhanced customer satisfaction.

The research findings based on the full model lead to the following conclusion:

There is evidence that customer satisfaction is positively related to customer loyalty. But the model above shows that the five dimensions of customer service quality positively affect customer satisfaction. So we see that customer satisfaction is playing a mediating role – a type of intermediate influence. The true result is:

Banks should consistently focus on the five dimensions of customer service quality to create customer loyalty.

We now consider the important issue of customer service failures – their indentification and resolution.

* N. Y. M. Siu and J. C. W. Mou, “Measuring service quality in internet banking: the case of Hong Kong”, Journal of International Consumer Marketing 17(4): 99-116, (2005).


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Chapter 5: Resolution of Customer Service Failures – The GAPs Model

Based on the discussions of the main issues in customer service quality and its links to customer satisfaction and finally to customer loyalty, what is the main lesson for retail bank executives?

First of all, all five dimensions of customer service are important to develop and enhance within a retail bank in order to generate customer satisfaction. The outcome of the interaction (reliability) and the interaction between the customer and bank (relational dimensions) within inviting physical elements are all required – or else gaps in customer service will develop and the consequent customer dissatisfaction will be observed.

It is interesting to note that academics have found evidence of what is known as the ‘service recovery paradox’. To understand the meaning of this paradox, consider customers who were at first dissatisfied with the service provided but were given excellent recovery service. By service recovery we refer to actions taken by the company in response to a service failure (Zeithaml & Bitner, 2003).*

Service failure occurs when the customer’s perceived service quality falls below customer expectations. The paradox states that the overall satisfaction levels for these customers (after the recovery service) are higher than those customers who were satisfied with the initial service. As stated by McCollough and Bharadwaj (1992),† ‘recovery paradox’ refers to situations in which the satisfaction, word-of-mouth intentions, and repurchase rates of recovered customers exceed those of customers who have not encountered any problems with the initial service.

At present, there is not overwhelming support for this paradox and, rather, research has shown that customers prefer superior service at all times. What seems to be the case is that when there is service failure, a recovery service that is viewed by the customer as better than expected is preferred over an initial service that is barely satisfying. This favours the paradox.

The lesson is clear. The root causes of customer service failure must be identified by the service provider and steps taken to recover at levels higher than the customer expects. Whether the

* V. A. Zeithaml, & M. J, Bitner, Services Marketing (3rd ed.). (New York, NY: The McGraw-Hill Companies, Inc. 2003).

† M. A. McCollough and S. G. Bharadwaj, ‘The Recovery Paradox: An Examination of Customer Satisfaction in Relation to Disconfirmation, Service Quality, and Attribution Based Theories,’ in C.T. Allen (Ed.), Marketing Theory and Applications, Chicago, American Marketing Association, pp. 119 (1992).


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service recovery paradox exists or not is not the most important issue. It may be as suggested by Hart et al (1990, page 148)* that “a good recovery can turn angry, frustrated customers into loyal ones. It can, in fact, create more goodwill than if things had gone smoothly in the first place”.

This is the objective of the Gaps Model of Service Quality.

Open Question #4

“In spite of the service recovery paradox, retail bank managers must strive for error-free and better than expected service quality the first time.”

Do you agree?

Gaps Analysis of Customer Service Quality

This brings us to a practical application of the Gaps Model† to assess defects in customer service and hence in customer satisfaction. This is a useful diagnostic tool for the bank to direct its resources in an optimal fashion to reach superior service quality. The Gaps Model is based on the principle that customer expectations (E) and their perceptions (P) may differ and, worse in the case of the bank, E > P.

Recall that customers’ expectations are determined by word-of-mouth referrals, customers’ past experiences and their needs. On the other hand, customers’ perceptions of customer service are determined by five dimensions – reliability, assurance, empathy, responsiveness and tangibles.

Furthermore, this customer gap can be disaggregated into simpler and actionable gaps.

Customer Gap depends on Gap #1, Gap #2, Gap #3, Gap #4.

GAP #1: Customer Gap (Management Perceptions ≠ Customer Expectations)

This gap occurs when management’s internal view of customer service expectations is different from the actual customer expectations of the bank’s service quality. This is not an uncommon mistake. In this case, the bank and the customer are not on the same page. Bank employees usually have a process-oriented view of the customer that is made worse by silo thinking. It is tough to break this perception but, if not corrected, it can lead to high customer attrition rates. The existence of this gap may reflect inadequate investment in marketing research. It may also reflect a general lack of communication between frontline bank staff and senior bank decision makers.

Example: A customer may want the ‘peace of mind’ a fixed-rate mortgage offers but the bank staff may think that the customer is persuaded by low mortgage rates, which give rise to more rate volatility.

GAP #2: Standards Gap (Service Standards are lacking)

In this, even if management perceptions do match customer expectations so that Gap #1 does not exist, it may be that management provision of service standards do not match their perceptions of consumers’ expectations. Simply put, service standards are lacking.

Example: Bank management may correctly anticipate what the customer wants but may incorrectly miss the requirement for service standards. Bank staff may correctly anticipate that the customer wants quick approval on his/her mortgage loan application but the staff may miss the customer’s requirement for a service guarantee (e.g., approval no later than two days).

* C. W. L. Hart, J. L. Heskett and W. E. J. Sasser “The Profitable Art of Service Recovery,” Harvard Business Review, Vol 68 No July-August, pp. 148-156 (1990).

† This is also called the ‘distances model’ of services quality.


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GAP #3: Delivery Gap (Service Delivery is lacking)

In this case, service standards reflect customers’ expectations but there is deficiency in the delivery of customer services.

Example: Service standards are in place but the bank’s IT infrastructure and complex processes create inconsistent and slow delivery so that customers become frustrated.

GAP #4: Communication Gap (Incorrect Messaging – Delivery Standards do not match what is Communicated)

This gap refers to the difference between the level of service actually delivered and what is (externally) communicated to the customer. What is actually communicated to the customer may come from different sources.

Example: customers are typically influenced by what they hear from others or from what they observe and see about a company’s service. This gap may cause customers to suffer regret which occurs when customers believe that they should have made another choice – the concept of opportunity loss.

We now describe a common metric used to obtain information on customer satisfaction with bank services.

Net Promoter Score – A Measure of Customer Satisfaction

One common metric used by banks and service industries in general to measure customer satisfaction is the Net Promoter Score. Banks typically employ the Net Promoter Score (NPS)* to evaluate customer’s satisfaction with a recent interaction (transaction or moment of truth) with bank employees. This is labeled Transactional NPS.

In calculating the transactional NPS, customers are asked a single question after an interaction with the bank:

“How likely is it that you would recommend Company X to a friend or colleague?”

On the basis of a scale of 0-10, promoters of the bank are identified by scores of 9 or 10; detractors will score between 0 and 6 and the other scores comprise passive customers.

0 1 2 3 4 5 6 7 8 9 10

Detractors Passive Promoters

107.5: Calculating Net Promoter Score

There is evidence that promoters account for about 80 percent of referrals and are the main source of additional purchases of the company’s products or services. On the other hand, detractors account for about 80 percent of negative comments and create harm to the company’s reputation.

The Net Promoter Score = Percentage of promoters - Percentage detractors.

For example, assume that a bank surveys 1,000 randomly selected customers who have had one interaction either with bank staff or at some other customer contact point. The period covered is the last month. They were asked to respond to the single question outlined above. There were 400 respondents. The scores show that 130 were promoters, 80 were detractors and the remaining were categorised as passive. Then the percentage of promoters were 130/400 = 32.5

* Fred Reichhold, The Ultimate Question (Harvard Business School Press, 2006).


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percent and there were 80/400 = 20 percent detractors. Hence NPS = 32.5 percent - 20 percent = 12.5 percent.

This means that the bank is viewed positively by most customers as evidenced by a positive NPS. Theoretically, NPS can range from -100 (all detractors) to +100 (all promoters).

Transactional NPS measures customer response to individual transactions with bank staff or at some other contact point with the bank. This provides an immediate feedback to bank employees as to the level of satisfaction customers experienced.

However, taken in isolation, transactional NPS may give only a myopic picture of customer satisfaction. Rather, bank executives are more interested in the movement of NPS over time – relational NPS. This gives the bank executives a dynamic picture of the trend in the calculated values of NPS. Whereas each transactional NPS is a snapshot at a point in time, the relational NPS considers whether there is improvement in customer satisfaction over time.

Generally, banks in mature markets experience relatively low levels of NPS. Here is an excerpt from Forbes.com (26/10/2011) for US banks:

Banks generally do a poor job today in delighting their customers. As The Ultimate Question 2.0 shows, the average Net Promoter Score (NPS) of US banks is only 13 percent: in other words, promoters barely outnumber detractors. The average NPS for a national bank with branches is minus 6 percent: i.e., detractors actually outnumber promoters.

The United Services Automobile Association (USAA) is the current leader in customer delight in the banking sector. It has a stunning NPS of 88 percent. Not surprisingly, its mission is to serve its members, not to make money for its shareholders. In fact it doesn’t have any shareholders. Profits are retained for financial strength or returned to the members.

But this is not necessarily representative of banks in emerging markets. For example:

• A recent survey by Bain and Company carried out in South Africa revealed the big four banks had a net promoter score of 22 percent compared with an average of 70 percent for the specialist banks (October 2012)

A word of caution here:

The scoring system for promoters may be culturally sensitive. Many societies do not score nine or 10 in any questionnaire since they view these levels as representing perfection. For example, many universities in the United States give a top A grade for any student performance above 85 percent. This is practically unheard of in many European and Asian universities. Indeed obtaining 70 percent is regarded as a spectacular performance in many of these universities. The point is that there are differences in ordinal ranking in societies. The Net Promoter Score methodology pretends that no such cultural differences exist since the scoring is standardised and global. It is therefore best to use local NPS scores, comparing with local competitors to evaluate how the bank is doing.

But there is another important deficiency of NPS in that it lacks explanatory power for the score that is obtained. In our illustration of the calculation of the NPS score, the overall NPS was 12.5 percent and hence positive – a good score. But there were 20 percent detractors.

The question is why are they detractors? Which of the five dimensions of customer service quality is (are) below customers’ expectations? Incidentally there is a very broad range of scores (from zero to six) in this category. How many customers scored at the lower end of the range? How many customers scored near the top end of the range? The NPS score is silent on these questions.

Similarly, there were 47.5 percent passive customers. Why are they passive? How many customers


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score near the top end of the range? Are they passive for different reasons? The NPS score is silent on these questions too.

Finally, even if there is a relatively high percentage of promoters (32.5 percent) in our example, why are they promoters? The NPS is again silent on this question.

To address these questions, we construct a service quality metric (SQM) that will serve to highlight the reasons behind the NPS. This will assist bank executives to design and implement appropriate strategies to shift detractors and passive customers to a higher NPS and to keep promoters at their current enthusiastic levels.

Service Quality Metric (SQM)

The SQM is based on the principle that customer satisfaction is determined by the disconfirmation theory – the relative difference between customers’ expectations and their perceptions (which we called the ‘customer gap’). The following steps are recommended:

a) Formulate indicator questions – one for each of the five dimensions of service quality. The bank executive must take care to obtain a general and yet informative question that will be representative of the service quality dimension. It is recommended that the decision-maker avoid several questions for the same dimension to avoid too many questions. Here are some examples:

• Bank employees show real concern in solving the problems I experienced with bank operations (Reliability).

• I believe that the bank staff I deal with are very competent and knowledgeable in banking (Assurance).

• Bank employees show that they understand my needs and take the time to explain bank offers (Empathy).

• Bank employees respond to my issues and concerns in a timely and prompt manner (Responsiveness).

• The bank’s brochures and communication materials are attractive and informative (Tangibles).

(b) The next step is to survey customers to score each of the five statements on an interval range from 1 to 10. Customers will be asked to score two factors – perceptions of service quality and expectations of service quality.

For perceptions of service quality, a score in the upper end of the range indicates that customers believe that the bank delivered a high service quality for the indicated dimension. A score in the lower end of the range will indicate that customers have a low perception of the quality of the bank’s service for the respective dimension.

For expectations of service quality, a score in the upper end of the range indicates that customers have high expectations for this dimension; a score in the lower end of the range indicates that customers have low expectations for this dimension.

(c) The next step is to calculate the average perceptions score and the average expectations score for the sample of customers and for each of the five service dimensions.

(d) Finally, the Service Quality Metric (SQM) is the difference between the average expectations score and the average perceptions score. A positive SQM indicates that customers are satisfied; a negative number indicates customer dissatisfaction and requires managerial action. A value of zero indicates that the bank just met expectations and should monitor this dimension for future deterioration.


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We summarise this procedure in the table below: Scores are included for discussion purposes only.

Calculation of the Service Quality Metric (SQM)

Typical Indicator Statement

Service Quality Dimension

Average Perception

Score

Average Expectation

Score

Service Quality Metric (SQM)

Bank employees show real concern in solving my problems with bank operations.

Reliability 3.5 3.0 +0.5

I believe that bank staff I deal with are competent and knowledgeable in banking.

Assurance 5.6 6.0 -0.4

Bank employees show that they understand my needs and take the time to explain bank offers.

Empathy 6.0 7.1 -1.1

Bank employees respond to my issues and concerns in a timely and prompt manner.

Responsiveness 5.8 5.0 +0.8

The bank’s brochures and communication materials are attractive and informative.

Tangible 7.1 6.0 +1.1

107.6: Calculation of the Service Quality Metric

The results in the table indicate that the bank staff has delivered on all service dimensions except for assurance. The negative score indicates that the customer believes that bank staff are not as competent, empathetic and knowledgeable in banking expertise and experience as expected. This requires immediate managerial action to invest in functional training for bank staff.

While the scores are presented in the table for discussion purposes, the SQM for each dimension presents bank executives with a template for focused discussion. Note that the average perception of all dimensions of service quality (5.6) exceeds the average expectation of all dimensions (5.4), implying that the bank has a positive overall satisfaction score. But this masks the fact that the bank has a problem with assurance – expertise and experience – of bank staff as far as consumers are concerned.


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Open Question #5

“It is possible for customer satisfaction to remain stable over time but different dimensions of customer service quality may actually deteriorate but remain hidden in the NPS.”

Do you agree?

Open Question #6

Within the context of the five dimensions of customer service, how does process performance affect customer satisfaction?

Summary

This module began with a brief historical account of customer service quality in retail industries such as hospitality (Ritz Carlton), aviation (Singapore Airlines) and retail banking (Bank of America). We then considered the antecedents of customer service quality, such as core dimension (reliability) and four others – tangibles, assurance, empathy and responsiveness. We cited several academic and professional references that have supported the choice of these five drivers of customer service quality. We then considered the important link between customer service quality and customer satisfaction. Finally, from the perspective of a successful cross-selling strategy, we considered the link between customer satisfaction and customer loyalty. We presented several research studies that support the proposition that customer satisfaction leads to customer loyalty. Finally, we considered how retail banking executives should resolve customer service failures via a GAPS model. We also discussed the so-called service recovery paradox. We concluded that the most important recommendation for retail banking executives is to strive for error-free and better-than-expected service the first time.


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Multiple Choice Questions

1. Consider the following indicator statement: “My dealings with bank staff shows that they are competent, with significant experience in banking.” This statement indicates which of the five dimensions of customer service quality?

a) Reliability b) Assurance c) Responsivenessd) Tangibles e) Empathy

2. The definition of customer service quality is based on the principle of disconfirmation. This means that customers compare:

a) Their perceived service quality with their expected service qualityb) Their perceived service quality with management’s benchmark of best in classc) Their expected service quality with prior experience of service qualityd) Their expected service quality with word-of-mouth referrals of service quality

3. Which of the following statements is incorrect?

a) The net promoter score may be affected by cultural differences of customers.b) A customer’s prior experience with bank staff may affect his/her expectations of customer service quality.c) The design of the bank branch is an indicator of one of the dimensions of service quality – responsiveness.d) The quality of the promotional material of the bank is an indicator of one of the dimensions of service quality – tangibles.

4. Which of the following dimensions of service quality is not a relational factor?

a) Reliabilityb) Assurancec) Tangible d) Empathy

5. A bank in calculating the NPS for a business unit over the last quarter, sampled 1000 customers with 600 respondents. There were 150 respondents labeled as advocates and 200 labeled as detractors. The remaining respondents were classified as passive. Which statement is correct?

a) The percentage of advocates were 15%b) The NPS score is 5%c) The NPS score indicates negative customer satisfactiond) The percentage of passive respondents is 25%

6. When the internal management view of customer expectations differs from the customer expectations, a gap exists. This gap is called:

a) Standards gap b) Customer gapc) Delivery gapd) Communication gap


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7. A standards gap is reflected in which of the following?

a) There is a deficiency in the delivery of bank services.b) Management’s view of customer expectations differs from actual customers’ expectations.c) The level of service communicated by the bank differs from what customers actually experience.d) Management fails to consider that customers require service quality assurance.

8. Which of the following is correct with respect to a positive NPS?

a) The percentage of detractors is low.b) The percentage of promoters is high.c) The percentage of passive customers is close to zero.d) the percentage of promoters exceeds the percentage of detractors.

9. Which statement is incorrect?

a) The service recovery paradox states that first-time errors are not critical for customer service quality.b) Academic research demonstrates that customer loyalty has a positive effect on the bank’s reputation. c) The halo effect refers to the importance of both outcome, and the dominance of customer experience in evaluating customer service quality.d) Reliability is a core dimension of customer service quality.

10. The SIM score for the indicator statement ‘bank employees show that they understand my needs and take the time to explain bank offers’ is -1.5. Based on this information, which of the following statements is correct?

a) The SIM score indicates that customer satisfaction is positive in relation to reliability.b) The SIM score indicates that customer satisfaction is negative with respect to assurance.c) The SIM score indicates that customer experience is negative with respect to empathy.d) The SIM score indicates that customer experience is negative with respect to responsiveness.

Answers:

1 2 3 4 5 6 7 8 9 10

b a c a c b d d a c


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