An insight into factors influencing bank selection decisions of Indian customers.

Kamakodi, N. ; Khan, Basheer Ahmed

Indian banking industry is undergoing metamorphosis in terms on adoption on technology and automation. New generation private sector banks which came into existence in the last ten years have gained a substantial market share and government owned banks are losing market share to these new banks. It is very important for the banks to understand the preferences of the customers to offer the services required both to attract new clients and protect existing client-base from migrating to other banks. A survey was conducted and results obtained from 292 clients were analysed to understand the factors that influence the bank selection decisions. The top 10 parameters based on importance are found as Safety of Funds, secured ATMs, ATMs availability, reputation, personal attention, pleasing manners, confidentiality, closeness to work, timely service and friendly staff willing to work.

Introduction

For the past two decades, both the global and Indian banking industries have been undergoing rapid changes, reflecting a number of underlying developments. The most significant change has been advances in communication and information technology, which have accelerated and broadened the dissemination of financial information while lowering the costs of many financial activities. A lot of structural changes were introduced in 1991 in the Indian banking industry, which coincided with the Information Technology Revolution of the 1990s. Reserve Bank of India (RBI) appointed a committee under Dr Rangarajan in 1980s to implement computerisation in phases to improve customer service, productivity and enhance management control. A new class of banks "New Private Sector Banks (NPSBs)" came into existence as a result of liberalisation of Indian economy, which competed with both foreign banks and Indian banks for market share. The domination of Public Sector Banks has declined over the years with the entry and aggressive expansion of the Private Banks. NPSBs perceived future competition among banks would be essentially based on the technology and developed state of the art technology infrastructure, comparable to that of banks in developed countries. The government owned commercial banks today have a market share of around 75% (down from the earlier 95%), the private sector banks about 20% and the foreign banks about 5% (Kannabiran and Narayan (2005)). NPSBs also stress that importance of branch banking will diminish by Information Technology based channels like ATMs, Internet/Mobile/Phone banking etc. Tech-savvy foreign banks and NPSBs have progressed a long way in offering a wide range of innovative services to their clients while other banks (both PSBs and Old Private Sector Banks (OPSBs)) are racing to catch-up. All the banks are moving towards core banking solutions and are investing heavily on Technology. As almost a decade is over since the arrival of NPSBs, it will be in the fitness of things to study in the Indian context the banking habits and preferences of Indian customers. A survey was conducted and the responses received from 292 respondents were analyzed to understand the perception on technology based services and preferences in banking. The study listed the factors of importance in choosing a bank by customers and also measured the performances in a five-point scale.

Literature Survey

The business literature is flooded with vast array of information on the customer preferences of customers various countries, while such data is limited in the Indian context. Even though customer preferences vary from country to country based on the culture, demography, affordability, IT penetration etc., study of the scenario in the other countries may throw some light to us on the subject.

Profitability of banks and growth of client base are interlinked. With intensifying competition in the market, it is very important for the banks to understand "How customers choose their banks?" Then only banks can take proper marketing efforts to increase client base. Improper identification of true determinants of consumers' bank selection decision may result in poor results for marketing efforts. Management's failure to identify customers' desire is one kind of quality gap (Zeithmal et al., 1990).

It was found that Bank customers tend to be loyal provided they are satisfied with its service and stick on to the same bank for five to seven years on an average and they change over only when they move to a new home in an area outside their bank's network. (Huber et al., 1998)

Khazeh and Decker (1992) analyzed the determinants of consumers' bank selection decision thro a survey conducted among 1198 of business school alumni of Salisbury state university in Maryland using a questionnaire containing 22 factors that were identified to influence the banking decision. Service charges, the reputation of the bank, interest rates on loans, time required for loan approval and friendly tellers were identified as the top 5 determinants of bank selection decision. Effective advertising was considered as least important (Rank 22) while ATM availability, closeness to work, closeness to home were ranked 12, 16 & 17 respectively. Focusing customer attention on low ranking factors may do little to attract new customers and on retaining the existing one.

Thwaites and Vere (1995) studied the student buying behavior of banking services and concluded that students are not convinced about the concept of financial supermarket and were more inclined to shop around for the best offer. They were also found conducting business with more than one institution and were not particularly loyal.

A survey of customer perceptions of competing banks and their attributes are essential in providing the bank manager with usual representation of customers' view on banks attributes and position in market place. A study conducted by Zineldin (1996) in Sweden highlights the importance of effective market positioning and has examined the concept of bank positioning and different approaches that a bank can use to occupy competitive position in competitive market place. The study highlights the fact that a well integrated application of technology and staff helps to build customer loyalties by creating deeper and fuller customer relationships. The study lead to the conclusions that from the bank's customers point of view, factors relating to the functional quality such as friendliness and helpfulness of personnel, accuracy in account transaction management, efficiency in correcting mistakes and speed of service and decision making, are the most important determinants of bank selection. Results implied that convenience of location, price and advertising had a minor effect on bank selection. The results also indicated that the performance of the contact personnel, word-of-mouth and technological based services might also compensate for an overall low score of factors such as full service provider.

Edris and Almahmeed (1997) conducted a study at Kuwait and concluded that the true determinants of bank selection decision made by business customers are more likely to be a function of both perceived importance of bank attributes and the difference among banks in a given region with regard to each of these attributes.

Ulengin (1998) indicated that customer in Turkey was more interested in the functional quality of financial services rather than the technical quality dimension. The study further concluded that as there were no big differences among financial products offered by banks and the quality of financial products offered by banks are much beyond expectations of the customers, delivery channels and customer relations gain importance in bank choice process as there were a lot of problems in those areas. The substantive conclusions of this study are that, on an average, respondents of the survey prefer the extended customer loyalty programs, the continuous information flow from the bank, the off site ATMs, the minimum waiting time in the branches and a simplified applications form for all accounts a bank offers.

Nielson et al., (1998) conducted a survey of CEOs of business firms and banks to find out how well banking industry in Australia understands the need of their business clients. Significant differences were found for six factors, which business firms consider prior to establishing a banking relationship. Business firms were found to place far more importance on the banks willingness to accommodate their credit needs, the efficiency of banking operations and the fact that banks have knowledge of their specific business. On the other hand, banks felt it was more important for them to offer competitive prices, full range of services and provide a personal banking relationship.

Mylonakis et al., (1998) concluded that the most important bank selections criteria are convenience, bank reputations, quality of products and services, interest rates and fees, education and personnel contacts, facilities, branch environment, services and after service satisfaction. Their research on bank customers of Greece showed that bank selection criteria like location-convenience, quality of service (attention to the customer, personalized service, no queues) seen to influence the bank selection and factors like Advertising did not seem to influence bank customers at all.

Phuong and Har (2000) under took a study of bank selection decisions in Singapore using the Analytical Hierarchy process through a study of banking preferences of college students. The findings indicated that the most important criteria affecting undergraduates' bank selection decisions are higher interest rate for saving, convenient location and overall quality of service. They are followed by the availability of self bank facilities, charges on services provided by banks, low interest rate on loans, long operating hours, availability of students privileges and recommendations by friends and parents specifically. The respondents considered overall quality of service more than twice as important as recommendations by parents/friends.

Almossawi (2001) studied the bank selection criteria by students of University of Bahrain. Findings revealed that the chief factors determining the bank selection by students were: Bank's reputation, availability of parking space, friendliness of the bank personnel and availability and location of ATMs. Study also found that the priorities of male and female students differed.

Devlin (2002) analysed the customer choice criteria in retail banking market in the UK on the potential variations in the importance of various choice criteria, which were classified as either intrinsic or extrinsic, with respect to customer financial knowledge. Intrinsic attributes were defined as those specific to a particular service rather than generalisable across services like price and service specific features. Extrinsic attributes were those factors that are not specific to a particular service and can be generalized across offering like service quality factors, corporate brand and relationship factors. It was found that lower knowledgeable groups were particularly influenced by extrinsic criteria of location of the branch and recommendations that they receive. Even though such extrinsic factors were found to influence higher financial knowledgeable groups also, higher knowledgeable groups were found more likely to take account of intrinsic attributes such as service features, rate of return and low fees in their choice.

Studying and understanding customer defection/ switching process is equally important as studying customers bank selection process as losing clients can have negative effect in bank's market share and profit.

Levesque and McDougall (1996) investigated the major determinants of customer satisfaction and future intentions to switch in the retail banking sector. 17 items were selected to measure service quality and switching intentions such as service quality dimensions (e.g. getting it right at the first time) service features (e.g. competitive interest rates), service problems, service recovery and products used. It was found that service problem and the bank's service recovery ability have a major impact on customer satisfaction and intentions to switch.

Colgate and Hedge (2001) studied the process of defection in Australia and New Zealand through a mail survey. The study indicated three main problem areas, which influenced customers to switch banks, were service failures, pricing problems and denied services. This finding is important in our context of study because, a client may switch to another bank because his present banker may not provide a service, which the customer thinks most important. They further add that customers tend to complain more often about services failure prior to exiting firm and customers may be staying silent about the problems that are most important in their decision to exit the firm.

Aish et al., (2003) compared the bank selection decisions of the small business market across UK and Egypt and the results advocated various similarities and provides evidence to suggest that brand plays major role in the bank selection decisions of the small businesses at both UK and Egypt .The study reinforces the opinion that technical quality (quality of service itself) is more important than functional quality (quality of the service provider) in bank selection decisions. More specifically both Egyptian and UK small business customers consider financial items (fees, interest rates and credit availability) as the most important factors in bank selection decisions.

Devlin and Gerrard (2005) studied the relative importance of various choice criteria for main and secondary banks. Results showed that relatively rudimentary factors such as location, recommendation and relationships were important choice criteria when choosing a main bank. Though the same criteria were found to be strongly influential in choosing the secondary bank, offering an incentive was also significantly more important in prompting the choice of secondary bank. Service exception was found to be significantly more important for main bank as were low fees and over draft charges.

Indian financial market is very diverse and the preferences of services change across demographic factors like education, age, sex, salary/earnings level etc. Hence, in an attempt to get a true representative sample, we sought the help of one of the leading retail financial services companies. The company advises clients on various investment options like mutual funds, shares, bonds, Insurance etc. The clientele of the company includes clients of various banks and has over 100 branches across various states of India. Out of their over one hundred branches, twenty branches were chosen carefully covering fifteen cities and towns including three of the four metros spreading across eight states across India.

The main instrument used for this research study was the questionnaire/survey designed by the researcher based on the factors which were selected from various empirical research works covered in the literature survey and were finalized after several rounds of discussions with select panel of bankers, customers using banking services and an academician.

Twenty five questionnaires were sent to each of those twenty branches asking them to get the questionnaires filled up by clients who came to their offices for investment purposes. After about ten days 292 filled up questionnaires were received back i.e. response rate of 58.4%.

When the answers were analyzed (Table 10), it was found that about 55 % of the respondents were banking with public sector banks, 7% with old private sector banks, 25% with new private sector banks, 9 % with foreign banks and remaining with cooperative banks and others, which means that Public sector banks are under represented by 20 % against their market share and others are over represented to that extent. This figure approximately represents the market share of respective categories in towns and metros as the rural market is almost monopolized by public sector banks which results in higher market share for PSBs. We have not covered rural market in this study.

In educational qualification about 70% of the respondents (Table 8) were graduates and post graduates, 15 % school final/Diploma and balance were professionally qualified and others. About 15% of the respondents reported monthly income (Table 9) over Rs 100,000, about 15% between Rs 50,000 and Rs 100,000, 30% between Rs 10,000 and Rs 50,000 and remaining below Rs 10,000. About 80% of the respondents are male. This may be because of the fact that still male members of the family make investment decisions in most of the families and since the questionnaires were filled by persons who came to the branches of the investor advisory services company (Table 6).

Analysis and Discussion

The questionnaire listed the important factors identified as the influencing factors on decision making and satisfaction levels of the clients from various studies referred in the literature survey and captured the respondents' perceived importance of the factors viz. a viz. the performance of the bank on each of the factors. The responses were captured in a scale of 1 to 5, 1--representing the "Very Important" while 5 representing "Not at all important". The weighted average scores of all responses were calculated and the scores on importance were ranked and tabulated.

On analyzing the Table 1, the following things may be observed. The safety of funds is the most important factor (Rank 1) for the respondents in choosing the bank. When the top 10 parameters based on importance are listed safety of funds, secured ATMs, ATMs availability, reputation, personal attention, pleasing manners, confidentiality, closeness to work, timely service and friendly staff willing to work are rated as top ten factors of importance in making a bank selection decision. Having the "Salary account" has been ranked 34th in terms of importance by the respondents but while the reason for switching of banks were analysed (Table 3), it became the third most important factor for switching. It could be that even though the customers may not want to switch bank, the employers' decision of having the salary account with another bank, has forced customers to switch over.

26.4% of the respondents (Table 2) have changed their prime bank in the last ten years. Change of residence was found to be the most important factor with 8.9% while 7.2% (Table 3) of the respondents have changed their prime bank as technology based services were not available with their earlier prime bankers. 5.1% have changed their prime bank as their employer had the salary account with the new bank. The percentage of people changed is almost equal to the total market share acquired by New Generation banks in the past 10 years.

16.8% (Table 4) of the respondents have reported that they were planning to change their prime bank in near future for which 6.2 % (Table 5) have cited the absence of IT based services as the reason for change, 3.4% cited the employers choice of new bank to disburse salary as the reason while 2.7 % cited likely change of their residence as the reason for changing their prime bank.

Conclusion and Recommendation

The top 10 factors of importance influencing the respondents to choose the bank are Safety of funds, Secured ATMs, ATMs availability, Reputation of the bank, personal attention, pleasing manners of the staff, confidentiality, closeness to work, timely service and friendly staff willing to work. It is understandable that safety of the funds is ranked number one in making the bank selection decisions. The factor "reputation of the bank" also has the perception about "safety of funds" built in it. At the same time "advertisements" is ranked only at 39, which lead to the opinion that "advertisements" on stand alone basis do not rank any where on the top of the customers in making bank selection decisions. This factor has to be studied in detail to understand the role of advertisements in bank selection decisions.

It is found that availability of ATMs finds a top priority in customer bank selection. Hence banks' have to give due importance in establishing a wide ATM network or entering into alliances with various banks. While studying the switching behaviour or bank clients, availability of Technology based services is found to be a major reason for clients to switch banks. Hence banks have to work on that area to understand the needs of the client and have to implement strategies to satisfy the needs in order to retain their existing clients and attract new clients.

Similarly the soft skills of the counter staff members has a significant role to play in influencing bank selection decisions of the customers, which is evident from the fact that five out of top ten factors are found to be the factors linked with the performance of the staff members. Hence banks have to take significant efforts in selecting, training and motivating the staff members to perform to the satisfaction of customers.

While rate of interest on deposits (rank 12) has a significant influence in bank selection decisions, clients are ready to pay reasonable service charges (rank 38).

The area of factors influencing customers on bank selection needs further research works to validate the findings with larger sample size and findings will help banks to make proper decisions in IT strategy.

References

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N. Kamakodi * and Basheer Ahmed Khan **

* SASTRA University, Thanjavur, Tamilnadu, India

** Pondicherry University, Pondicherry, India

* E-mail: [email protected], ** E-mail: [email protected]

Table 1: Ranking of "Factors of Importance"

Parameters Weighted average Rank Importance
 Score of
 Importance Rating

Safety of funds 1.50 1
Secured ATMs 1.60 2
ATM availability 1.61 3
Reputation 1.61 4
Personal attention 1.65 5
Pleasing manners 1.66 6
Confidentiality 1.67 7
Closeness to work 1.69 8
Timely service 1.70 9
Friendly staff willing to help 1.71 10
Clear communication 1.74 11
Higher rate of Int-deposits 1.74 12
Size of the bank 1.74 13
Quick/prompt service 1.75 14
Minimum waiting time 1.75 15
Convenient working hour 1.75 16
More No. of branches 1.78 17
Good complaint handling 1.80 18
Any branch banking 1.81 19
Modern looking(building) 1.83 20
Prompt response 1.83 21
Ease contact branch manager 1.83 22
User friendly ATMs 1.84 23
Brand name 1.84 24
Connectivity to other bank's ATMs 1.87 25
Accuracy/absence of errors 1.89 26
No breakdown of machine 1.90 27
Closeness to home 1.90 28
Delivering what is promised 1.90 29
Dependability 1.90 30
Secured internet banking 1.98 31
Employees dress & appearance 2.01 32
User friendly net banking 2.03 33
Salary account 2.04 34
Easy connectivity 2.05 35
Higher rate of Int-loans 2.06 36
Debit card 2.09 37
Low/reasonable service-charges 2.10 38
Advertisement 2.11 39
Staff knowledge 2.12 40
Innovative services 2.14 41
Error free net banking 2.16 42
Internet banking 2.18 43
Depository services 2.22 44
Phone banking 2.25 45
Credit card 2.30 46
One stop banking 2.33 47
Other it based services 2.44 48
Friend's referral 2.61 49
My father's bank 2.62 50

Source: Primary Data

Table 2: Have You Changed Your Bank In Past 10 Years?

Responds of Respondent No. of Respondent Percentage

YES 77 26.4
NO 210 71.9
Blank 5 1.7

Total 292 100.0

Source: Primary Data

Table 3: Reasons for Change Your Bank in Past 10 Years?

Reasons No. of Percentage of Percentage
 Respondent people changed of total
 says "yes" the bank in last respondent
 10 years

IT based services not
 available with previous
 bank 21 27.3 7.2

Changed my home 26 33.8 8.9

Salary account with new
 bank 15 19.5 5.1

A specific request for a
 service was denied 1 1.3 0.3

General Service level of
 previous bank was not
 up to the expectation 4 5.2 1.4

Attracted by
 advertisements of
 present banker 1 1.3 0.3

Attracted by marketing
 efforts of present banker 0 0.0 0.0

Easy loans given by
 present bank 4 5.2 1.4

Requested /suggested by a
 friend, customer,
 business partner etc. 2 2.6 0.7

Interest rate service
 charges were unfavorable
 with previous bank 0 0.0 0.0

Others 1 1.3 0.3

Blanks 2 2.6 0.7

Total 77 100.0 26.4

Source: Primary Data

Table 4: Do You Plan To Change Your Banker In Near Future?

Responds of Respondent No. of Respondent Percentage

YES 49 16.8
NO 232 79.5
Blank 11 3.8
Total 292 100.0

Source: Primary Data

Table 5: Reason for Changing Your Banker in Near Future

Reasons No. of Percentage of Percentage
 Respondent people changed of total
 says "yes" the bank in respondent
 last 10 years

IT based services not
 available with previous
 bank 18 36.7 6.2

Changed my home 8 16.3 2.7

Salary account with new
 bank 10 20.4 3.4

A specific request for a
 service was denied 0 0.0 0.0

General Service level 0 0.0 0.0
 of previous bank was not
 up to the expectation

Attracted by advertisements
 of present banker 2 4.1 0.7

Attracted by marketing
 efforts of present banker 0 0.0 0.0

Easy loans given by present
 bank 5 10.2 1.7

Requested /suggested by a 0 0.0 0.0
 friend, customer,
 business partner etc.

Interest rate service 0 0.0 0.0
 charges were unfavorable
 with previous bank

Others 0 0.0 0.0

Blanks 6 12.2 2.1

Total 49 100.0 17.0

Source: Primary Data

Table 6: Sex wise distribution of respondents

Sex No. of Respondent Percentage

Male 231 79.10
Female 60 20.60
Blanks 1 0.30

Total 292 100.00

Source: Primary data

Table 7: Age wise distribution of respondents

Age (Years) No. of Respondent Percentage

< 18 2 0.70
18 to 25 55 18.80
25 to 35 79 27.10
35 to 45 47 16.10
45 to 55 49 16.80
55 to 65 29 9.90
65 to 75 23 7.90
> 75 5 1.70
Blank 3 1.00

Total 292 100.00

Source: Primary Data

Table 8: Education-wise distribution of respondents

Education No. of Respondent Percentage

School Final 13 4.50
Diploma 26 8.90
Graduate 120 41.10
Post-Graduate 87 29.80
Professionally Qualified 34 11.60
Doctorate 6 2.10
Others 1 0.30
Blanks 5 1.70

Total 292 100.00

Source: Primary Data

Table 9: Monthly earning-wise distribution of respondents

Monthly Earnings No. of Respondent Percentage

Greater than 5 Lacs 9 3.1
Between 2 to 5 Lacs 16 5.5
Between 1 to 2 Lacs 19 6.5
Between 50000 to 1 Lacs 43 14.7
Between 25000 to 50000 32 11.0
Between 10000 to 25000 55 18.8
Between 5000 to 10000 59 20.2
Less than 5000 37 12.7
Blanks 22 7.5

Total 292 100.0

Source: Primary data

Table 10: Type of Bank wise Respondents

Type of Prime Bank No. of Respondent Percentage

Public Sector Bank 160 54.8
Old Private Sector Bank 21 7.2
New Private Sector Bank 73 25.0
Foreign Bank 25 8.6
Co-Operative Bank 9 3.1
Blanks 4 1.4

Total 292 100.0

Source: Primary Data