Determinants of customer loyalty in retail banking a case study of BIDVs branches and transaction offices in lam dong province

DETERMINANTS OF CUSTOMER LOYALTY IN RETAIL BANKING A case study of BIDV’s branches and transaction offices in Lam Dong Province In Partial Fulfillment of the Requirements of the Degree

DETERMINANTS OF CUSTOMER LOYALTY IN RETAIL BANKING

A case study of BIDV’s branches and transaction offices in Lam Dong Province

In Partial Fulfillment of the Requirements of the Degree of

MASTER OF BUSINESS ADMINISTRATION

In MARKETING

By

Student’s name: Ms: NGUYEN TRAN TRA LINH (MBA04019)

Advisor: DR NGUYEN QUYNH MAI

International University - Vietnam National University HCMC

August 2013

DETERMINANTS OF CUSTOMER LOYALTY IN RETAIL BANKING

A case study of BIDV’s branches and transaction offices in Lam Dong Province

In Partial Fulfillment of the Requirements of the Degree of

MASTER OF BUSINESS ADMINISTRATION

Under the guidance and approval of the committee, and approved by all its members, this

thesis has been accepted in partial fulfillment of the requirements for the degree

Acknowledge

To complete this thesis, I have been benefited from the following people:

First of all, I would like to express deep gratitude to my advisor, Dr Nguyen

Quynh Mai, School of Business, International University, Hochiminh City, for her

effective academic advisory and her encouragement

Secondly, I would like to send my sincere thank you to the professors and

lecturers at School of Business Administration, International University The knowledge

and skills that I have learned from them are useful to complete this thesis

My thanks also go to my friends, other students of MBA111, who are doing their

theses at the same time with me, for your share and encouragement

I would like to thank managers and employees at BIDV‟s branches and

transaction offices in Lam Dong Province, for their enthusiasm and help

Last but not least, I would like to express great gratitude to my parents and my

sister who give me encouragement and financial support through the whole course They

have supported me with all the love

Plagiarism Statements

I would like to declare that, apart from the acknowledged references, this thesis

either does not use language, ideas, or other original material from anyone; or has not

been previously submitted to any other educational and research programs or institutions

I fully understand that any writings in this thesis contradicted to the above statement will

automatically lead to the rejection from the MBA program at the International University

– Vietnam National University Hochiminh City

Copyright Statement

This copy of the thesis has been supplied on condition that anyone who consults it

is understood to recognize that its copyright rests with its author and that no quotation

from the thesis and no information derived from it may be published without the author‟s

prior consent

© Nguyen Tran Tra Linh/ MBA04019/2011-2013

Table of Contents

CHAPTER ONE – INTRODUCTION 1

1 Background 1

1.1 Overview of the banking industry in Vietnam 1

1.2 Overview of the banking industry in Lam Dong Province 2

1.3 BIDV‟s general Information and the network in Lam Dong Province 3

1.3.1 General Information of BIDV 3

1.3.2 BIDV‟s network in Lam Dong Province 4

2 Research Problem 5

3 Research Question 7

4 Research Objective 7

5 Scope And Limitation 7

6 Significance Of The Study 8

7 Structure Of Thesis 8

CHAPTER TWO – LITERATURE REVIEW 9

1 Customer Loyalty 9

1.1 Definition 9

1.2 Importance of Customer Loyalty 10

1.3 Customer Loyalty Index 11

2 Factors influence Customer Loyalty 12

2.1 Customer Satisfaction 13

2.2 Service Quality 13

2.2.1 Concept 13

2.2.2 Impact of service quality on customer loyalty 14

2.2.3 Service Quality Measurement 14

2.2.4 Service Quality Measurement in the banking industry 15

2.3 Corporate Image 16

2.4 Customer Trust 16

2.5 Switching Costs 17

CHAPTER THREE – RESEARCH METHODOLOGY 18

1 Research Model & Hypotheses 18

2 Research Process 21

3 Measurement Design 21

3.1 Customer Loyalty Measurement 22

3.2 Customer Satisfaction Measurement 22

3.3 Service Quality Measurement 22

3.4 Corporate Image Measurement 24

3.5 Customer Trust Measurement 24

3.6 Switching costs Measurement 24

4 Questionnaire Design 25

4.1 First draft of Questionnaire 25

4.2 Pilot Test 25

4.3 Final format of Questionnaire 28

5 Data Collection Method 29

5.1 Sample 29

5.2 Sample Size 29

5.3 Sampling 31

6 Data Analysis Method 32

7 Validity And Reliability 35

CHAPTER FOUR – DATA ANALYSIS 36

1 Sample Demographic 36

2 Descriptive Statistics 39

2.1 Customer Loyalty 40

2.2 Customer Satisfaction 42

2.3 Service Quality 43

2.4 Corporate Image 45

2.5 Customer Trust 47

2.6 Switching Costs 48

3 Reliability Test 50

4 Exploratory Factor Analysis (EFA) 51

5 Confirmatory Factory Analysis (CFA) 54

6 Correlation Testing 56

7 Structural Equation Modeling (SEM) 58

8 Multi-Group Structural Equation Modeling (MGSEM) 62

9 One-Way ANOVA Testing 64

CHAPTER FIVE – CONCLUSION AND RECOMMENDATION 67

1 Conclusion 67

1.1 Customer Loyalty & Customer Loyalty Index 68

1.2 Factors influencing Customer Loyalty – Model Results 69

2 Recommendations 72

2.1 Applying Lean Six Sigma for banking business 74

2.2 Building multi-channel system 75

2.3 Enhancing banking infrastructure 76

2.4 Improving employee performance 76

2.4.1 Communication 77

2.4.2 Employee appearance 78

2.5 Managing Corporate Image 78

3 Limitation & Further Research Direction 80

REFERENCE 81

APPENDIX 92

List of Tables

Table 1.1: BIDV‟s network in Lam Dong Province 4

Table 3.1: Customer Loyalty Measurement 22

Table 3.2: Customer Satisfaction Measurement 22

Table 3.3: Service Quality Measurement - SERVQUAL Measurement 23

Table 3.4: Service Quality Measurement – SYSTRA-SQ Measurement 23

Table 3.5: Corporate Image Measurement 24

Table 3.6: Customer Trust Measurement 24

Table 3.7: Switching costs Measurement 24

Table 3.8: First pilot test‟s result – Cronbach‟s Alpha 26

Table 3.9: Second pilot test‟s result – Cronbach‟s Alpha 27

Table 3.10: Final format of Questionnaire 29

Table 4.1: Customer Loyalty descriptive statistics 40

Table 4.2: Customer Satisfaction descriptive statistics 42

Table 4.3: Service Quality descriptive statistics 43

Table 4.4: Corporate Image descriptive statistics 45

Table 4.5: Customer Trust descriptive statistics 47

Table 4.6: Switching Costs descriptive statistics 48

Table 4.7: Reliability test‟s result - Cronbach's Alpha 50

Table 4.8: Pattern matrix of variables 52

Table.4.9: CFA Result - Standardized Regression Weights 55

Table 4.10: Correlations testing result 57

Table 4.11: Coefficient of correlation (r) 57

Table 4.12: Regression Weights of Model 1 59

Table 4.13: Regression Weights of Model 2 60

Table 4.14: Model 2 - Squared Multiple Correlation 61

Table 4.15: Model 2 - Regression Weights 61

Table 5.1: Five steps of Lean Six Sigma 74

Table 5.2: The Trust Creation Process 78

Table 5.3: Strategic Brand Management Process 80

Table E.1: Cronbach‟s Alpha of Customer Loyalty 110

Table E.2: Item-Total Statistics of Customer Loyalty 110

Table E.3: Cronbach‟s Alpha of Customer Satisfaction 110

Table E.4: Item-Total Statistics of Customer Satisfaction 110

Table E.5: Cronbach‟s Alpha of Service Quality 110

Table E.6: Item-Total Statistics of Service Quality 110

Table E.7: Cronbach‟s Alpha of Corporate Image 111

Table E.8: Item-Total Statistics of Corporate Image 111

Table E.9: Cronbach‟s Alpha of Customer Trust 111

Table E.10: Item-Total Statistics of Customer Trust 111

Table E.11: Cronbach‟s Alpha of Switching Cost 111

Table E.12: Item-Total Statistics of Switching Costs 111

Table F.1: Round 1 - KMO and Bartlett's Test 113

Table G.2: Round 1 - Total Variance Explained 113

Table G.3: Round 1 - Pattern Matrix 114

Table G.4: Round 2 - KMO and Bartlett's Test 114

Table G.5: Round 2 - Total Variance Explained 114

Table G.6: Round 2 - Pattern Matrix 115

Table G.7: Round 3 - KMO and Bartlett's Test 115

Table G.8: Round 3 - Total Variance Explained 116

Table G.9: Round 3 - Pattern Matrix 116

Table G.10: Round 4 - KMO and Bartlett's Test 116

Table G.11: Round 4 - Total Variance Explained 117

Table G.12: Round 4 - Pattern Matrix 117

Table G.13: EFA‟s result - Cronbach‟s Alpha of Service Quality 118

Table G.14: EFA‟s result - Item-Total Statistics of Service Quality 118

Table J.1: Education level – Test of Homogeneity of Variances 121

Table J.2: Education level – ANOVA 121

Table J.3: Income – Test of Homogeneity of Variances 121

Table J.4: Income – ANOVA 121

List of Figures

Figure 2.1: Net Promoter Score Equation 11

Figure 2.2: Determinants of Perceived Service Quality 15

Figure 3.1: Research model 18

Figure 3.2: Research process 21

Figure 4.1: The percentage gender of BIDV‟s customers 36

Figure 4.2: The percentage education level of BIDV‟s customers 36

Figure 4.3: The percentage monthly income of BIDV‟s customers 37

Figure 4.4: The percentage job categories of BIDV‟s customers 37

Figure 4.5: The length of working relationship between customers and BIDV 38

Figure 4.6: Multichannel of BIDV 38

Figure 4.7: Categories of BIDV‟s Products and Services 39

Figure 4.8: Questionnaire response on Customer Loyalty 40

Figure 4.9: Questionnaire response on Customer Satisfaction 42

Figure 4.10: Questionnaire response on Service Quality 44

Figure 4.11: Questionnaire response on Corporate Image 46

Figure 4.12: Questionnaire response on Customer Trust 47

Figure 4.13: Questionnaire response on Switching Costs 49

Figure 4.14: CFA result 54

Figure 4.15: Revised Model 56

Figure 4.16: SEM result – Model 1 59

Figure 4.17: SEM result – Model 2 60

Figure 4.18: Final research model 62

Figure 4.19: MGSEM result – invariant model and variant model of Female/Male group 63

Figure 4.20: MGSEM result – P-value 64

Figure 4.21: Radar chart - Customer Loyalty & Education level 65

Figure 4.22: Radar chart - Customer Loyalty & Income 66

Figure 5.1: Recommendations for enhancing BIDV‟s customer loyalty 73

Figure E.1: The Trust Equation 112

Figure G.1: MGSEM result – invariant model and variant model of Low/Medium/High Income group 119

Abstract Purpose: Customer loyalty plays important role in retail banking because of its

high interaction with customers When the market is increasingly competitive, especially

in the context of economic recession, more and more banks try to find how to retain their

loyal customers and focus on factors enhancing customer loyalty Therefore, the main

purpose of this research is to investigate the factors that influence customer loyalty

Design/methodology/approach: In the research a causal modeling approach was

used and a conceptual model was proposed after an extensive review of the literature

Data was collected from 377 habitual customers of BIDV‟s branches and transaction

offices in Lam Dong Province Descriptive statistics, reliability test, factor analysis

(including EFA and CFA), correlation testing, structural equation modeling, and

One-Way ANOVA testing were applied to analyze and confirm the conceptual model

proposed in this research Besides, Net-Promoter Score was calculated to provide

valuable insights into the real situation of BIDV‟s customer loyalty in this region

Findings: The research finds that service quality, customer trust, and corporate

image positively impact on customer loyalty Furthermore, service quality and customer

satisfaction are regarded as a component because they tend to overlap in the long term

Practical implications: The research can be used for a reference aim and

reliability suggestions to enhance the customer loyalty of BIDV‟s branches and transaction offices in Lam Dong Province

Keywords: customer loyalty, retail banking, service quality

CHAPTER ONE – INTRODUCTION

The first aim of this research is to investigate customer loyalty towards BIDV’s

branches and transaction offices in Lam Dong Province This chapter firstly introduces

an overview of the banking industry in Vietnam and BIDV Then the research problem,

the research question and the research objectives, scope and limitation, the significance

of this study and the structure of this thesis are presented

1 Background

1.1 Overview of the banking industry in Vietnam

The banking system is regarded as the “lifeblood” of the economy and plays the

most important role in the financial intermediation system According to The State Bank

of Vietnam (http://www.sbv.gov.v), economy heavily depends on the banking sector The worst performance of the banking industry inevitably leads the economy into a

rapidly weak situation; and vice versa, the banking system is in an easily vulnerable

position because of the economic instability Furthermore, in the context of the deeper

international integration, the Vietnam banking system should be strengthened and

developed to take new opportunities and faced many difficulties and challenges

The banking industry in Vietnam is regulated by The State Bank of Vietnam

(SBV), which has the object of ensuring effective administration, supervision, regulation

and controls the banking businesses in Vietnam Nowadays, competition in this industry

has greatly increased as many new entrants have joined the industry At the end of 2012,

the banking industry includes 5 state-owned credit institutions, 34 joint-stock commercial

banks, 4 joint-venture banks, 50 branches of foreign banks, 49 representative offices of

foreign banks, 5 wholly foreign-owned banks, 18 finance companies and 12 leasing

companies There is information on the SBV‟s web site (http://www.sbv.gov.vn)

There are four remarkable periods in more two decades of major reform in this

industry Firstly, from 1990 to 1996, the quantity and sorts of credit institution

dramatically increased, which had the objective of meeting a surge in demand of financial

service During the second period, 1997 – 2005, the two-level banking system which had

just formed was consolidated and reorganized in the context of the Asian financial crisis

During the next period, from 2006 to 2010, higher charter capital and tighter regulation

were on the way Besides, wholly foreign-owned were appeared Finally, from 2011 till

now, the banking sector has faced many difficulties and challenges in the context of

global economic crisis The system of credit institutions has exposed the financial

weaknesses and vulnerabilities, especially increased bad debts In this situation, SBV

took decisive and consistent management measures to ensure liquidity, the stability of the

money, forex and gold markets, to reduce lending rates, and to restructure the banking

sector There is information on the SBV‟s web site (http://www.sbv.gov.vn)

1.2 Overview of the banking industry in Lam Dong Province

According to SBV (http://www.sbv.gov.v), the activities of the banking industry which mainly boost capital mobilization and investment contribute to promoting

sustainable region's economic and social development in The Central Highland in general

and Lam Dong Province in particular

In a meeting of the Central Highland Steering Committee on July 22th 2013 at

Lam Dong Province, it is reported that capital mobilization reaches VND 66 680 billion

increased of 5.27% compared to those in 2012 However, at the end of June 2013, the

total credit balance in the region is VND 112 008 billion increased of 7.2% compared to

those in 2012 Moreover, the banking sector importantly focuses on boosting agricultural

production and investing projects related industrial plants such as rubber, coffee, pepper,

and etc which are known as one of the main competitive advantages of the Central

Highland There is information on the SBV‟s web site (http://www.sbv.gov.vn)

In sum, the role of the banking industry in the Central Highland and also Lam

Dong Province is to mobilize financial capital in economics, to contribute to reinforce

competitive advantages of this region, to promote poverty alleviation and to enhance life

standard and to gradually change the rural image of this region

1.3 BIDV’s general Information and the network in Lam Dong Province

1.3.1 General Information of BIDV

BIDV (formerly named the Bank for Construction of Vietnam) is a state-owned

commercial bank established on 26 April 1957 On 24 June 1981, this bank was renamed

as the Bank for Investment and Construction of Vietnam, and was renamed again as the

Bank for Investment and Development of Vietnam on 14 November 1990 Following the

policy of restructuring state-owned enterprises, BIDV was subsequently restructured into

a state-owned corporation effective from 21 September 1996 BIDV is now a joint-stock

commercial bank which officially started its operations since 01 May 2012 There is

information on the BIDV‟s web site (http://bidv.com.vn)

The Head Office of the Bank is located in BIDV Tower, 35 Hang Voi Street,

Hoan Kiem District, Hanoi, Vietnam BIDV has developed a wide network, covering 63

provinces and cities nationwide, including 117 branches and 432 transaction offices,

which is one of the top three commercial banks with the most extensive network in

Vietnam There is information on the BIDV‟s web site (http://bidv.com.vn)

In spite of difficulties in the business environment, BIDV has still ensured its

growth in terms of scale and total operating incomes increased According to the BIDV‟s

annual report, as at 31 December 2012, BIDV‟s total assets reached VND 484.785 billion increased of 19.5% compared to those in 2012 Moreover, this bank has focused on safe

operation by making sufficient provision for credit losses, strengthening financial

capacity, and operating expenses as well as complying with SBV prudent regulation

In order to become a leading and modern retail bank, BIDV‟s numerous retail banking activities were undertaken on the basis of newly-enhanced retail banking

management techniques and the adoption of a customer-focused retail banking model at

every branch, expanding and improving the quality of traditional and modern distribution

channels, and upgrading the IT infrastructure and platform As the result, by the end of

2012, retail funding reached VND 179,128 billion marking an impressive year over year

increase of 38.64% and accounted for 49.76% of total fund mobilization compared to

45% in 2011.There is information on the BIDV‟s web site (http://bidv.com.vn)

1.3.2 BIDV’s network in Lam Dong Province

- Chi Lang Transaction office - 26 Chi Lang Street, Ward 9, Da Lat City

- Da Lat Transaction office - 42, Hoa Binh Street, Ward 9, Da Lat City

- Don Duong Transaction office - 281, 2/4 Street, Thanh My Town, Don Duong District

- Duc Trong Transaction office - 25, Tran Hung Dao Street, Duc Trong District

Bao Loc Branch 52 Le Thi Pha Street, Bao Loc City

- Bao Lam Transaction office - Loc Thang Town, Bao Loc City

- Di Linh Transaction office - 619, Hung Vuong Street, Di Linh District

Table 1.1: BIDV‟s network in Lam Dong Province (Source: http://bidv.com.vn)

2 Research Problem

In the previous researches, it is strongly clear that loyalty in the services sector is

more difficult to conceptualize than in the product sector due to the characteristics of

services (Lee & Cunningham, 2001; Mittal & Lassar, 1998) For instance, intangibility

and lack of standardization might influence reliability and confidence which play major

roles in building or maintaining loyalty (Bloemer et al., 1998; Dick & Basu, 1994)

However, theoretical and empirical researches have continued to investigate service

loyalty, because customer loyalty is considered the backbone of service organizations

(Gremler & Brown, 1996; Ruyter et al., 1997) More specifically, customer loyalty plays

very crucial role in helping lower marketing costs, solicit more customers, and effectively

operates trading leverage (Aaker, 1992), and is also a key factor in winning market share

and developing sustainable competitive advantages (Jones et al., 2007; Lee et al., 2011;

Lin & Wang, 2006;)

In financial services, nowadays, the traditional product-oriented bank is becoming

increasingly customer-oriented, which concentrates on customer loyalty as its main goal

In fact, the banking industry specific issues and characteristics affect consumer behavior

and attitude, which play very important roles in the formation of bank loyalty (Javalgi &

Moberg, 1997; Lewis & Soureli, 2006) Moreover, in the retail banking which have high

interaction with customers, there are very slight differences in financial services and

products between retail banks It is shown that customer loyalty has obvious importance

to all retail banks in the highly competitive market (Beerli et al., 2004) Besides, during

the period of the global economic crisis and recession, customers who have become

increasingly sophisticated and knowledgeable can be expected to become even less loyal

with a tendency to open their new accounts in many banks (Jones et al., 2007) Therefore,

managers always try to find how to retain their current customers and concentrate on

factors which enhances customer loyalty

There are not many researches on customer loyalty of BIDV in the list of

Research Topics on the web site of BIDV Training School (http://bts.bidv.com.vn/) Although some topics seem to be relevant to bank loyalty, they have just embarked on

building loyalty programs, for example, “The Points Rewards Program for customers

who have saving accounts at BIDV named Earn Points, Get Rewards”, “The Promotion

Program for customer use products and services at BIDV named Loyal Customer" There

is information on the BIDV Training School‟s website (http://bts.bidv.com.vn/) Furthermore, by observation and mystery shopper as well, BIDV‟s branches and

transaction offices in Lam Dong Province have not conducted any survey of customer

satisfaction and customer loyalty

Additionally, the environment of the bank industry in Lam Dong Province is

increasingly competitive According to information from The State Bank – Lam Dong

Branch, before 2000, there were just few branches and transaction offices of state-owned

banks, such as: Vietinbank, Agribank and BIDV However, from 2000 to now, the

banking industry has undergone drastic changes in the quantity of credit institutions

system Many branches and transactions of other banks were established and have

developed, including Asia Commercial Bank (ACB), DongA Bank (EAB), Vietnam

International Bank (VIB), Eximbank, Techcombank, Sacombank, and etc

In sum, a significant gap exists in BIDV‟s branches and transaction offices in Lam Dong Province which should be investigated in order to propose highly effective

solutions and wise strategies what leads customers to become loyal toward this bank

Therefore, the subject of customer loyalty of BIDV‟s branches and transaction offices in

Lam Dong Province has to be received much-needed attention If customer loyalty and

factors enhancing customer loyalty are investigated, BIDV‟s customer loyalty in this region can be improved and enhanced

3 Research Question

For these above-mentioned reasons, the research seeks to answer the following

question: What factors that influence the customer loyalty in BIDV’s branches and

transaction offices in Lam Dong province?

4 Research Objective

Here are two main objectives of this research

 To define the factors that influence customer loyalty of BIDV‟s branches and transaction offices in Lam Dong Province;

 To propose recommendations to enhance customer loyalty of BIDV‟s branches and transaction offices in Lam Dong Province

5 Scope And Limitation

This research was conducted from March 2013 to August 2013, in Lam Dong

Province and Ho Chi Minh City There are three kinds of customers in BIDV including

individual customers, corporate customers and financial institution This research focuses

on determining the loyalty of individual customers in retail banking of eight branches and

transaction offices of BIDV in Lam Dong Province

The in-depth interviews with experienced managers of BIDV‟s branches and

transaction offices in Lam Dong Provinces who understand their own customers more

than anyone can not be conducted because of the time limitation Therefore, the

recommendations of this research cannot be proposed specifically for each banking

business of branches and transaction office of BIDV in Lam Dong Province

6 Significance Of The Study

It is expected to find out which factors improve customer loyalty in retail banking

By determining these factors, the research can be used for a reference aim and reliability

suggestions in order to enhance the customer loyalty of BIDV‟s branches and transaction offices in Lam Dong Province

7 Structure Of Thesis

This research is structured and organized in five chapters as follows:

Chapter 1 – Introduction: Introducing the thesis topic and a brief background

about it, and then following by problem statement, research question, research objectives,

scope and limitations, the significance of the research, and finally structure of the thesis

Chapter 2 – Literature Review: Presenting the related literature concerning

customer loyalty and customer loyalty in retail banking

Chapter 3 – Research Methodology: Providing detail instrument of research

model, research process, measurements and questionnaire design, data collection method

and data analysis method

Chapter 4 – Discussions and Findings: Analyze collected data and interpret into

the findings of the research

Chapter 5 – Conclusion and Recommendations: Draw out conclusion and

propose recommendations to enhance customer loyalty of BIDV‟s branches and

transaction offices in Lam Dong Province

CHAPTER TWO – LITERATURE REVIEW

The purpose of this chapter is to list some literatures relevant to this research

The chapter begins with the definition and the importance of customer loyalty, and then

follows by the net-promoter score which is popularly used to calculate customer loyalty

in companies Next, the most important and popular factors which influence customer

loyalty are presented These factors are customer satisfaction, service quality, corporate

image, customer trust and switching cost

1 Customer Loyalty

1.1 Definition

The concept of customer loyalty has been received much consideration and

attention from both academics and practitioners in many industries Although there are so

many different definitions about customer loyalty, there seem to be two basic approaches One is the behavioral approach and another is the attitudinal approach

Firstly, in the behavioral approach, Oliver (1999) defined customer loyalty as: “…

to re-buy product or service consistently in the future, thereby causing repetitive same

brand or same brand-set purchasing, despite situational influences and marketing efforts

having the potential to cause switching behavior.” In order words, customers who repeat purchase behavior such as amount of purchases, frequency of purchase and amount of brand switching have been regarded as loyal (Mercier, 2000; Zins, 2001)

In contrast, the attitudinal approach incorporates consumer attitudes, preferences and disposition towards brands which allows greater insight into loyal behavior (Javalgi

& Moberg, 1997) In addition, Reichheld (2003) defined customer loyalty as: “… to make an investment or personal sacrifice in order to strengthen a relationship with a

supplier who treats him well and gives him good value in the long term even if the supplier does not offer the best price in a particular transaction Consequently, customer loyalty is about much more than to repeat purchases.” He also explained that a customer making frequent repeat purchases might not be loyal, and emphasized that a loyal customer might not buy again and again because of a decrease in his or her need for a product or service

Other researchers suggested that loyalty is formed both by the customer‟s attitude

and behavioral intentions (Pedersen & Nysveen, 2001) and so it should be measured as a

combination of attitudinal and behavioral dimensions (Dick & Basu, 1994)

In sum, customer loyalty in this research is defined both the customer’s behavior

which is to make frequent repeat purchases consistent in the future and customer’s

attitude which is to make an investment or personal sacrifice in order to remain a

long-term relationship with a company.

1.2 Importance of Customer Loyalty

When markets become increasingly competitive, more and more companies

recognize the importance of retaining current customers and are increasingly concerned

to develop and maintain customer loyalty (McMullan & Gilmore, 2008) It is clear that it

is always costly to attract new customers Indeed, it takes five times as much effort, time

and money to attract a new customer than to keep an existing customer (Kotler et al.,

1996) Specifically, customer loyalty enables companies to reduce operational and

marketing costs (Griffin, 1995) to guarantee income, to increase market share (Meidan, 1996); to maximize the level of profitability (Rauyruen & Miller, 2007) and can boost

employees‟ morale and productivity (Lee & Cunningham, 2001) Besides, customer

loyalty can lead to price indifference, favorable word-of-mouth communication, endorsements and customer referrals, and resistance to competition (Barnes & Howlett, 1998) In sum, other factors besides customer loyalty play roles in driving a company‟s growth–economics; however, customer loyalty is clearly one of the most important drivers of growth (Reichheld, 2003)

1.3 Customer Loyalty Index

Among of ways measuring customer loyalty, using Net-Promoter Score (NPS) is

very effective for a company to produce a clear measure of an organization's performance through its customers' eyes

Net Promoter Score (NPS) is a customer loyalty metric introduced by Reichheld, (2003) NPS provides valuable insights into how to get more promoters and fewer detractors and a clear measure of an organization‟s performance through its customers‟ eyes According to Bain & Company, NPS has been adopted by several companies, including E.ON, Philips, GE, Apple Retail, American Express, Amazon, Rackspace, TD Bank, Harley-Davidson, Charles Schwab, Zappos, Costco, Vanguard, and Dell

This below equation is how we calculate a Net Promoter Score for a company

Figure 2.1: Net Promoter Score Equation (Source: http://www.netpromotersystem.com)

Firstly, asking customers “How likely is it that you would recommend our company to a friend or colleague?” is to count up the ratio of promoters to detractors The answer is settled on a scale which 10 means “extremely likely” to recommend, 5 means neutral, and 0 means “not at all likely” Based on the responses on a 0 to 10 rating scale, the company‟s customers can be divided into three categories including “promoters” (9-

10 rating–extremely likely to recommend), “passively satisfied” (7-8 rating), and

“detractors” (0-6 rating–extremely unlikely to recommend) More specifically,

“promoters” are loyal enthusiasts who keep buying from a company and urge their friends to do the same, “passives” are satisfied but unenthusiastic customers who can be easily wooed by the competition, and “detractors” are unhappy customers trapped in a bad relationship Then NPS is calculated by subtracting the percentage of detractors from the percentage of promoters (Reichheld, 2003)

According to Bain & Company, a company that gains world-class loyalty receives NPS of 75% to more than 80% and an average firm has an NPS efficiency of only 5 percent to 10 percent; while a firm has a negative NPS meaning that they are creating more detractors than promoters

2 Factors influence Customer Loyalty

Customer loyalty in service may be affected by many different variables which

vary among services, according to the specific characteristics of each service industry

(Harrison, 2000; Lewis & Soureli, 2006) In the retail banking industry, the most

important and popular variables are customer satisfaction, service quality, corporate

image, customer trust and switching costs (Athanassopoulos, 1997; Beerli et al., 2004;

Blanchard & Galloway, 1994; Lewis & Soureli, 2006; Newman & Cowling, 1996)

2.1 Customer Satisfaction

Customer satisfaction has been receiving more attention in researches Oliver

(1997) defined customer satisfaction as “consumers‟ post-purchase evaluation and affective response to the overall product or service experience” Jamal and Naser (2002)

described customer satisfaction as the full meeting of customer expectation towards

service or a product after using Egan (2004) put the definitions of several authors

together and stated that customer satisfaction as a psychological process of evaluating

perceived performance outcomes based on predetermined expectations

Many studies have found that higher levels of customer satisfaction could lead to

greater customer loyalty (Anderson & Sullivan, 1993; Beerli et al, 2004; Bolton & Drew,

1991; Boulding et al., 1993; Fornell, 1992; Levesque, & McDougall, 1996; Lewis &

Soureli, 2006) It is strongly clear customer satisfaction, in the highly competitive market,

is regarded as the substance of organizational success, because customer satisfaction can

lead to customer retention and then to profitability for the organization (Jamal & Naser,

2002) Therefore, enhancing customer satisfaction should be a key driver for firms in

building and improving customer loyalty

2.2 Service Quality

2.2.1 Concept

Service quality is a concept that has aroused considerable interest and debate in

researches because of the difficulties in both defining it and measuring it (Wisniewski,

2001) Service quality is commonly defined as the difference between customer

expectations of service and perceived service (Asubonteng et al., 1996; Lewis &

Mitchell, 1990; Wisniewski & Donnelly, 1996) If expectations are greater than

performance, perceived quality is less than satisfactory and hence customer

dissatisfaction occurs (Lewis & Mitchell, 1990; Parasuraman et al., 1985)

2.2.2 Impact of service quality on customer loyalty

The previous studies on customer loyalty have acknowledged that service quality

has both direct and indirect effects on customer loyalty (Olsen, 2002) These researches

have also indicated that service quality influences organizational performance, including

increasing sales profit, remaining competitive advantage, improving current customer

relations, attracting new potential customers, winning market share, enhancing corporate

image and finally promoting customer loyalty (Caruana, 2002; Duncan & Elliot, 2002,

Ehigie, 2006; Fisher, 2001; Kish, 2000; Levesque & Mc Dougal, 1996; Newman, 2001;

Szymigin & Carrigan, 2001) To sum up, the success of a service provider depends on its

high service quality which has a positive effect on customer loyalty (Panda, 2003)

2.2.3 Service Quality Measurement

The measurement service quality allows for comparison before and after changes

and the establishment of clear standards for service quality Edvardsen et al (1994) stated

that the starting point in developing service quality is to analyze and measure it The

model of service quality developed by Parasuraman et al (1985) is the most popular

model for measuring service quality There are 5 major gaps in the service quality model;

however, this research focuses on investigating the Gap5 between customer expectations

and their perceptions of the service quality, which is as a result of the influences exerted

from the customer side and the shortfalls on the part of the service provider

Parasuraman et al (1985) initially identified ten key determinants of service

quality, including Reliability, Responsiveness, Competence, Access, Courtesy,

Communication, Credibility, Security, Understanding, Tangibles However, Parasuraman

et al (1988) mentioned that SERVQUAL with five dimensions can better help in

assessing the expectations of customers and service quality perceptions It focuses on the

core value which managers need to take attention and action in order to improve service

quality The following figure is the determinants of service quality with five dimensions

Figure 2.2: Determinants of Perceived Service Quality

2.2.4 Service Quality Measurement in the banking industry

Although most of the studies of the banking industry have measured service

quality by applying the SERVQUAL model (Athanassopoulos, 1997; Blanchard &

Galloway, 1994; Marshall & Smith, 1999; Newman & Cowling, 1996), a number of

researchers have developed and validated new scales for this industry Among of these

researches, SYSTRA-SQ is one of new well-known measures of bank service quality,

especially for the retail banking, which was developed by Aldaigan & Buttle (2002) The

patrimony, reliability and validity of the scale in their research demonstrated that

SYSTRA-SQ is a measure of high utility for the retail banking

SYSTRA-SQ measurement consists of four dimensions, including service system

quality (containing the functional quality attributes and the technical organizational

attributes), behavioral service quality, service transactional accuracy and machine service

GAP 5

Word of Mouth Communication Personal Needs Past Experience

Expected Service

Perceived Service

Perceived Service Quality

quality These items were categorized against the technical and functional service quality

schema proposed by Grönroos (1978, 1982, 1990, 1994, 1997, 1999, 2000, and 2006)

2.3 Corporate Image

Corporate image is described as the overall impression on the mind of the public

about a firm (Barich & Kotler, 1991) According to MacInnis and Price (1987), corporate

image is the result of an evaluation process, which stems from ideas, feelings and

consumption experiences with an organization retrieved from memory and transformed

into mental images (Yuille & Catchpole, 1977)

In the researches, corporate image is demonstrated to positively affect customer

loyalty (Johnson et al., 2001; Juhl et al., 2002; Kristensen et al., 2000; Lewis & Soureli,

2006; Nguyen & LeBlanc, 2001) Although a customer does not have enough information

about a firm, information obtained from different sources such as advertisements and

word of mouth not only retains loyal customers but also attracts new customers (Bloemer

et al, 1998; Lewis & Soureli, 2006; Nguyen & LeBlanc, 1998) Therefore, corporate

image is considered as an antecedent of customer loyalty

2.4 Customer Trust

The trust appears whena party believes that the other party‟s actions would result

in positive outcomes for itself, and therefore to develop some form of positive behavioral

intention towards the other party (Anderson & Narus, 1990; Aydin & Ozer, 2005)

Accordingly, when customers trust a company, they are to form a positive buying

intention towards the company (Lau & Lee, 1999) Moreover, to trust a company,

customers should not only perceive positive outcomes but also believe that these positive

outcomes will continue in the future (Aydin & Ozer, 2005)

It is claimed that there is a positive relationship between customer trust and

customer loyalty in previous research (Chaudhuri & Holbrook, 2001; Gundlach &

Murphy, 1993; Lau & Lee, 1999) Trust reflects the credibility (Ganesan, 1994), which

affects the long-term orientation of a customer by reducing the customer‟s perception of

risk (Erdem et al., 2002; Ganesan, 1994) Specifically, trust reduces uncertainty in an

environment in which consumers feel vulnerable and unsafe, as they know that they can

rely on the trusted brand (Chaudhuri & Holbrook, 2001) Therefore, customer trust has

been recognized as an important role in enhancing customer loyalty

2.5 Switching Costs

Switching costs are defined as one-time costs facing the buyer when switching from one company to another company (Porter, 1998) Besides objectively measurable monetary costs, switching costs may also consist of the time, relationship and psychological effort when customers decide to become loyal customers of a new service provider (Bloemer et al., 1998; Klemperer, 1987)

The benefit of switching cost is to prevent consumers from switching service providers (Ganesh et al., 2000; Keaveney & Parthasarathy, 2001) This is why switching

costs can be regarded as barriers that deter customers from demanding a rival firm‟s brand (Aydin & Ozer, 2005) In the context of a market having switching costs,

customers select a service provider from a number of functionally identical brands, and then they continue buying the same brand even competing brands become cheaper In other words, the customer behaves loyally toward the service provider (Klemperer, 1987) For these reasons, switching costs are a factor that directly influences customer loyalty (Bloemer et al., 1998; Burnham et al., 2003; Jones et al., 2002; Lee et al., 2001)

CHAPTER THREE – RESEARCH METHODOLOGY

This chapter presents the methodological detail instrument used in conducting this research and provides a justification for steps taken The chapter begins with the

research model & hypotheses, the research process, and then follows by measurements

and questionnaire design Finally, data collection method (including sample, sample size

and sampling), and data analysis method is presented.

1 Research Model & Hypotheses

After reviewing above-mentioned literature, a casual model is proposed in which

the dependent variable is Customer Loyalty and independent variables regarded as the

antecedents of loyalty are Customer Satisfaction, Corporate Image, Customer Trust and

Switching Costs Further, the indirect effect of Service Quality on Customer Loyalty via

Customer Satisfaction is supported

Figure 3.1: Research model

The research hypotheses of the research model are as below

Effect of Customer Satisfaction on Customer Loyalty: In the researches of

customer loyalty in retail banking, Beerli et al (2004) strongly affirmed that the

relationship between satisfaction and loyalty is positive and statistically significant,

which satisfaction has a greater weightier on loyalty than switching costs This strong

H3 H2

H4

H5.1

H5.2

Customer Satisfaction Corporate Image

Customer Trust

Customer Loyalty

Switching Costs

relationship is demonstrated again in the research of Lewis & Soureli (2006)

Furthermore, a substantial amount of research concludes that satisfaction is an important

determinant of customer loyalty (Asuncion et al., 2004; Bearden & Teel, 1983; Cronin &

Taylor, 1992; Dick & Basu, 1994; Drake et al., 1998; Moutinho & Smith, 2000; Nguyen

& LeBlanc, 1998; Oliver, 1997)

H1: There is a positive impact of Customer Satisfaction on Customer Loyalty

Effect of Corporate Image on Customer Loyalty: It is clear that the image of a

bank can play a very important role in retaining loyal customers and attracting new

customers as well (Bloemer et al., 1998; Nguyen & LeBlanc, 1998) The positive and

statistically significant relationship between corporate image and customer loyalty is

confirmed in the studies (Johnson et al., 2001; Juhl et al., 2002; Kristensen et al., 2000;

Lewis & Soureli, 2006; Nguyen & LeBlanc, 2001) Hence, if the image of a bank is

better, its impact on customer loyalty is greater

H2: There is a positive impact of Corporate Image on Customer Loyalty

Effect of Customer Trust on Customer Loyalty: Because of the emotional nature

of customer loyalty, customer trust in the service provider‟s reliability and integrity is

extremely important (Bejou et al., 1998; Pedersen & Nysveen, 2001) In the research of

Lewis & Soureli (2006), it is strongly evidence that customer loyalty is affected by

customer trust This relationship is also proved in other researches (Ballester & Aleman,

2001; Chaudhuri & Holbrook, 2001; Gundlach & Murphy, 1993; Lau & Lee, 1999)

Therefore, the greater customer trust is, the greater customer loyalty is

H3: There is a positive impact of Customer Trust on Customer Loyalty

Effect of Switching Costs on Customer Loyalty: Switching costs include monetary

costs, time, relationship and the psychological effort generated from the uncertainty of

building a working relationship with a new service provider (Ruyter et al., 1998) In retail

banking, the positive and significant relationship between switching costs and customer

loyalty is demonstrated in the research of Beerli et al (2004) Moreover, other researches

also insist that switching costs can be significantly influential in determining customer

loyalty (Andreassen & Lindestad, 1998; Aydin & Ozer, 2005; Bloemer et al., 1998;

Burnham et al., 2003; Dawes & Swailes, 1999; Harrison, 2000; Jones et al., 2002; Lee &

Cunningham, 2001; Jones et al., 2002) Hence, customer loyalty is greater if switching

costs are greater

H4: There is a positive impact between Switching Costs on Customer Loyalty

Effects of Service Quality on Customer Satisfaction: There are researches

reporting a causal link between service quality and customer satisfaction (Anderson &

Sullivan, 1993; Bolton & Drew, 1991; Cronin & Taylor, 1992) In retail banking, it is

strongly proved that there is a relationship between customer satisfaction and customer

loyalty (Berlin et al., 2004; Lewis & Soureli, 2006) While customer satisfaction is an

antecedent of service quality in the research of Beerli et al (2004), service quality is an

antecedent of customer satisfaction in the research of Lewis & Soureli (2006) Here are

set of hypotheses for this relationship

H5.1: Service Quality has a positive impact on Customer Satisfaction

H5.2: Customer Satisfaction has a positive impact on Service Quality

H5.3: There exists a bidirectional relationship between Service Quality and

Customer Satisfaction

2 Research Process

Figure 3.2: Research process

In this phase of research, it is divided into four main steps:

- Step1: Review related literature to create the research model and design questionnaire

- Step2: Conduct two pilot tests which both qualitative and quantitative methods are

used to confirm the model and to refine questionnaire

- Step3: Conduct a survey and analyze data

- Step4: Draw out conclusion and propose recommendations

3 Measurement Design

Measurements were based on the literature review of previous researches and

semi-structured interviews with some bank employees and customers in the pilot tests

Literature review &

Research model

First draft of Questionnaire

First pilot test Questionnaire

to enhance customer loyalty

3.1 Customer Loyalty Measurement

Word of mouth

Customers recommend a bank to their friends, colleague or family

Reichheld (2003), Aydin & Ozer (2005), Lewis & Soureli (2006), Afsar

et al (2010)Re-buying

product/service

Customers continue using the product / service in the future

Reichheld (2003), Aydin & Ozer (2005), Lewis & Soureli (2006), Afsar

et al (2010), Priority

Customers would not hesitate to choose a bank when they have new need

Aydin & Ozer (2005), Lewis &

Soureli (2006), Jamal & Anastasiadou (2009), Afsar et al (2010)

Consistency

Customers are consistent with a bank even though a better bank is offered

Aydin & Ozer (2004), Lewis &

Soureli (2006), Jamal & Anastasiadou (2009), Afsar et al (2010)

Table 3.1: Customer Loyalty Measurement

3.2 Customer Satisfaction Measurement

Comparison

A bank gains more satisfaction than others from customers

Beerli et al (2004), Lewis & Soureli (2006), Jamal & Anastasiadou (2009)

Ideal bank It is an ideal bunk in the

customer‟s mind

Lewis & Soureli (2006), Jamal &

Anastasiadou (2009),Table 3.2: Customer Satisfaction Measurement

3.3 Service Quality Measurement

Firstly, SERVQUAL Measurement, a well-known scale created by Parasuraman

et al (1988) is applied In retail banking, most of empirical studies have measured service

quality by adapting the SERVQUAL model (Blanchard & Galloway, 1994; Marshall &

Smith, 1992) However, the result of reliability test in the first pilot test is rather bad

For this reason, SYSTRA-SQ Measurement, which is a new measurement of bank

service quality in retail banking developed by Aldaigan & Buttle (2002), was applied

with the result that the value of Cronbach‟s Alpha is good in the final pilot test

SERVQUAL Measurement

Reliability Ability to perform the promised service dependably

ability to inspire trust and confidence

Empathy Caring, individualized attention the firm provides its

customers Tangible Physical facilities, appearance of personnel and

equipment Table 3.3: Service Quality Measurement – SERVQUAL Measurement

Service system

quality

(technical

performance)

The technical organizational attributes include quality

of advice, flexibility and customized service solutions, promise fulfillment, employee empowerment and customer updating on service

Behavioral

service quality

It is composed of behavioral attributes such as politeness, courtesy, friendliness and helpfulness of the employee It also contains the employee‟s service attitude

mistakes when performing service for customers

Table 3.4: Service Quality Measurement – SYSTRA-SQ Measurement

3.4 Corporate Image Measurement

Sustainability A bank is stable and firmly

established

Aydin & Ozer (2005), Lewis & Soureli (2006), Souiden et al (2006)

Innovation A bank is innovative and

forward-looking

Aydin & Ozer (2005), Lewis & Soureli (2006), Souiden et al (2006)

Business ethic A bank does business in an ethical

Table 3.5: Corporate Image Measurement

3.5 Customer Trust Measurement

Credibility Customers believe the information

from a bank

Aydin & Ozer (2005), Pedersen & Nysveen (2001), Lewis & Soureli (2006),

Reliability

How customers perceive the consistency of the bank‟s actions, and these actions connection with its words

Aydin & Ozer (2005), Pedersen & Nysveen (2001), Lewis & Soureli (2006)

Intimacy How secure or safe the customers

feel sharing with a bank

Pedersen & Nysveen (2001), Aydin & Ozer (2005)

Self-interest A bank acts to the best interest of

customers

Pedersen & Nysveen (2001), Aydin & Ozer (2005)

Table 3.6: Customer Trust Measurement

3.6 Switching costs Measurement

Selection Customers are undecided about

which bank to choose

Lewis & Soureli (2006), Beerli et

al (2004)Time It is time-consuming to do business

with a new bank

Aydin & Ozer (2005), Lewis & Soureli (2006)

Money It is costly to do business with a

4 Questionnaire Design

The questionnaire is designed to match with the objectives of the study and

conceptual framework

4.1 First draft of Questionnaire

The first draft of the questionnaire includes two parts, which one is customer‟s

evaluation on loyal and the antecedents of loyal and another is customer‟s information

In the first part, there are six components including Customer Loyalty (with 4

statements), Service Quality (with 5 statements based on SERVQUAL Measurement),

Customer Satisfaction (with 4 statements), Corporate Image (with 4 statements) and

Customer Trust (with 4 statements), Switching costs (with 4 statements) Ten-point

Likert-scale, ranged from 0 (extremely likely to disagree/Not at all likely to disagree) to

10 (extremely likely to agree) is used In sum, there are total 25 statements in this part,

which describe the customer‟s experience on the constructs of the research model

In the second part, customer‟s information is asked including age, gender,

education level, job situation, and income Besides, the information between customers

and BIDV is also exploited with the contents of the length of working relationship,

transaction channel and products/services which customers usually use

4.2 Pilot Test

In order to perfect the questionnaire for a survey, both qualitative and quantitative

methods are used for a pilot test

Firstly, semi-structured interviews were conducted to six employees and

customers at the Lam Dong Branch in May 2013 The objectives of this step are to

confirm interviewees‟ understanding definitions in the questionnaire and to select the

appropriate items of Service Quality based on SERVQUAL measurement on the list

Finally, some words were changed to make definitions intelligible and illuminating

Secondly, a customer survey was conducted to check the reliability of

measurements Data is obtained from 39 customers who use BIDV‟s service/product

many times per year and all their relationships with this bank are over 6 months This

survey is conducted at the Lam Dong Branch in May 2013 Then, the data was checked

by using Cronbach‟s Alpha value if a scale is reliable or not Because the sample is small, EFA (Exploratory factor analysis) cannot be used at that time The result of the

preliminary study is as the below table

Variable Cronbach’s Alpha N of Item

Table 3.8: First pilot test‟s result – Cronbach‟s Alpha

According to Table 3.8, the value of Cronbach‟s Alpha of Service Quality is 0.702, which seems to be not good This is why SYSTRA-SQ, a new measure of bank

service quality in retail banking developed by Aldaigan & Buttle (2002) were chosen to

replace SERVQUAL measurement For the new measurement, it was examined again

through qualitative and quantitative methods like the first pilot test Besides, the

Cronbach‟s Alpha of Switching Costs is nearly 0.95, which should be readjusted

To select appropriate items of Service Quality based on SYSTRA-SQ

measurement on the list, in the qualitative method of the second pilot test,

semi-structured interviews were conducted to eight employees and customers at the BIDV‟s

branch at Lam Dong Branch Beside, this step is also to confirm how customers

understand the definitions in the questionnaire Finally, some words were changed to

make the definitions more intelligible than that in the first pilot test; and some items were

replaced and some new items were added to refine measurements

Finally, the questionnaire adjusted from semi-structure interviews‟ result is used

for the next step of the second pilot test The purpose of this survey is to check the

reliability of measurements and to establish the final format of questionnaire for the

full-scale study In this quantitative method, data are obtained from 42 habitual customers

whose length of working relationship with BIDV‟s branch or transaction office is over 6

months This survey is conducted at the Lam Dong Branch Then, reliability test was

used to exam the reliability of measurements and the result of the preliminary study is as

the below table

Variable Cronbach’s Alpha N of Item

Table 3.9: Second pilot test‟s result – Cronbach‟s Alpha

Table 3.9 shows that the reliability statistics of all measurement factors in the

pilot test It shows that the minimum value of Cronbach‟s Alpha is 0.832 (of Customer

Satisfaction), and the maximum value is 0.914 (of Switching costs) All these Cronbach‟s

Alpha values are higher than 0.8 which makes this research more reliable for conducting

the full-scale study Besides, there is no value of Corrected Item-Total Correlation which

is lower than 0.3 The detailed reliability test‟s result of the second pilot test is displayed

in Appendix B Therefore, all the measurement‟s items of constructs are kept in the

formal questionnaire