The effect of relationship banking on customer loyalty in the retail business banking environment

Abstract

Relationship banking, as exemplified by retail banks, is a valuable enabling strategy that promotes competitiveness and provides sustainable success. The utilisation of relationship banking as a business strategy to increase customer retention, create customer loyalty and ultimately increase long-term profits is a relative young tactic, originating in the 1980s and gathering pace during the 1990s. The correct application of relationship banking could impact on the bottomline of banks favourably. Hence the positioning of this research to investigate the effect of the relationship banking offering on customer loyalty, and its use in realising customer loyalty and long-term value from relationship banking initiatives. The retail banking industry in South Africa is a complex and very competitive environment, which is dominated by the big four banks (ABSA, First National Bank, Nedbank, and Standard Bank). It is a business imperative for the management of the banks to ensure that they establish, develop and improve relationships with their most important asset, their customers. Operating in such a dynamic environment requires of banks to fully understand all the factors of relationship banking that affect their success and market share. What is the impact of relationship banking on customer loyalty, and what are the possible results that can flow from a close relationship between bank and customer? The main research hypothesis states that business customers who receive the relationship banking offering from their retail bankers are more loyal towards their bank than those business customers who do not receive the relationship banking offering. With this in mind the research seeks to clarify specific primary objectives based on the hypothesis: • To investigate the impact that relationship banking has on the loyalty of business banking customers in the retail banks in South Africa. ii • To identify the critical factors of relationship banking that can influence customer loyalty. • To identify the benefits of relationship banking and customer loyalty. The research composed of a field study in the retail banking industry, with a sample of 80 business banking customers with a close business relationship with their banker or having a personal banker looking after the relationship, and 80 business customers without a close business relationship with their banker or no personal banker looking after their relationship. The survey focused on the attitude or perception of business customers based on relationship and loyalty dimensions. The research, in combination with the literature review provided valuable insight into the factors influencing relationship banking, its value as part of a retail business banking proposition, as well as the effect it has on customer loyalty. It also provided insight into the importance of customer loyalty and its impact on customer retention and long-term profitability. It is clear from the literature review and research that a relationship banking offering adds value with regard to customer retention and loyalty. The results and findings from the research and literature review represent a remarkable difference between the perceived levels of customer loyalty of the two groups. This is an indication that relationship banking affects customer loyalty positively. The critical factors of relationship banking that were found to influence customer loyalty included the value proposition, service and quality, employee competency (relationship banker), price, reward and recognition, and communication. The benefits of developing and building customer loyalty included: retention of customers and staff, customer satisfaction, trust, word of mouth referrals and growth, cost reduction, cross-sales, profitability (relationship lifetime value) and enhancing the bank’s competitive advantage. iii The researcher recommends that retail banks must continue to implement relationship banking offerings across all business customer segments. A possible consideration will be to divide the relationship banking offering on different levels: high-touch; medium-touch; and low-touch. These different value propositions should represent mutual (bank and customer) requirements and financial feasibility for banks. Banks must place customer-centricity at the core of their relationship banking strategy. To support the relationship strategies banks need to understand the behaviour of their customers and their buying habits. Market segmentation is a critical aspect of relationship marketing and the segmentation of business customers must be in line with the different levels of relationship offerings. Segmentation should also be in line with customer value or customer profitability, complexity of financial demands, annual turnover and industry. This segmentation will allow banks to provide the correct relationship banking offering to the right customer. To support the segmentation process banks need to be able to determine the individual customer profitability. Management information systems must be developed and used to determine the customer’s profitability. Once the segmentation has been concluded banks must implement and use applicable CRM strategies and CRM systems to complement the relationship banking offering. It’s about knowing their customers well enough to determine the kind of relationship they would like to have. Banks must also try to extend their CRM strategy across all customers. The support from top management and understanding of the relationship banking offering is critical as a lack of support can derail the success. The main recommendations for further study that transpired from the research included: • Research on the calculation of relationship life time value. iv • Research on a model for appropriate market segmentation of business banking customers in South Africa. • Research on the importance of reward and recognition strategies to valued customers, plus loyalty programmes. • Research on the key characteristics of relationship bankers.