Effects of Disruptive Events on Consumer Loyalty: Bank Switching After 2008’s Crisis

Historically, consumers named convenience as their top reason for choosing a bank. Several studies found that this factor has been pushed to third place behind financial stability (65 %) and trust (54 %) after 2008’s financial crisis (Krohn 2009). Implications of this change in consumer behavior need to be analyzed in a sophisticated way: Only few European consumers participated in the “big game” gambled by the bank service industry. In Europe, only every tenth person holds stocks or is engaged in the financial marketplace with high hazard investments. From this point of view, experienced personal losses cannot be as much the determining factor for lost trust in the bank industry as an overall perceived concernment about the financial crisis. Our in-depth interviews show that consumers have an ambivalent view on the financial crisis. On the one hand, the financial crisis did not affect them directly and they quite often do not associate the financial crisis with their own financial service provider. On the other hand, they associate negative metaphors like “dragons” and “snakes” with the financial crisis, interpreting this disruptive event as harassment and having caused bad feelings toward the banking system. The financial crisis thus elevated the consumers’ sensibility to bank managers’ practices and damaged the image of bank service industries in general. As a consequence, consumers’ intention to switch their bank proves to be related with the concern about the financial crisis.

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Journal of Business and Policy Research Vol. 7. No. 3. September 2012 Special Issue. Pp. 195 – 205 Effects of Disruptive Events on Consumer Loyalty: Bank Switching After 2008’s Crisis Thorsten Teichert* and Daniel Wagenführer** The financial crisis of 2008 undoubtedly constituted a disruptive event in the worldwide financial markets, which impacted the relationships of consumers with their banks in various ways. This holds true given the importance of customers’ service and performance orientation in generally risk-averse households. Therefore, the effects of the financial crisis on customers’ relationships are explored. Insights are gained into patterns of consumer behavior in disruptive settings. A conceptual framework is generated – supported by in-depth interviews – to understand consumers’ concernments with and reactions to the financial crisis. A structural equation model is developed and tested in a survey with 167 customers. The quantitative analyses identify key determinants influencing customers’ loyalty and their intention to switch their bank. Keywords: Disruptive event, financial crisis, customer loyalty, switching intention. 1. Introduction Historically, consumers named convenience as their top reason for choosing a bank. Several studies found that this factor has been pushed to third place behind financial stability (65 %) and trust (54 %) after 2008’s financial crisis (Krohn 2009). Implications of this change in consumer behavior need to be analyzed in a sophisticated way: Only few European consumers participated in the “big game” gambled by the bank service industry. In Europe, only every tenth person holds stocks or is engaged in the financial marketplace with high hazard investments. From this point of view, experienced personal losses cannot be as much the determining factor for lost trust in the bank industry as an overall perceived concernment about the financial crisis. Our in-depth interviews show that consumers have an ambivalent view on the financial crisis. On the one hand, the financial crisis did not affect them directly and they quite often do not associate the financial crisis with their own financial service provider. On the other hand, they associate negative metaphors like “dragons” and “snakes” with the financial crisis, interpreting this disruptive event as harassment and having caused bad feelings toward the banking system. The financial crisis thus elevated the consumers’ sensibility to bank managers’ practices and damaged the image of bank service industries in general. As a consequence, consumers’ intention to switch their bank proves to be related with the concern about the financial crisis. A negative feeling is mainly determined by the German “angst” to become affected by the long-term impacts * Prof. Dr. Thorsten Teichert, Chair of Marketing and Innovation, University of Hamburg, Germany. Email : teichert@econ.uni-hamburg.de ** Dr. Daniel Wagenführer, Marketing and Innovation, University of Hamburg, Germany Email: Wagenfuehrer@econ.uni-hamburg.de Teichert & Wagenführer 196 of the financial crisis. Here, we are not discussing the reason for this feeling of consumers. Instead, we study the impacts of this feeling regarding loyalty and intention to switch the bank service provider from a consumer behavioral perspective. Loyalty and the intention to switch the retail bank are the dependent variables of key interest for papers which worked on related topics (Winnie & Gopal 2001; Shergill & Bing 2005; Lees et al. 2007). We argue that the consumers’ intention to switch their bank might have changed after the financial crisis. Consumers, who have been concerned with the financial crisis starting in 2008, might have an altered relationship to their bank service provider. Medial report on the financial crisis might have influenced the subjective feeling about own involvement. Thus, the subjective view about future financial losses (e. g. due to unemployment) is likely to affect the consumers’ relation- ship towards their banks. 2. Literature Review and Framework Consumers’ intention to stay loyal or to switch banks is a result of multiple factors. Lees et al. (2007) analyzed prices, competition, service failure and other reasons to predict the probability of consumers switching. Clemens (2007) investigated prices, service quality, reputation service products and commitment as independent variables. All these variables are interconnected hypothetically, but their interactions have yet not been validated empirically. In our approach, we want to investigate the interaction of key independent, mediating and response variables to derive joint implications from the aforementioned factors influencing the intention to switch the bank service provider. Our conceptual framework is based on a three-stage model of causal effects (Figure 1): As exogenous variables, we examine the capabilities of consumers to act independently on the financial market. According to the established M-O-A framework (Motivation, Opportunity, Ability) of Rothschild (1999), consumers should first be able to act on the financial market. They must then be motivated to act thereon. Finally, consumers have to be given the opportunity to act on the financial marketplace. We also consider mediating variables of consumer behavior. Here, we specifically investigate service orientation as well as performance orientation and their role as mediating variables. Finally, two opposing outcome variables are investigated: Loyalty and switching intention. For all variables dealt with here, dedicated hypotheses are generated as outlined in the following. Teichert & Wagenführer 197 Figure 1: Conceptual Framework Financial experience represents the ability of the consumers to act independently on the financial marketplace. It is considered a key variable for evaluating bank consultants and product offerings (Chen & Volpe 1998; Agnew & Zykman 2005; Rooij et al. 2007; Lusardi & Tufano 2009). We thus consider financial literacy as a personal characteristic, which influences the consumers’ expectations and their intention to be loyal. We argue that the subjective evaluation of the service quality is dependent on the own experience of the customers in the financial marketplace. There is yet little empirical evidence about the direct impact of financial experience on customers’ loyalty. O’Louglin and Szmigin (2002) found that financial experience is determined by the customer interactions with the bank service provider. Vice versa, financial experience should impact customers’ loyalty (O’Loughlin & Szmigin 2002). This, however, might be offset by an experienced disruptive event as the uniqueness of the banks position might be questioned by experienced consumers. This leads to the first hypotheses: H1a: Consumers’ financial experience strengthens bank loyalty (under regular conditions). H1b: Consumers’ financial experience does not impact on bank loyalty in case of an experienced disruptive event. Communication and trust characterize consumers’ propensity to base their financial decisions on extensive discussions with their financial consultants. Communication is a key aspect for the motivation to act in the financial market. A basic condition of intensive communication with the original retail bank consultant is trust. Trust regularly results from continuous interaction between costumer and bank. In addition, communication of bank issues enforces trust to the original bank service provider. Chaoprasert and Elsey (2004) discovered that a bank’s staff plays a key role to retain customer loyalty by providing a good quality personal service (Ouyang 2010). Hence, communication influences consumers’ loyalty to the bank service provider. Trust is a key factor of successful communication with the financial consultant of the home bank service provider. It is being regarded as one of the most critical variables for Independent variables Personal characteristics Financial Experience (Ability to act) Communication and decision behavior (Motivation to act) Information search (Opportunity to act) Mediator variables Consumer relationship characteristics Service orientation Performance orientation Outcome variables Consumer intention Loyalty Switching intention (within bank sector) Teichert & Wagenführer 198 developing and maintaining well-functioning relationships (Morgan & Hunt 1994; Moorman et al. 1993). This is especially important in our case as financial service providers have an implicit responsibility for the management of their customers’ funds and the nature of financial advice supplied (Harrison 2003). Thus, communication with the financial consultant is of special importance in case of disruptive events. This leads to the following hypotheses: H2a: Communication with and trust in the bank service provider strengthens the consumers’ bank loyalty (under regular conditions). H2b: Communication and trust exert an even stronger positive effect on bank loyalty in case of an experienced disruptive event. Information search behavior of consumers reflects their opportunity to obtain relevant information needed for financial decisions. A high degree of interpersonal information-sharing between consumer and financial service consultant is considered essential for successful service delivery and has been found to positively affect financial consumer relationship commitment (Sharma & Patterson 1999). Information search involves a high degree of interest and motivation in performance regarding the consumers’ own financial portfolio. Gough and Nurullah (2009) found that respondents who scored in the upper quartile of financial literacy were less inclined to evaluate services based on charges. Additionally, they were more proactive in discussing the investment strategy. This implies that the degree of information search behavior correlates with the expected outcome or profit – meaning the performance – of the investment. This aspect is likely to gain relevance in case of an experienced disruptive event. This leads us the following hypotheses: H3a: An elaborated information search leads to a strong performance orientation (under regular conditions). H3b: An elaborated information search behavior exerts an even stronger positive effect on performance orientation in case of an experienced disruptive event. Furthermore, communication and trust indirectly influence loyalty through the mediating variable “service orientation”. Information-seeking consumers will be highly motivated to switch banks if their own performance expectations cannot be achieved by their original bank. These effects should be independent of external conditions. H4: Performance orientation increases with elaborated information search. H5: Switching intentions increase with elaborated information search. Service orientation is a relationship characteristic which acts as a mediating variable. In the financial marketplace, it can be characterized by proactive service offerings on behalf of the bank service provider. Service orientation is a relevant construct to explain loyalty on a market with homogeneous products like basic offerings of the financial marketplace. Service orientation is empirically validated as a key factor for successful customer relationship management (Wahab et al. 2010) and consumer loyalty (Zeithaml et al. 1996). Heskett et al. (1994) suggested a positive relationship between staff satisfaction, service quality as well as customer satisfaction on the one hand and profitability on the other. Dimensions of service orientation, such as empathy and reliability, significantly predict customer trust and commitment (Hazra & Srivastava 2009). Arun Kumar et al Teichert & Wagenführer 199 (2010) found that perceived service quality fosters customers’ attitudinal loyalty. Results also indicate that service orientation is positively associated with customer loyalty in case of an experienced disruptive event (Ravichandran et al. 2010). These results lead to following hypotheses: H6: Consumers’ service orientation increases with a high level of communication and trust. H7a: High service orientation normally enhances consumers’ loyalty. H7b: A high level of service orientation exerts an even stronger positive effect on loyalty in case of an experienced disruptive event. Performance orientation reflects customers’ desire to receive above-average return on investment from the bank because of their investments. Berg (2008) found that resourceful consumers (both high income and education level) tend to be more financially oriented than others. Her implications show that people with meager financial resources tend to end up in rather unfavorable banks: They are less likely to monitor their banking conditions compared to persons with a high income. Thus, performance orientation is a key predictor for costumers’ intention to switch their retail bank. The higher the performance orientation of customers, the more likely disloyal behavior becomes (Samli & Frohlich 1993). If consumers strongly request valuable financial services from their provider, they will demand high performance. If their expectations remain unfulfilled, they will have a high propensity to switch their bank: H8: Performance orientation enhances the probability that a consumer breaks an existing business connection and that he intends to switch to another bank. Loyalty and switching intentions are the dependent variables in our model. Loyalty reflects the intention to achieve a business contact with the original bank service provider. The intention to switch the financial service provider and choose another bank is naturally negatively correlated with the probability to be loyal: H9: Loyalty is negatively associated with the intention to switch the bank. 3. Methodology We used a population sample of Berlin, the capital of Germany, to test our hypotheses. We drew a stratified random sample of tenants from a large housing company aged 18+, reflecting the distribution of gender and age. 1,000 tenants were contacted by mail and asked to respond to the questionnaire. 167 tenants responded to the questionnaire, their age ranges from 18 to over 75 years. 88 subjects out of the sample of 167 were male (52%). Measurement items are based on items developed and tested by prior research. They were modified in some cases to fit the financial service context of our study. All items were checked by a pre-study of nearly sixty business administration students. Internal consistency was checked by Cronbach’s Alpha and items were adjusted on these results. The final items for each construct are summarized in the following paragraphs. Consumers’ personal characteristics: Financial experience was measured by a three- item scale modified from Lusardi (2009) and reflecting the financial experience of consumers regarding saving books, stocks and the risk of these products. Communication and trust was measured by a modified scale from Flynn et al. (1996). Teichert & Wagenführer 200 Three items were used to measure the quality of communication with the financial consultant of the retail bank and the propensity to base financial decisions on this communication. Information search was measured by a four-item scale from Bearden et al. (2001) and incorporates items concerning the consumers’ possibility to acquire relevant information regarding financial products and services. Consumers’ relationship characteristics: Service orientation was measured by a three- item scale used by a previous online survey regarding the typology of bank service consumers. It consists of items regarding the consumers’ intention to pay for valuable services by the retail bank and their expectations to get proactive information from the concerned bank. Performance orientation is measured by a three-item scale previously used in an online-survey. Items of this online-survey were pre-checked; internal consistency as well as face validity were tested by the researchers. The used items comprise the consumers’ prospects regarding valuable offerings by their retail bank. A cost / performance ratio was used to operationalize the consumers’ performance expectations. Consumer intentions: The loyalty to the retail bank was measured by a three-item scale derived from Clemes et al. (2007) and focuses here on the intention to stay connected with the retail bank in the future. The intention to switch the original bank is also measured by Clemes et al. (2007). It consists of three items to measure the intention to switch the bank. Beginning with an exploratory factor analysis for all our items, we used the principal component method to extract the relevant constructs for our model. Tests of internal consistency and total variance explained were executed. Achieved values range from good – with Cronbach’s Alpha of 0.845 and average variance explained (AVE) of 75.51 % (construct ‘Switching intention’) – to satisfying (Cronbachs’ Alpha of the construct “financial experience”: 0.656 / AVE: 60.5 %)). For cross-verification, we conducted confirmatory factor analysis (CFA) on each of the eight constructs. Details are provided in the following table 1. To test our hypotheses, we developed a structural equation model. We yield a chi-square of 357.6 at 200 degrees of freedom (Chi² / DF = 1.788) and a Comparative Fit Index (CFI) of 0.913. This indicates an acceptable comparative fit of the model (Hu & Bentler 1998). The Root Mean Square Error of Approximation (RMSEA = 0.069) has a good value according to Browne & Cudeck (1993). The SRMR value of 0.095 can be accepted as well (Hu & Bentler 1998). Finally, even the Tucker Lewis Index (TLI) is at an acceptable level (0.90) according to Hu & Bentler (1998) who reported a value of 0.95 to be a good value. Teichert & Wagenführer 201 Table 1: Items, Constructs and Statistical Fit Indices Construct Item Factor- loading Commu- nality Cronbach’s Alpha AVE (%) Financial experience I have valuable knowledge about financial products. 0.755 0.570 0.656 60.5 I have knowledge about stock and funds and I know much about the risks of these products. 0.868 0.754 I already invested my money into stocks and funds. 0.699 0.489 Communication and trust Before deciding for a product, I ask my financial consultant for his or her advice. 0.905 0.819 0.81 72.25 When considering a financial decision, I always ask my financial consultant for his or her advice. 0.908 0.824 Mutual trust is very important to my financial consultant. 0.723 0.523 Information search I know where to get information about financial products. 0.927 0.860 0.889 75.43 Relevant information about financial products is easy to obtain for me. 0.930 0.866 I could easily source the relevant information regarding financial decisions. 0.888 0.788 Before deciding for a special financial product, I always decide at least between three alternatives. 0.707 0.501 Service orientation I expect my bank service provider to send me unrequested information about financial products. 0.783 0.613 0.682 61.42 I have the intention to pay more for competent advice from my bank. 0.748 0.560 I like it if my bank offers me products which fit to my personal environment. 0.817 0.668 Performance orientation I always search for the best performance of my financial products. 0.744 0.554 0.811 72.81 I am interested in the best cost-performance-ratio. 0.913 0.833 I a