Alternative Distribution Channels vs Traditional Banking - Research Paper Example

ALTERNATIVE DISTRIBUTION CHANNELS VS TRADITIONAL BANKING Background of the Study Since the 1980s, electronic banking has been available in the United Kingdom; still, only a fraction of the banking public regularly avail of its several services twenty years into its implementation (Daniel &Storey, 1997). There are several types of electronic banking that have evolved over the years. Some ten years ago, the basic form of internet banking would involve the use of web pages that provide information about the bank and its products. The web page would allow companies access to groups of customers not being reached before. At present, all banks in the UK have Web pages, which increasingly allowed customers to interact with the information provided. This would include calculating the payments on a mortgage, or to avail of services by the bank. The web page also acted as mechanism for handling customer complaints and for soliciting suggestions for improvement. Promotion and selling via the web page has already made it a distinct form of remote distribution. The interactive nature of this distribution channel makes it an especially potent tool for keeping the product within customer recall and encouraging customer involvement. Daniel & Storey (1997) mentions that it has been proven by research that people remember: 20% of what they see 40% of what they see and hear 70% of what they see, hear and do. At present, more often than not electronic banking would refer to electronic fund transfer (EFT). It now entails the use of computer and electronic technology as substitute for paper transactions and check payments. EFT transactions are initiated through cards with magnetic strips or codes inputted through a handheld device, that are enabled by the account owner or those he/she may authorize. Many financial institutions now use ATM or debit cards activated by a Personal Identification Number (PIN) (FTC, 2006). There are various objectives for which banks employ electronic banking, foremost of which is as a new distribution channel. Financial services may be made accessible to more potential customers at a lower cost for an equivalent quantity. This enables banks to enlarge their market without opening new branches. In the Unites States, the web is used to explore opportunities in three different ways: to market information , to deliver banking products and services, and to improve customer relationship (Nicoleta, 2006). It is interesting to determine how popularly in what ways alternative banking distribution channels are used in the UK. Aim and Objectives This study aims to determine the qualities that customers feel are important in assessing alternative banking distribution channels, and the level of satisfaction they have gained based on their experience with using each of these services. Main Research Question How effectively do alternative banking distribution channels satisfy customers compared to traditional banking? Related Sub-questions 1. What are the services under alternative banking distribution channels? 2. How important do customers regard these services ? 3. How satisfied are customers regarding these services? 4. Do customers prefer alternative banking distribution channels to traditional banking, vice-versa, or neither? Why? 5. What are the implications for alternative distribution channels in banking? Methodology This study is a historical-descriptive study that shall employ both quantitative and qualitative analysis techniques. It shall source quantitative primary data through the use of survey questionnaires. Data from these questionnaires shall be supported with qualitative primary data to be sourced through interviews. Respondents shall be chosen through random sampling, and the population to be sampled shall be all individuals 18 years and older who avail of banking services, whether or not they are bank depositors or account holders (since there are banking services, such as some credit cards, that do not require the customer to open an account with the bank). The conceptual framework shall follow the theory of customer satisfaction and service quality, as depicted in the table that follows: Table X.X The Distinctions between Customer Satisfaction and Service Quality Source: Fen & Lian, 2006, as adapted from various sources (Taylor, 1993; Oliver, 1993; Rust and Oliver, 1994; Spreng and Mackoy,1996; Choi et al., 2004; Grace and O’Cass, 2005) Financial customers satisfaction shall be elicited concerning banking transactions conducted with, automated teller machines, money transfer at the point of sale (anywhere banking), credit cards, debit cards, internet banking, telephone banking, and smart cards. The following service quality criteria have been suggested by and combined from the study of Williamson & Lichtenstein (2006), and Bhalakrishnan (2009). 1. Accessibility – This refers to the degree that the customer could gain access or reach to the means of availing of the service. In the case of internet banking, this means that the customer gains access not only to a computer or similar device, but also to an internet connection. Some individuals may have computers with internet connections, but such subscriptions sometimes have limited access hours, for cost based reasons. This access time may be used for work purposes or children’s homework, with little or no time to devote to internet banking. Likewise, where the internet connection is available in the workplace, but the worker is restricted from using it for his/her personal utility applications because it is dedicated to work purposes, then such situations could not be counted as accessibility. 2. Self-efficacy – This criteria refers to the person’s confidence in using and availing of the service, given that it is available. Confidence is usually acquired with frequency of use, if not of the service itself, then the technology involved. It is possible that individuals may choose to avoid using an available service because of their lack of familiarity with it, leading to the belief that it is not necessary in their lives. 3. Convenience – More than availability and accessibility of the service, this refers to the compatibility of the service with the lifestyle, workplace or housebound use, not having to travel, personal safety, not having to wait, and saved time. 4. Usability – This criterion refers to the ease of use, and is contrasted with complexity. Complexity may be associated with the need to perform many steps and/or a complicated procedure as preliminary to availing of the service. This may include the registration procedure, for instance, where the customer is asked to fill up a form with his or her personal data. It may also include the manipulation of unfamiliar devices needed to execute the service. Another description for usability is “user-friendliness”. 5. Security – Security as a criterion would involve concerns about trust in the institution, its personnel and in the medium, and the general issue of information privacy. 6. Costs – For the most part, this refers to the financial costs of availing of the service, in terms of service charge, interest charge, finance and overdue charges involved in availing of the service. It also means the opportunity costs involved, if any. It may or may not include the cost of acquiring the hardware or internet subscription necessary for the service; if the customer needed to acquire these items to especially avail of the service, then he may perceive that the costs involved could be attributed to this category. However, if such items are already within his possession and are used for other purposes, then only whatever incremental costs are involved to avail of the service would be considered. 7. Awareness – This refers to the knowledge possessed by the customer about the features and capabilities of the service. If the person were not initially aware of the service or its features and capabilities, this may be remedied by the existence of support services such as a tutorial or information source by which the customer could gain quick advice and instruction. 8. Flexibility – This quality criterion refers to the number and variety of uses that the remote banking service is able to perform pursuant to the needs of the customer. Flexibility also refers to the “smartness” of the service, the adaptability of the service to the customer’s preferences by sensing such preference from the customer’s responses. 9. Speed of obtaining desired results – This criterion refers to the relative speed by which the transaction yields the desired results. The speed factor is relative to the needs of the customer. If the customer is comfortable with receiving the results of the transaction within the next few days, then that is sufficient for the service to meet the speed criterion. If on the other hand, the service takes two minutes to respond when it should take five seconds, then that would mean that the service is too slow and fails the speed criteria. 10. Reliability - This criterion refers to the probability that the customer would be able to attain the desired results, and that such results would be: (a) accurately executed, and (b) consistent throughout several such events or transactions. Consistency is an important part of reliability, because it must be of such frequency that it may be relied upon as a matter of course. Review of Academic Literature Financial institutions exploit new technology to deliver new banking channels to their customers, in addition to the classic banking systems. Some of these services include Internet banking, automated teller machines (ATM), phone banking, wireless application protocol (WAP), electronic fund transfer at a point of sale (EFTPOS), bank branches in stores). Bhalakrishnan (2009) identified the following electronic banking services as significant alternative distribution channels: 1. Credit cards – These are instruments which provide immediate credit facilities to its holder to avail of a variety of goods and services at merchant outlets. For most credit cards, the customer may or may not be a depositor at the bank; a few, however, insist that the prospective cardholder open a deposit account with them. The cardholder is required to pay a minimum of about 5% on the total amount credited against the card. A yearly service charge is imposed for every year the customer remains a cardholder, and a monthly interest charge at the rate of 2.5% to 3.5% is charged on accounts that remain unpaid beyond the minimum payment due. 2. Debit cards – These facilitate payment or purchases by the cardholder. It immediately debits money from the cardholder’s account when used in a transaction. 3. Net (Internet) banking – This enables the bank’s customers to perform their banking operations from their home through the internet. Net banking offers the following functions: a. Check Account Balance b. Download Account Statement c. Request for a stop payment of a checque d. Request for a new checque book e. Make inquiries and access various bank accounts f. Transfer funds g. Facilitate bills payment h. Pay Credit Card dues instantly 4. Mobile Banking – This facilitates access of the customer to his/her account through the use of his cell phone. Mobile banking usually accommodates the following services: a. Check Account Balances b. Check last three transactions c. Request for a statement d. Request for a checque book e. Enquire on checque status f. Instruct stop checque payment g. View account details h. Transfer funds i. Pay utility bills. 5. Phone Banking – A service that allows the customer to conduct a wide range of banking transactions through the landline telephone, through interaction with a live customer service representative, or through programmed selections made on a menu verbally relayed by a computer-active voice recording. Phone banking facility allows one to: a. Check Account Balances b. Check the last three transactions c. Request for a cheque book d. Transfer funds e. Enquire on a cheque status, and much more. 6. Anywhere Banking – A feature that enables a customer to operate his roaming current account at centres other than the particular branch where he has his account. One can deposit or withdraw cash or transfer funds from any branch of a particular bank all over the country/jurisdiction, up to a prescribed limit. 7. Automated Teller Machines (ATM) – ATMs provide access to user-friendly graphic screens that prompt the customer through the steps in completing the desired transaction. The machines are programmed in the local language, are located in commercial areas and other convenient locations, and are sufficiently widespread to be easily accessible at any time. ATMs provide the following services: a. Cash withdrawal b. Cash deposit c. Balance inquiry d. Mini account statements e. Checque book requests f. Transactions at various merchant establishments g. Utility payments 8. Smart Card – This is the most recent innovation in banking and information technology, and is the largest volume-driven end-product today due it data portability, security and convenience. It is a plastic card with an embedded memory chip that stores electronic data and programs protected by advanced security features. Coupled with a reader, the smart card serves a variety of applications such as that of an access control device that makes personal and business data available to specific authorized users. Its technology combines private and public key cryptography with a digital certificate, one of the most advanced security techniques presently available. Several studies have been conducted on internet banking and electronic banking services in general. Following are a few of the findings from these studies. Internet banking, ATM, and phone banking are equally regarded by the market and used alternatively. This means that each of this substitutes the other, and if the bank gives greater importance to any one of these, (e.g. internet banking) it may give less importance to the other two because they are all perceived to be similar (Calisir and Gumussoy, 2008). Internet banking has a high success rate because off coordination with traditional banking and bank branches in stores. Internet and traditional banking are both supportive banking channels and customers use them equally (Moutinho, Davies, Peris, & Alcaniz, 1997). Furthermore, physical branch banking uses the internet channel to complement, not substitute, their services (De Young, Lang & Noelle, 2007). Most customers favor internet banking for its ease of use and access, even in their workplace or from home (BBC News, 2005). Other attractions are the convenience, speed, and round the clock availability of Internet banking (Cheng, et al, 2006). Customers appreciate the lack of restrictions in using Internet banking, as long as expectations of accuracy, security, network speed, user-friendliness, user involvement, and convenience are assured (Liao & Cheung, 2002). By user involvement is meant the control the customer can exercise over the process. Customers are able to view operation alternatives more easily through the internet banking design. Greater convenience and accessibility is related to the increase in the number of operation options the service offers (Devlin, 1995). Traditional bank branches are being converted into an open-space interface through which bank experts are able to meet and talk to customers to deliver specialized advise, but this does not influence the users to prefer traditional banking more than internet banking (Yakhlef, 2001). A negative comment, however, is that internet bank users do not believe that the internet banking web sites are totally reliable and secure. Customers are very private about their finances and are highly concerned about the security of the internet banking services (Furnell, 2004). Resistance to the use of internet banking is due mainly to consumers concern about security risks and the absence of any need to avail of it (Gerrard, Cunningham, and Devlin, 2006). New techniques are necessary to improve the reliability of Internet banking web sites. Error prevention and recovery are most important for self-service channels (Liao & Cheung, 2002; Jayawardhena & Foley, 2000). Internet banking performance depends much on user performance, and their performance determines whether they are able to accomplish their objective or not. Thus, ease of use and access are most important considerations in Internet banking (Calisir and Gumussoy, 2008). Customers avail of internet banking because they prefer not to spend too much time in the bank centers; thus, internet banking services as seen as time saving for the users and cost-effective for the banks (Nathan, 1999; Gopalakrisnan, et al., 2003). The cost-saving feature of internet banking also arouses the interest of banks rather than just customers (Shanmugham, 2003) User friendliness is incorporated into internet banking service, because they develop the ability to do individual and interactive search. The very service thus allows the customer to tailor the specific service to his/her preference (Bagozzi, 1990; Davis, Bagozzi, & Warshaw, 1989). For most goods and services, customer satisfaction is a guarantee of loyalty. In internet banking, however, customer satisfaction does not ensure customer loyalty (Bloemer et al., 1998; Bowen and Chen, 2001; Fornell, 1992; Ganesh et al., 2000; Mittal and Lassar, 1998). Although market research conducted by companies show that 80% to 90% of customers are either satisfied or very satisfied with their internet banking service; however, although satisfied they are breaking up and switching brands (Soderlund, 1998; Strauss & Neuhaus, 1997, Reichheld, 1996). On the other hand, customers who have expressed satisfaction with traditional banking are likely to avoid adopting new distribution channels (Chau & Tam, 1997), meaning that patrons of traditional banking may encounter an obstacle to shifting to internet banking. Even if customers perceive alternate forms of banking service channels to be an advantage, this perception of internet usage being advantageous, they would prefer to continue with internet banking because of greater satisfaction attached to it (Eriksson & Nilsson, 2007). While many of these studies deal with customer satisfaction and quality of service, they deal with other sets of quality criteria such as acceptability and loyalty to the bank. Several of them also date back to the last decade or two, when services were not as developed as they are today. This study is thus important in contributing to and updating the present academic literature, and to provide feedback to policy makers and marketing managers in the banking and finance industry. REFERENCES Bagozzi, R. P. (1990). Buyer behavior models for technological products and services: A critique and proposal. Advances in Telecommunications Management, 2, 43–69. BBC News (2005). Reluctance to switch banks fades. Published 28.11.05 BBC MMV. Accessed 10 February 2010 from /http://news.bbc.co.uk/1/hi/business/4385842.stmS. Bhalakrishnan, H (2009) Analyzing the Gap Between Management Perception and Customer Perception with Respect to the Services Offered in Retail Banking. Unpublished project report. Accessed 15 February 2010 from http://www.scribd.com/full/12248582?access_key=key-2mulj2jyp0wrg49sng2f Bloemer, J., de Ruyter, K., Peeters, P. (1998). Investigating drivers of bank loyalty: the complex relationship between image, service quality and satisfaction. International Journal of Bank Marketing 16 (7), 276–286. Bowen, J.T., Chen, S.L., (2001). The relationship between buyer loyalty and buyer satisfaction. International Journal of Contemporary Hospitality Management 13 (4–5), 213–217. Calisir, F & Gumussoy, C A (2008) International Journal of Information Management, vol. 28, pp. 215-221 Chau, P.Y.K., Tam, K.Y., (1997). Factors affecting the adoption of open systems: an exploratory study. 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Revista Tinerilor Economisti (The Young Economists Journal), Bucharest, Romania: Romanian-American University. Accessed 14 February 2010 from http://feaa.ucv.ro/RTE/012-04.pdf Reichheld, F.F., (1996). Learning from buyer defections. Harvard Business Review 74 (2), 56–69. Soderlund, M., (1998). Buyer satisfaction and its consequences on buyer behaviour revisited—the impact of different levels of satisfaction on word-of-mouth, feedback to the supplier and loyalty. International Journal of Service Industry Management 9 (2), 169–188. Williamson, K & Lichtenstein, S. 2006 Understanding Consumer Adoption of Internet Banking: An Interpretive Study in the Australian Banking Context. Journal of Electronic Commerce Research. 1 Jan 2006. Accessed 15 Feb 2010 from http://www.allbusiness.com/buying_exiting_businesses/3504608-1.html Yakhlef, A. (2001). Does the Internet compete with or complement bricks and mortar bank branches? International Journal of Retail and Distribution Management, 29(6), 272–281. SURVEY QUESTIONNAIRE A. Personal Profile Age: 18-25 26 – 35 36 – 45 older than 45 Gender: Male Female Occupation: Student Employee Self-employed Managerial H omemaker Other _________________ Highest educational attainment: Elementary High School Trade/vocation College Graduate school Other _________________ Do you have a bank account? Yes No If yes, what kind of account? Choose as many as are applicable. Savings account Payroll account Checking account Trust account Money market placement Other: __________________________ __________________________ Between going to the bank or transacting by remote channels (ATM, Internet, phone, etc.), which do you prefer, and why? (Feel free to elaborate) Go to the bank more Use remote channel more Use both equally Reason:_____________________________________________________________________ ____________________________________________________________________________ ____________________________________________________________________________ ____________________________________________________________________________ ____________________________________________________________________________ B. Service Quality: Importance of Criteria to the Customer This section seeks to gain information about how important you feel the criterion is in availing of remote banking services. Please encircle the number that corresponds to your answer, based on the following scale: 5 - Extremely important 4 - Very important 3 - Important 2 - Slightly important 1 - Unimportant B. Customer Satisfaction: Rating of Alternate Banking Service per Criterion Place a mark in the box corresponding to how satisfied you are that the service, on the average, meets your expectations under the criterion specified. The rating will be based on a five-point scale, with 4 as the best rating and 0 the worst. Thank you for participating in this survey. Read More