Why customers choose community banks: an empirical study.

Bexley, James B.

INTRODUCTION

Community banks occupy a unique position in the United States. What is it that makes community banking unique? Based upon what customers have indicated in various banking situations, personalized and quality customer service will provide community banks with the ability to be more competitive than large regional or multi-national banks. This fact is born out in the two studies.

Customer satisfaction related to expectation fulfillment is an extremely important and critical issue facing organizations in the complex business environment of today. The banking industry is, certainly not an exception to this premise. In fact, it has been widely held in financial institutions that customer satisfaction may be the most influential factor in the selection of a banking institution. Likewise, with all of the changes taking place in the financial marketplace and the increase in competition, it becomes apparent that more attention must be given to customer service and satisfaction.

Based on what customers have indicated in various banking situations, personalized and quality customer service will provide community banks with the ability to be more competitive than large regional or multi-national banks.

To develop and implement a successful customer relations program, a financial institution must begin by determining the inherent view within the organization relative to customer service. Usually, it is determined that management sets the standard by which an organization establishes its goals and objectives. For management to set the standard, there must be some perception of what the customer or prospective customer wants and needs. By inference, the employees and officers of a financial institution usually exhibit those service characteristics emanated by management.

Therefore, it is not only important to obtain customer input as to the services and products they desire, but it is equally important to receive management's perceptions of the customers' wants and needs to avoid situations where the institution fails to live up to customer expectations due to failed communications. For example, management may determine that his/her bank does not need more than one automated teller machine. Management's basis for the decision is based upon low usage of an existing machine in a poor location. On the other hand, customers may be moving from that bank because they believe the competition has machines in locations that better meet their needs.

EXISTING LITERATURE

The American Bankers Association (1994) reported that during the past decade banks have seen their customer base decline. Efforts to reduce this decline have not proved successful to date. One thing that appears to be promising is the implementation of good customer service. To implement good customer service, it has been shown that researching customer expectations and determining customer desires is vital. Studies have shown that developing programs that revolve around customer expectations is necessary in the implementation of a successful customer relations atmosphere (Zeithaml, Parasuraman, & Berry, 1990). This directly relates to the implementation of a successful customer satisfaction program that measures and delivers goods and services.

Kessler (1996) noted that increasing satisfaction requires an understanding of what it is and how it is to be handled. There are three levels of customer satisfaction according to Noriaki Kano (Kessler, 1996). They are expected quality, desired quality, and excited quality. An example of expected quality would be the receipt of a deposit slip when a deposit is made at the bank. The receipt is definitely expected by the customer. Assume the customer had to spend a substantial amount of time waiting in line to make that deposit. The customer did not expect to spend that much time in line, in which case this goes to quality expectations of the customer. If the bank can shorten the wait in line, it will surely enhance desired quality. Excited quality may be a gift given to the customer when a deposit is made. This adds value to the service and consequently causes the customer to enjoy the banking experience. It has been noted that features considered excited quality might easily become expected. For example, when a bank traditionally gave a gift when the customer made a deposit, and then discontinued the practice, they may have found extreme disappointment (Kessler, 1996).

While many methods for improving customer satisfaction have been developed, customization of banking services may prove highly successful. According to Kotler (1999), bank customization may be exemplified in the following manner:

"Instead of viewing the bank as an assembly line provider of standardized services, the bank can be viewed as a job shop with flexible production capabilities. At the heart of the bank would be a comprehensive customer database and a product profit database. The bank would be able to identify all of the services used by any customer, the profit (or loss) on these services and the potentially profitable services that may be proposed to that customer" (quoted in Gutek, 1955, p. 202).

For the bank to be able to utilize customization, it must determine what services the customer wants and needs. Then, the bank must strive to continually maintain exceptional service. It must also determine which services add value to the relationships to set it apart from the competition.

Reliability in meeting customer service expectations is one of the most important dimensions of the service element (Berry, 1995). Simply providing an expected service in a reliable manner does not allow for a bank to exceed customers' expectations. Customers do not view a service that is expected to be provided by an organization as one, which should receive praise. According to Leonard Berry,

"Companies that surprise customers with unusual caring, commitment, or resourcefulness during the service process receive the extra credit." The providing of service that is above and beyond expectations cannot be accomplished until expected service is determined. Customer desires and needs must be determined when implementing a competitive customer relations program" (Leonard Berry,1995, p. 89).

THE STUDY

This research was conducted for a two-fold purpose. First, there was a need to determine the reasons customers choose community banks and to determine their likes and dislikes of the products and services offered by the banks. Second, the important element of determining whether chief executive officers properly perceived the customers needs and wants in the area of bank products and services needed to be measured.

A representative group of community bank chief executive officers were consulted and shown sample questions to develop the customer survey. This group's input was used to refine the final questionnaire for completion by the customer and also the questionnaire to be completed by the chief executive officers of the community banks.

Two questionnaires were finalized, with the first questionnaire being sent to chief executive officers from 60 banks in the three major population areas of Texas (Houston, Dallas-Ft. Worth, and Austin-San Antonio). The research included both urban and rural banks within these areas. Over 68% of the bank chief executive officers responded giving us a highly reliable sample for that portion of the research. After receiving the banks' responses, 150 questionnaires were sent to each of the 41 responding banks for random distribution to each tenth customer who came to the lobby or motor bank. While the questionnaire response rate was only 7.6%, the large size of the sample insured an accuracy of +/- 5%. The researchers independent of the banks conducted all tabulations.

Typical Customer

A snapshot of the a typical customer was indicated from the research results. That typical customer was female in gender, 45-54 years of age, and had been a customer of the bank for over 10 years. Additionally, she lived in a small to middle-sized community, preferred to use the motor bank, and conducted business with the bank four or more times per month.

Why Did the Customers Choose the Bank?

Customers were asked to rank the importance of criteria for selecting a community bank, choosing from advertising, location, recommendation of others, service charges or fees, and strength/stability. On average, strength/stability was ranked as the most important.' Location was second in importance, with service charges or fees in third place, recommendation of others was fourth, and advertising ranked fifth. A few customers selected the category "other"

Conversely, chief executive officers were given the same instructions and criteria as the customers, but the results were totally different. Location was considered most important, followed by recommendation of others in second place, strength/stability was third, service charges or fees ranked fourth, and advertising was fifth.

Most Frequently Used Facilities

Customers were given bank lobby, motor bank or drive-in, and automated teller machines to indicate which facility they utilized most. These customers indicated that 54% utilized the motor bank or drive-in most frequently, followed by 42% of the respondents selecting the bank lobby, and only 4% frequented the automated teller machine most. Chief executive officers perceived correctly that the motor bank would be the most used facility, followed by the bank lobby and the automated teller machine in that order.

Frequency of Conducting Business

Customers were questioned about the frequency of conducting business either in the bank lobby or motor bank, and they were given the selections of one time a month or less, two or three times a month, and four or more times a month. The customers indicated that 74% conducted business four or more times a month, followed by 22% who conducted business two to three times a month, and only 4% conducted business one time a month or less.

 Chief executive officers perceived overwhelmingly that most of the
 customers surveyed would conduct business four or more times per
 month in the bank lobby or motor bank.

Importance of Services In Selecting A Bank

There are a number of factors evaluated by customers in the selection of a bank. The questionnaire listed the following categories and asked the customers to rate them as "must have", "somewhat important", "desirable" or "not important": convenient lobby banking hours, convenient motor banking hours, Saturday banking hours, computer banking availability, telephone banking services, mutual fund services, insurance services, and reasonable fees/services. Chief executive officers were asked to rank their perception of how the customers would rate the categories.

There was little consistency in the customers' ratings of the categories and the perception of the chief executive officers as noted by the data in Table 2 below:

CONCLUSIONS

This research has provided some interesting insight into what the customer expects from a community bank, as well as the chief executive officers' perceptions concerning customer expectations. As is obvious from the research, some of the chief executive officers' conclusions are substantially different from the customers expectations in most of the areas. This would lead to the conclusion that there could be a problem unless the chief executive officers ask the customers what they want in the way of products and services, and then implement the customers' requests.

Age and gender did not impact why the customer chose the bank meaning that strength and stability was the critical factor in community bank selection. However, age and gender did impact which facilities the customers most frequently utilized. Therefore, one could draw the conclusion that banks whose markets are heavily skewed toward a specific age group (such as a retirement community on the older spectrum or young professionals in the younger category) need to take into consideration the age and gender make up of their customer base when they add lobby tellers, motor bank tellers, or automated teller machines.

Three things stood out in the research related to the importance of services in the selection of a bank. First, an unusually high number of customers, found reasonable fees/services as a must have, while surprisingly, the chief executive officers failed to recognize its significance to the customer. Second, customers said that they must have convenient motor bank hours. Chief executive officers recognized that the customers felt this was important by their responses. Third, convenient lobby hours were indicated as a critical must have. However, chief executive officers did not see this as being a must have, but did at least see it as somewhat important to the customer.

Two services in the selection of a bank ranked low in customer importance-mutual fund services and insurance services. Care should be taken not to ignore the future potential of these two services. In fact, it is possible that these ranked low due to the perception by the customers and the chief executive officers that these are not services normally found in the conventional banking environment. Since the face of the financial services industry is changing to more of a "one-stop shopping" concept, it would be wise for bankers to include these services in their future plans. Judging from customers responses to the questionnaire, it would appear that the most potential for future growth in the non lending areas of the average community bank would be in the areas of money market accounts, certificates of deposit, credit cards, mutual funds, and insurance.

In conclusion, there are many opportunities for growth in community banks, but they must provide the products, service and convenience the customers desire.

REFERENCES

Allred, Anthony T. and H. Lon Addams (2000), "Service Quality at Banks and Credit Unions: What Do Their Customers Say?", International Journal of Bank Marketing, 18/4, 200-207.

American Bankers Association (1994). A report on the status of banking.

Berry, Leonard L. (1995). Leonard L. Berry on Great Service, New York, NY: The Free Press.

Kessler, S. (1996). Measuring and Managing Customer Satisfaction, Milwaukee, WI: ASQC Quality Press.

Kotler, Phillip (1999), Kotler on Marketing: How to Create, Win, and Dominate Markets, New York, NY: The Free Press.

Sinkula, J. L. and L. Lawtor (1988), " Bank Characteristics and Customer Bank Choice: How Important Are Importance Measures," Journal of Professional Services Marketing, 3/3, 131-141.

Taylor, Steven A. and Thomas L. Baker (1994), "An Assessment of the Relationship Between Service Quality and Customer Satisfaction in the Formation of Consumers' Purchase Intentions," Journal of Retailing, 70 (2), 163-178.

Walker, James L. (1995), "Service Encounter Satisfaction: Conceptionalized," Journal of Services Marketing, 9, 5-14.

Zeithaml, Valarie A., A. Parasuraman, and Leonard L. Berry (1990), Developing Quality Service--Balancing Customer Perceptions and Expectations, New York, NY: Free Press.

Zineldin, Mosad (1996), "Bank Strategic Positioning and Some Determinants of Bank Selection," International Journal of Bank Marketing, 14/6, 12-22.

James B. Bexley, Sam Houston State University

TABLE 1: Facility Use By Age & Gender

 Age

Facility Under 25 25-34 35-44 45-54 55-64 Over 65

Bank Lobby 20% 50% 27% 41% 46% 57%
Motor Bank 60% 45% 66% 57% 52% 40%
ATM 20% 5% 7% 2% 2% 3%

 Gender

Facility Male Female

Bank Lobby 50% 36%
Motor Bank 45% 61%
ATM 5% 3%

TABLE 2: Customer & CEO Ratings of the Categories

 Must Somewhat Not
Convenient Lobby Hours Have Important Desirable Important

Customers 58% 26% 13% 3%
CEOs 35% 53% 10% 2%

 Must Somewhat Not
Convenient Motor Bank Have Important Desirable Important

Customers 69% 18% 9% 4%
CEOs 66% 31% 3% 0%

 Must Somewhat Not
Saturday Banking Hours Have Important Desirable Important

Customers 29% 25% 25% 21%
CEOs 13% 25% 48% 15%

 Must Somewhat Not
Computer Banking Have Important Desirable Important

Customers 14% 24% 25% 37%
CEOs 2% 15% 58% 25%

 Must Somewhat Not
Telephone Banking Have Important Desirable Important

Customers 25% 29% 23% 23%
CEOs 17% 44% 39% 0%

 Must Somewhat Not
Mutual Fund Services Have Important Desirable Important

Customers 4% 17% 25% 61%
CEOs 3% 10% 42% 45%

 Must Somewhat Not
Insurance Services Have Important Desirable Important

Customers 8% 14% 17% 61%
CEOs 0% 10% 40% 50%

 Must Somewhat Not
Reasonable Fees/Services Have Important Desirable Important

Customers 72% 19% 7% 2%
CEOs 33% 53% 15% 0%