} ...~'(1!}>;1~·

i*llutu•• o1 Sodild ~·

. ~?...~.

.

·~:.

DETERMINANTS OF CUSTOMER LOYALTY
IN RETAIL BANKING IN HO CHI MINH CITY

BY
PHAM THI THU HA
MDE CLASS 15
... :·

'

. .._.,

··~

~·

"A thesis was submitted in partial fulfillment of the requirements for the

-·

Master of Development Economics degree (MDE) of Vietnam- Netherlands


Keywords: Service quality, Price, switching cost, customer loyalty, retail banking.

11


TABLE OF CONTENTS
ACKNOWLEDGEMENTS ..................................................................................... i
ABSTRACT ............................................................................................................. ii
TABLE OF CONTENTS ........................................................................................ iii
LIST OF FIGURES ................................................................................................. vi
LIST OF TABLES ................................................................................................... vi
ABBREVIATIONS .................................................................................................. vii

CHAPTER I: INTRODUCTION ............................................................................ p. 1

1.1 Research Statement .............................................................................................. p. 1
1.2 Research Objectives ............................................................................................. p. 2
1.3 Research Questions .............................................................................................. p. 2

•

1.4 Research Scope ..................................................................................................... p. 2
1.5 Research Structure ................................................................................................ p. 2
CHAPTER II: LITERATURE REVIEW .............................................................. p. 4

2.1 Customer Loyalty ................................................................................................ p. 4
2.2 Factors affect Customer Loyalty .......................................................................... p. 5
2.2.1 Service Quality .................................................................................................. p. 5
2.2.2 Price ...................................................... ~ ............................................................ p. 7

4.3 .3 Interpreting Customer Loyalty Equation and testing Hypotheses .................... p.31
4.3.4. Means Score Comparison between VCB with other banks and Industry
Average ..................................................................................................... p.31
4.3.4.1 Service Quality .............................................................................................. p.32
4.3 .4.2 Price ............................................................................................................... p.33
4.3.4.3 Switching cost ............................................................................................... p.33

iv


4.3.4.4 Customer Loyalty .......................................................................................... p.33
CHAPTER V: CONCLUSION AND RECOMMENDATIONS ......................... p.35

5.1 Summary offindings ........................................................................................... p.35
5.1.1 Determinants of Customer Loyalty .................................................................. p.35
5.1.2 Comparison between Vietcombank and Industry Average .............................. p.35
5.2 Recommendations to Vietcombank .......................................................... p.36
5 .2.1 Improving the Service Quality ......................................................................... p.36
5.2.2 Improving Price ................................................................................................ p.38
5.2.3 Improving Switching cost .................... ,............................................................ p.39
5.3 Limitations ........................................................................................................... p.39
5.4 Conclusion ........................................................................................................... p.39
References ................................................................................................................. p.41

APPENDICES
Appendix 1 Questionnaire- English version .............................................................. p.46
Appendix 2 Questionnaire- Vietnamese version ....................................................... p.49
Appendix 3: Reliability of all variables (23 items) ................................................... p.52
Appendix 4: Results of exploratory factor analysis
(EFA) .................................................................................................................. p.54


vi


ABBREVIATIONS

I SBV

State Bank of Vietnam

SMEs

Small and Medium Enterprises

WTO

World Trade Organization

SERVQUAL

Service Quality

EFA

Exploratory Factor Analysis

VCB

Vietcombank


Statistical Package for Social Science

TAG

Tangibles

REL

Reliability

RES

Responsiveness

ASS

Assurance

EMP

Empathy

PR

Price

SQ

Service Quality


Customers expect the higher quality of products and services than before. The higher
perceived service quality, the more satisfied and loyal the customers (Petruzzellis, D'Uggento
and Romanazzi, 2006). Beside the competing each other about the total assets and market
share (number of customers), efficiency in using the capital, ratio of bad debt, banks always
find out the customers' needs and supply at the right time to get the more market share. They
must try to offer attractive interest rates to both savers and borrowers, which means that they
must minimize their own internal operating costs and loss.

Nowadays, commercial banks have intend to develop retail sector, approach the individual
customers, small and medium enterprises (SMEs) because it is a large market and disperse
risks in banking business. Customers have opportunities to approach a lot of banks and choose
the best bank suitable to their own based on the price, service quality and convenience. In
2011, the competition is more and more heated when lots of commercial banks try to change
technology, reduce cost to strengthen competitive ability over the others. In this race, foreign-


owned banks have experience and strategy to expand their market in retail sector; privateowned and joint-venture commercial banks always change in technology, service quality and
staff skills, is it state-owned commercial banks known as 'to be hard to please' have
competitive ability with trials or not?

1.2 RESEARCH OBJECTIVES
The objectives of this study are:
•

To identify the key factors impact on customer's loyalty.

•

To measure the strength of relationship between key factors and loyalty.


conclusions and recommendations. Chapter 1 introduces the structure of the research,
including research statement, research objectives, research questions and research scope.
Chapter 2- literature review consists of definitions of factors influencing on customer loyalty
as service quality, price and switching cost, and relevant literature review and evidence to

.-

2


clarify the research topic, the conceptual framework and hypotheses also are presented in this
chapter. The next chapter named research methodology that presents detail of qualitative and
quantitative research. Chapter 4 shows the results of sample size through the assessment of
measurement scale, this chapter also apply multiple regression analysis to test hypotheses.
The last chapter is chapter of conclusion and recommendations indicates the main findings of
the research and gives out some suggestions to improve customer loyal in retail banking,
finally, this chapter also shows the limitations of this research for further studies in the future.

3


-.

CHAPTER II: LITERATURE REVIEW
This chapter presents an overview of customer's loyalty and factors influencing on customer's
loyalty in retail banking. This chapter also presents conceptual framework, hypotheses of this
study and measurement scales of factors of customer loyalty and its affected factors.

2.1 CUSTOMER LOYALTY
Service loyalty can be defined in the following way: "Service loyalty refers the degree to


Responsiveness: Willing to help customers and promote service.

•

Assurance: Knowledge and courtesy of employees and their ability to inspire trust and
confidence.

•

Empathy: Caring such as individualized attention which the employee provides for its
customers.

Tangibles relates to the effect of physical facility, equipment, personnel and communication
materials on customers; and reliability, responsiveness, assurance and empathy relate to
element of human intervention in the service delivery.

5


The five SERVQUAL dimensions ofParasuraman eta! (1985, 1988, 1991) have been applied
in evaluating service quality. For example, Levesque and McDougall (1996) based on the
SERVQUAL model to find the determinants of customer satisfaction in the bank. Avkiran
(1994) also based on the SERVQUAL measurement to identify four dimensions including 17
items in the Australian retail banking industry, there are: staff conduct, credibility,
communication and access to teller services. Ennew and Bink (1996) developed three banking
service quality dimension in United Kingdom, they are: knowledge, advice offered,
personalization in the service delivery and general product characteristics.

It is very difficult for customers to evaluate services at pre-consumption, consumption and


Service quality can affect customer's behavior, especially factors related to service quality
such as: speed of delivery, efficiency, friendliness, frequent communication can increase
customer's loyalty (Lewis and Soureli, 2006). Customer's behavior can be determined by
service quality: loyalty will be raised depend on perceived higher standards of service quality
than their expectations, on the other hand, poor service quality leads to the higher customer's
defection (Leed's, 1992; Zeithaml et al, 1996). In the investigation of Mavri and Loannou
(2008) of customer's switching behavior in Greek banking services, found that there is
positive relationship between good service quality and customer's loyalty.

2.2.2 Price
According to Zeithaml (1998), price is an attribute that must be given up or sacrificed to
obtain certain kinds of products or service. In a research of Keaveny (1995) stated that
'pricing' factor involves prices, rates, fees, charges, surcharges, service charges, penalties,
price deals, coupons, and price promotions.

Madill and colleagues (2002) showed that there are some advantages for customers and banks
in their relationships: the final goal of banks is to maximize profit, improve financial report
with low risk, the customers want to easily borrow money with suitable rate, etc .. Thus, the
good relationships with customers bring a lot of advantages to banks such as: reducing the
switching rate of customers and increasing the number of new customers through the
recommendations of their current customers. In the financial service industry, transaction cost
has wider implications than other service industries such as bank charges, interest rates
charged and paid, fee implementation (Gerrard and Cunningham, 2004).

Price is an important factor that can effect on customer satisfaction and behavioral intentions
(Varki and Colgate, 2001 ). Some studies of Stewart ( 1998), Colgate et al (1996) and Keaveny
(1995) also showed that price has strong influence on the customer's decision. Especially in
the banking sector, price has a wider implication, Gerrad and Cunningham (2004) found that
pricing seems to effect to customer loyalty of bank more than of other services. In the study of

switching costs involving the loss of benefits and financial resources, and relational switching
costs associated with the loss of personal relationship and with the mark that can generate
emotional and psychological discomfort. In the banking industry, Matthews and Murray
(2007) showed switching cost is the cost that the customers suffer since they wish to change
the bank provider. Kiser (2002) showed the switching cost for bank customers including the
time necessary to open a new account, close an old account, and inform to their partners about
the new account information.

8


Many studies stated that there is relationship between switching cost and defection rate of
customers. Fomell (1992) showed that high switching cost can reduce switching rate of
customer and prevent switching behavior if switching cost is higher than the expected benefits
of changing service supplier (Lees and al., 2007). Colgate and Lang (200 1) found that
switching cost takes an important role in decisions of customers to stay or not when
investigated the switching barriers in the New Zealand financial industry.

2.3 CONCEPTUAL FRAMEWORK AND HYPOTHESES
From the research objectives and literature review, the conceptual framework is presented in
Figure 2.1 and hypotheses of customer loyalty are proposed as follows:

Service
Quality

Customer Loyalty

Price

Switching

Responsiveness: the scale 'employees are willing to help' and scale 'employees are
never too busy to respond to your request' will be combined into one scale 'staff of
banks make every effort to help customers to solve their problems'.

•

Assurance: The scale 'behavior employees instills confidence in you' and scale 'feel
safe in transactions' also will be combined into one scale 'I feel safe to have my bank
serviced at this bank'.

•

Empathy: The scale 'employees who gives you personal attention' is more meaningful
than the scale 'gives you individual attention'.

The table below indicates the original items of Parasuraman et al (1988) and adjusted items
scale fit to this study:

Table 2.1: Original Scales of Service Quality and research scales
No

1

Original items

Research items

XYZ Company has operating hours Eliminated item (all banks have the same
that are convenient to all its customers.


(such a pamphlets or statements) are
visually appealing at XYZ Company
XYZ Company's employees appear Bank staffs appear neat and sympathy.

5

neat
When XYZ Company promises to do The bank provides services as committed

6

something by a certain time, it does so.
When problem happened, the bank shows a

When you have a problem, XYZ

7

I
I

Company shows a sincere interest in sincere interest in solving it.
solving it

I

8

XYZ Company performs the service The bank does customer's demand right at
the first time


Employees in XYZ Company give you Bank staff can answer customers' questions
prompt service

13

I

or concerns quickly

Employees in XYZ Company are
Bank staff makes any effort to help

always willing to help

I

Employees in XYZ Company are customers to solve their problems.

14

never too busy to respond to your
request

15
16
17

The behavior employees m XYZ


attention

attention (send Happy Birthday gift, Happy

19

bank

gives

customers

individual

XYZ Company has employees who New Year calendar, etc ... )
20
gives you personal attention
XYZ Company has your best interest The bank has customer's best interest at
21
heart

at heart
Employees
22

of

XYZ

Company The

2

New

The charged price suitable with the used
services

2.4.3 Switching cost:
According to Jones eta!., (2000), switching cost scale will be revised and adjusted to suitable
with this research:
•

The scale 'inconvenient for me to switch to another service' is not clear and difficult
to understand so it will be replaced by scale 'I don't want to move to further location'.

•

The scale 'take a lot of time and effort to change to another company' and scale 'the
costs in time, money and effort to switch to another company' will be combined into
one scale 'take a lot of time to change to another bank'.

12


The table 2.3 shows the items scale of switching cost.

Table 2.3: Original Scales of switching cost and Research scales
No
1


For me, the costs in time, money and effort to

to change to another bank.

switch to another service company are high

5

I don't want to move to the further
New
location

2.4.4 Customer Loyalty:
Scales of customer loyalty adopted from Fomell et al. (1996), the table 2.4 indicates the items
of factor Customer loyalty.

Table 2.4: Customer Loyalty
No

Original items

I

Overall satisfaction with the service of

Research items
I feel satisfied with the bank service

XYZ Company



Based on the findings in the chapter 2, a questionnaire design will be completed in this
chapter that is very useful for collecting data. This chapter also presents the research method
EF A (Exploratory Factor Analysis) used in analyzing survey data.

3.1 RESEARCH PROCESS
This study will apply qualitative and quantitative method. In qualitative method, measurement
scales of factors will be adjusted to complete the final questionnaire. Data collection and data
analysis procedure will be presented in the quantitative method.
The research process is presented in Figure 3.1:

Literature review of Customer loyalty and
influenced factors

Data collection

•
Conceptual framework, its hypothesis and
adjustments of measurement scales

Data analysis

Development of questionnaire

Testing of reliability
and Validity

Test pilot questionnaire

Testing the

3.2 QUESTIONNAIRE DESIGN
A questionnaire was designed to analyze customer loyalty in retail banking in HCM city. The
questionnaire was developed based on the findings from literature and adjusted from the pilot
survey in practice. The literature review identified factors influencing customer's loyalty in
the retail banking. The final questionnaire consist of 2 sections, first section includes 23
statements of factors affect to customer loyalty ( indicated in Table 2.1, 2.2, 2.3 and 2.4) and
section II includes other information also impact on customer loyalty such as gender, income,
education level, etc ...

This questionnaire will be translated into 2 languages: Vietnamese and English. The design of
the questionnaire was based on seven-point Likert scale measurement from 1 (strongly
disagree) to 7 (strongly agree).

16


Table 3.1: Variable Codes
Component

Variables

Code

Service Quality
Banks' equipments and materials are well

Tangibles

TAGl


service needs or additional maintenance

RES7

requirement.
Bank staff can answer customer's questions or

Responsiveness
RES8

/ concerns quickly

RES9

solve their problems.

I

bank.

ASSll 1
I

ASS12

I

Customer feels safe to have bank serviced at this

ASSlO