Customer Satisfaction in Banking

INTRODUCTION

The domestic banking system is largely homogenous, standardized with similar products. Therefore, service is the only differentiator between the banks, hence, the reason for service being of utmost priority in this industry. Delivering optimal customer service is a determinant factor of customer satisfaction which can also lead to improved market share. Once the bank’s customers are satisfied with the received service, they are less likely to switch to another financial institution. Subsequently, if a bank can retain their existing customers while attracting new once, they are likely to increase their market share (Siddique, Karin & Rahman, 2011).

The creation of customer satisfaction and customer value is considered undoubtedly a competitive advantage in today’s competitive banking industry. In order to maintain and keep their customers satisfied with their level of service banks need to ensure that the right product,  service and support are available at the right time for their customers (Hunter, 1995). The local banking industry is heavily regulated by the Central Bank of Aruba (CBA) making it necessary for the banks to continue innovating and bring new products and services to the market to continue capturing the interest of the customers by creating the value that only superior customer service can deliver. The local banking industry consists currently of five commercial banks (Central Bank of Aruba, 2015). The local commercial banks are more and more following international trends and switching to market oriented structures and centralizing their products and services to reduce cost, ensure uniformity of services, personal leadership, flexibility, efficiency, specialization and increase profitability (Webel, 2012).

While the service delivery units are non-client facing departments their service is of vital importance to measure the service quality, perceived value and ultimately customer satisfaction. In an effort to maintain a balance between customer satisfaction, increase profitability and lower costs, the local banking industry is centralizing services such; local and international wire transfers, credit card payments, debit services, trade, collection, standing order processing, funds disbursement, collateral and contract services, reconciliation,call center service  and technology support to cross-border units with lower wages (Hunter, 1995).

The following section gives an overview of the business problem of the research topic.

1.1 Business Problem 

Customer Satisfaction (CS) is a behavioral concept the goes beyond purchasing a product or service. CS can also be defined as a consumer’s fulfillment response. It’s their assessment of a product or service feature or of the product or service itself provide a pleasurable level of consumption-related fulfillment which could also include levels of under or over fulfillment (Oliver, 1997). One of the widely used concepts of customer satisfaction paradigms is the Expectancy Disconfirmation Theory (EDT) which was developed by Oliver (1980). He proposed that the satisfaction level was a consequence of the difference between expected and perceived performance. He argued the positive disconfirmation (satisfaction) occurs when product or service is better than expected. In contrast, negative disconfirmation (dissatisfaction) happens when the performance is worse than expected (Oliver, 1980).

The banking industry is clearly under the intense pressure of reducing overhead costs, improve efficiency, profitable and create shareholder’s value. The banks have invested heavily in technological innovations, marketing strategies and promotion to that end (Abishua, 2010). While marketing and promotion are important in business, banks realized that having satisfied customer is far more important because this can help boost their financial performance significantly. Moreover, satisfied customers are not likely to defect and will remain client of the bank and usually have one or more product of their bank (William & Nelson, 2015). The effects of the aforementioned challenges in combination with fierce competition called for the rethinking of new strategies in the industry to counter the challenges in the banking sector. Many banks that were previously operating on a decentralized system adopted gradually a centralized system to streamline their costs, capitalize on efficiency and improve profitability. Centralization often involves downsizing, staff reduction or branch consolidated (KPMG, 2012). In a study conducted by Hunter (1995) which was consistent with a previous research conducted by Hunter and Timme (1986) it was found that centralizing back-office operations tend to reduce costs by approximately four percent and therefore benefiting from scale economies.

The key success drivers in any service oriented industry are the service quality, service charges, perceived value and customer satisfaction (Olorunniwo & Hsu, 2006). On the other hand, the issues measuring service quality and customer satisfaction stems from operation and marketing (Carrillat, Jaramillo, & Mulki, 2007). To get a better understanding of the variables of service quality and how they affect customer satisfaction, it’s imperative also to know how to define the Commercial Banking Industry (CBI). Schmenner (1986) classified this industry as mass service with a high degree of labor intensity and low customization of services. Kuo, Wu, and Deng (2009) are of the opinion that by improving service quality, perceived value and satisfaction you automatically improve customer satisfaction (Joseph, McClure & Joseph, 1999).

It’s clear from a previous study conducted in the United States (US) in 1989 to 1991 among 118 large banks, that 86.44 percent (102) moved from a functional oriented-structure to a market-oriented structure and centralized their service delivery units. The banks with a functional oriented-structure have functional units at the top reporting to the CEO. In contrast in a market-oriented structure departments are organized around the customer and division managers have individual sales targets. The challenge facing CB in Aruba is to continue providing the highest standards of customer service in digital enabled environment which calls for centralizing units (Hunter 1995).

1.2 Research Problem

The research problem is to determine how or if the highest level of CS can be maintained if service units are centralized. While there are many studies that examined CS, there are not many studies that explored CS in combination with centralization. It will be interesting to measure if centralization of the service delivery units will cause client defection or not. The customers’ perception towards the received costumer service with respect to service quality, service charge and perceived value will be assessed to determine the level of customer satisfaction in this study.

1.3 Research Objective

The objective of this research is to identify the determinants of customer satisfaction in a centralized service delivery environment in the Aruban Banking Industry. Furthermore to see how the constructs; centralized service delivery, service quality, service charge and perceived value affect each other and assess their impact on CS.

1.4 Research Questions

The research questions to be answered in this study are as follows:

1. Does centralized service delivery affect service quality in the local banking industry?
2. Does centralized service delivery affect service charge in the local banking industry?
3. Does centralized service delivery affect perceived value in the local banking industry?
4. Does centralized service delivery affect customer satisfaction in the local banking industry?
5. Does Service quality affect perceived value in the local banking industry?
6. Does Service quality affect customer satisfaction in the local banking industry?
7. Does Service charge affect perceived value in the banking local industry?
8. Does Service charge affect customer satisfaction in the local banking industry?
9. Does Perceived value affect customer satisfaction in the local banking industry

1.5 Significance of the Study

The results of the research will provide valuable information to researchers as well as the CBI in Aruba as to how factors of centralization can influence CS. Throughout this study, the researcher will highlight important aspects of global trends in terms of centralization and customer satisfaction and relate this to the domestic banking situation as more banks are moving toward a market-oriented platform and digitalization due to intense competition. The research will show that due to their size, structure and share distribution, the local banks are left with no other option than to mimic global trends on centralization to achieve sustainable growth and shareholders value. Moreover, the conceptual model utilized by the researcher is an existing model by Uddin and Akhter (2012) on customer satisfaction with the constructs; service quality, service charge, perceived value and customer satisfaction which was expanded to include centralized service delivery. As far as we know, this is the only local study measuring both centralization of the service delivery units and customer satisfaction. The following section discusses the previous literature and studies related to the constructs in the current research and the development of the conceptual model.

LITERATURE REVIEW

2.0 Introduction

This section of the study will cover the key definition, concepts and previous literature. The researcher will further study related constructs of the conceptual model and will discuss the literature on customer satisfaction (CS) and Centralized Service Delivery to provide the reader with a better understanding of the topic. The researcher will also discuss of relevant theories in support of the literature and will show the developed conceptual model.

2.1 Conceptual Definition

2.1.1 Customer Satisfaction

Customer satisfaction is defined as customers’ response to the perceived gap between prior expectations or experiences and actual performance of products or services consumed (Che-Ha & Hashim, 2007).

2.1.2 Centralization

The highly centralized organization is managed by the top executives who retain authority for most strategic and operating decisions and keep a tight rein on the business. There is not much flexibility of authority given to subordinated managers or individual employees in the decision-making process (Bateman & Zeithaml, 1993). The concentration of authority for the decision-making is in the hands of the top of an organizational hierarchy (Huczynski & Buchanan, 2001). Centralization is focused on control and attempts to improve efficiency by taking advantage of potential economies of scale. It improves reliability by minimizing opportunities for mistakes. Centralization pulls a group together to create order and implement a process. Moreover, it seeks to remove the frustrating, money waste, duplication of systems, extra work, and manual processes. New technological advancement often brings opportunities for centralization (Simon, Kozmetsky, Goetzkow & Tyndall, 1954).

2.1.3 Service Delivery Unit

The service delivery unit is described as the back-office, non-client facing banking unit that provide administrative support to the front-office, sales staff and other client facing units (Hunter, 1995). The service delivery units handle the entire responsibility of processing the products and services provided by the front office staff. Therefore, processing of clients work is their chief responsibility. The service delivery units, despite their less than glamorous reputation, are absolutely critical to the day-to-day functioning and operating of a bank. In addition, service delivery units functions are a lot more complex in nature due to the work they tend to require personnel who are well-qualified and have strong relevant skill sets. Moreover, the service delivery units provide support to the management of the organization in performing their key responsibilities (PWC, 2017).

2.1.4 Service Quality

Service quality is viewed as the general assessment of a specific service firm as a result of comparing that firm’s performance with the customer’s general expectations of how firms in that industry should perform (Lo, Osman, Ramayah & Rahim, 2010).

2.1.5 Service Charge

The effort to create the potential buyers’ willingness to purchase at prices set by the seller. The level of acceptance of price signifies the price ceiling in which a buyer is willing or deciding to pay for the products and services (Saeed, Niazi, Arif, & Jehan, 2011).

2.1.6 Perceived Value

Perceived value is the compression between the price paid by customers for products or services and utility derived from perception (Kumbhar, 2011).

2.2 Literature Review and Previous Studies

2.2.1 Customer Satisfaction

The term CS, is very popular nowadays and used throughout different industries to measure their service, customer loyalty, and level of customer engagement. Most discussions on the topic of CS gravitate around the customer’s expectation of the service, the actual delivery how the customer experience the service and whether or not their expectations were met or not. It goes without saying that if the customer’s expectations are met the report will be positive and if they are not met the report will be negative. In the very demanding and competitive banking industry, the key driver of sustainable advantage is the consistent delivery of high-quality service in order the satisfied customer’s needs (Shemwell, 1998). An important factor in CS in the banking sector was found to be a competitive interest rate as researched by Levesque and Mc.Dougal (1996). Their study suggests that the customer will be loyal to their bank if they believe to have gotten an attractive interest rate. They further uncover that complaint handling and solving to be important to keep the customer satisfied (Fornell, 1992). Conversely, the outcome of their study didn’t support their theory that complaint handling and solving increased satisfaction. As a final point, they determined that competitiveness and convenience to be the two critical elements of customer satisfaction (Levesque & Mc.Dougal, 1996).

Oliver (1997) suggests that satisfaction is primarily based on emotions rather than reasoning. He defines satisfaction as ‘the consumer’s fulfillment response”. His statement is based on the consumer’s evaluation of the after service of a service provider and whether or not they lived up to the consumer’s level of fulfillment. Cronin, Brady and Hult, (2000) on the other hand measure service and service satisfaction through seven components such as; interest, enjoyment, surprise, anger, wise choice, and doing what is right. Because CS is primarily based on emotions as previously indicated by Oliver (1997), it’s also natural that each experience emotions in a different way and therefore also judge CS also in different ways. The level of satisfaction or dissatisfaction has everything to do with the person providing and receiving the service, the product offered and the appraisal of how the product and services of the bank meet up or exceed the customer’s expectations. Satisfaction is related to a number of both psychological and physical which are associated with a feeling of satisfaction. Kotler (2000) defines satisfaction as: “a person’s feeling of pleasure or disappointment resulting from comparing a product’s perceived performance or outcome in relation to his or her expectations”. Huang (1998) another researcher in the field of CS used product, service, staff, overall performance and closeness to expectations as the five elements to measure CS. Baker and Crompton (2000) endorsed satisfaction as a personal experience and rational relationship between a person’s expectation and the actual service. They further defined customer satisfaction as the total assessment of the received services. In other words, it’s the reflection of the client of their previous purchase. Devlin (2001) highlights the fact that the banking industry is very competitive and as such very little service creativity and variation are offered and if there is variation this service is very quickly copied by the competition. Jamal and Naser (2003) linked the core of banking to be related to their services quality and its association to customer satisfaction. Therefore, indicating that the satisfied customers will be an ambassador of the good service for others because such customers’ judge things in higher quality due to positive affect they have experienced (Gilbert, Veloutsou, Goode & Moutinho, 2004). Similarly, scholars like Abu-Mu’amar (2005) found a strong and significant correlation between CS and the service quality in the banking service. Abu-Mu’amar came to the conclusion that for a customer to continue dealing and being loyal to their bank irrespective of the brand strongly depended on their judgment of the service quality. He also points out the need for banks to know and understand their client’s banking needs to provide a better banking experience to the client and made them feel comfortable with the level of service.

2.2.2 Centralized Service Delivery Unit

The centralization of the service delivery units started years ago as a key cost savings objective for banks. However, it has extended to include other benefits such as process efficiencies, standardization and career opportunities for employees, talent sharing across traditional boundaries, innovation and the integration of mergers and acquisitions. Centralization became more popular especially in the years following the global economic crisis and global economic uncertainty (Ernest & Young, 2014). Webel (1997) views centralization of the banking service delivery services as; cost reduction, service uniformity, personal leadership, flexibility, efficiency and increase the level of service and specialization. Centralization is the process by which authority, power, responsibility, organizational decision-making activities and operations are concentrated in an organization. Thompson (1997) views centralization as the scenario by which the leader or a group of senior strategists makes all the major decisions centrally, at their head office. Mintzberg (1979) also argues that a centralized structure is a situation where all the power of decision-making rests at a single point in the organization. According to Thompson and Strickland (1998), there had been a shift from authoritarian, hierarchical structures to a more flat decentralized structures that stress employee empowerment. The main reasons behind these strategic shifts are; Firstly, the movement from world economies from the industrial to the information technology age, where traditional hierarchical structures which were built around functional specialization underwent radical changes to accommodate a greater emphasis on building competitively valuable cross-functional capabilities. In other words, the organizations have to match their capabilities to outlined strategies. Secondly, the decision-making authorities should shift to the lowest organizational level capable of making timely, informed and competent decisions. The philosophy behind the idea is that the managers and employees which are on the ground are best suited to carry out the unit’s strategy and lead the decision-making process on how to implement the best strategy. Thirdly, middle management and supervisors should be empowered to exercise sound judgment on matters about their jobs. Naddler and Tushman (1992) argued that strategic changes are major and systematic shifts in strategic orientation are geared toward improving organizational alignment; where organizational alignment concerns the scope by which a firm’s structures and processes supports the firm’s strategy. Mintzberg and Quinn (1991) argued that there are structures redesigned to carry out new strategies although the choice of any new strategy is also influenced by the realities and limitations of the existing structure. In contrast, Waterman, Peters and Philips (1980) emphasizes that productive organizational changes are not only a matter of structure although the structure is important, but rather that effective organizational changes are actually a relationship between structure, strategy, operational systems, style, skills, staff, and goals.

2.2.3 Centralization of Potential Banking Areas

The literature on the subject of centralization reveals that extensive know-how associated with the best practices reduces operational costs (Hunter & Timme, 1986). However, not every area of the bank can be consolidated. Only the area where centralization leads to the creation of economic value and high control level without jeopardizing the service quality qualifies for consolidation (Operational Council, 2005). Uva and Catalao-Lopes (2013) categorized the potential areas for centralization of the service delivery units into three groups namely; high, medium and low. The high potential service delivery units for centralization are those units that management would consider first to be centralized due to the positive impact they would have on the company’s bottom line due to economies of scale such as; call centers, internet banking, information technology, debit and credit card, human resources, purchase, and logistics. The medium category is for those units that are less labor intensive and have medium volume but with high customer benefits due to their flexibility and accessibility such as; mobile banking and payments. The low category are for those units that their consolidation would have little to no impact on the company’s profit and loss such as; branches, auditing and compliance(Uva & Catalao-Lopes 2013). The latter three categories of centralization potential are based on existing references of reporting in European and worldwide banks best practices (Uva & Catalao-Lopes, 2013).

The call centers are not only high potential for centralized banking services but also other services across industries. The reason for call centers to be potential candidates for centralization is that they increase the importance of the bank’s environment, especially terms of Customer Relationship Management (CRM) to cross and deep sell their products (Batt, 2002; Eichfeld, Morse, & Scott, 2006). The aforementioned strategy was applied in 2009 by Banco Santander when the group consolidated all their call center functions in a single facility in Mexico to service eight Latin America countries to achieve better global results. The latter was done due to the cheaper wages in Mexico in contrast to Spain (Uva & Catalao-Lopes, 2013).

Internet Banking is also a high potential candidate for consolidation considering the growing importance of service in the banking industry. The advantages were found in IT security, cost reducing but also ease of adaption to new software. That’s the reason for the Netherlands-based ING Bank moving their internet banking platform which serviced their eight eastern and central European operations into on single location in Poland (Uva & Catalao-Lopes, 2013).

Debit and credit cards also have a high potential to be centralized due to their process similarities across centers in other countries. There have a great costs reductions potential on card production due to economies of scale. In other words “The higher the processed volumes, the lower the individual transaction cost” (Yeomans, 2004). Furthermore, the costs reduction is associated with efficiency and decline in full-time employees (FTE) both in remuneration and training costs. The adaptation of the new development in the card department is also one of the advantage integration. The latter enables the easier product-to-product (PTP) transfer as well as expedites new product creation and development. This strategy was implemented by Barclays Bank when centralizing its administration of the card portfolio worldwide (Uva & Catalao-Lopes, 2013). The previous examples though based on global banking trends has it’s similarities with the local banking industry which we will illustrate in a subsequent section because local banks tend to mimic global best practices to create efficiency and increase profitability. More so since the banking sector is globally one of the most regulated industries taking into account that they are dealing with people’s money and livelihoods. The only way of being creative, improve efficiency and profitability is by consolidating the internal processes (PWC, 2017).

2.2.4 Advantages of Centralization

2.2.4.1 Specialization of skills

Organizations in a centralized environment can take advantage of the optimal utilization of specialized skills, talent and technology. However, these traits are at times difficult to find and if available they are not affordable. Therefore, employees in a centralized environment are trained in one specific area of the job and become experts in that filed (Terry & Franklin, 1997).

2.2.4.2 Cost reduction

Organizations in a centralized environment will usually focus on cost reduction such as  branches, units, staff compliment and other costs. These organizations operate with skeleton staff and equipment and would not require the skilled and highly paid staff. The latter denote a great probability of economies of scale (KPMG, 2012).

2.2.4.3 Full utilization of technology

With the recent technological advancement, centralized organizations would be able to process local and international wire transfers, credit card payments and debit services, trade, collection and standing order from a central location thereby optimizing the use of their facilities (Lynch, 1997).

2.2.4.4 Control of operations

Organizations operating under a centralized system feel more in control of daily activities carried out in the organization. Having a centralized services system eliminates the room for errors that would otherwise be permitted in a decentralized environment (Terry & Franklin, 1997).

2.2.4.5 Uniformity of policies, procedures and decisions

Centralization of decision-making, authority and responsibility makes it possible for an organization to create a consistent strategy across the company. The processes and activities within units, division or branch are standardized (Lynch, 1997). Therefore there is consistency of strategy in a centralized organization (Thompson, 1997).

2.2.4.6 Planning and reporting procedures

There is less extensive planning and reporting in a centralized organization. The decision making process is also easier since fewer people are expected to plan and therefore contribute to the reporting process. The duplication of functions is therefore minimized in centralization system (Terry & Franklin, 1997).

2.2.4.7 Efficiency in decision making

Organization with a centralized structure makes faster and easier decision in the best interest of the company with less compromise. The leaders at the top of the organization are conscience of the organizational or the company’s actual and future plans are likely to make informed decisions in the best interest of the firm (Lynch, 1997).

2.2.4.8 Better co-ordination of activities

Besides the fact that’s easier to allocate resources, coordinate activities and handle interdependence there is a better control changes in a centralized organization (Thompson, 1997).

2.2.5 Disadvantages of Centralization

2.2.5.1 Hinders Successful Implementation of strategies

A successful strategic implementation involves empowering others to act on or do their utmost to put strategy into place and execute it proficiently. However, line, unit managers and employees may not always understand or interpret the corporate vision and may hinder the process. Hence contribute to its achievement (Bhasin, 2016).

2.2.5.2 Resistance

In a centralized operating environment, managers and employees of units are not involved in the day-to-day decision-making. There are some genuine morale gains when people are well informed and allowed to operate in a self-directed way, which is lost through centralization. Mintzberg (1979) is of the opinion that decentralization stimulates motivation. The challenge is how to exercise adequate control over the actions of empowered employees so that the business is not put at risk at the same time that the benefits of empowerment are realized. Moreover, people take pride in confidently undertaking responsibilities delegated to them. Bowman and Asch (1987), believe that lower management levels may be upset as a result of their lack of participation in decisions.

2.2.5.3. Compromise on Customer Service

The decisions making process in a centralized cross border unit are oftentimes made without the full knowledge of the local circumstances. When decisions are centralized, there are tendencies to delay decision-making as no one want to take ownership of the situation. Organizations may lose customers and a huge part of business waiting on the decision from the Central authority. The decision makers nearest to the scene are conversant about the issues are trained to weigh all the options that may be best suited to handle situations as they arise (Bowman & Asch, 1987)

2.2.5.4. Human Resource Development

The major strategic decisions are left to the executives and senior managers at the head office in a centralized environment. The branch staff and units will remain passive and tend to only forward assignments to the central office. Therefore, major decision making and training gained through years of experience are not used and the manager’s personal development is hindered. The managers are consequently unable to build competitive, cross-functional capabilities that would usually come with exposure to different scenarios in a work environment. The lack of personal development and internal training will make it difficult for companies to finding and hold on to talented and ambitious staff. In other words, centralized decisions tend to hinder initiative at the lower organizational levels (Bowman & Asch, 1987).

2.2.5.5 Costs and risks associated with centralization

The person(s) to whom the authority is vested in a centralized operation must be specialized and understand the operations well for this to be effective. It can become quite expensive for an organization if the individual(s) to which the authority is vested in don’t have the expected capacity (KPMG, 2012).

2.2.5.6 Organizational culture

The organizational history helped to shape its current culture, shared norm and values. It’s therefore, of utmost importance to understand the organizational culture as some members of the organization may not support the control at the top while others in the organizations support the opposite. This may be observed in rapidly grown firms through mergers and acquisitions where the managers of the acquiring firm will prefer greater independence of the acquired company hence decentralization (Stoner, Freeman & Gilbert, 2003).

2.2.6 Customer Satisfaction in the Aruban Banking Industry  

2.2.6.1 Overview of the Aruban Banking Industry 

The Commercial Banking (CB) industry in Aruba consists of five market player namely;  Aruba Bank N.V.(AB), Caribbean Mercantile Bank N.V.(CMB), RBC Royal Bank (Aruba) N.V.(RBC), Banco di Caribe (BDC) and the new entrant First Caribbean International Bank (Cayman) Limited (FCIB). In addition to the CB industry there are other bank like institutions such as Citibank Aruba N.V. (International Bank), Aruba Investment Bank (AIB), Island Finance (IF) and a Mortgage Bank; Fundation Cas pa Comunidad Arubano (FCCA). All of these institutions are under the regulatory supervision of the Central Bank of Aruba (CBA). The CBA is the highest regulatory and financial authority on the island. The aggregated balance sheet of the CB at year-end 2016 accounted for the total of Afl.5.405.8 million which is equivalent to 113.2% of the estimated nominal Gross Domestic Product (GDP). These figures are up by Afl.315.5 (5,090.3 million) and by 7.9% (105.3%) compared to 2015. The latter is a clear indication of the importance of the commercial banking sector in the Aruban economy (CBA, 2016).  Although the CB’s are fierce competitors they collaborate on issues of mutual interest though the (ABA) Aruba Bankers Association (CBA, 2016).

2.2.6.2 The Commercial Banking Industry at glance

Aruba Bank (AB) was officially founded in 1925 (92 years) as a sole proprietorship and incorporated in 1932 (85 years) as a LLC and is often referred to as the only indigenous bank of Aruba even though their shares were sold to and are 100% owned by the Orco Group based in Curacao. AB purchased the shares of Interbank Aruba in 2003 and continued operating under the AB flagship. AB is a full-fledged bank with an array of banking product and services. They are estimated to have the biggest market share on Aruba (Aruba Bank, 2017).

The Maduro & Curiel’s Bank (MCB) based in Curacao is the parent company of Caribbean Mercantile Bank N.V.  (CMB). The Maduro & Curiel’s Bank (MCB) has been affiliated with Bank of Nova Scotia of Toronto, Canada (Scotiabank) since 1970. The Bank of Nova Scotia owns 49% of the shares of the group and Maduro & Curiel’s Bank Group 51% CMB is also a full-fledged bank with an array of banking product and services. They are estimated to have the second biggest market share on Aruba (CMB, 2017).

RBC Royal Bank based in Toronto, Canada is the parent company of RBC Royal Bank (Aruba) N.V. (RBC). RBC is a fusion between former ABN-Amro Bank/ First National Bank Aruba/ Royal Bank of Trinidad & Tobago (RBTT). RBC Royal Bank of Canada owns since 2008 100% of the shares of RBC Royal Bank (Aruba) N.V.(RBC Royal Bank, 2017). RBC is also a full-fledged bank with an array of banking product and services. They are estimated to have the third biggest market share on Aruba (RBC, 2017).

Banco di Caribe (BDC) based in Curacao is the parent company of Banco di Caribe Aruba. BDC Curacao was established in 1973 (44 years) and in Aruba since 1983 (34 years). The Houston based Investment Company Parman Group International became the majority shareholder of the bank in 2005 and also acquired insurance company ENNIA Caribe and investment bank Nibanc in 2006. BDC is also a full-fledged bank with an array of banking product and services. BDC has the fourth place in the market in terms of market share on Aruba (DBC, 2017).

First Caribbean International Bank Aruba (CIBC-FCIB). CICB-FCIB was founded in 2002 as a merger between Canadian Imperial Bank of Commerce (CIBC) West Indies Holdings and Barclays Bank PLC Caribbean operations. In December 2006, CIBC acquired Barclays stake and became the majority shareholder in FirstCaribbean Bank. The company’s history in the Caribbean dates back to 1920. CIBC-FCIB is not a full-fledged bank and concentrates mainly on the commercial banking sector. CIBC-FCIB is ranked fifth in the local market (FCIB, 2017).

2.2.6.3 Customer Satisfaction in the local Banking Industry

The researcher covered previously in section 2.2.1 the subject of CS which is centered on the customer’s expectation of a product or service versus the actual delivery and how the customer experienced the service and most importantly, whether or not their expectations were met or not (Shemwell, 1998). In order to get a better understanding of CS in the local banking industry we first have to define what is satisfaction, how the client experience this and ultimately what they are looking for in their banks. Generally speaking the customer satisfaction aspect of a banking product or service is dependent on the client’s emotional and mental state versus the performance. Within the antecedent of satisfaction we encounter five predisposing conditions such; mood, quality, value, attitude and expectation which are measured after purchasing the product or service in the post-purchase observations stage. In the post-purchase observation stage the clients judge the performance and their expectations. Subsequently, the clients move on to the consumption processing-stage where the subjective disconfirmation or calculated disconfirmation is observed. The client moves to the satisfaction formation-stage once they are satisfied or dissatisfied with the product or service. If the performance meets their expectations and they are satisfaction with the consequence that the client will would either repurchase, recommend, brag about (word-of-mouth) or become loyal the product, service or brand. These stages are illustrated in figure 1 of the EDT model and are no different in the local banking industry where the client’s mood can play an important role in the satisfaction formation over the product or service and would either be positive or negative. The clients similarly look for quality in the product and service they receive from the bank and compare this to that of other banks. They can rate the quality in three categories namely; bad, good or exceptional. The clients moreover look for value in the product or service they purchase or receive from the bank and compare this to the value they receive from other financial institution whether monetary or not. An additional antecedent concept of rational judgment is attitude. In this stage the client judge the product or service based on desirable or undesirable attributes (Oliver, 1997).

Another aspect of CS in the local banking industry is how banks shape the concept of  satisfaction by how they gain, maintain and recover customer trust to guarantee their patronage.  The customer needs to feel that their bank consider their best interests. To that end the customer is in continuous search for easy, personalized, professional and reliable service. The customer wants to understand the financial benefits and risks associated with dealing with their bank. Onboarding a customer only with an attractive offer is not the key to success in today’s market if this is not supported by a superior service culture that can differentiate the bank from the others. Banks are systematically measuring how well they treat their customers by identifying the factors of satisfaction and changing their operations and marketing as a result. The most savvy banks measure customer satisfaction regularly since it is a key driver of customer retention (Melnic, 2016).

One way banks aim to retain and keep their customers satisfied with their level of service is to ensure that their product and services such as; local and international wire transfers, credit card payments and debit services, trade, collection, standing order processing, disbursement of funds, collateral and contract services, reconciliation of accounts, call center services, technology (IT), insurances and merchant are up to par (Bhasin, 2016).

Another aspect of achieving CS is through constant communication with the customer. If the customers feel that their banker communicate honest and openly with them they will also believe that their relationship with the bank is of mutual trust. Bank should be forthright in the manner in which they deal with their costumer by eliminating any negative situations before they occur and at the same time catering to their needs (Bhasin, 2016).

The Banks could also benefit from making the employees job easy by ensuring that they are well trained, competent and empower to service the client’s needs in any given situation. The customer should never feel that the need to speak to a supervisor or manager to get the job done (Bhasin, 2016).

Customers expect prompt service, therefore when requesting for service, they shouldn’t have to ask twice. The emphasis should be on the quality of service. Therefore, setting internal deadlines to accomplish this task timely and efficiently should be the norm. On the other hand, banks have to ensure that these standards are well engrained by the employees and promoted to the customers (Bhasin, 2016).

The customer is the boss. Banks most do their utmost to keep their customers happy because it takes more money and effort to acquire a new customer then it takes to keep one. Financial institutions should view a complaint as an opportunity to make it right to the customer and understand that dissatisfied customers will tell ten others about their experience while a satisfied one will tell no one. If a customer is satisfied with the services received from their bank they will become ambassadors for the bank and spread positive word of mouth (Bhasin, 2016).

One more facet in achieving CS in the local banking industry is by grouping the  customers and treat them accordingly. Knowing in which group to segment a customer allows financial institutions to cater to their specific needs. The Pareto principle (80/20) dictates that 20 percent of the customer based will drive 80 percent of the revenue and profit for the banks. To that end its important banks should know which group is their revenue drivers and treat them right by offering extra benefits and service. For this group it’s not about satisfying them but to wow them (Bhasin, 2016).

When onboarding the costumer that bank should explain and offer them an array of product and services to ensure that the customers are well informed about the value proposition. Be upfront and let the customer know the entire package of services that comes with a sale and even the after sale so they don’t have to come back to the bank for support (Bhasin, 2016).

Front office associates should be well rounded and knowledgeable about the product and service of the bank to offer solutions instead of dead ends. The associate should ownership of every problem even if this doesn’t fall within their scope responsibilities (Bhasin, 2016).

Banks should moreover encourage complaints as 95 percent of dissatisfied customers wouldn’t complaint about the service, however probably wouldn’t do business with that financial institution again. Therefore, asking for feedback should be promoted. The local banks use “You Talk We Listen” forms to react to the customer query (Bhasin, 2016).

The CB industry could also conduct customer satisfaction surveys regularly. One way of finding out what your customers like or dislike is through conducting surveys. It is one of the fastest and effective tools banks have at their disposal to improve their product or service to measure if they are meeting the costumers’ expectations or not. Customer satisfaction surveys help to confirm whether the local banks are meeting expectations (Bhasin, 2016).

2.2.6.4 Centralization in the local Banking Industry

The local CB industry although having different structure and strategy has adopted in recent years some form of centralization of their service delivery units to streamline and reduce their operational costs and create efficiency (reference). The latter is not surprising since due to their size and shares distribution the five market players have to follow global technological and  innovation trends to survive in the market. The researcher note that three of the five parent companies of the local banks and majority shareholders are based in Curacao (AB, CMB, BDC) while the other two are based in Canada (RBC, CIBC-FCIB) (reference website ). The researcher further observed that in recent years several branch consolidations took place in Aruba. Aruba Bank previously operated with eight branches and now has three full-fledge branches. Caribbean Mercantile Bank followed suit and consolidated to six branches and soon to be five as they announced on July 11, 2017 the closure of their LG Smith Boulevard branch as per August 31, 2017(CMB 2017).  RBC also consolidated its branches from five to three. Besides Branch consolidation the CB’s are streamlining their operational process and consolidating service delivery unit and sending the operation to cross-border units with lower salaries and operational cost (source).

2.3 The Dimensions measuring Customer Satisfaction

For the purpose of this research, the following model dimensions will be analyzed to evaluate the determinants of CS: centralized service delivery, service quality, service charge, perceived value, resulting in CS. The researcher will explain how these dimensions relate to the chosen topic of CS in the Aruban Banking industry with supporting literature in the subsequent section.

2.3.1 Customer Satisfaction

The satisfaction process is the comparison between what was expected and the performance of the product or service. This process is described as the confirmation or disconfirmation process where the customer would form an expectation prior to acquiring the product or service. After the costumer experience the product or service a level of perceived quality is formed that is influenced by the expectation. If the perceived service is less than expected service, adjustment will occur and the perceived performance will be move upward to equal expectations. On the other hand if perceived service is less than the expectations significant difference will occur where the lack of perceived service will be overstated (Lee, Lee, & Yoo 2000). Satisfaction is determined by subjective and objective factors. Subjective factors are considered to be; customer needs and emotions while objective factors are; product and service. Atkinson (1988) suggests that cleanliness, value for money and courteous staff can determine customer satisfaction. On the other hand, Knutson (1988) is of the opinion that comfort, convenience, friendliness and prompt in combination with safety and security can determine customer satisfaction. Akan (1995) argues that employees’ behavior, cleanliness and timeliness are determinants of CS. Liu, Li, Tao and Wang. (2008) developed five criteria for measuring CS based on the purchase and consumption of good and service namely; satisfaction, content, relived novelty and surprise. Satisfaction is when the perception created by the costumer that the good or service is acceptable. Content is when the underlying benefits of the goods and provides the customer with a positive experience. In addition relived is the ease of a negative state of mind of the costumer about the goods or service. The goods or service offer excitement to the customers in the case of novelty. Surprise occurs when the product or service brings unexpected an amazement and pleasure to the customer. The different phases of the customer relationship life-cycle denote the importance of CS at each level (Ravald & Grönroos, 1996).

2.3.2 Centralized Service Delivery

The centralization of the operations service delivery is the consequence of the constant streamlining of the costs. Centralization is defined as the consolidation of power and services in one location. This means that the same work has to be performed by less staff and therefore putting pressure on the service quality which may affect customer satisfaction (Uva & Catalao-Lopes, 2013). The service delivery department in the banking industry is considered to be the heart of the organization as all operational transactions are channeled through this center. Despite the fact that service delivery unit is a non-client facing center their deliverance is vital to measure the service quality and perceived value of the bank by the client which may ultimately lead to customer satisfaction. In light of safeguarding the constant flow of quality service to meet their customer needs many banks introduced inter-department Service Level Agreements (SLA) between the client-facing departments (sales & service staff) and the service delivery units. Technological innovations in the banking industry enable the delivery of services efficiently and effectively (Uva & Catalao-Lopes, 2013). Hence, the season for the banking sector to make massive investments in technological advancement to gain customer satisfaction and to build a good reputation among the customers. Having a good reputation is important for business especially in the aftermath of the economic meltdown where the bank’s reputation were at its lowest (KPMG, 2012).

2.3.3 Service Quality

The literature on service seems to be dominated by three fundamental pillars namely; the study on service quality, service value, and satisfaction. The interest in service is due to the significance of the variables which has been linked to ideologies such as; Total Quality Management (TQM), Customer Satisfaction Measurement (CSM) and Customer Value Management (CVM) (Oliver, Rust, & Varki, 1997). The combined word service quality refers to the customer’s judgment about a service received (Culiberg & Rojsek, 2010). The difference between service quality and perceived service is the comparison made by the customer between their expectations and perceptions of the service actually provided by vendors (Siddique, Karim & Rahman, 2011). Furthermore, the classification of service quality could be further extended to include the overall assessment of a specific service that results from comparing that firm’s deliverance with the customer’s expectations of how firms should perform (Lo, Osman, Ramayah & Rahim, 2010). From system-thinking dimension, service quality is expressed as a production system where various inputs are processed into outputs and provides utility and value to the service buyers, both in the economic sense and for the sake of pleasure (Salifu, Decaro, Evans, Hobbs & Iyer, 2010).

The customer expects to receive a standard of service from their bank. Unfortunately, there are sometimes shortcomings between the real service and expected service for the client. The gap between what is expected and what is received is often measured by the (SERQUAL) service quality model (Parasuraman, Zeithaml, & Berry,1985). (Parasuraman et al.(1988)  developed the service quality model consisting of five dimensions namely; tangibility, responsiveness, reliability, assurance, and empathy. Tangibility entails tangible items such as; the physical appearance of the staff, the condition of the facilities, the equipment used by the bank, logos and design. Responsiveness is the willingness to provide prompt service the banks customers. Reliability is the ability to deliver the promised service dependably and accurately. Assurance is the knowledge, trustworthy and confidence level of the employees and their ability to inspire trust. Empathy is caring for the client’s well-being and giving them the individualized attention. Parasuraman (1985; 1988) defines service quality as “a multi-attribute construct, the product of the comparison between the customer’s expectations and their perceptions of the company’s actions.” On the other hand, the perceived service quality is described as the consumer’s general attitude or account of the complete or superior service (Zeithaml, Berry, & Parasuraman, 1993). Lewis, Orledge, & Mitchell,(1994) defines service quality as the perceived service in comparison to the received service of the bank. Moreover, customer’s expectations are the set of service standards against which service performance is measured (Zeithaml, Berry, & Parasuraman, 1993). Overall it could be said that customer’s expectations are developed from their past experiences, needs and wishes (Edvardsson, Thomasson, & Reutveit, 1994). Cronin and Taylor (1992) developed another method to measure service quality known as SERVPERF. They argued that their model was a enhance measurement of the service construct (Cronin & Taylor,  1992). The SERVPERF scale was found to be superior to the SERVQUAL model and more effective in reducing the number of items to 22 instead of 44(Hartline and Ferrell, 1996; Babakus and Boler, 1992; Bolton and Drew, 1991). Extant literature on service quality suggests that both scales are widely used for different sectors (Adil, Al-Ghaswyneh & Albkour 2013).

Agur, Nataraajan and Jahera, (1999) found in their research on service quality in the banking industry that not all SERVQUAL constructs were equally significant in accentuating all aspects of service quality. They found for example that the most important two were responsiveness and reliability followed by empathy and tangibility which ranked third and fourth respectively. Assurance was found to be the least important construct. Notwithstanding the rank order of the construct, Agur, Nataraajan and Jahera, (1999) found that the SERVQUAL model to be the best to measure service quality in the banking industry. Huseyin, Salime and Salih, (2005) supports Agur, et.al. (1999)argument that a thorough understanding of the characteristics and benefits of service quality in the banking industry will contribute to their success in the competitive international environment. Especially since the quality of the banking service is considered to be the core of their business which is offered to their external clients. The client is considered to be an independent individual with a lot of other banking choices and to not only win the business but also retain the customer they must be able to provide the service based on the customer’s expectations. Hossain and Leo (2009) also underscore the fact that banks should care about the service quality they provide since this is considered to be the cornerstone of their strategic competition. Malik, Naeem and Arif (2011) just like Agur, et.al., (1999) came to the conclusion that not all SERVQUAL constructs have an enhancing role on the satisfaction level of the banking customers. However, in their case, they found that assurance had a relatively higher contribution to customer satisfaction than reliability. The latter, however, was attributed to the research question they were trying to answer. Finn and Lamb (1991) were of the opinion that the five dimensions were inadequate to measure the quality in the retail setting and contested whether they are generic. Despite some resistance of the model, it’s widely used for confirmatory factor analysis. Moreover, the SERQUAL was proven to be the most economical model that was adopted in a wide range of organization including the banking sector (Lo, Osman, Ramayah & Rahim, 2010).

2.3.4 Service Charge

The Merriam-Webster dictionary (2016), defines service charge as the amount of money that e person is charged for a certain service on top of the regular fee. In the banking terminology, however, this is defined as the amount of payment requested by the service provider for a service. The price of the service charge is determined by several factors among others the strategy of the bank, the market it operates in, overhead expenses, competition, the client’s willingness to pay for the service and the type of product and services offered. There will always be a price fluctuation between the service-charge from one financial institution to the other. However, to stay competitive, attract new customers and maintain existing ones, banks strive to offer their product and services at a lower price than their competitors (Lien & Yu-Ching, 2006). Banks always benchmark themselves against the competition to charge in line with market conditions. The service charge (fees) fairness related to the different types of services has a direct effect on the customer satisfaction (Lien & Yu-Ching, 2006).  Price fluctuation affects price performance. The kind of performance price stability moderate between performance potential and successive performance and satisfaction judgments (Voss, Parasuraman, & Grewal, 1998). The banking service charge or price of service is the amount of payment requested by the seller of the service (Uddin & Akhter 2012). The price represents an attempt to establish the potential buyers’ willingness to purchase as a function of various set by the seller. The acceptance level of price is defined as the maximum price which a buyer’ is ready or decide to pay for the products and services (Saeed, Niazi, Arif & Jehan, 2011). However, consumer price of acceptance represented an individual utility profiles (Kohli, 1991). The role of price as a purchasing cause as well as so-called post-purchasing process is well recognized (Matzler, Wurtele & Renzl, 2006).

2.3.5 Perceived Value

The customer usually buys product and service from the companies that they believe offers them the highest perceived value. This is also the case in the banking industry. The perceived customer value is the difference between the client’s evaluation of all the benefits and all the costs of that product and service offering and the perceived substitutes. Lin and Wang, (2006) define perceived value as the customers’ psychological evaluation of a product and service in comparison to the expectations. The perceived customer value which has its origin in marketing research is used to explain and measure customer satisfaction in the banking industry (Lin & Wang, 2006). Perceived value is further defined as density between the price paid by customer for the utility of the product and services resulting from perception (Kumbhar, 2011). In other words, the customers in the banking industry weigh the benefits they obtain in comparison to the costs of the product (Bontis, Booker & Serenko, 2007).The manifestation of value could be categorized into four categories; (1) value is low price, (2) value is whatever the consumer wants in a product, (3) value is the quality the consumer gets for the price they pay and (4) value is what the consumer gets for what he gives(Wong, 2011). Other than monetary gains perceived value is viewed the social psychological research, handling and negotiating cost (Kuo et al., 2009). Perceived value can be further divided into two dimensions. Gronroos (1990) in his research makes a clear distinction between the “how” and “what” of the perceived service quality. He viewed the perceived service quality as having a functional and technical aspect. The practical aspect focuses on how the service is delivered while technical quality concentrates on what is perceived by the customer. The functional benefit in the banking industry is the ease of use, safety, and confidence in the system that the clients perceived as technical benefits. Berry and Parasuraman (1991) in their book service marketing; competing through quality they also make a distinction between two dimensions namely; the process and the outcome and lay the framework for zero defects in service. The focus of this study is on the practical aspect, process or “how” which we hope will lead to a high level of technical aspect, outcome or “what”.