Determinants of customer loyalty in retail banking in ho chi minh city

VIETNAM - NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS DE 1EKMINANTS GF CUSTOMER LOYALTY IN RETAIL BANKING IN HO CMI 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 program for M.A in Development Economics” Jaly, 2011 ACKNOWLEGEMENTS I am greatly thankful to my supervisor, Dr Cao Hao Thi, whose valuable advice and guidance at every stage of my thesis to help me to develop an understanding of this research I also give thanks to all professors, tutors, MDE staff for giving me academic knowledge and advice and my classmates for encouragement to complete the thesis I would like to thank Service Managers at VCB and friends who works at banks who supported me in building the questionnaires and collecting data for this study Finally, I would like to give special thanks to my parents, aunt and sister and friends who give me great and warm support me to follow this MDE program In spite of my endeavour, this study may have many shortcomings and limitations I am looking forward to receive suggestions and opinions of teachers and colleagues ABSTRACT With the development of financial market in Vietnam especially retail banking sector, bank managers should have many strategies to keep customers stay with their banks longer The bank mangers focus on the loyalty of their customers because they know the revenue and cost savings from the old customers are greater than from the attracting the new ones Thus, bank managers need to find solutions to impact the factors that influence customer loyalty to compete with the other banks This study focuses on two objectives: identifying the determinants of customer loyalty in retail banking in Ho Chi Minh city, and based on the results to give recommendations to improve the loyalty of state-owned banks’ customers, in this case, it is Vietcombank The qualitative and quantitative method will be applied to find out the determinants of customer loyalty in retail banking The findings of this research show that factors which affect customer loyalty are Service Quality, Price and Switching Cost They , have strong influence on customer loyalty with the strongest impact factor is Price (beta coefficient 0.583) and two factors Service Quality (beta coefficient 0.327), Switching Cost (0.301) Based on the findings, recommendations for Vietcombank to improve customer loyalty such as: diversifying distribution channels and service-products, different price strategies for each kind of customers, some special program for VIP customers, etc This study only makes survey on banks in HCMC, there are state-owned banks (Vietcombank and Agribank), private-owned banks (ACB and VIBBank), joint-venture banks (Indovina Bank and Vid Public) and foreign-owned banks (HSBC and Citibank) It should be widen to more banks, big areas to increase the accuracy of the research This study provides useful information for future researchers who study customer loyalty in banking industry Keywords Service quality, Price, switching cost, customer loyalty, retail banking 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 Research Statement p 1.2 Research Objectives p 1.3 Research Questions p * 1.4 Research Scope p 1.5 Research Structure p CHAPTER II: LITERATURE REVIEW p 2.1 Customer Loyalty p 2.2 Factors affect Customer Loyalty p 2.2.1 Service Quality p 2.2.2Price p 2.2.3 Switching cost p 2.3 Conceptual framework and hypotheses p 2.4 Adjustment of Measurement Scales p.10 2.4.1 Service Quality p 10 2.4.2 Price p.12 2.4.3 Switching cost p.12 2.4.4 Customer Loyalty p 13 CHAPTER III: RESEARCH METHODOLOGY p.15 Research Process p 15 3.2 Questionnaire Design p.16 3.3 Data Collection p 18 3.4 Data Analysis Technique p.18 3.4 Reliability p.19 3.4.2 validity p.19 o.4.3 Multiple Regression p.19 CHAPTER IV: DATA ANALYSIS AND FINGDINGS p.20 4.1 Descriptive Statistics p.21 4.1.1 Sample size p.21 1.2 Demographic Characteristics p.22 4.2 Measurement Scale Refinement p.23 4.2.1 Reliability Assessment p.23 4.2.2 Exploratory Factor Analysis p.25 4.3 Hypotheses testing p.28 4.3.1 Correlation Coefficient Analysis p.29 4.3.2 Multiple Regression Results p.29 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 Service Quality p.32 43.4.2 Price 4343Switchingcost p.33 p.33 4.3.4.4 Customer Loyalty p.33 CHAPTER V: CONCLUSION AND RECOMMENDATIONS p.35 Summary of findings p.35 5.1.1 Determinants of Customer Loyalty p.35 5.1.2 Comparison between Vietcombank and Industry Average p.o5 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 5.4Conclusion References .p.39 .p.41 APPENDICES Appendix Questionnaire- English version p.46 Appendix Questionnaire- Vietnamese version p.49 Appendix 3: Reliability of all variables (23 items) p.52 Appendix 4: Results of exploratory factor analysis Appendix 5: Correlation of coefficients p.59 LIST OF FIGURES Figure 1: Conceptual Framework of Customer Loyalty Figure 1: Research process p.15 - Figure 4.1: Model of Customer Loyalty after carrying out EFA p.28 LIST OF TABLES Table 2.1: Original Scales of Service Quality and research scales p.10 Table 2.2: Original Scales of Price and Research Scales p 12 Table 2.3: Original Scales of switching cost and Research scales p.13 Table 2.4: Customer Loyalty p.13 Table 3.1 : Variable Codes p.17 Table 4.1: Sample size p.20 Table 4.2: Demographic Characteristics p.22 Table 4.3: Reliability Test Results p.23 Table 4.4: Results of Exploratory Factor Analysis p.26 Table 4.5: Result of Customer Loyalty p.27 Table 4.6: Correlation Matrix p.29 Table 4.7: Model Summary p.29 Table 4.8: Coefficients p.29 Table 4.9: Model Summary p.30 Table 10: Coefficients p.30 Table 4.11: Means Score Comparison between VCB and other banks and Industry Average p.31 ABBREVIATIONS SBV State Bank of Vietnam SMEs Small and Medium Enterprises World Trade Organization SERVQUAL Service Quality EFA Exploratory Factor Analysis VCB Vietcombank ACB Asia Commercial Bank AGRI Agribank VIB VlBBank HS9C Hongkong and Sanghai Bank Corporation CITI Citibank INDO Indovina Bank VID Vid Public Bank Statistical Package for Social Science TAG Tangibles Reliability Responsiveness ASS Assurance Empathy EMP Price PR SQ Service Quality Switching Cost Customer Loyalty CL CHAPTER I: INTRODUCTION 1.1 RESEARCH STATEMENT From 1990 until now, number of banks increases highly especially private-owned banks and foreign-owned bank branches, shows that attractive and potential development of Vietnam’s banking industry for domestic and foreign investors According to the data of State Bank of Vietnam (SBV) until October 2009, Vietnam’s banking system has state-owned banks, 40 private-owned banks, joint-venture banks and 41 branches of foreign-owned bank Vietnam with population of 85 million people and increasing income is a potential market for commercial banks Moreover, many Government policies are issued to limit cash payment in the public such as: pay salary through cards system, accepted banking documents in deducting VAT, etc Vietnam’s accession to the World Trade Organization (WTO) with their commitments of financial services market’s liberalization and deregulation, their customers have more choice between domestic and foreign banks Furthermore, the customers access financial products • with no limitation, as a result, it affects to customer loyalty In Vietnam, service market is more and more improved and it is a new potential market for banks to explore However, the " more increasing is personal income, the higher demands for products and services are 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; private• owned 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 • Based on the research results to give recommendations to improve customer loyalty in retail banking, especially Vietcombank- state-owned commercial bank 1.3 RESEARCH QUESTIONS In order to find out the solutions to improve customer loyalty of the retail banking, this study deals with the following questions: • Which factors affect the customer loyalty? • How the banks improve and make their customers become loyal in retail sector? • What recommendations to Vietcombank about how to improve customer loyalty 1.4 RESEARCH SCOPE This study focuses on identifying the main factors influence on the customer loyalty in retail banking in Viet Nam The survey questionnaire is applied to collect data for this study with the survey time from February to March, 2011 The survey interviewees of this study are individuals who aged over 18 and usually go to the banks irrespective of purposes gender, age, income and education 1.5 RESEARCH STRUCTURE This study includes five sections compatible with five chapters with the names of theirs are: introduction, literature review, research methodology data analysis and findings, and conclusions and recommendations Chapter 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 influenc ing on customer loyalty as service quality, price and switching cost, and relevant literature review and evidence to 17 The charged price suitable with the used services 18 It would be cost me too much to change to another bank 19 For me, it would take a lot of time to change to another 20 I don’t want to move to the further location 21 I feel satisfied with the bank service 22 I will be the loyal customer of the bank 23 I would recommend the bank service to my friends and bank relatives SECTION II: OTHER INFORMATION Please provide more information by choosing (X) the appropriate row: a What is your gender? Mal• b Which is your age group? 18-25 26-35 Female 36-45 56-65 46-55 66-75 76+ c Which is the highest level of education you have completed? Primary education Dip1oma/ Certification Middle school education Bachelors Degree High school education Postgraduate Degree Other d What is your personal monthly income before tax? (VND)