According to analyses of the most business consulting companies (KPMG, Capgemini, Deloitte, TowerGroup, etc.) customers are discontented with the retail banking experience. To achieve higher business growth, banks must increase customer loyalty by delivering a distinctive experience that combines the right mix of convenience, value and service and forges an emotional bond with consumers. Winners will be those that transform themselves into customer-centric enterprises by having a clear vision of what they want to achieve, fully aligning business processes and IT infrastructure to achieve those goals and engaging their employees in the process. The first step to do it is the identification of customer satisfaction. This paper intends to reveal its essential elements.customer loyalty, customer attitudes, retail banking

György Kadocsa

István Szûts

Zsolt Tóth

English

Research Papers in Economics

MEB 2008 – 6
th International Conference on Management, Enterprise and Benchmarking 
May 30-31, 2008      Budapest, Hungary 
  355 
Customer Loyalty Problems in Retail Banking 
István Szűts, Zsolt Tóth 
Budapest Tech, szuts@bmf.hu 
zstoth75@gmail.com 
Abstract: According to analyses of the most business consulting companies (KPMG, 
Capgemini, Deloitte, TowerGroup, etc.) customers are discontented with the retail banking 
experience. To achieve higher business growth, banks must increase customer loyalty by 
delivering a distinctive experience that combines the right mix of convenience, value and 
service and forges an emotional bond with consumers. Winners will be those that transform 
themselves into customer-centric enterprises by having a clear vision of what they want to 
achieve, fully aligning business processes and IT infrastructure to achieve those goals and 
engaging their employees in the process. The first step to do it is the identification of 
customer satisfaction. This paper intends to reveal its essential elements. 
Keywords: customer loyalty, customer attitudes, retail banking 
1  Forewords 
Banks have not done a good job in focusing on the customer at least not in a way 
that has led to providing customers with distinctive experiences where their needs 
and preferences are recognized and consistently met and where loyalty emerges. 
Indeed, how customers feel about their banks can really be summarized as 
ambivalent. 2005 Deloitte Employee Survey [6] found that only 19 percent of bank 
customers can be characterized as truly loyal to their bank. This proportion was 
the same in the USA and Europe. This ambivalence and weak loyalty is evident in 
a high degree of attrition. These are hardly the results of an industry that has built 
a loyal customer base. The main elements of the problem space seem to be the 
following [2]: 
-  Banks continue to struggle with loyalty programs: how to create them, how to 
measure loyalty, what rewards are appropriate. 
-  Measuring customer loyalty means quantifying customer attitudes and 
behaviors accurately, which can be difficult. 
-  Retail banks rarely have the competency and capability to accurately measure 
the profitability of their customers. I. Szűts et al. 
Customer Loyalty Problems in Retail Banking 
  356 
-  A sophisticated loyalty program should be based on the concept of a fair value 
exchange between or among partners. 
-  Retail banks need to move away from product-centric loyalty programs toward 
those that reward an entire relationship. 
Customer loyalty continues to be the bane of retail bankers' existence. Over the 
last decades bankers have experimented with a multitude of programs and tactics 
to strengthen customers' bonds of loyalty to their institutions. Throughout this 
period, perhaps the most frustrating challenges for retail bankers have been 
designing programs that have a discernible impact on loyalty, determining an 
appropriate level of rewards, and devising standards and metrics for measuring 
loyalty. Many retail banks have explored the path of least resistance, limiting their 
loyalty efforts to product-specific programs or simple date-based recognition 
programs. 
If you examine the status of customer loyalty programs found within retail banks 
today, you will argue that retail bankers need to be more creative if loyalty 
between customers and the bank is to be a cornerstone of a strong, profitable 
relationship. Actions for designing effective loyalty programs are recommended. 
2  Customer Loyalty 
Mention the phrase, "customer loyalty program" to most bankers and their first 
thought is typically of product-oriented programs such as those that reward 
customers for using a particular product or service. Credit card programs that 
reward customers with airline miles are an obvious and ubiquitous example. And 
while such product-centric programs have been successful in promoting loyalty to 
products, they are not necessarily the most effective method of fostering 
customers' loyalty to their banks. Retail banks that desire to build relationships 
with customers that go beyond a single product need to focus on loyalty programs 
that are relationship oriented. 
Today, retail banks struggle with customer loyalty; indeed, they often seem to 
have a classic "love/hate" relationship with their customers. Bankers profess to 
love their customers and want to engender unquestioning loyalty in them, but at 
the same time, they want to be able to "fire" customers, raise prices, or change 
basic agreements at will. Scratch the surface a bit, and it becomes clear that banks 
want to foster loyalty in "some" customers but not all. The distinction is important 
because it demonstrates the banking industry's assumption that not all customers 
are created equal and that valued customers (however the bank defines "valued") 
are worthy of a greater investment than those deemed less valuable. 
This selectivity in regard to building loyalty is not unwise, but it presupposes that 
banks have the ability to discern the value of customers and negotiate with valued MEB 2008 – 6
th International Conference on Management, Enterprise and Benchmarking 
May 30-31, 2008      Budapest, Hungary 
  357 
customers professionally, efficiently, and effectively. Given the rather simplistic 
calculations of customer profitability that exist in most retail banks, the idea of an 
equitable value exchange between two partners (customer and bank) is difficult 
for bankers to execute against. Hence the Janus-like behavior typical of retail 
banks: that is, lavish product-specific loyalty efforts on one hand and blunt notices 
of fee increases, branch closures, or changes in products and services on the other. 
As long as banks use a product focus as the cornerstone of their customer loyalty 
programs, any given customer enrolled in a customer loyalty program may be on 
the receiving end of correspondences that whipsaw between high esteem and cold 
disdain. 
3  Customer Loyalty in Retail Banking 
Customer loyalty is truly an amorphous concept for many bankers. Indeed, it can 
be argued that the reason so many bankers struggle with developing, deploying, 
and measuring customer loyalty programs is that there is little agreement among 
bankers as to what behaviors constitute customer loyalty and how best to 
encourage these behaviors. The lack of agreement among bankers as to what 
constitutes customer loyalty renders the discussion of customer loyalty programs 
cloudy and often unproductive. Further complicating the discussion is the fact that 
too many retail bankers still confuse customer loyalty with two distinct, yet 
closely related concepts: customer satisfaction and customer retention. The 
following definitions intend to clarify the interrelationships among these three 
concepts: 
-  Customer Loyalty: A customer's demonstration of faithful adherence to an 
institution (or merchant) despite the occasional error or indifferent service. As 
the definition implies, having entered into a business relationship with a 
financial services institution, the customer maintains and continues the 
relationship. In this view, customer loyalty is an attitude or behavior that 
customers explicitly vocalize or exhibit. 
-  Customer Satisfaction: A customer's perception that his or her needs, wishes, 
expectations, or desires with regard to products and service have been fulfilled. 
Again, it is an attitude or behavior that customers vocalize or exhibit. The 
implication is that the financial institution is consciously and proactively able 
to meet the myriad expectations of its many customers. Unfortunately, 
customer satisfaction is no guarantee of retention or loyalty. 
-  Customer Retention: The ability to hold on to customers over time. Unlike 
customer loyalty and customer satisfaction, which measure aspects of the 
relationship from the customer's perspective, customer retention is a direct 
measure of the institution's ability to maintain relationships with customers. I. Szűts et al. 
Customer Loyalty Problems in Retail Banking 
  358 
The tendency of bankers to use these three terms interchangeably only 
complicates the challenges of building effective customer loyalty programs. Even 
though increasing customer retention is not the same as having loyal customers, 
many bankers continue to act as though it is. 
Retail banks are often guilty of mistaking customer inertia for loyalty. Correctly 
assigning customers to the four quadrants of behavior-attitude scale (Truly Loyal, 
Accessible, Trapped, Higher Risk) requires being able to discern the differences 
between the behaviors that customers demonstrate and their attitudes toward the 
bank. Customers that remain in a long-term relationship with a banking institution 
while holding the bank in relatively low esteem are merely trapped, not loyal. The 
challenge for the bank is in understanding the degrees of loyalty that exist among 
customers and designing loyalty programs that can address the loyalty gaps. In the 
interests of building healthy, long-term, mutually profitable, and satisfying 
relationships, bankers need to understand the connection between retention and 
satisfaction and how they interact to foster customer loyalty. Customer retention 
should not be used as a convenient proxy for customer loyalty. 
4  The Challenges in Building Loyalty Programs 
In today's world, so-called customer loyalty programs abound. Grocers, coffee 
shops, shoe stores, hotels, ice cream parlors, car washes, restaurants, and parking 
lots represent but a smattering of the merchants that regularly provide benefits to 
frequent and loyal consumers. 
The programs offered by these merchants are typically simple, relying on the 
principle that patrons will receive a purchase or service either gratis or at a 
discount after meeting a predetermined quota of purchases. 
Yet even in these relatively simple frequent-purchase programs merchants have 
considerable doubt as to the value of the rewards on offer. Consumers have many 
motivations for choosing a product or service provider: quality and variety of 
products and services, price, locational convenience, and quality of customer 
service all factor into why a consumer chooses to patronize a particular merchant 
at a particular moment. Merchants that institute frequent-buyer loyalty programs 
are never sure what has motivated the consumer's purchase. The reward may play 
a role, or it may represent nothing more than forgone revenue. 
4.1  Bank Loyalty Programs 
Against this societal backdrop of near ubiquitous loyalty programs, retail banks 
have long recognized the importance of building and strengthening customer 
loyalty. Despite a lack of clarity of objectives in banks' loyalty rewards programs, 
the programs do exist and typically fall into three categories: MEB 2008 – 6
th International Conference on Management, Enterprise and Benchmarking 
May 30-31, 2008      Budapest, Hungary 
  359 
-  Points programs reward consumers for maintaining a product or service with 
the bank. 
-  Relationship packages bundle products and services together and provide 
discounts or special pricing to consumers. 
-  Recognition programs are commonly date based, acknowledging the longevity 
of customers' relationships with the bank or their personal milestones such as 
birthdays or anniversaries. 
Such programs are simple and often inflexible in design in that they are designed 
for masses of customers and have very little customization capability. Programs 
that allow the consumer to redeem points from a catalog with a broad spectrum of 
consumer goods or services represent an attempt to inject some customization into 
bank loyalty programs. 
Given the competition for loyalty awards that is common in the broader consumer 
market, it has often been difficult for banks to design programs and fund rewards 
that stand out not only from those of their banking competitors but from those of 
merchants as well. And so the challenges for banks in strengthening customer 
loyalty are actually threefold: 
-  how to construct loyalty programs that go beyond product loyalty to building 
relationships with customers, 
-  how to determine the appropriate combination of rewards for their customers, 
and 
-  how to measure the cause and effects of a loyalty program. 
4.1.1  Program Structure 
The primary challenge for retail bankers is determining the behaviors and attitudes 
that accurately reflect customer loyalty. Customer loyalty programs represent a 
long-term commitment on the part of the bank. Given that retail banks offer a 
multitude of products and services to consumers and spend considerable time and 
effort upselling and cross-selling the same, bankers should focus on the total 
relationship rather than on a single product or service. Communications with 
enrolled customers should reflect the tone and tenor of the loyalty program, 
regardless of the nature of the communication (e.g., notification of a branch 
closing, introduction of a new product). 
4.1.2  Appropriate Rewards 
Not only are customers not created equal, but also they perceive reward programs 
differently. What appeals to one consumer may have no value to another. Possible 
rewards should include discounts on bank products and services, interest rate 
bonuses, service level guarantees, and third-party reward programs. A broad array 
of rewards is necessary to ensure that all enrolled customers perceive value; a I. Szűts et al. 
Customer Loyalty Problems in Retail Banking 
  360 
wide range of reward values ensures that the customer is rewarded based on the 
value of the total relationship. 
4.1.3  Measurement 
As noted earlier, customer loyalty should be measured in terms of both attitude 
and behavior. Within the banking industry, the emerging standard for defining 
customer loyalty involves the consumer's overall satisfaction, willingness to 
purchase additional products or services, and willingness to recommend the bank 
to others. 
Retail banks vary significantly in the frequency with which they measure 
customer loyalty. Larger banks field surveys of their customers on a monthly basis 
but limit the surveys to representative samples among key customer segments. 
Smaller banks tend to field sample loyalty studies on a quarterly basis; attempting 
to measure attitudes and behaviors for all customers involved in loyalty programs 
every month would consume scarce research resources. 
4.2  Building Loyalty into Retail Banking Relationships 
Retail banks that are embarking upon or revamping a customer loyalty program 
should strongly consider incorporating a rewards system into their plans. Because 
retail banking is a relationship business, the institution needs to accept that a 
relationship is a two-way street and that a customer will maintain a relationship 
only if there is value in doing so. Fortunately, retail banks have a significant 
number of potential rewards they can use to promote and solidify customer 
loyalty. 
Having a range of potential rewards to offer is critical because not all customers 
place the same value on all the characteristics of a banking relationship. Just as 
consumers patronize merchants for a variety of reasons, including quality and 
selection of products or services, price, location, and staff quality, customers 
choose their banks for a host of reasons. 
To the extent that core processing systems and delivery channels allow, retail 
banks have a plethora of potential rewards they can offer to consumers as rewards 
for sustaining long-term, profitable relationships. Clearly, two integral aspects of 
negotiating value exchanges with customers are the ability to calculate the value 
of the total customer relationship and the ability to understand the real and 
perceived costs of each potential reward. Retail banks will be more successful in 
building loyal, profitable customer relationships when they pursue a value 
exchange approach to building loyalty programs. 
 
 MEB 2008 – 6
th International Conference on Management, Enterprise and Benchmarking 
May 30-31, 2008      Budapest, Hungary 
  361 
4.3  Recommended Actions 
Bankers must focus upon five actions in designing customer loyalty programs [2]: 
-  Determine which behaviors and attitudes are most indicative of loyalty, and 
then measure them regularly and track results according to customer segments. 
-  Keep product silos from undermining loyalty efforts by making sure that the 
whole relationship is acknowledged in all business units. 
-  Calculate the profit contribution for every customer involved in a loyalty 
program so that the value of customers can be correlated to the value of the 
rewards program. 
-  Reward customer loyalty according to the customers' priorities. 
-  Determine the risks and realities of working with third-party or partner loyalty 
programs. 
Conclusions 
While some retail banks have been successful in implementing loyalty programs 
based on products or services, the nature of retail banking is an argument for 
establishing relationship-based programs instead. In addition to providing 
assistance in meeting cross-selling goals, a relationship focus in loyalty programs 
can also preclude communication mistakes that result from one product group 
within the bank not knowing the true value of a customer's total relationship with 
the bank. This problem does exist in Hungary too. 
References 
[1]  Dick, Alan, Basu, Kunal (1994): Theoretical model framework. Journal of 
Academy of Marketing Science, April 
[2]  Khirallah, Kathleen (2005): Customer Loyalty in Retail Banks: Time to 
Move Beyond, Simple Programs or a Product Orientation, TowerGroup 
[3]  Ross, Pat (2004): Customer relationship management in retail banking 
Programs or a Product Orientation. TowerGroup, Reference # ViewPoint 
Issue 127 
[4]  Schneider, Ivan (2006): The Next Generation. Bank Systems & 
Technology, March 
[5]  (without author) (2005): Banking beyond borders: will European 
consumers buy it?, KPMG 
[6]  (without author) (2005): Deloitte Employee Survey, Deloitte 
[7]  (without author) (2005): Loyalty Quest. Enhancing the Retail Banking 
Experience to Drive Growth, Deloitte – Consumer Bank Association 

Banking beyond borders: will European consumers buy it?,

Customer Loyalty in Retail Banks: Time to Move Beyond, Simple Programs or a Product Orientation,

Customer relationship management in retail banking Programs or a Product Orientation.

Deloitte Employee Survey,

Loyalty Quest. Enhancing the Retail Banking Experience to Drive Growth, Deloitte –

The Next Generation. Bank Systems

Theoretical model framework.

Customer Loyalty Problems in Retail Banking

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Customer Loyalty Problems in Retail Banking

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