CHAPTER TWO

LITERATURE REVIEW

2.0 Introduction

This chapter was discussed and explores theoretical underpinnings depicting the impact of E
banking on customer retention Case study: Premier bank in Mogadishu Somalia. The chapter is
meant to assist the researchers and the readers to understand the theoretical prepositions of the
study with already existing information about the area under study.

2.1 Electronic Banking

Electronic banking, also known as the electronic banking, has become a popular phenomenon in
as far as facilitating E commerce in the global market is concerned. The change was because of
the intense competitive atmosphere because of globalization of markets, prompting companies in
the banking sector to implement innovative techniques as a way of improving their competitive
position. As Suleiman et al [4] postulates, in their study, customer loyalty has become a key
driver in a company’s profitability and electronic banking has revolutionized the interaction
between customers and the bank. As a result, companies are prompted to make customer loyalty
as one of their major goals to achieving because the variable is a function of the company’s
success. [3] Observed that technology is making a tremendous impact upon service companies in
general and the financial services sector is no exception. The application of information and
communication technology concepts, techniques, policies and implementation strategies to
banking services has become a subject of fundamentals importance and concerns to all banks and
indeed a prerequisite for local and global competitiveness in banking industry. Different Authors
have examined the concept of E-banking.

Shrimali (2015) in his article discussed the impact of electronic banking on customer retention
and compared with traditional banking brick and Mortar service. Saeidipour et al. (2013). The
electronic division way can increase value for bank through prerogative in several ways,
depending on which to form physical branch (brick and mortar banks) or in form electronic
banks only, also the imperative view of electronic banks only is low value added business
transactions for example bill payment, account transfers, lending credit cards, and balance
inquiries, through the cheap electronic channel. However, there are high value added transactions
e.g., customers’ small business lending, personal trust services, investment banking through the
branch channel.

Diniz (1998) prepare a questionnaire about websites of banks to understand of models of web
banking and their permission in the United States. He discovers that the banks in USA they are
used web banking to get of three different sections: marketing information, transferring products
and services by banks, and improvement customers’ retention, and in his survey he focuses on
that most of banks in the USA offer essential and medium services in the transactions to
providing to customers.

Reddy and Banu (2018) explained in their study that mobile technology create a revolution in
banking industry and global electronic payment system, due to building a lot of opportunities for
banks it makes a high convenience to their customers in the developed countries, also and this
technology can reach a lot of people in developing 12 market, however, a lot of banks those run
face to face with technological system has a significant challenge with new customers and
change the economic system of those industries. Jaruwachirathanakul and Fink (2005) they are
determined the factors have been a role in electronic banking’s adoption in Thailand, and they
suggest the extraction plans like expanding service value and potential plans like the ease of
usage, and confidentiality one of the factors for successful any services in banks because of the
customers want to stay their personal information confident.

Hernandez and Mazzon (2007) provide different models of electronic banking adoption and the
empirical result showed that the technological feature, realize behaviour control, and individual
feature, the determination of exact applying of electronic banking. According to Casalo et al.
(2007) electronic banking like an assumption channel that authorizes customers to let the service
with several ways and banks provide some opportunity for customers to access their bank
account in any time they need 24 hours in 7 days.

Based on Anesti (2004) in her master thesis explained the cost operation in traditional brick and
mortar banks are higher than electronic banking providing by banks. And it means that providing
service via online is cheaper than the traditional branch. As data below from United States banks
for processing cost for full service by banks and estimated services cost via electronic banking is
$0.27 for ATM service and $0.54 for mobile banking service, but for transactions via traditional
branch is $1.07 is cost. And support calls support by humans is $10 to $33 but web-based by
self-service about $1.

However, in Greece the cost of service via traditional branch is $1.40 but via the electronic is
lower is$0.01 and According to Yu et al. (2015) based on Bank Negara Malaysia 2012, the
numbers of individual users of electronic banking were increased from 9.8% in 2005 to 42.9% in
2012 and it means that the users of electronic banking from 2005 to 2012 increased by 337.7%.
And based on another survey there are 2.7 million visited bank website in 2011 and it is growth
percentage is 16 from a year to year and this is the highest in all southeast Asian countries.
Callaway (2011) there are the dimensions for electronic banking such as development to reach
the market, decreasing the cost of a transaction, market segmentation. Finally, electronic banking
13 has three advantages that help the bank to improvable their performance such as: expanding
to reach for the market, expand of services line, cost of transactions in lower level.

And Maseke (2018) in their articles explained the impacts of mobile banking on customer
retention and the case study from Namibia, Keetmanshoop and they distribute quantitative
structure questionnaire to 60 responders, also in this study the authors disclose those factors of
mobile banking that influence on customer retention and this factors participate 75% on
customers’ satisfy and they are includes: reliability, convenience, cost, the system available in
another’s mobile networks, encouraging that advertisement to effect on customers, the service
provides agree and comply with mobile devices, the incomes that customers received influence
on mobile banking usability and those services by mobile banking are more secure that service
provide by branches.

Worku et al. (2016) in another research about the impacts of electronic banking on customer
retention and the case study from Ethiopia, Gondar, also they use questionnaire form and they
distributed 420 and they receive 402 questionnaire from responders in 12 commercial banks and
20 branches, however, according to those data collected from customers all results are significant
and based on those data there are positive retention between customer retention and demographic
characteristics, and customer retention has a relation with customer knowledge also based on
their result there are difference after adopted electronic banking to visit branches.
Toor et al. (2016) discussed in their articles about the influence of electronic banking on
customer retention a case study from various cities in Pakistan. Quantitative data is used also
data has been collected through questionnaire form and they distribute 264 form to electronic
banking users, however, the authors they determined five dimensions of SERVQUAL such as
reliability, responsiveness, assurance, empathy and tangibles also according to the result of the
study has been shown that all five dimensions have a significant effect on customer retention on
electronic banking.

14 Raza et al. (2015) explained the influencing factors of electronic banking on customer
retention also they use a questionnaire form to collect a quantitative data form 400 respondents
by electronic banking users in several banks in Karachi city, Pakistan. they determined six
dimensions include assurance, empathy, reliability, responsiveness and tangibility. According to
the results, those collected from the responders explain that all dimensions have a positive
correlation and significant except the empathy result is insignificant due to the p value less than
0.05.

Musiime and Ramadhan (2011) in their study focused on consumer adoption and retention on
electronic banking, a case study from Uganda also they determine those factors have influence
on consumer adoption on electronic banking, however, they use quantitative data for them
research by collecting data from questionnaire those distributed to 332 responders and according
to the results, there is a strong and positive correlation between electronic banking service and
consumer adoption and customer retention.

Choudary (2013) in his studies about the impact of electronic banking system on customer
retention explained those factors have an influence on customer to be satisfied, also the case of
the study in Chennai, India and the author uses a quantitative data to collect information from
customers, and he was distributed 250 questionnaire form to responders and determined four
dimensions of service quality such as interface, responsiveness, fulfillment and security. also
based on one of the question that face to customers about the most satisfied electronic banking
channel and they answered as follow 55% of them agreed with that mobile banking is most
satisfied channel and 28% chose branches, 13% selected ATM is satisfied for them, also 2% for
online channel and call center is 2%. However, according to the results as shown that there is a
significant and positive correlation between variables and all dimensions has a significant effect
on customer retention, however, the customer retention and electronic banking have a significant
effect on customer loyalty?

Lal (2015) explains the main duties of banks are accepting deposits from clients and making
loans to clients, With the passage of time the traditional services in banks changed to modern
service and in the traditional service, the bank provide various type of service such as, give
separate kind of deposit account, gives a loan to 15 customers, gives an advances, monthly
income, pension program, project, exchange currency, transferring money between account and
to outside of country, buy or sell securities(stock and bonds),transfer of mail. Under the modern
service kept a lot of traditional service and the bank provides such as debit and credit card,
electronic banking (ATM, online banking, and POS machine), full-time service in a safe mode.

The advantages and disadvantages of e banking

A. The advantages of e banking

Many banks have begun to offer customers the option of online-internet banking, a practice that
has advantages for both all parties involved. The convenience of being able to access accounts at
any time as well as the ability to perform transactions without visiting a local branch, draw many
people to be involved. Some of these advantages of internet banking but are not limited to,
include:

Customer’s convenience

Direct banks are open for business anywhere there is an internet connection. They are also 24
hours a day, 365 days a year open while if internet service is not available, customer services is
normally provided around the clock via telephone. Real-time account balances and information
are available at the touch of a few buttons thus, making banking faster, easier and more efficient.
In addition, updating and maintaining a direct account is easy since it takes only a few minutes to
change the mailing address, order additional checks and be informed for market interest rates.

More efficient rates

The lack of significant infrastructure and overhead costs allow direct banks to pay higher interest
rates on savings and charge lower mortgage and loan rates. Some offer high-yield checking
accounts, high yield certificate of deposits (CDs), and even no-penalty CDs for early withdrawal.
In addition, some accounts can be opened with no minimum deposits and carry no minimum
balance or service fees. Mana

Services

Direct banks typically have more robust websites that offer a comprehensive set of features that
may not be found on the websites of traditional banks. These include functional budgeting and
forecasting tools, financial planning capabilities, investment analysis tools, loan calculators and
equity trading platforms. In addition, they offer free online bill payments, online tax forms and
tax preparation.

Mobility

Internet banking also includes mobile capabilities. New applications are continually being
created to expand and improve this capability or smart-phones and other mobile devices.

Transfers

Accounts can be automatically funded from a traditional bank account via electronic transfer.
Most direct banks offer unlimited transfers at no cost, including those destined for outside
financial institutions. They will also accept direct deposits and withdrawals that the customer
authorizes such as payroll deposits and automatic bill payment.

Ease of use

Online accounts are easy to set up and require no more information than a traditional bank
account. Many offer the option of inputting the customer's data online or downloading the forms
and mailing them in. If the customer runs into a problem, he has the option of calling or e-
mailing the bank directly.

Environment friendly

Internet banking is also environmentally friendly. Electronic transmissions require no paper,

reduce vehicle traffic and are virtually pollution-free. They also eliminate the need for buildings
and office equipment.
B. The disadvantages of e banking

Internet banking seems like an obvious choice to leave the hassles of traditional money
management behind in exchange for it. However, there are potential problems associated with
banking over the internet of which customers may not be aware. Consumers need to weigh the
advantages as well as the disadvantages of internet banking before signing up. Some of the
disadvantages of internet banking include:

Today, internet banking has become a popular method to manage one's money and finances.
When using internet banking accounts, more consumers now feel empowered to take control of
their money. Internet banking, or banking by way of the Internet, offers numerous advantages for
banks and consumers. These benefits are easy to set up, fewer cost, easy and convenient online
bank comparison, easy way of bank account monitoring, maintain accurate financial records,
ban.

Gao and Owolabi (2008) identified social (culture, tradition, education), economic (economic
system, average income level) and technological (industrial infrastructure, technological
background characteristics) aspects as key factors in the development and adoption of e-banking.
It is very important for the banker to understand the expectations of customers, as observed by
Chaffey (2009). Electronic banking services have provided numerous benefits for both banks
and customers. The first benefit for banks offering electronic banking services is better branding
and improved responsiveness to the market. Those banks that offer services such as Internet
banking are perceived as leaders in technology implementation. Rabi (2011:4) observed that the
main advantage of e-banking is a new distribution channel providing improved services to
customers, as well as the use of electronic commerce strategies.

The benefits of e-banking depend on which side one is on - banks do not experience the same
advantages as customers. The banking industry has reaped various benefits due to the
development of the e-banking system. The main objective of every financial organization is to
boost profits for its shareholders, and online banking services offer ideal opportunities for
increasing profits. The development of e-banking has greatly helped banks to minimize their
overheads, charges and service costs. Many routine services and tasks have now been fully
computerized and are quicker and more efficient. The growth of e-banking has made banks more
economical, and has also led to the growth of the banking industry, with the introduction of new
opportunities for banking processes. The Internet offers a potential competitive advantage for
banks - this advantage lies in the areas of cost reduction and increased satisfaction of customer
needs (Bradley & Stewart, 2003; Jaruwachirathanakul & Fink, 2005). The Internet is the
cheapest distribution channel for standardized bank operations, such as account management and
funds transfer (Polasik & Wisniewski, 2009). The commitment of senior management was also
found to be a driving force in the adoption and exploitation of technology (Shiels, McIvor, &
O'Reilly, 2003). According to getting moneywise (2011), there are advantages to using Internet
banking for anyone who is a customer of a bank. The ability to view statements online without
having to spend money on overpriced telephone banking calls, for example, is an obvious
benefit. Wang et al. (2003) observed that different distribution channels increase effective
market coverage by enabling different products to be targeted in different demographic
segments. In general, customers have been affected in a positive manner by e-banking.

Despite the many benefits that Internet banking provides to both banks and their customers,
acceptance of this technology has not been equal in all parts of the world (Getting moneywise,
2011). Security, of course, is the primary concern for those who are wary of taking their banking
online, and there have been cases of successful breaches of some bank websites’ security.
According to Karjaluoto et al. (2002), there are also some disadvantages associated with e-
banking services, as most people do not trust transactions which are conducted online. For
beginners, e-banking can be difficult to learn, and websites sometimes take time to load. Some
websites ask for identification, which can be very inconvenient for newcomers to e-banking.
Hackers may intercept data and defraud customers, and phone bills can increase due to Internet
usage. There is also a need for customers to have skills to deal with computers and the Internet.
For the elderly and housewives, for example, this may make Internet banking difficult, and
website changes may result in confusion among customers and delays in processing of
transactions.

As stated by buzzle.com (2011), one very common disadvantage of online banking is when a
person has some problem or query. In a traditional bank, if one experiences a problem, one can
go to an employee of the bank to solve it. However, in the case of Internet banking, one will find
oneself making endless calls to the customer services department.
2.1.1 Internet Banking and Efficiency

The banking industry has been tremendously influenced by technological advancements just like the other
aspects of life. The emergence of e-banking has significantly redefined and transformed banks’ operations
(Kolodinsky, Hogarth & Hilgert, 2004). Technology is viewed as the major driving force in firms’
performance success. All banks irrespective of whether local or foreign are investing heavily on emerging
technologies that assure customer retention in e-banking. Technologies such as mobile banking,
electronic funds transfer (EFT), PC banking, online bills payments, online statements, account to account
transfer, ATMs and credit cards, and account to account transfer are the banks major services.

With reference to Harker and Zenios (2000), it’s stated that technological advancement encourages more
competitive force. Primarily, it opens up new conveyance channels, keeping in mind that those are not
more cost effective for the organization; hence customers get the chance to rely on upon them and
demand access. Nevertheless, before the bank branch was the main channel for the dispersion of financial
services, we see today an assortment of channels eroding the branch's dominance.

The economies of scale that lead to more incorporated automation cause more economies of scope
effects. As financial establishments – in concurrence with all other retail services – understand that
consumer retention and loyalty lead to a fixed progression, they go for increasing the share of customers'
wallets that they are servicing. With stage automation, a representative can get a single view of the whole
customer relationship; economies of scope can be made when a firm offers appropriate product mix to
support its customer base.

Gale and Allan (1994) opposed advancement to remain noticed by means of: presentation of original
economic devices and/or services and/or repetition, 16 launching of original fund expenditures,
discovering new wellsprings of funds, launching of original developments and/or methods towards
handling everyday processes, and/or setting up an innovative organization; with every one of respective
modifications to be a piece of present economic organizations, rise of remarkable development of
innovative economic organizations and marketplaces.

Financial advancement refers to making before promoting innovative economic devices, also inclusive of
first-hand economic know-hows, organizations and marketplaces (Lerner & Tufano, 2011). The
advancements are in some cases separated into products and/or procedure variations, through
merchandise advancements demonstrated through innovative unoriginal agreements, innovative
commercial securities, or first-hand types of joint speculation goods, plus processes enhancements
characterized via first-hand ways for disseminating securities, handling dealings, and/or valuing trades.

2.1.2 Bank Size

Bank size determines the extent to which a firm is affected by legal and financial factors. The size of the
bank is also closely linked with the capital adequacy because large banks raise less expensive capital and
thus generate huge profits. Bank size has a positive correlation with the return on assets indicating that
large banks can achieve economies of scales that reduce operational cost and hence help banks to improve
their financial performance (Amato & Burson, 2007). Magweva and Marime (2016) link bank size to
capital rations claiming that they are positively related to each other suggesting that as the size increases
profitability rises.

The amount of assets owned by an organization determine it size (Amato &Burson, 2007). It is argued
that large firms have adequate resources to undertake a number of large projects with better returns than
firms with small amounts of total assets. In addition, firms with large amounts of total assets have
adequate collateral which they can pledge to access credit and other debt facilities compared to their
smaller counterparts (Njoroge, 2014). Lee (2009) established that the total assets controlled by a firm as
measured by the total assets have an influence on the level of profitability recorded from one year to
another.

2.1.3 Bank Liquidity

Liquidity is defined as the degree in which an entity is able to honor debt obligations falling due in the
next twelve months through cash or cash equivalents for example assets that are short term can be quickly
converted into cash. Liquidity results from the managers’ ability to fulfill their commitments that fall due
to creditors without having to liquidate financial assets (Adam & Buckle, 2003).

According to Liargovas and Skandalis (2008), liquid assets can be used by firms for purposes of financing
their activities and investments in instances where the external finance is not forthcoming. Firms with
higher liquidity are able to deal with unexpected or unforeseen contingencies as well as cope with its
obligations that fall. Almajali et al., (2012) noted that firm’s liquidity may have high impact on efficiency
of firms; therefore, firms should aim at increasing their current assets while decreasing their current
liabilities as per his recommendation. However, Jovanovic (1982) noted that an abundance of liquidity
may at times result to more harm.

2.2 Transactional Internet Banking

In the wake of the internet revolution, electronic commerce emerged and allowed businesses to interact
more effectively with their customers and other corporations. In this proliferated information age, banking
industry has been using this new communication channel to reach its varieties of customers. Electronic
commerce (E commerce) has become a very important technological advancement for businesses by
changing business practices (Brodie et al., 2007; (Gonza´lez et al., 2008; Lichtenstein and Williamson,
2006). This has experienced tremendous growth in recent years as a result of new business initiatives
utilizing these technologies (Barwise and Farley, 2005). In particular, industries that are information-
oriented such as banking services and securities trading sector are expected to experience the highest
growths in e-commerce (Ibrahim et al. 2006; Hughes, 2002). Inevitably, this phenomenon has sparked a
lot of attention in the academic literature lately (such as Gan et al., 2006; Pikkarainen et al., 2006;
Shamdasani et al., 2008).

Undoubtedly, electronic banking (e-banking) has experienced explosive growth and has transformed
traditional practices in banking (Barwise and Farley, 2005; Gonzalez et al., 2008; Lichtenstein and
Williamson, 2006). The banking industry has declared 18 information privacy and security to be major
obstacles in the development of consumer related electronic commerce. Besides that, success of banking
industry depends on the capabilities of management to anticipate and react to such changes in the
financial marketplace (Gan et al., 2006). Meanwhile Internet banking also allows customer to have direct
access to their financial information and to undertake financial transactions with more convenient way
(Rotchanakitumnuai and Speece, 2003). Since, it represents an electronic marketplace whereby
consumers may conduct their transactions on a virtual level (Reiser, 1997; Daniel, 1999; Bradley and
Stewart, 2003).

Correspondingly, the banking industry is now using the new communication media (Internet) to offer its
versatile services to the customers with ease and convenience. This system of mutual interactions between
the consumers and the banking industries is widely known as electronic banking (e-banking). E-banking
is particularly wellpracticed in Austria, Korea, the Scandinavian countries, Singapore, Spain, and
Switzerland, where more than 75% of all banks offer such services. Yet the development and increasing
role of the Internet as a service channel has removed the locus power from service provider to customers
(Mäenpää, 2006) and also breaching geographical, industrial, and regulatory barriers, creating new
products, services, market opportunities, and developing more information and system-oriented business
and management processes (Liao and Cheung, 2002).

To re-examine the role of traditional service quality in an e-banking environment by providing a review
of how traditional service quality perceptions have evolved through the current and continuing stream of
change in banking technology and the corresponding changes in the nature of how banks interact with
their customers, Wong et al., (2008) investigate the important ranking of the five SERVQUAL
dimensions. These have not changed until now, while large scale discrepancies have been found between
customer expectations and their perceived performance of traditional banking services. These
developments influence the banking industry to adopt the technological innovation, since the
characteristic of banking is known as “tried and tested” process of service delivery which affected by
environmental changes (Bradley and Stewart, 2003). Moreover, changing consumer behavior and needs,
globalization, deregulation, disintermediation and the emergence of new 19 financial service models are
all dynamics in the financial services industry. Conversely, Internet is also having its impact (Bradley and
Stewart, 2003).

As prospect of E-banking depends on customers, therefore, specific understanding on customers'

perceived requirements and meeting their demands and expectations is becoming an intricate challenge.
With the growth of Internet and the E-Economy, the customer is in control and it is not difficult for them
to move to a competitor's site (Shailey et al. 2003). The total Customer Experience (TCE) includes all
stages of a customer’s interaction with an E-Commerce environment, such as the delivery of the service
or product on schedule, the Web-based retail site, the back-office systems, and the post-sales support. To
create value and to generate a positive TCE is important for banking environments in order to acquire
customers (Shailey et al. 2003). To explore the determinants of users’ adoption momentum of e-banking
in Malaysia, Poon (2008) indicates that privacy and security are the major sources of disretention, which
have momentously impacted users’ retention.

Meanwhile, accessibility, convenience, design and content are sources of retention. Besides, the speed,
product features availability, and reasonable service fees and charges, as well as the bank’s operations
management factor are critical to the success of the e-banks. WAP, GPRS and 3G features from mobile
devices are of no significance or influence in the adoption of e-banking services in this study. Results also
reveal that privacy; security and convenience factors play an important role in determining the users’
acceptance of e-banking services with respect to different segmentation of age group, education level and
income level. Moreover, the exposure of internet banking adoption in Malaysia is relatively lower and
very little research has been done to understand the key adoption determinants. Though, electronic
revolution has commenced in Malaysia a long ago, but Internet banking is still in its infancy stage.

So, it’s become very hard for the bank industry to design interventions that would enhance the diffusion
of Internet banking (Ndubisi and Sinti, 2006). However, in the market place, this is the era of growing
competition in technological arena while the Internet is the focal point as the potential customers have
direct access to it. Further potential customers have wide ranges of choices as they can compare among
the 20 competitive banks through gathering Internet information. So, it is becoming increasingly difficult
for the banks to acquire expected number of customers. Therefore, as a condition of acquiring new
customers and retaining existing customers, e-banking organizations need to be seriously concerned about
the customers' value in order to build customers’ loyalty, and to reduce customer defections. From the
previous research, it was found that perceived service quality strongly influence customers. Prior research
also suggests that customer retention also has a positive influence on the use of E-Banking. In addition,
the quality of the service is crucial in acquiring customers in e-banking organizations.

According to the essence of service quality is the ability to deliver what the customer needs and expects
(Shailey Minocha et al. 2003). Therefore, in view of above discussions, the purpose of our study is: (a) to
examine the level of consumer perception about e-payment; (b) to evaluate the level of confidence on
electronic transaction; and (c) to examine the factors affecting consumer perceptions towards electronic
payment.

2.3 Service Quality in Banks

Schmenner (1986) refer to retail banking as a mass service that needs customization and low
service interaction. The intangible aspect of services requires making the service warm and
friendly and responsive to customers‟ needs. Further, he states that the tangible and intangible
features are a key component of bank service quality. In the mass service, service classification
includes, knowledge which the possession of required skills and competence of employees,
reliability, tangibility which are the appearance of service staff, equipment and physical
facilities, responsiveness and accessibility, which is the operating hours, customization and
readily availability (Schmenner, 1986; 2004).

The functional and technical service quality includes how the service is delivered and is an
integral part of service ingredient (Richard and Allaway, 1993; Arora and Stoner, 1996;
Powpaka, 1996; Brady and Cronin, 2001; Kang, 2006). Service quality therefore has both
operations and marketing orientations (Olorunniwo and Hsu, 2006). Employees‟ behavior and
their aptitude to target the specific needs of their customers are fundamental elements of the
marketing attributes and service quality 21 operations (Schmenner, 2004; Olorunniwo and Hsu,
2006). Ba and Johnson (2008) propose utilizing technology to improve the delivery of service
and subsequently customer retention. Increased utilization of technology in services has affected
the productivity of companies and quality of operations (Heim and Field 2007; Cho and Menor,
2010).

Bahia and Natel (2000) in their study on bank service quality suggested the banking service
quality scale. Perceived service quality in the banking industry is as a result of the gap between
the expectation and the actual service provided. The initial SERVQUAL scale comprised of
various marketing mix aspects however, „price‟ and „promotion‟ elements were not included
(Bahia and Nantel, 2000).

The BSQ scale they developed includes 31 items some of which are price, service portfolio,
reliability, tangibles, access, effectiveness and assurance. They propose that service quality in the
banking industry entails constantly anticipating and meeting the needs and expectations of
clients. Service quality therefore is determined by the clients‟ perceptions and should include
accomplishing these expectations (Lewis, 1989; Howcroft, 1991; Kathawala and Elmuti, 1991;
Blanched and Galloway, 1994; Chen, 2009).

According to Lassar, Manolis and Winsor (2000) there are two elements fundamental for
understanding service quality in the banking industry. SERVQUAL was fundamental for
assessing quality and they included technical/functional features of bank service. Similarly,
Aldlaigan and Buttle (2002) state that bank service quality comprise of attributes such as
behavioral quality, system quality, machine efficiency, transactional accuracy, and service
quality.

Various studies have looked into bank service quality (Cronin and Taylor, 1992; Blanched and
Galloway, 1994; Kwan and Lee, 1994; Johnston, 1997; Natarajan, Balaram and Ramana, 1999;
Jun, Peterson and Zsidisin, 1999; Bahia and Nantel, 2000; Lassar, Manolis and Winsor, 2000;
Herington and Weaven, 2007; Chen, 2009; Kumar, Kee and Manshor, 2009) that have utilized
and changed the SERVQUAL scale. In their research on Chinese banking industry, Guo, Duff
and Hair (2008) discovered that service quality was measured by two higher level concepts that
were 22 related to technical and functional quality and four lower level aspects that were human
capital, communication, technology and reliability.

2.3.1 The Impact of Service Quality on Customer Retention

According to Parasuraman, Berry and Zeithaml (1985), service quality is the global assessment
or attitude of complete excellence of services. The difference between the perceptions of services
provided by service firms and the customers‟ expectations is what constitutes service quality.
Service quality as defined by Nitecki and Hernon (2000) is meeting or exceeding a client‟s
expectations or the difference in a client‟s perceptions and service expectations.

Long distance telecommunication, motor repair shop, credit card companies and banking
industry are the four different types of services studies by Parasuraman, Berry and Zeithaml
(1985). The results indicated that service quality had the following dimensions responsiveness,
reliability tangibility, knowing/understanding the customer, security, communication, credibility,
access, courtesy and competence. In 1988, the ten dimensions were reduced to five which are
reliability, assurance, responsiveness, empathy and tangibility. In addition, Sureshchandar,
Rajendran and Anantharaman (2001) identified the following five aspects of service quality,
human element or service provision, tangibles of service, service product or core service, social
responsibility and systemization of service delivery.

SERVQUAL, later called RATER, is a quality management framework that was developed in
the mid-1980s by Zeithaml, Parasuraman and Berry to measure quality in the service sector. The
four various measurement models as indicated by Cronin and Taylor (1992) include SERVPERF
(this is a performance component of the Service Quality scale), SERVQUAL (this is a tool used
to measure five underlying dimensions of service corresponding to Tangibles, Reliability,
Responsiveness, Assurance, and Empathy), Weighted SERVPERF and Weighted SERVQUAL
amongst which SERVPERF was considered the best. Moreover, the Martilla and James (1977)
Importance Performance Analysis was another service quality measuring technique. The
importance performance system was used to establish which resources were not properly
allocated or which items needed immediate improvement.

23 2.3.2 Strategies for Improving Service Quality in Banks

In spite of SERVQUAL‟s input on our understanding, considerable debate has arisen in the
literature regarding the model and especially revolving around the study of Cronin and Taylor
(1992) that indicates the redundancy of the expectations portion of the tool as customers‟
expectations is included in their perceptions of performance. Their reduced tool SERVPERF
which contains the perceptions portion of the instrument only better indicates the repurchase
intentions as compared to SERVQUAL. With the five aspects of service quality captured in the
SERVQUAL instrument the gap model of service is still widely known, tested empirically and
largely accepted description of quality in service literature (Westbrook, 1980). Service quality
improvement, especially from an operations point of view, needs attentions when addressing
how to deliver better service in a bid to increase the perceptions of the consumer (Parasuraman,
Berry and Zeithaml, 1988). Service literature examination indicates this choice echoed in four
thematic areas of variation based, design based, culture based and failure based enhancement
strategies.

2.3.3 Dimensions of service quality

Customer’s expectation of a particular service is determined by factors such as

recommendations, personal needs and past experiences. The expected service and the perceived
service sometimes may not be equal, thus leaving a gap. The service quality model or the ‘GAP
model’ developed by a group of authors- Kevin, Kristine and Berry at Texas and North Carolina
in 1985, highlights the main requirements for delivering high service quality. It identifies five
‘gaps’ that cause unsuccessful delivery. Customers generally have a tendency to compare the
service they ‘experience’ with the service they ‘expect’. If the experience does not match the
expectation, there arises a gap. Ten determinants that may influence the appearance of a gap
were described by Parasuraman, Zenithal and Berry.

2.4 Customer retention

Customer retention has been one of the top tools for a successful business. Customer retention is
defined as an overall evaluation based on the total purchase and consumption experience with the
good or service over time (Fornell, Johnson, Anderson, Cha & Bryant 1996). With marketing,
customer retention also comes 24 along with it which means it ascertains the expectation of the
customer on how the goods and services are being facilitated by the companies. Actionable
information on how to make customers further satisfied is therefore, a crucial outcome (Oliver
1999.)
At a glance, customer retention is a crucial component of a business strategy as well as customer
retention and product repurchase. To maximize the customer retention companies should sell
ideas and methods after the completion with all the necessary documents. As for example,
customers will buy a car after taking a closer look at it such as how is the engine, what is its
model, how many kilometers it has been traveling, and is there any cracks or not. Therefore, they
do not feel disappointed after purchasing it. Otherwise, if the company uses only their sell and
build method customers might expect that the car is exactly the same as what they see in the
pictures or during the exhibition and later on the company might receive complaint if anything is
wrong. Customer retention is a barometer that predicts the future customer behavior (Hill, Roche
& Allen 2007.)

However, the product and its features, functions, reliability, sales activity and customer support
are the most important topics required to meet or exceed the retention of the customers. Satisfied
customers usually rebound and buy more. Besides buying more they also work as a network to
reach other potential customers by sharing experiences (Hague & Hague 2016.) The value of
keeping a customer is only one- tenth of winning a new one. Therefore, when the organization
wins a customer it should continue to build up a good relationship with the client. Providing the
quality of goods and services in the 20th century is not only to satisfy the customers but also to
have a safe position. Indeed, this has benefited the customers significantly on consuming
qualitative products (Rebekah & Sharyn 2004.)

Customers often look for a value in the total service which requires internal collaboration among
the department that is responsible for different elements of the offering, such as the core product
(goods or services) delivering the product, product documentation, etc. Moreover, from
profitability and productivity perspectives only activities that produce value for customers should
be carried out. Hence, firms have to get to know their customers much better than has normally
been. However, the company should be able to build trust with the customer so it is easy to get
the 25 feedback from the customer. This is how customer oriented product or service could be
developed (Hill, Brierley & MacDougall 2003.)

Customer retention is dynamic and relative. Only the idea “customer-centric” can help
companies improve retention and keep customer truly, conversely, if competitors improve
customer retention, then it may loss corporate customers. While improving customer retention,
customer expectations should be noticed. Service quality, product quality and value for money
have a direct positive impact on customer retention. Retention is equally important before
achieving the customer retention. If employees have a positive influence, then they can play a
big role to increase customer retention level. Retention is a dynamic, moving target that may
evolve overtime, influenced by a variety of factors. Particularly when product usage or the
service experience takes place over time, retention may be highly variable depending on which
point in the usage or experience cycle one is focusing. (Lovelock, C & Wright, L.2007,86-87.)

Customer retention is influenced by specific product or service features and perceptions of

quality. Retention is also influenced by customer’s emotional responses, their attibutions natheir
perception of equity (Zeithal & Bitner. 2003, 87- 89.) Increased customer retention can provide
company benefits like customer loyalty, extending the life cycle of a customer expanding the life
of merchandise the customer purchase and increases customers positive word of mouth
communication. When the customer is satisfied with the product or service of the company, it
can make the customer to purchase frequently and to recommend products or services to
potential customers. It is impossible for a business organization to grow up in case the company
ignores or disregards the needs of customers (Tao 2014.)

2.4.1 Factors influences customer retention

Consumer behavior refers to the selection, purchase, and consumption of goods and services for
the fulfillment of their basic and the fundamental needs. There are different phases involved in
consumer behavior. Initially, the consumer finds the needs and then goes for the selection and
budgets the commodities and takes the decision to consume. Product quality, price, service,
consumer emotion, personal 26 factors, situational factors, a perception of equity or fairness,
product features are some of the factors that influence the customer retention. On the other hand,
several factors like mentioned in the figure influence the purchasing behavior of the consumer (I
research Service 2017)

Cultural factors: Culture is crucial when it comes to understanding the needs and behavior of
an individual. The values, perceptions, behaviors and preferences are the factors basically
learned at the very early stage of childhood from the people and the common behaviors of the
culture. Norms and values are carried forward by generation from one entity to the other.
Cultural factors represent the learned values and perceptions that define consumer wants and
behaviors. Consumers are first influenced by the groups they belong to but also by the groups
(aspirational groups) they wish to belong to.

Social factors: Human beings live in an environment surrounded by several people who have
different buying behavior. A person’s behavior is influenced by many small groups like family,
friends, social networks, and surrounding who have different buying behaviors. These groups
form an environment in which an individual evolves and shape the personality. Hence, the social
factor influences the buying behavior of an individual to a great extent

Personal factors: This consumer behavior includes personal factors such as age, occupation,
economic situation, and lifestyle. Consumer changes the purchase of goods and services with the
passage of time. Occupation and the economic situation also have a significant impact on buying
behavior. On the other hand, a person with low income chooses to purchase inexpensive
services. The lifestyle of customers is another crucial factor affecting the consumer buying
behavior. Lifestyle refers to the way a person lives in a society and is expressed by the things in
the surroundings.

Psychological factor: Many psychological factors like motivation, perception, learning, and
attitudes and beliefs play a crucial role in purchasing a particular product and services. To
increase sales and encourage the consumer to purchase the service organization should try to
create a conscious need in the consumer's mind which develops an interest in buying the service.
Similarly, depending on the experiences of the costumer's experiences, beliefs, and personal
characteristics, an 27 individual has a different perception of another. Attitudes allow the
individual to develop a coherent behavior against the class of their personality. Through the
experiences that the consumers acquire, the customer develops beliefs which will influence the
buying behavior.

2.4.2 Measuring customer retention

Measuring customer retention is a key performance indicator within business and is often part of
the balanced scorecard. The main aim of measuring customer retention is to make a prompt
decision for the continuous improvement of the business transactions. Attracting a new customer
as a source to build on existing relationship, customer retention measurement is essential to be
measured. Similarly, to retain the current customer base, measuring customer retention is equally
important. Actionable information on how to make customers more satisfied is, therefore, a
crucial outcome. Unless the organization focuses on their improvement efforts in the right area
the organization cannot maintain the competition level of business in a market. To recognize the
needs of the customer is to satisfy the customer and to meet the need of the customer, a
measurement of customer retention is what matters the organization. (Hill, Roche & Allen 2007.)
Measuring a customer retention may be different in the different organization since there are
different approaches to measure customer retention. As one of the measurements of the
performance of the quality management system, the organization shall monitor information
relating to customer perception as to whether the organization has met the customer
requirements. The methods for obtaining and using this information shall be determined.
(American National Standards Institute/International Organization for Standardization/American
Society of Quality 9001-2000). Every organization seeks customer retention where these sorts of
parameters help an organization to measure the customer’s retention and demands so that
organizations can provide them with appropriate services as per their requirements. The possible
dimension to measure customer retention could be quality, price, trust relationship, complaints,
problems and many others. The key point of measuring customer retention is to 28 conclude how
to improve it and how to keep building a good relationship with customers and potential
customers.

2.5 Relationship between Internet banking and customer retention

According to Tomiuk and Pinsonneault (2001), it was found that electronic banking usage had a
considerable effect on customer loyalty among the electronic banking users, while it had a
negative impact on non-users. It was concluded that customer care and customer retention should
be taken into consideration, because the convenient, easy and fast banking services is associated
with the human and technology based delivery processes so that they are linked with the
customers’ perceptions of how these banlc services are delivered to them. Customer retention;
Power and Associates (2009) note that retention is defined as the degree to which a customer
exhibits repeat purchasing and price tolerance behavior to a service provider, and possesses a
positive attitudinal and cognitive disposition, and Keiningham (2007) said that customer
retention is defined as customers’ stated continuation of a business relationship with the firm.
Al-hawari and Ward (2005) indicate that internet banking is positively related to customer
retention. Boateng and Molla (2006) contend that operational constraints related to customer
location, the need to maintain customer retention and the capabilities of the Bank’s main
software are influential factors in motivating the decision to enter electronic banking services
and consequently influencing the usage 29 experience and thus affecting the level of retention.
Raman et al. (2008) said that service as an intangible good appeal differently to each customer
and certain extent of service should be achieved in order to satisfy the customer and that the
resulting commitment, loyalty and retention are critical indicators of customer retention.

Customer commitment; Power and Associates (2009) note that on average, highly committed
customers use more products or services, give more referrals and are much less likely to switch
to another bank, compared with customers who have lower commitment levels. Indeed this view
is supported by Casalo et al. (2008) who contend that higher levels of website usability might
lead to higher levels of consumer’s affective commitment to the website as well a direct, positive
and significant relationship between retention in previous interactions and the consumer’s
commitment to a financial services website

Customer loyalty; Power and Associates (2009) define customer loyalty as a deeply held
commitment to frequently rebuy or repatronize the same product or service, and though
multidimensional in nature, it includes rebuy, repurchasing and resistance towards price increase
(Wangenheim and Bayon, 2004). Michael (2007) notes that loyalty equates to a willingness to
sacrifice on the part of the customer: a loyal customer may forgo a lower cost solution from a
competitor or give you time to improve capabilities because they value other aspects of doing
business with you. According to Tomiuk and Pinsonneault (2001), it was found that electronic
banking usage had a considerable effect on customer loyalty among the electronic banking users,
while it had a negative impact on non-users. It was concluded that customer care and customer
16 retention should be taken into consideration, because the convenient, easy and fast banking
services is associated with the human and technology based delivery processes so that they are
linked with the customers’ perceptions of how these bank services are delivered to them.
Customer retention; Power and Associates (2009) note that retention is defined as the degree to
which a customer exhibits repeat purchasing and price tolerance behavior to a service provider,
and possesses a positive attitudinal and cognitive disposition, and Keiningham (2007) said that
customer retention is defined as customers’ stated 30 continuation of a business relationship with
the firm. Al-hawari and Ward (2005) indicate that internet banking is positively related to
customer retention.

ANALYTICAL AND CONCEPTUAL FRAME WORK

Independent Variables

Service quality

Responsiveness

Privacy and security

Customer
retention

Assurance
Dependent Variable

Reliability

Figure 2.2…..Conceptual frame works

Source: Developed by the researcher, 2015

2.6 Conclusions
This chapter introduced the previous literature about the internet banking and banker customer
relationship, also examine the relationship between the dependent and independent variables,
researchers in previous literature use different dimensions to find the customer retention and
researcher choose Transactional internet bank, service quality, , Mobile banking as an internet
banking dimensions and for customer retention dimensions there are customer expectation.