Recession and Consumer Behavior in the Banking Industry
Banks Must Worry about Customer Attraction Strategies after the Recession
November 24, 2012: [Insert Name]
Consumer behavior is a dynamic aspect of human day-to-day interaction that is influenced by a number of factors. The buying patterns of customers include changes in customer loyalty and the quantity of goods they buy at a shopping trip to their favorite retail outlet. An article by Dougherty (2011) on the Wall Street Journal shows that customers are the biggest stakeholders in business and recession makes them cut on spending automatically. The just ended recession had lots of effects on the society from all perspectives. This article looks at how economic recession influences the consumer behavior in the banking sector. Since economic recession affects the amount or value of money available to consumers, it is true that some goods or services may not be affordable to the customers. When customer buying patterns change, the business organizations are also forced to adjust to find new ways of improving customer loyalty.
Drivers for Change in the Banking Sector
The banking industry is an extremely sensitive sector of economy that is affected by numerous factors that are responsible for transformation in the banking sector. Population trends affect the decisions made by the banks because they have to adjust their products to reflect demographic trends of the target markets (Roberts, 2012). For instance, considering a population that is primarily composed of the old age would imply that the products the banks bring to the market must also reflect this information by clearly having items that touch on the old age. Under the population trends, there are also customer tastes and preferences that are prone to change based on other extenuating factors. Another factor that drives change in the banking sector is the general economic climate, which incorporates issues like recession, economic boom, inflation and other economic indicators. This paper mainly focuses on recession as an important factor in driving change in the banking sector. There are many other factors that affect operations in the banking industry. However, the main idea is that all these factors affect the customer loyalty since the buying patterns of the customers change based on conditions they face. While customer buying patterns is an area that encompasses many aspects of the customer behavior, this article only focuses on the brunt of the economic recession on the customer loyalty.
Customer Loyalty in the Banking Industry during Recession
Studies have been carried out in attempt to classify the consumer loyalty and the most prominent classification is that done by Rowley (2005) and other authors who had previously attempted to do the same categorization (basically Dick & Basu 1994). In their categorization, the authors classified customer loyalty into four categories commonly referred to as the four C’s of customer loyalty. Through this classification, a customer can be viewed as captive, or convenience-seeker, or contented or committed. This model of classifying customers based on their buying patterns clearly differentiates the customers that are positively oriented toward the business and those that act on their inertial behavior. This is important to the banking institution because positive customer loyalty is positively correlated with a bank’s financial performance.
Therefore, the captive and convenience-seeker customers are those that are based on the consumer attitudes and not positive attitude toward the business. Those who represent the positive attitude are the contended and the committed customers in the model. The captive customers are said to demonstrate their loyalty to a particular bank by patronizing a specific brand and they do this simply because they have limited choice. It is this limited choice that makes them to make any repeat purchase (Jones & Farquhar, 2009). It’s not uncommon to find individuals who stick to one type of car brand and remain committed to the car model because fear the costs of switching. Captive customers are connected with the products that do not require frequent decision making with respect to purchasing. It is not uncommon to find captive customers for bank products such as long term savings accounts. They become trapped simply because they fear costs of switching even when conditions change unfavorably.
The convenience-seekers exhibit customer loyalty that is determined by convenience factors such as convenient location of the bank, the opening and closing hours, the teller machines and the types of product packages offered by the banking institution as explained by Duffy, (2003). In this category, there are three subcategories. Those who seek convenience that results from the positioning of the bank are subcategorized under the convenience of access. Those who seek convenience based on the types of product packages offered fall under the convenience of product. And those who seek convenience from the type of service delivery of the bank are categorized under the convenience subcategory.
For the contended customers, they exhibit reluctant customer loyalty to products and services and do not subscribe to any other services that might be attached to the product. The contended customers continue with the products though they do not widen their involvement. However, for the other types of customers Bohlen, Carlotti and Mihas (2009) observe that they are likely to seek for cheaper alternatives and get satisfied with them.
Changes in customer loyalty during the periods of economic slowdowns and recessions have been documented through empirical investigations carried out in the past few years (Jones & Farquhar, 2009). Research studies have indicated that customer loyalty to major banking institutions decreased significantly during the recession period of 2008 and 2009. This was exhibited by the decrease in the company’s performance in the market, reduction in the stock piles, and the reduced earnings per share during the period. The effect of recession on the customer purchasing patterns in the banking sector can be seen as a cyclical relationship between the financial institutions and the customers. As customers face hard times economically, their activities with the banks reduce and the banks’ performance slams. This leads to more worries among the major stakeholders due to panic (Longbottom & Hilton, 2011).
Reference:
Bohlen,B Carlotti, S & Mihas L. (2009). How the recession has changed US consumer behavior: Companies waiting for a return to normality following the recession may be disappointed. Their customers have tried cheaper products. Available: http://www.mckinseyquarterly.com/How_the_recession_has_changed_US_consumer_behavior_2477. Last accessed 24th Nov 2012.
Dick, A. and Basu, K. (1994) ‘Customer loyalty: toward an integrated conceptual framework’, Journal of Marketing Science, Vol. 22, No. 2, pp. 99-113
Dougherty, C. (2011). Signs Consumers Have Changed Spending Behaviors: Holding Off on a Haircut to Buy a New Car. . Available: http://online.wsj.com/article/SB10001424053111904491704576574901552964000.html. Last accessed 24th Nov 2012.
Duffy, D. (2003) ‘Internal and external factors which affect customer loyalty’, Journal of Consumer Marketing, Vol. 20, Issue 5, pp. 480-485
Jones, H. and Farquhar, J. (2009) “Putting it right: service failure and customer loyalty in UK banks”, International Journal of Bank Marketing, Vol. 25 Iss: 3, pp.161 – 172
Kincaid, J. (2003) Customer relationship management: getting it right!, London: Prentice Hall Professional.
Lee, T., Chung, W. and Taylor, R. (2011) ‘A strategic response to the financial crisis: an empirical analysis of financial services advertising before and during the financial crisis’, Journal of Services Marketing, Vol. 25, Issue 3, pp. 150-164.
Longbottom, D. and Hilton, J. (2011) “Service improvement: lessons from the UK financial services sector”, International Journal of Quality and Service Sciences, Vol. 3 Iss: 1, pp.39 – 59
Roberts, R. (2012). The Impact of Economic Recession on Customer Loyalty to Banks.. Available: http://www.ivoryresearch.com/Dissertation-The-Impact-of-Economic-Recession-on-Customer-Loyalty-to-Banks.pdf. Last accessed 24th Nov 2012.
Rowley, J. (2005) ‘The four Cs of customer loyalty’, Marketing Intelligence & Planning, Vol. 23, Issue 6, pp. 574-581
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