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In any business enterprise the role played by customers is tremendously significant for the profitability, operation, and continuity of the business process. Customers are the center of attention. Every business strives to win and secure customers, as they are the ones who must trade with a business for it to achieve its goals and expected results regarding its operation. The banking sector should not, therefore, understate the importance of customers. Customer switching behavior is a prevalent phenomenon among banking clients. After being dissatisfied with services of their banks, customers move from one bank to another in search of more attractive and appealing services.

According to Dawoud S Alduwaisan (2010) there are many terms that are used to depict customer switching behaviors. The definition of switching behavior is equated with terms like customer withdrawal, churning of customer, customer egress, and extinction of an existing customer relationship. Customer switching and customer deflection are terms used in commerce to convey withdrawal of customers from business relationship. In this context, Malallah deduces that customer switching behavior refers to a situation, where customers are persistently using a particular service category (banking service), but move from one service provider (bank) to another in search from better services. It is a prevalent phenomenon, where the client ceases patronage of a particular service provider (Sangeetha & Mahalingam 2011).

Effects of Customer Switching Behavior

Retention of clients and their sustainable satisfaction are crucial chief long-term goals of any business. According to Keiningham et al (2009), there is a negative correlation between the rate of deflection and the productivity of service firm. This implies that when customer switching behavior intensifies, it makes earnings of the firm decrease while costs are generally increased. According to Wright, Garland, and Lees (2010) most bank managers get worried about losing their clients to other competitor banks. Executives of these banks need to comprehend the reasons that cause switching of existing customers. They also need to understand how to attract new clients. These scholars believe that reasons behind switching are connected to utility maximization, search for better offers, disconfirmation of expectations, and failure of services. When identified services that the bank provides fail to meet customer expectations, customer switching occurs. This may affect both defensive and offensive strategies of marketing.

According to Zeithaml et al (2009), switching of customers from one service provider to another creates a negative effect on the financial state of the service giver decreasing his revenues, profit, and volume of market share. When the customer becomes more affiliated with a firm, it becomes easy for him/her to agree to service charges without wavering. This results in increased profits. Meng & Elliott (2009) claim that contented customers who are able to sustain a long lasting relationship with a service provider have an ability to influence firm’s productivity through decreasing costs of advertisement, promotion and start up activities, intensified repurchases as well as through spreading of positive information by the word of mouth. According to Malallah (2011), costs incurred in maintenance and retention of existing customers are lower as compared to costs of obtaining new ones to replace those that have switched. On the other hand, numerous studies have revealed that working efficiencies of serving obtainable customers are higher while the selling cost is lower.

Existing customers recruit new clients through positive verbal persuasions. This eventually affects the market share of the service provider and hence its profit (Malallah 2011). Recent studies in the service sector revealed that there are numerous benefits that arise from declining rate of customer switching. Thus, retail banking firms have to foster strong customer relationships, as well as high-quality service delivery. Firm’s productivity and retention of customers will be enhanced and intensified as the loyalty of customers increase. This phenomenon of customer switching has been considered to cause reduced profit and decreased market share in a banking sector, which is highly competitive. According to a research carried out by Meng & Elliott (2009), there exists a robust positive correlation between productivity of business and loyalty of its customers.

Morgan (2012) explains the connection between retention of customers and firm’s productivity suggesting that costs of retaining customers are generally minimal in comparison to costs of acquiring new ones. He claims that productivity increase emanates from generation of additional revenue and cost saving. This is because satisfied customers have a tendency to spread positive word-of-mouth information, which leads to enhancement of acquisition of potential customers by the bank. Regarding customer retention issue, Morgan suggests that if the rate of customer switching declines from 15% to 10% annually, firm’s profits will double. A study conducted by Ladhari, Ladhari & Morales (2010) concludes that solutions to the issue of switching behaviors have been incorporated in marketing strategies in order to reduce the tendency of customers to switch banks. Emotional costs and transaction costs are some of the examples of switching barriers.

Factors Affecting Customer Switching Behavior

Numerous studies have been conducted on various factors that stimulate customers in Arab Gulf Countries to switch banks. These studies were conducted in order to improve long-term relationships with customers and minimize negative impacts of customer switching. According to Matthews and Murray (2009) these factors comprise of switching costs, advertising rivalry, involuntary switching, quality of products, quality of services, reputation, price, and pragmatism. Inconvenience, pricing, competition, and spontaneous or involuntary switching in have higher significance in the context of banking sphere.

Effective Advertising

Efficient advertising can improve the communication network between banks and their customers. This creates opportunities for success despite intense competition. According to results of a study conducted by Ganguli & Roy (2010), the primary function of advertising activity is to create awareness among prospective customers about the accessibility of products and services as well as about specific locations. The research emphasizes the significance of advertising in attracting new clients to a business and in retention of existing customer base during times of economic downturns.

According to Sundus (2011), a banking firm can employ effective advertising as a way to influence intentions of customers to switch by giving them adequate information about purchasing opportunities within available banking services. The findings of Ganguli & Roy (2010) highlight a robust correlation between advertising, attitudes of the customer, and purchase behavior. They found out that, usually, customers collect information about various brands and then process gathered information, assessing and evaluating diverse services offered by different firms. Then they are making a decision on whether to remain with or switch the existing service provider. The review also reflects on findings of Bayon and Wangenheim, who state that there is a difference of customer satisfaction levels among ‘switchers’ and ‘stayers’. Findings also distinguish between switchers who have been attracted through positive word of mouth and those that have been attracted through advertisements.

Switching Costs and Barriers

As cited by Bakanauskas & Zikiene (2009) and Porter (1998), switching costs are the charges incurred by customers during the process of switching to from one product or service provider to another. Meng & Elliott (2009) claim that switching costs include the assortment of both financial and non-financial costs, that a customer incurs during the process of changing one supplier to another.

In the context of banking industry, switching costs represent the variety of costs incurred by bank customers when they switch their bank for another. Moreover, it can be defined as the awareness of the extent of extra costs needed to terminate relations with one bank when searching for a substituting one. According to a survey conducted by Meng & Elliott (2009), loyalty of customers can be strengthened by identified quality of service through switching costs that result from patronizing service and switching to another bank that provides more attractive service. Different studies provide a wide range of categories of switching costs. Mahjan & Burnham (2010) and Malallah (2011) provide a list of eight kinds of switching costs which include set-up costs, assessment costs, erudition costs, economic risk costs, costs of lost benefits, financial loss costs, costs of lost brand relationship, and costs of lost personal associations with fellow customers.

Malallah (2011) claims that perceived risk which can be associated with perception of uncertainty by customers may also be incorporated in the list. Furthermore, the study subdivides perceived risks of switching costs into six constituents: psychological, social, monetary, convenience/time, achievement, and safety loss. Another research carried out by Murray and Matthew (2009) breaks down switching costs categorically into three groups presented below.

  • Financial switching costs, which are costs that estimate the quantifiable financial loss of resources;
  • Procedural switching costs, which concern time spent and effort made;
  • Relational switching costs, which relate to emotional and psychological distress.

Same researchers describe switching costs as the variety of costs incurred by bank customers in case they make a decision to switch their banks. Switching costs of bank customers may also comprise of time required to close previous accounts, open a new one, and inform parties concerned with payments. Several researchers have attempted to indicate a correlation between switching costs and customer switching behavior. According to Liao & Wu (2009), a bank customer will refrain from switching to another bank in case he/she incurs high costs because of switching. The costs of switching, time investment, and effort can serve as essential barrier to switching of customers. Research carried out by Lang & Colgate (2001) found out that costs of switching play a significant role in discouraging and creating an unfavorable situation for customers to switch service providers. If they do attempt to switch, they will do it in the worst case situation.     

Involuntary Switching

Bakanauskas & Zikiene (2009) point out that switching behavior can be divided into two categories. The first category relates to voluntary decisions of customer to switch their banks, while the second category relates to the involuntary switching behavior, which results from aspects unrelated to the discrete decision. These aspects are out of customer’s control or out of bank’s control as a service provider. They include relocation of the bank, job variations, moving of customer, or change of alliances by a third party player.

According to Bakanauskas & Zikiene (2009), change of location of service customer can result to switching behavior especially if the accessibility of the service at the new residence place is limited. Relocating to a new residential area may also mean a change of customer’s needs and desires. As depicted by Bakanauskas & Zikiene (2009), involuntary or unavoidable switching is the most widespread switching type indicated in many studies. Malallah (2011) claims that moving to new residential ecosystem is immaterial. This proves that there is no major category of e-retailers, in which a large share in the market to a bricks-and-mortar retailer is leading.

A study conducted by Al-Elisa & Alhemoud (2009), which researched satisfaction of customers of Kuwait retail banking sector indicates that about 81% of customers in retail banking are generally loyal. This could indicate that the needs of customers are efficiently met by retail banks in Kuwait. Nevertheless, Al-Eisa & Alhemoud (2009) discovered that fifth of the total number of customers in retail banking are not loyal. Even though the number of unsatisfied customers is low, researchers suggest that this should not be seen as trivial by bank executives, who need to effectively address customer’s needs in the best way possible.

According to Alessandro, Arbore & Busacca (2009), majority of customers who are not satisfied usually do not express their discontentment directly to bank’s management, but articulate their dissatisfaction by spreading negative word of mouth about the bank. They might also opt to switch to another bank which has better services. This behavior will affect both image and reputation of the bank as well as its financial achievements. Therefore, Al-Eisa and Alhemoud (2009) propose that policy makers of retail banks ought to consider their shortcomings and take appropriate actions to eliminate them. Dissatisfaction of customers emanates from insufficient interpersonal relations with them, lack of empowerment of the staff, inadequate staff training, and unavailability of self-baking services to customers.

According to a study carried out by Muhammad Ziaul Hoq and Muslim Amin in 2010 about the role of customer satisfaction in increasing of loyalty of customers, switching behaviors result from a decline in customer confidence as far as their satisfaction and loyalty is concerned. Findings suggest that indicators of customer satisfaction provide useful suggestions for development of loyalty of customers in Islamic banks. The study reveals that there are significant disparities in the impact of customer satisfaction on loyalty of Muslim and non-Muslim clients. The impact of clients’ satisfaction on their loyalty is greater among non-Muslim clients than Muslims. Findings reveal that most non-Muslim clients are considerably satisfied with services they get from their Islamic banks, therefore, they are loyal to them.

In their study Hoq and Amin (2010) also hypothesized that there was a negative correlation between satisfaction of customers and their intentions to switch. They also hypothesized that switching behavior of customers was determined by three main attributes i.e. favorable services offered by bank’s competitors, provision of higher profit by other banks, and the multiplicity of products and services. However, the study revealed a surprising trend of substantial disparities in the impact of customer satisfaction on the intent to switch among Muslim and non-Muslim customers.

A survey carried out by Al-Eisa & Alhemoud (2009) showed that there was a greater probability to switch in case of non-Muslim as compared to Muslim customers. If the products of Islamic banks were not beneficial to non-Muslim customers, they could attempt to switch to other banks. The conclusion of this study was based on the fact that higher customer satisfaction level resulted in a lower probability of customers to end business relationship with the bank. Further, the study indicated that if an Islamic bank handled a service failure properly, the reaction of customers to this effort could have impacted a prospect resolution to remain loyal to the bank and prevent them to attempt to switch to another bank. Therefore, the study proved that Islamic banks had to pay greater attention to increase customer satisfaction to a level that would significantly influence the loyalty of customers as well as their intention to switch to other banks. The study proposed that it was important for Islamic banks to reflect on the current service provision as well as customer relations quality.

The findings of the survey conducted by Hoq & Amin (2010) reveal that there is a high level of intentional loyalty and little intentions to switch among customers who do not experience service problems, in contrast to those who have unsettled problems with their banks. Therefore, the study indicates that effective service management significantly promotes all features of behavioral intention. This notion is supported by Jaya Sangeetha S. Mahalingam (2011), who explains that most of customers in the high switching propensity seem to have encountered precedent problems with their banks. Lower levels of general customer satisfaction are more probable to effect prospective switching behavior when contrasted with the resultant behavior that comes from declined business interaction. Consequently, loyal clients will be maintained not only in continual purchases, but will also attract their relatives and friends.     

Middle East (GCC) Retail Banking Market

In a regional outlook on retail banking in Middle East banking market within GCC countries, Cyril Gourp, Cyril Garbois, and Alexander von Pock (2012) concluded that retail banking has become a growth engine for most of GCC markets since 2011. The analysis focused more on Kuwait, Bahrain, and Saudi Arabia. The outlook indicates that numerous studies prove general lack of focus on satisfaction of customers, declining retention of customers, and decrease of productivity of GCC banks. The survey emphasizes the importance of GCC banks to invest more in retail banking infrastructure in order to outperform competitors, notwithstanding the aspect of driving forces in the banking industry.

The authors Pham Ngoc Thuy and Le Nguyen Hau (2010) suggest that improvement of the experience of customers should remain paramount through considering the use of established customer service framework, which supports organization’s aspects such as culture, processes, people, performance metrics, and infrastructure with the brand promise. Further suggestions from the outlook indicate that GCC banks need to invest in development and popularization of retail banking. Online banking can be used in channeling the sales in order to attract new clients using multi-channel management as the key tool. The analysis also emphasizes the Kingdom of Saudi Arabia as deserving specific attention due to the fact that it offers market’s biggest retail banking opportunity among the GCC members and it also has considerably low branch exposure. Online banking can also provide an attractive way for foreign banks to counterbalance their limitations on numerous branches.

As the retail banking market of the GCC becomes more and more competitive, Abdulla M.Alhemoud (2010) encourages financial organizations in Middle East to respond to the situation, boost customer retention, and bare the risk of losing their potential customers due to switching banks behavior. Jaya Sangeetha S. Mahalingam (2011) supposes that being a provider of incremental income products and services on global scope, banks in Middle East are particularly expected to enact more innovative strategies to retain their clients, who are being offered with a numerous financial services and products to choose from. In a project held in 2011 to boost retention of customers in GCC retail banking industry, Wilson Howell, who is Collinson Latitude’s Leader of Middle East and African business and planning development, claimed that in Middle East there is a high customer demand for better services in their respective banks. This is true even as the GCC economy recovers from the economic downtown. He continued that lack of high-quality services will cause clients to engage in switching banks behavior if they do not get what they need from their particular banks.

Expressing discontentment with their general experience with banking services, Ernst and Young’s (2011) recent study revealed that 25% of customers in GCC retail banking planned to switch their banks in the course of next year. The survey revealed the tendency of banks’ competition for customers, the quality of the customer’s experience, causes of switching, preventive ways, and also strategies to encourage customers to talk well about their banks with others and spread positive word-of-mouth. The study of Ernst and Young (2011) presented the comments of Salmaan Jaffrey, the leader of MENA Financial Services Retail Banking Sector, who outlined that there was a surging competition within the retail banking market of GCC. He continued that since there are numerous customer choices, it is important that banks invest in providing their customers with positive general experience. The survey puts emphasis on numerous customers who are disloyal to their banks and will readily switch in case of low quality service. This will pile up to the existing difficulties that banks are already facing. Salmaan Jaffrey indicates that quality experience of customers and the resultant trust are fundamental for profitable progress.

The leader of MENA Financial Service Industry, Gordon Bennie claims that there is a high demand for better banking service for customers, who are willing to instantly switch to better service providers. This manifestation of the power of customers is triggering banks to come to a realization that improvement of customer experience is an efficient tool for strengthening financial position and developing sustainable franchises in banking. Furthermore, the survey reveals that experience of customers has to be propelled by operational distinction of every transaction. On the issue of loyalty of customers, the survey reveals that GCC customers use services of numerous banks while reliance on their primary banks is declining. This notion is proved as the study indicates that almost 60 percent of GCC bank clients are associated with more than one bank. About 35% of GCC bank clients admitted to have switched banks or to have planned to do so.

Moreover, according to the study conducted by Ernst and Young (2011), with better services GCC bank clients will spread positive word-of-mouth about their primary banks. The survey shows that 41% of the customers are willing to recommend their banks to other people. The survey also indicates disparities on the issue of customer advocacy in different regions across GCC countries with high rate of advocacy in Kuwait and Saudi Arabia but less in Bahrain and Qatar. Approximately 40% of the respondents cited that there is a need for improvement of the transaction speed and ensure high quality of services. Jaffrey concluded on development opportunity pointing out that banks that are be able to harness the power of social networks and new media, will manage to build their brands, as well as shape the organizational set-up around the centricity of customers in order to create franchises as well as achieve long-term success within the surging market dynamics. 

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