Customer Service and Satisfaction in The Banking Industry Essay

A Service Science Perspective on Strategic Choice, IT, and Performance in U.S. Banking Paul P. Tallon Paul Tallon is an Associate Professor and Director of the David D. Lattanze Center for Information Value at the Joseph A. Sellinger, S.J., School of Business, Loyola University, Baltimore, Maryland. He previously worked as a systems auditor and accountant with PricewaterhouseCoopers. His research interests include the economic impacts of IT, strategic alignment, IT portfolio analysis, and the economics of information management. He is currently researching the topic of information life cycle management in an attempt to better understand the complex interplay between information value, total cost of ownership, and value-at-risk. His research has been published in top-tier IS journals, including the Journal of Management Information Systems, Journal of Strategic Information Systems, and Communications of the ACM. His research on IT business value received the JMIS paper of the year award for 2007. Abstract: With the move to an information-based economy, financial services has become a key contributor to the U.S. gross domestic product. Even as consolidation reduces the number of banks, small banks with under $100 million in assets continue to report higher profit margins than large banks with over $100 million in assets. Lacking scale, small banks employ a service-oriented business strategy (customer intimacy), whereas large banks focus on productivity and throughput (operational excellence). Information technology (IT) plays a key role in applying each strategy, but as banks move toward customer intimacy in general, the challenge is to grow without undermining service quality. Using a balanced panel data set from 43 U.S. banks, this paper finds that banking strategies are becoming more customer focused. Yet for large banks in particular, IT remains resolutely operations focused. This misalignment could restrict future banking performance. In this way, this paper contributes to the service science literature by using size to dissect banking strategies and performance. Key words and phrases: banking, business value, customer intimacy, financial services, relationship banking, service science, services, strategic alignment, strategic choice, value disciplines. With the transition first to a services economy and later to an information economy, the financial services sector has become the single-largest contributor to the U.S. gross domestic product (GDP).1 Much of this contribution reflects the far-reaching technological, economic, and regulatory changes affecting the sector in recent years. Journal of Management Information Systems / Spring 2010, Vol. 26, No. 4, pp. 219–252. © 2010 M.E. Sharpe, Inc. 0742–1222 / 2010 $9.50 + 0.00. DOI 10.2753/MIS0742-1222260408 220 Paul P. Tallon For example, the enactment of the Financial Services Modernization Act of 1999—repealing the Banking Act of 1935, which, as a way to protect depositors following the 1929 Wall Street crash, restricted banks to banking activities alone—allows banks to merge with other financial entities. The result has been the rise of global financial conglomerates that offer a range of products and services across banking, securities trading, and insurance. Removing regulatory obstacles helped competition but it also led to record consolidation. From 1990 to 2008, the number of FDIC-insured banks fell by 43 percent (12,343 to 7,085).2 Small banks, defined by the FDIC as having less than $100 million in assets, were hit the hardest. From 1994 to 2008, the number of small banks declined by 62 percent (7,411 to 2,784) while the number of large banks, defined by the FDIC as having more than $100 million in assets, grew by 35 percent (3,183 to 4,301).3 As a result, over this 15‑year period, the assets of small banks grew by, on average, only 1.2 percent annually while the assets of large banks, driven in large part by progressively larger mergers and acquisitions, grew by, on average, 5.8 percent annually. Despite this trend in which the five largest banks (JPMorgan, Bank of America, Citigroup, Wells Fargo, and U.S. Bank) now control 50 percent of all U.S. bank assets, small banks continue to earn higher profit margins (see Figure 1). As a quintessential services industry whose sole product involves the distribution or manipulation of information, this trend informs our primary research question: Why are small banks more profitable and is information technology (IT) part of the reason, whether in the form of different IT spending levels or different IT uses?4 To answer this question, we apply the logic and language of service science, an embryonic field of multidisciplinary research that offers an integrative view of service design, delivery, and innovation [5]. Banking is particularly amenable to a service science review in light of the many changes affecting the sector and the threats that banks face from innovative banking models such as peer-to-peer or retailer-based banking,5 which in some cases have disintermediated traditional banks entirely. From the advent of e‑banking in the 1990s, service innovation has grown to include bill payment and presentment, account aggregation, digital checking, paperless deposits, integrated cell phone payment systems, contact-less credit cards, radio frequency identification (RFID), and mobile banking. Today, banks use IT for customer outreach and back-office activities, signaling a shift toward high-speed transaction processing, greater risk analysis, and use of cross selling as a way to expand market share [5]. Using service science to explore banking strategies and how IT supports these strategies, whether through mainframes or new and more innovative Web-based applications—with size as a key contextual variable—contributes to the evolving literature on service science and to the already established literature on strategic alignment where alignment is defined as the level of fit, integration, cohesiveness, or harmony between IT and business strategy [9, 34, 48, 52]. While banks vary in several ways, the focus of this study is on size-related differences in business strategy and how, when aligned with IT, differences in the extent of fit between IT and business strategy lead to varied levels of banking performance. An extensive body of research confirms that alignment is a key driver of firm performance in the form of competitive advantage, profit, and market share [9, 10, 28]. Yet Strategic Choice, IT, and Performance in U.S. Banking 221 Figure 1. Historical Trends in U.S. Banking (Bank Size and Profitability) Source: FDIC Quarterly Banking Profile reports, 1994–2008. not all firms will adopt the same strategy, and so the form of alignment may vary even if the extent of alignment is similar [41]. Although alignment has not been formally evaluated under the rubric of service science, alignment is clearly relevant to service because misalignment—IT fails to support business strategy—can hurt service delivery. A resource perspective can also be added to this view of alignment and service to the extent that service systems comprise “value co-creation configurations of people, technology [and] value propositions connecting internal and external systems, and shared information” [36, p. 18]. Adding a resource dimension recognizes that banks can substitute IT for labor, depending on their specific choice of service strategy and whether that strategy is more IT (capital) intensive or labor intensive. Investigating service using the lens of size also exposes the possible rewards of staying small when the received view is that bigger is better. By focusing on size, this paper also helps to resolve issues with earlier studies where size has either been completely ignored or trivialized for estimation purposes as a control or dummy variable [23]. Strategy, Size, and Service Delivery: An Integrated Service Science Perspective Service science espouses a broad goal of applying “scientific understanding to advance our ability to design, improve, and scale service systems” [36, p. 18]. A servicedominant logic has grown up around service science to provide a framework and a vocabulary within which to assess service delivery [35, 36]. Part of this logic calls for a greater understanding of the organizational context within which services are designed and delivered, a context that speaks to the peculiarities of the service provider and the role of the consumer in service co-creation [57, 63]. The size of the provider organization is arguably a key aspect of service design and delivery to the extent that size can generate scale economies that help deliver services at lower cost. Yet size can 222 Paul P. Tallon also be an impediment if customers are depersonalized or if, in the push for ever higher profits, service becomes routinized. Anecdotally, there are many stories of customers being ignored or marginalized by large firms that respond to complaints using form letters or use their large size to intimidate customers; airlines are especially prone to this type of behavior. The perception, therefore, may be that superior service is a hallmark of small firms and that, beyond a certain size, service quality and the profit that flows from superior service delivery may be perhaps compromised by further increases in size. The fact that small banks continue to see higher profit margins—a trend that has stood for over a decade—suggests that there may be important differences in the service design and delivery models of small versus large banks and that these models may change as banks grow through mergers and acquisitions. But what then of the impact of IT? Would large banks not benefit disproportionately more from IT given their size? Remarkably, research reveals that while IT has greatly enhanced bank performance [16, 17], IT has had a greater impact on cost reduction and profit growth in small banks [8]. These studies do not say why small size matters or why profit effects persist, but with all banks facing the same interest rates, regulations, and capital requirements, certain size-based factors appear to be enabling small banks to survive and prosper. Using the value disciplines typology devised by Treacy and Wiersema [56] and confirmed in later studies [41, 52, 60, 61], we posit that large banks use a strategy of operational excellence that emphasizes transaction throughput, accuracy, and productivity whereas small banks use a strategy of customer intimacy. In effect, size is a predictor of how banks provide service to customers. Because small banks tend to be more geographically focused—community or local banks, for example—they tend to know their customers and their banking needs personally and to be flexible in things such as voiding out-of-network automated teller machine (ATM) fees or using discretion to limit overdraft charges [56]. Small banks cannot differentiate themselves through economies of scale; other means must be found. In this way, we argue that small banks will place customer intimacy rather than efficiency, productivity, or throughput at the heart of all client interactions. These arguments are highlighted in the conceptual model in Figure 2 where bank size affects the choice of both business and IT strategy, the ensuing degree of alignment between these strategies, and their impact on firm performance. This paper offers a theoretical discussion of how differences in service strategies impact the fit between IT and business strategy. The IT needs of two prominent strategies are assessed within the Treacy and Wiersema [56] typology and how these needs are met by banks of varied size. Data were drawn from a matched survey of 43 banks over two time periods (2003 and 2007).6 Theoretical Overview Business strategy, defined as “the determination of the basic long-term goals of an enterprise, and the adoption of courses of action and allocation of resources necessary for carrying out these goals” [11, p. 13], has been studied using typologies by Miles and Snow [39], Porter [42], and others. The aim of each typology is to separate out and Strategic Choice, IT, and Performance in U.S. Banking 223 Figure 2. Conceptual Model label how firms compete and deliver value in the marketplace. Typologies are useful but they can oversimplify the choices firms make [28]. Firms rarely see themselves as having a single strategic focus but rather a mix of different strategies. For example, under the Miles and Snow [39] typology, a firm may consider itself as a defender in some markets and a prospector in others. Treacy and Wiersema [56] examine this issue of single versus multiple foci but also take a key step toward improving or extending Porter’s [42] typology of low-cost leadership, niche, and differentiation by offering more descriptive labels to reflect the range of activities within firms. The ensuing value disciplines typology applies to both manufacturing and service firms in various industries. It is academically rigorous, descriptively rich, and yet managerially pragmatic or relevant, as various strategy researchers have noted [41, 51, 52, 60, 61]. As described in Table 1, Treacy and Wiersema [56] identify three unique foci. Firms can focus on operational excellence, meaning low cost, reliability, accuracy, and availability; customer intimacy, with a focus on service quality; or product leadership, meaning innovation of leading-edge products and services. The authors call for firms to focus on just one of these three value disciplines, but they nonetheless urge firms to be competent in all other areas. As the examples in Table 1 show, in the context of retail banking, some banks readily fall into one of the three value disciplines, but others—notably, banks such as Wells Fargo and Bank of America that have been actively acquiring banks, brokerage houses, and insurance carriers—can have a presence in more than one value discipline at the same time. As research has repeatedly found, the problem with stuck-in-the-middle firms—a term coined by Porter [42] for firms with mixed strategies—is that they underperform single-strategy firms [51, 62]. From a service perspective, it is easy to see why banks might want to build out their range of product offerings as a way to increase wallet share, creating a one-stop shop for all financial needs. Yet we also know from past studies on vertical integration and from the experience of firms such as Ford or Dell that owning each link in the supply chain is not always best [31]. Unlike large banks, small banks do not have the financial means to expand their product portfolio by buying other firms, and yet a glance at any small bank’s Web site will reveal portal-like links that allow small banks to maintain the appearance of having a wide range of products and services. A portal solution is ideal if each customer wants something different. For example, retirees look to fixed or variable annuity products whereas business customers may be more interested in vehicle leasing or capital loans. Of the three value disciplines shown in Table 1, product leadership, is 224 Paul P. Tallon Table 1. Value Disciplines and Banking Strategies [56] Value discipline Description/areas of emphasis Banking examples Operational excellence (best total cost) Productivity, low-cost, reliability, product standardization, error reduction, capacity, accuracy, transaction volume throughput Bank of America; Wells Fargo, PNC; TD Banknorth; Citizens Customer intimacy (best total solution) Service experience, trust, flexibility, price premium, attention to detail, satisfaction at any price, separately managed accounts* Boston Private Bank & Trust; Goldman Sachs; Morgan Stanley Product leadership (best product) Innovation, research and development, unique product mix or combinations ING (savings accounts); Fidelity Investments (Freedom Funds) * Many customer-intimate banks and investment management firms offer a highly personalized service to high–net worth individuals. For example, AlphaOne Partners, a London-based investment management firm, applies a $100 million minimum to open an account. The private banking side of many U.S. banks such as Citigroup and Bank of America operate similar minimum opening balance criteria, though not as high. While small banks operate under no such restriction, their customer intimacy is a function of their service delivery rather than their exclusivity. unusual in that banks tend not to be leading-edge innovators. For example, online bill pay was created by CheckFree and account aggregation was created by Yodlee, so few banks see themselves as pure innovators. Certainly, banks perform some innovation as Bank of America has shown with paperless ATM deposits, but most banking strategies tend to focus on operational excellence or customer intimacy or a combination of both. In Table 1, product leadership is linked to firms such as the Dutch bank ING, which uses high-yield online savings accounts to attract new customers, or Fidelity Investments, whose target date Freedom Funds are popular in retirement accounts because of their automatic rebalancing of risk and primary asset allocation based on the number of years left to retirement. Perhaps the best-known example of product innovation is Merrill Lynch’s cash management account, first introduced in 1977 as a way to compete with highly regulated state banks. Today, however, with the push toward banks becoming financial conglomerates, all banking entities offer some type of cash management account, and so, in general, banks have tended to be fast adopters of new ideas rather than pure innovators. The Role of Size in Service Strategy Determination Small, owner-managed businesses are the norm in most industrialized nations, including the United States, where 99.7 percent of all businesses have fewer than 500 Strategic Choice, IT, and Performance in U.S. Banking 225 employees.7 Because IT research tends to focus on large firms—in part because of access to data—size effects are often ignored [23]. Size is normally treated as a control variable, but in those rare instances where size is explicitly modeled, some interesting results have emerged. For example, Porter [42] first spoke about size in the context of sector profitability. Recognizing that small firms can, on occasion, be more profitable than their larger rivals, he asks, “under what industry circumstances can a firm select a specialist strategy [differentiation or niche] without being vulnerable to economies of scale . . . achieved by broader-line firms” [42, p. 146]? In other studies, Chen and Hambrick [12], Hofer [26], and Raju et al. [45] identify size as a key contingency variable in the link between strategy and firm performance, with small firms outperforming large firms. Smith et al. [49] report a similar result in using the Miles and Snow typology. In a study of the airline industry, Goll et al. [22] find that size also moderates the link between environment, strategy, and performance. In a result that holds implications for the present study of banks, Goll et al. find that large airlines tend to pursue low-cost leadership strategies whereas smaller airlines employ niche service strategies that offer a very different type of value proposition than low cost. Separately, the marketing literature boasts an extensive body of work on perceived service quality with links to customer satisfaction and firm performance. For example, Anderson et al. [4] find a positive link between customer satisfaction and shareholder value; almost half of the variance in shareholder value is attributable to firm-level heterogeneity, which includes size-related factors. Anderson et al. [3] also find a positive link between perceived quality, customer satisfaction, and net profitability. However, consistent with prior r..Do you have a similar assignment and would want someone to complete it for you? Click on the ORDER NOW option to get instant services at