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RETAIL BANKING I

RETAIL BANKINGACADEMY

Chapter 1: Attributes of Financial Services in Retail Banking

Financial services share four attributes with other service industries. There are other features that are unique to !nancial services that we will discuss in due course. These four common attributes of service industries are:

1. Intangibility, which means that services lack a physical form. Hence, unlike physical goods that are tangible, services cannot be sensed or touched or even displayed in the pre-purchase stage of a customer-bank transaction. It is di"cult to have an emotional connection to an actual savings account, as would be the case with a luxury watch, or car, or a designer handbag.

2. Inseparability, which means that a service is produced by the service provider and consumed (i.e., experienced) by the consumer at the same time. Think of a service such as a haircut delivered by a barber. There is no separation in time between the production of the service by the barber and the consumption of the service by the consumer.

3. Perishability, which means that service providers cannot store their service (i.e., it cannot be inventoried). In the context of !nancial services, perishability also means that once the term of the contract (e.g., a two-year loan) is reached, the service has perished, or is terminated.

4. Heterogeneity, which means that the quality of service delivered by bank sta# is not exactly the same each time, but varies over time – not, it is hoped, with high variability.* This is normal customer experience in service industries. One does not expect that a concert performance is identical each day.

This has important implications for the retail bank. First, customer satisfaction is determined by the actions of the people delivering the service. Second, while training and development of bank sta# can help to maintain consistency, there are always unexpected and uncontrollable factors that could create higher variation in service.

* Variability of service delivery is considered in Operations I where Lean Six Sigma is considered.

Course Code 103 - Products

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RETAIL BANKING I

64

RETAIL BANKINGACADEMY

The common four attributes of services are summarised below:

Intangibility

Inseparability

Perishability

Heterogeneity

Lacks Physical Form

Co-creation

No Storage & Finite Life

People Dependent

Serv

ices

103.1: Four attributes of services

There are implications for the bank sta# that are derived from the four attributes, as stated above. These include:

a) There is a !duciary responsibility of the retail bank as service provider over customer funds entrusted to them. Customers who own savings accounts understand that the bank will lend their savings in the form of loans to other customers and make a pro!t. But borrowers can default and the bank may not be able to get its money back in full. This may a#ect the return promised to savers. Hence savings accounts customers expect that the bank will exercise due diligence and not take excessive risks on its banking book.

The bank has discretionary power to a!ect the saver’s assurance of a guaranteed rate of return and principal. This is the essence of a "duciary relationship – dependency by one party, which is the savings account customer.

b) Unlike other services, !nancial services can create inertia in the customer-bank relationship. This means that trust and con!dence in the bank sta# take time to develop. This means that customer experience with the bank sta# must be con!rmed and validated in order for a long-term relationship to develop. This investment by the customer in the relationship is a form of switching cost.

Customer inertia is created by, among other factors, high switching cost.

c) The third unique feature of !nancial services is based on the observation that while some customer transactions are short-lived (e.g., checking account balance), they are part of a longer-term customer-bank relationship that creates these short-term transactions. For example, a long-term loan contract creates short-term transactions such as interest payments. Hence a two-way $ow of information is required to develop the long-term relationship that then creates short-term transactions. The bank requires this two-way $ow to develop a correct view of the customer.

Three additional attributes of "nancial services

McKechnie (1992), as cited in Omarini (2011), identi!ed three other characteristics present in !nancial services but not always for other services. These are:

“(1) transparency of performance, which refers to the availability of information presented by the bank, and consumer ability to make evaluations based on that information; (2) uncertainty of outcome, marked by consumer control over the uncertain external environment and by the process of co-creation during the production of services; and (3) poor comparability caused by the scarce number of identi!able attributes and the long-term maturity of the service o#erings.”*

* Anna Omarini: ‘Retail banking: the Challenge of Getting Customer Intimate’, Banks and Bank Systems, Vol 6, Issue 3, p81 (2011).

Course Code 103 - Products

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65© Retail Banking Academy, 2014

RETAIL BANKING I

RETAIL BANKINGACADEMY

Note that transparency of performance is a#ected by the fact that customers may have limited information compared to bank sta#. This is especially true when customers invest in bank mutual funds where customers may !nd that they have limited information to assess the reported investment performance. In addition, customers may not have su"cient knowledge about investment jargon and so may su#er doubt about the investment performance. So there are two sources of information risk that customers may incur when assessing performance – limited information and information ambiguity.

The fact that !nancial services are delivered in an environment that is unpredictable means that performance is not assured. Uncertainty arises from an economic environment that creates risk, as well as the more local issue of co-creation where performance depends on the ability of bank sta#. There are two dimensions to uncertainty of performance – economic environment and the co-creation service delivery process.

The third unique attribute of !nancial services is the lack of su"cient information for the comparability of performance. This is due to the uniqueness of bank o#ers with di#erent maturities. Of course, all personal loans incur credit risk. But each bank may underwrite personal loans based on customer-speci!c demographics and other variables. Hence the performance of a loan book may not be comparable with that of another bank.

We may summarise the attributes of !nancial services as follows:

Summary of Attributes

Services have four fundamental attributes: intangibility, inseparability, perishability and heterogeneity. Financial services have three additional attributes – transparency of performance, uncertainty of performance and poor comparability of performance.

We now categorise bank products according to the main bene!ts they deliver to the customer in a particular stage of his/her life cycle.

These attributes have important implications as pointed out in later modules in this programme such as Marketing, E#ective Sales Management, Customer Service Quality and Relationship Management.

Course Code 103 - Products