Source Paper : Retail financial services: transaction to relationship marketing - A paper by Nicholas Alexander & Mark Colgate
The paper Presents the findings of a survey carried out among the financial directors of leading retail companies in Australia, Ireland, New Zealand and the UK. The purpose of the survey was to determine those factors that influence the development of financial services within retail organisations. Considers the introduction of financial services, within the context of retailers' relationships with their customers, and retailers' ability to build closer relationships with existing and potential customers. Financial service provision is, therefore, considered in the context of the relationship marketing paradigm. Considers the opportunities which financial services provide for retailers to move from a transactional to relationship approach to marketing.
Introduction
The development of financial service provision within the retail sector has offered retailers the opportunity to build closer relationships with their customers. The development of financial services has occurred within increasingly competitive environments where retailers faced with limited growth opportunities in their core markets have sought to secure existing customer loyalty with schemes which establish a relationship built on retailers' better understanding of the customer and customers' greater involvement with the retailer.
This paper considers the introduction of financial services by retailers within four markets within the northern and southern hemispheres: Australia, Ireland, New Zealand and the UK. It presents the findings of a recent survey carried out in those markets amongst the financial directors of leading retail operations. The purpose of the survey was to determine those factors that influence the development of financial services within retail organisations. In so doing, it addresses a lacuna within the study of retail financial services, where an appreciation of the motives behind the introduction of such services has previously been considered within the context of a much smaller group of respondents.
The introduction of financial services is considered within the context of retailers' relationships with their customers and retailers' ability to build closer relationships with existing and potential customers. That is, the paper considers retailers' move away from a transactional based marketing effort to a relationship based approach that has at its core the recognition of the lifetime value of the customer.
Relationship marketing: the opportunity for retailers - The opportunity to create strong relationships with customers should not be ignored by retailers, as the burgeoning literature on relationships has identified many benefits. One of the main reasons for the dramatic growth in interest in relationship marketing (RM) has been the assertion of the benefits that it can bring to an organisation. These benefits have taken many forms. Rosenberg and Czepiel (1984), for example, asserted that the cost of winning a new customer is about five times greater than the cost of retaining a current customer through the use of RM. Reichheld and Sasser (1990) further outlined the economic benefits of customer retention (which is the central notion of RM). Their claims that ``companies can boost profits by almost 100 per cent by retaining just 5 per cent more of their customers'' (p. 105) inspired a new wave of research into RM. Reichheld and Sasser (1990) also highlighted the importance of the lifetime value of the customer. This approach advocates the need to move away from a transactional view of the customer to a relationship view in order to maximise the return from a customer over a long period of time. Many other researchers have also outlined the direct economic benefits of RM. Along with the direct economic benefits of RM, researchers have outlined other benefits of a RM strategy for an organisation. Shani and Chalasani (1992) suggest that having a ``core group'' of customers provides the company with a market for testing and introducing new products or offers with reduced risk.
Madhavan et al. (1994) state that from the firm's perspective, RM also brings about much stability and decreased uncertainty. Colgate et al. (1996) state that close relationships can act as a barrier to competitor entry by keeping a stable and solid base of customers. In addition to benefits for the firm, there is also a growing base of literature that looks at the benefits for the consumer. Authors such as Sheth and Parvatiyar (1995), Berry (1995), Gwinmer et al. (1998) have indicated that consumers receive psychological benefits from close relationships. Likewise, social benefits such as familiarity, personal recognition and friendship (Gwinmer et al., 1998) are predicted and supported by Czepiel (1990) and Buttle (1996). Customers may also receive economic benefits. Peterson (1995) suggests that the primary reason for consumers to engage in long-term relationships is to obtain discounts or money-saving schemes. Finally, consumers may obtain customisation benefits as services providers may tailor their services to meet customer's specifications and requirements (Berry, 1995; Gwinmer et al., 1998). However, despite the considerable benefits which are attributed to relationship marketing in the literature, there are also drawbacks that need to be considered. For retailers in particular there are aspects of the relationship marketing approach which pose extra challenges and threats.
Problem of relationships for retailers - In many respects, retailers, particularly those such as food retailers where customer interaction is regular, are well placed to build long-term relationships with customers. This relates to the fundamental requirements of a relationship: that is a series of interactions (Storbacka, 1994). However, large and essentially impersonal retail organisations have greater difficulty moving beyond this basic level of relationship. Similarly, many retail transactions may be low in involvement (Zaichowsky, 1985), where the purchase has little meaning to the customer. Gordon et al. (1998) suggest that the higher the levels of involvement the more important relationships become. Thus, large retail operations may find it difficult, within their normal business transactions, to establish the relationship criteria suggested by Barnes (1997a), where there exists the mutual recognition of a relationship or that the relationship which does exist is perceived to possess a ``special status'' (Czepiel, 1990). Nevertheless, some retailers successfully establish such relationships but the relationship may essentially exist as a fragile one where the lack of service consistency will quickly erode the relationship established. The social psychology literature (see, for example, Duck, 1991, 1992) has identified many factors that are required for a strong relationship to exist. It has been suggested that relationships exist and develop where there is commitment to the relationship by both parties, where mutual trust and respect exist, together with good communications, prioritisation of the other parties interests, and support and assistance in the achievement of long-term goals.
While some of the factors which build ideal relationships between individuals may be very difficult to achieve within the individual to corporate retail setting, there exists, nevertheless, the opportunity to establish trust and commitment. That is where trust and commitment are recognised in the marketing literature as forming the basis for successful relationships. However, the relationship established by retailers may all too easily fall into the category identified by McGoldrick and Andre (1997) as being ``habitual''. That is where the customer may be a regular user of a store but have an essentially low commitment to that store. In such a ``relationship'', there exist very fewof the relationship sustaining factors which build closer and truer relationships that were identified earlier. Retailers' ability to establish close relationships with customers while supported by their fundamental activities are also limited because of the type of transaction involved. That is, while some retailers may sell products that engage the customer in high involvement decision-making processes, the decisions, once made, do not in themselves automatically build sustained relationships. Indeed, within retailing, the higher the involvement at the time of purchase the less likely continual interaction will be due to the infrequency of the purchase. Likewise, serial interaction easily established in some retail subsectors, such as food retailing, will not engage the customer in the type of commitment implied by high involvement decisions.
Retailers do not, for example, have the same regular opportunities as banks to build relationships in the context of service provision, which are considered of high importance to customers. Thus, compared to banks, retailers by their very nature do not attract the commitment and trust required within a banking relationship. As Barnes (1997b) has shown with extensive empirical evidence, customers are more likely to consider they have a close relationship with their bank than with their retailer. Similarly, customers are more likely to desire a closer relationship with their bank than their retailer. Thus, as Colgate (1996) and Barnes (1997b) have shown with empirical data, bank customers want and value relationships with their financial service provider. This is not as true for retailers.
For retailers, therefore, the offering of financial services may provide the opportunity to build closer relationships. The theoretical and empirical evidence, noted above, suggests this may be so. By communicating with customers not only through the provision of core retail services but also through the provision of financial services, retailers have the opportunity to move closer to their customers. This is because of the greater levels of information gathered on customers, the sustained increased involvement with customers, the provision of a service which requires and facilitates direct, regular, meaningful contact and the larger amounts of commitment and trust. It should also be noted here that attempting to create closer relationships with customers through the provision of financial services has associated risks. Creating formal relationships with customers is an inherently risky process (Colgate and Danaher, 1998), where the status quo may often have been more desirable. Retailers attempting to create stronger relationships through financial service provision may raise expectations, lead to undesirable consequences such as refusal of credit and, overall, weaken the original retailercustomer bond.
However, if managed correctly, relationships provide many benefits and retailers have the opportunity to explore the three different types of relationship marketing identified by Brodie et al. (1997). Brodie et al. (1997), through a literature search and empirical evidence, suggest that marketing can be split into two main types; transactional and relationship. Transactional marketing is where the company focuses solely on maximising the return on the individual transaction while relationship, marketing focuses more on utilising the encounters with the customer to build and enhance relationships with them.
Relationship marketing, Brodie et al. (1997) indicate, can then be split into three distinct parts: database marketing; interaction marketing; and network marketing. Financial services provide retailers with the opportunity to use all three areas of relationship marketing more effectively. Firstly, they enable retailers to hold information in marketing databases they would otherwise lack. Secondly, they provide the opportunity for greater interaction with customers both in-store and remotely, through viable and valid communication regarding their financial services. Finally, they offer the opportunity to create networks with other retailers or banks (or both) when a decision is made to enter into a strategic alliance with these parties to provide financial services.
Retailers and financial services - The provision of financial services within retail operations is not a new
departure. Retailers such as department stores have long been associated with systems that provide credit facilities and hence build customer identification with a particular store. In great part, the provision of credit has been used both within the modern retail system and pre-modern systems to create relationships between retailer and customer through a mutual interdependence (see Alexander and Colgate, 1998). To some extent, therefore, those large multiple store operations which are currently developing loyalty schemes and financial services packages in order to retain customer loyalty are rediscovering the value of other means of retaining customer loyalty and commitment to retail outlets. Retailers provide a wide range of financial services: store chargecards; current accounts; credit cards (e.g. Visa); savings accounts; insurance; life assurance; mortgages; personal loans; personal equity plans; share dealing; and foreign currency exchange. Some of these products are directly associated with the core products sold within the retail environment. Retailers selling high value items are able to sell insurance or provide a supporting service through the arranging of personal loans. Other financial services may be provided because of the customer base. Foreign currency exchange is a valuable service in cosmopolitan retail environments. Conversely, some financial services may be provided because the retailer offers the customer a convenient location in which to engage in banking transactions. Where traditional bank networks are weak, customers may prefer to hold current accounts with retailers. It has been the assumption that retailers, through their regular interaction with customers, are well placed to exploit their contact with customers and hence develop financial services (Worthington, 1992). However, such interaction is not necessarily of the type or quality to sustain a relationship carrying higher expectations than the merchandise sales relationship on which it is built. The development of financial services may not be entirely focused on supporting existing sales activities. Other services such as share dealing services or credit card services, where the credit card may be used in the issuer's chain of stores and also in other retail and service outlets, may represent diversification into new service products. The development of financial services within retail outlets may, therefore, have two fundamental objectives. Financial services may be used to support core operational activities or they may be considered to be a diversification of current service activity. Individual financial services may support both objectives but they will not necessarily do so, therefore it is necessary for retailers to understand the fundamentally different benefits which different services deliver to their customers and their operations. In supporting core operational activities, financial services may be used to provide marketing information not otherwise available to the retailer, to be used away from the point of sale and at the moment of product purchase Likewise, the same financial service may create an enhanced relationship with the customer at the point of sale at the time of product purchase. Both benefits support core merchandise sales activity. However, in the development of financial services retailers may confuse the benefits of such activities with the opportunities available for product diversification in the area of financial services. This confusion may be compounded by the belief that those products that support core activities will provide cross-selling opportunities for products that do not directly support core sales activities. Thus, financial services have to be considered as both supporting core activities but also a potential distraction from those core activities.
The offering of financial services by retailers, as an additional service to the customer when purchasing the core product, fits into the marketing literature of augmented retailer services (Kotler et al., 1998; Taher et al., 1996). This is where retailers offer additional services above the core product ``to build and maintain a loyal body of patrons who will ensure that the store's profit objectives are met'' (Taher et al., 1996, p. 218).
While financial services may be seen as a means by which retailers may positively develop their relationship with existing customers, they may also be seen as a means by which retailers reduce the negative aspects of their relationship with financial service providers such as the banks. As Worthington and Harbisher's (1997) research into retailers' relationships with the suppliers of financial services has shown, retailers' ability to control transaction costs or control the use of payment methods remains a contentious issue. Indeed, the triadic relationship that exists at the point of sale between banks, retailers and customers is fundamental to an understanding of retailers' development of financial services and their competitive stance with respect to bank operations (Colgate and Alexander, 1998). Retailers' dependence on banks to provide payment methods has become increasingly threatened by retailers' unwillingness to accept the cost structures imposed on them and their ability to develop alternative payment systems. In terms of Worthington and Horne's (1998) modelling of the affinity card market and the symbiotic relationships which exist between parties, retailers' traditional relationship with banks, as defined by the payment systems used by customers at the point of sale, had increasingly become ``parasitic''. That is where one party, namely the retailer, was increasingly harmed by the relationship. Retailers' development of financial payment services may be seen as a means to establish a ``mutualistic'' relationship, where both parties derive benefits. However, it may be argued that retailers' attempts to establish financial services may actually create a ``synnecrotic'' relationship that is detrimental to both parties. The development of financial services within retail operations has therefore become of fundamental importance to a number of parties. To the retailer, the development of services that support existing activities provides the opportunity to build closer relationships with customers and address the customer's desire for a closer relationship within the context of core product sales and the opportunity to diversify into non-core areas in increasingly saturated core markets. For banks, it has implications for the changing nature of the competitive environment and those financial product areas in which the retailers will choose to compete and in which they are able to pose a credible threat. Given that the literature review above suggests that relationships are beneficial to organisations such as retailers, that financial services can createcloser and stronger relationships than retailers are able to create, and that there is a scarcity of literature within this subject area, the objectives of this paper are twofold. First, the paper asks whether retailers believe that financial services can build these relationships: if retailers do not believe this is so, then the importance of offering financial services is reduced. Second, the paper asks if retailers' perceptions of the benefits and barriers of implementing financial services will help to predict the development of financial services products within retail operations.
Methodology
A postal survey was carried out among leading retail organisations in Australia, Ireland, New Zealand and the UK. The design of the questionnaire and formulation of the questions followed pilot interviews with senior personnel in retail organisations offering financial services to gather their expert opinion. A postal questionnaire approach was used in order to gain a breadth of opinion across the retail environment. Previous studies had utilised individual cases extensively, therefore it was considered appropriate to gain a broader perspective before interviewing senior managers in greater detail. The pilot interviews were designed to identify the key factors that have stimulated the development of financial services in retail outlets as well as the benefits and problems associated with the offering of such services. The responses from these interviews were used to formulate the statements used in the questionnaire. Questionnaires were sent to named financial directors within large retail organisations. In total, 259 questionnaires were mailed. Companies were selected on the basis of turnover. The turnover of the last company in the Australian/New Zealand list was equivalent to the turnover of the twohundredth company in the combined UK and Ireland list. The first mailing was made in May 1998 and followed by a second mailing six weeks later. The response rate was 29 per cent, a positive result given the nature of the survey, the seniority of those surveyed and the sensitivity of the issues raised (see Table I).
Table I
An analysis of non-respondents revealed that level of turnover did not affect the response of those surveyed so that a balance of large and smaller companies was maintained. Responses were received from retailers engaged in the development of financial services as well as non-providers (40 per cent of respondents did not offer financial services). Likewise, retailer responses covered a wide range of product sub-sectors. Finally, Armstrong and Overton's (1977) test for non-response bias was used to check for non-response bias (analysing the surveys that were received late to see if they differed from those that arrived earlier), and the test revealed no bias.
Results
As stated earlier the primary objective of the survey was to establish the relative benefits and demerits of offering financial services, and the role relationships play in this area. It was not the aim of the paper to compare difference between countries, although ``t tests'' of mean scores between the countries reveals very little significant difference in the results.
Benefits
It has been suggested in the literature that there are essentially two strategies that retailers may follow when offering financial services (Worthington, 1990). That is, the maximisation of profit and the utilisation of marketing information generated through the offering of financial services will tend to be categorised separately. However, while this fundamental dichotomy was observed on a basic level, the benefits identified by retailers were more complex in nature. Table II shows the hierarchy of benefits identified by survey respondents.
Table II
Of the seven benefits presented, three benefits appear to outweigh the others while three other benefits receive moderate support. The most significant benefit was considered to be marketing information. This was closely followed by direct contribution to profit and the opportunity to develop closer relationships with customers. Clearly, therefore, retailers appear to believe that financial services are capable of enhancing relationships they currently possess. This is an important finding given the focus of this paper. It is also interesting to note that the marketing information benefits are seen as more important than direct profit contributions (and significantly so at the 0.01 level in a comparison of means t-test). Given that collecting information on the customer can facilitate the building of closer relationships, this also has implications for this paper In building closer relationships with customers, however, respondents did not strongly support the contention that financial services could build trust that would not be in part created by core product sales and associated relationships. However, respondents considered financial services were capable of enhancing existing relationships built on core product sales, although they were divided on the issue of financial services supporting growth in core product areas. Likewise, little more than a half of respondents perceived financial services to be the natural extension of the service offered at the point of sale. To develop more insights into how retailers categorise the benefits of financial services, factor analysis was carried out on the seven benefits that that were listed within in the survey that were identified through pilot research and expert opinion. This research employs the principal component factor analysis, which uses an orthogonal (Varimax) rotation of the initial factor pattern and therefore produces factors, which are linearly independent. This rotated factor pattern provides a clearer resolution of the underlying factors. Two factors were extracted using Kaiser's criterion (Child, 1991). Only those variables with greater than 0.5 were considered to be significant. The KMO sampling adequacy score was 0.833, well above the 0.5 recommended (Malhorta et al., 1996). They accounted for 63 per cent of the total variance. The variables relating to the variable numbers are presented in Table III.
Table III
Table III clearly shows that the factor analysis creates two factors which can be easily labelled. The first refers to direct profit contribution and other benefits that are related to actual business activities or the extension of current activities. This may be called ``product focused benefits'' as the four variables all relate to the retailer believing that the provision of financial services can extend its core business. That is, they refer to ``making direct contribution to profit'', ``support sales growth'', ``building trust that would not otherwise exist'' and ``extending service activity at the point of sale''. The second refers to marketing information and other relationship building benefits. It may be termed ``relationship focused benefits'', as the three variables in this factor, ``developing closer relationships'', ``providing valuable marketing information'' and ``building on trust created through core product sales'', all indicate that retailers believe that financial services are capable of creating stronger relationships between a retailer and customer. Trust is particularly important in the second factor as many authors (Buttle, 1996; Morgan and Hunt, 1994; Webster, 1994) have indicated that this characteristic is a critical component of any strong relationship.These two factors suggest, therefore, that retailers get much more out of financial services than simply more sophisticated marketing information and direct profits (Worthington, 1990), although these two benefits are indicative of a more complex set of perceived benefits.
Barriers
The second part of the survey analysed the conditions and barriers that may arise when offering financial services. These are presented in Table IV.
Table IV
Foremost amongst the problems were the skills required by staff in retail outlets. This was clearly seen as the main concern of respondents with three quarters (75 per cent) agreeing to some degree that this was a problem. While it was primarily the shortage of skills in-store with which respondents were concerned, almost half (48 per cent) of respondents also recognised the problem of skill shortages in head office. Overall, respondents were very conscious of the additional skills required when offering financial services and the implications this potentially has on the interface with customers and the main activity of the business.
Thus, respondents placed considerable emphasis on the issue that the offering of financial services could distract from the primary functions of the business (67 per cent) and that financial services could raise issues with customers, such as the refusal of credit, which would damage existing relationships (59 per cent). This led half (50 per cent) of respondents to agree that financial services were not entirely compatible with the operational aspects of in-store activities. In contrast, respondents were not concerned that offering financial services would damage existing banking relationships (14 per cent), neither did they believe that financial services were not sustainable in the long term (14 per cent). There was greater, though essentially limited, concern that the offering of financial services would create unacceptable financial risk to the retailer (37 per cent). In the mid-1990s, the growth of financial services in has been a notable facet of retail service development, as indeed it was in the late 1980s. Retailers, therefore, were also asked to indicate the importance of environmental conditions that support the development of financial services offered in-store. Foremost among the conditions identified by respondents were banks' willingness to form joint ventures (80 per cent) and competition in the retail sector prompting retailers to build closer relationships with their customers (77 per cent). Respondents focused on the conditions that allowed or prompted retailers to offer financial services rather than the banks' failure to provide competitive and attractive financial services to the customers who retailers recruit to their financial service schemes. Thus, while factors such as banks' lack of perceived customer friendliness (63 per cent), banks' limited accessibility (64 per cent) and banks' failure to provide good on-line services (56 per cent) were given some weight, they were considered less significant than the conditions which enabled retailers to offer an in-store financial service. Again, while given some weight, the charges imposed on retailers by banks for accepting credit and debit card transactions were seen as relatively less important.
Factor analysis was again carried out to separate these barriers and conditions into meaningful categories. Table V shows the factor analysis. This factor analysis deployed the same method of analysis as the first. The KMO sampling adequacy score for this factor was 0.665, well above the 0.5 recommended (Malhorta et al., 1996). They accounted for 72 per cent of the total variance. The variables relating to the variable numbers are presented in Table V.
Table V
The first factor can be called ``incompatibility of current operations'' as they all relate to the fact that banking is not a core activity and is not compatible with current operations. The second can be called ``banking perceptions'' as they relate to the perception customers may have of banks ± being inaccessible and unfriendly. Retailers obviously believe that these perceptions are important to the success of offering financial services. The third factor can be called ``risks'' as its relates to the risks financial services provide retailers with ± in terms of financial risks for example. The fourth factor may be called ``dominance of banks'' as this factor relates to the fact that retailers may be more likely to offer financial services when banks are willing to create joint ventures or charge disproportionally for financial transactions. The more likely banks are to do either of these the more likely financial services will be offered by retailers. The final factor is called ``protecting relationships'' as it relates to protecting the relationships retailers currently have with their customers and making them stronger.
Discussion - The results of the survey strongly indicate that retailers are aware of the marketing advantages to be derived from the offering of financial services ± in particular creating stronger and closer relationships. While respondents were aware of the opportunity for financial services to make a direct contribution to profits and some organisations in the survey indicated that they had already received such benefits from offering financial services, respondents were also clearly aware of the relationship-building opportunities afforded by financial services. However, while it was recognised that financial services could build on the trust created by sales of core products, respondents were less supportive of the contention that financial services could build trust that would not otherwise develop through core product sales. Likewise, respondents gave limited support to the contention that financial services were a natural extension of service activity at the point of sale. Given that the greatest problem associated with the provision of financial services was the lack of compatibility of current operations, it may reasonably be assumed that while database building and hence database marketing may be within the capability of retail organisations who move into financial services, interaction marketing may not prove such a readily achievable goal.
The results presented here would suggest that, while retailers are aware of the benefits of building databases and communicating with the customer in order to develop closer relationships, they are less than confident that they are able to integrate financial services within their store and head office operations. Thus, in part, they are conscious that, while day-to-day, face-to-face contact is one reason why they are able to offer the customer the convenience of in-store banking, they are less than well equipped to follow up on the service offered. This in itself has serious implications in that the retailer may succeed in raising customer expectations only for these to be unrealised during the period of the customer's relationship with the retailer.
Conclusion
This paper has had two objectives. First, to establish if retailers believe that financial services can build closer relationships and secondly, to understand the perceived benefits and barriers of implementing financial services. The first objective was answered emphatically by the fact that creating relationships through financial services and the marketing information collected information from the provision of financial services were seen as the first and third most important benefits of financial services. The second objective was answered through factor analysis: it revealed two categories for the benefits of financial services and five categories in terms of the barriers and conditions in providing financial services. This analysis showed that the fundamental dichotomy previously recognised by Worthington (1990) was important but that a far more complex motivational structure existed when retailers considered developing financial services. Thus, the research shows that it is necessary to think about the motivations, which lie behind the introduction of financial services, and the strategies adopted in terms of ``product focused benefits'' and ``relationship focused benefits''. Likewise, it is important to consider the environmental conditions in which financial services are introduced and the concerns retailers have about financial service introduction in terms of the incompatibility of current operations, perceptions of banking conditions, the risks involved, the power of the banks and the need to protect existing relationships. The results, it is hoped, will assist managers and academics alike in understand the importance of financial services in creating relationships for retailers and the benefits and barriers of doing so.
The development of financial services within retail outlets suggests that retailers have developed a more sophisticated appreciation of marketing opportunities and that they are increasingly able to market their products. That is, they are moving from a transactional approach to a relationship approach that recognises the lifetime value of the customer. However, the results presented here also suggest that the development of financial services in order to build closer relationships will only succeed where retailers are conscious of the supportive nature but distinct processes involved in the offering of financial services.
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