Introduction

Theoretical framework

Methodology

Results

Discussion

References

Abstract

Purpose – Changes in consumers’ awareness of interest rates (deposits and loans) are important for making financial decisions, particularly in the banking industry. However, little is known about the effect of consumer awareness on customer orientation and loyalty. The purpose of this paper is to examine how changes in consumers’ awareness of interest rates in Korea can influence customer loyalty, considering banks’ efforts to improve customer orientation. The authors explicitly rationalize the fact that consumers’ awareness of interest rates can play an important role in moderating the strength of the relationship between customer orientation and loyalty. Design/methodology/approach – The data were collected from participants (n ¼ ۳۲۷) who had made banking transactions based on their real income in Seoul. Participants mainly focused on personal loans and debts, and most people had banked with a specific bank (one of the main Korean banks) for longer than three years. The authors tested the effect of interest rates using two methodologies, namely, a field study using SEM and an experimental design.
Findings – The study tested these relationships with survey data and two simulated experiments. The findings indicated that the influence of customer orientation on customer loyalty decreased with the increase in loan interest rate awareness. Moreover, the customer orientation-loyalty link weakened with the increase in awareness of central bank base rates. Conversely, the awareness that loan rates were decreasing strengthened the relationship.
Research limitations/implications – Banks need to know the importance of periodic consultation services with valuable consumers who transact with one or more banks because changes in the consumer awareness of interest rates influence customer loyalty (or switching behavior), particularly when their awareness of loan interest rates increases.
Originality/value – This paper is, to the best of the authors’ knowledge, the first to investigate the consequence of such a change in consumers’ awareness of both deposit and loan interest rates with regard to the relationship between customer orientation and loyalty.

Introduction

A customer-focused business culture is widely recognized to strengthen successful organizations and be closely related to customer loyalty (Agarwal et al., 2003). The banking service sector particularly emphasizes customer orientation to increase customer loyalty ( Johlke and Lyer, 2017; Pousa et al., 2018); however, such loyalty can vary when economic situations change rapidly (Hampson and McGoldrick, 2015). For example, when the personal loan interest rate in Korea dropped from 4.10 percent in December 2013 to 3.78 percent in August 2014 (The Bank of Korea, 2015), bank loan customers switched to other competitive banks (Ha, 2011). This case follows the explicit assumption that debt customers strongly consider switching actions when competing banks offer lower loan interest rates (Ioannidou and Ongena, 2010). Previous studies on consumer financial decision making that were reported in a special issue of the Journal of Marketing Research (JMR, 2011) were primarily focused on debt account aversion (Amar et al., 2011) or increasing savings behavior for retirement (Hershfield et al., 2011). In this new study, we explore whether customers are sensitive to interest rate levels and, specifically, whether a strong link exists between customer orientation and loyalty. Many people struggle with repaying their debts during periods of economic downturn (e.g. home mortgages, credit card loans, and personal loans across financial markets), which thereby results in switching behaviors. Identifying the different roles of interest rates will explain how two moderators (deposit and loan interest rates) can significantly affect customer orientation and, subsequently, customer loyalty. This approach offers a means for banks to re-evaluate their past performance and redesign their current strategies positively. This problem of maximizing outcomes across the entire product category shows how customer orientation influences customer loyalty when consumers’ awareness of bank interest rates (affecting deposits or loans) is low or high. Certainly, the interest rates that a financial institution charges its customers can negatively affect the institution’s competitiveness, and consequently, certain customers will leave, thus damaging the institution’s performance in terms of customer loyalty (Ha, 2011). Similarly, whether or not interest rates are consumers’ main concern from a psychological perspective remains a question. However, the effect of the relationship may vary when choosing between banks for a loan because banking customers may be insufficiently sensitive to interest rates when deciding between loans (Shu, 2010). However, customers with large deposits or loans become considerably sensitive to interest rates as they may represent significant gains or losses (Ha and Choi, 2010). Although one may argue that rates always matter (Mild et al., 2015), this study strongly emphasizes interest rates in financial services when justifying changes in customer orientation and loyalty.