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 Journal of Service Management
The relationship between service quality and retention within the automated and
traditional contexts of retail banking
Mohammad Al-Hawari Tony Ward Leonce Newby
Article information:
To cite this document:
Mohammad Al-Hawari Tony Ward Leonce Newby, (2009),"The relationship between service quality and
retention within the automated and traditional contexts of retail banking", Journal of Service Management,
Vol. 20 Iss 4 pp. 455 - 472
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Karin A. Venetis, Pervez N. Ghauri, (2004),"Service quality and customer retention: building
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dx.doi.org/10.1108/03090560410560254
Mohammed Al#Hawari, Tony Ward, (2006),"The effect of automated service quality on Australian banks'
financial performance and the mediating role of customer satisfaction", Marketing Intelligence &
Planning, Vol. 24 Iss 2 pp. 127-147 http://dx.doi.org/10.1108/02634500610653991
Rizal Ahmad, Francis Buttle, (2002),"Customer retention management: a reflection of theory
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Service quality
The relationship between service and retention
quality and retention within
the automated and traditional
455
contexts of retail banking
Received 13 November 2008
Mohammad Al-Hawari Revised 26 February 2009
Management, Marketing, and Public Administration Department, Accepted 16 April 2009
Business Administration Faculty, Sharjah University, Sharjah,
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United Arab Emirates, and

Tony Ward and Leonce Newby
Central Queensland University, North Rockhampton, Australia

Abstract
Purpose The main purpose of this paper is to highlight the significance of service quality factors
on customer retention within the Australian traditional and automated banking contexts.
Design/methodology/approach The relative importance of traditional and automated service
quality factors on customer retention was examined with the intention of determining which indicator
factors are likely to have a significant impact on customer retention. The paper then proposes a
conceptual model of the relationship between service quality factors within the two contexts and
customer retention. AMOS 5 was used to test for the hypothesized relationships.
Findings All of the traditional service quality factors have positively influenced customer
retention. Conversely, this paper finds that automated service quality in general has no positive
significant influence on customer retention.
Research limitations/implications This research was applied to the financial institutions in
Queensland, Australia. Further testing of the proposed conceptual model across different industries
and countries is needed to determine the generalisability and consistency of this studys findings.
Practical implications The proposed model of retention prediction has the potential to help
Australian bank managers to strengthen the customer-bank relationship and, ultimately, to enhance
customer retention ratios.
Originality/value The key contribution of this paper is a conceptualisation of customer retention
predictors that takes into account both traditional and automated service customer interactions with
banks.
Keywords Australia, Customer retention, Automation, Services, Retailing, Banking
Paper type Research paper

Introduction
During the last two decades, the Australian financial system has developed rapidly in
terms of size, industry structure and variety of products and services (Edey and Gray,
1996). The Australian financial system has been transformed from a relatively closed
system in the 1950s and 1960s based on traditional banking activities to a more open, Journal of Service Management
Vol. 20 No. 4, 2009
effective and competitive system which is able to offer an extensive range of products pp. 455-472
q Emerald Group Publishing Limited
and services (Edey and Gray, 1996). Service quality has become a critical component in 1757-5818
running a successful business in todays economy (Blose et al., 2005). Provision of high DOI 10.1108/09564230910978539
 JOSM quality services enhances customer retention rates, helps attract new customers
20,4 through word-of-mouth advertising, increases productivity, leads to higher market
share, lowers staff turnover and operating costs, and improves employees morale, and
financial performance (Duncan and Elliot, 2004; Ranaweera and Neely, 2003; Jamal and
Naser, 2003).
The literature review revealed that there has been an intensive investigation into
456 service quality outcomes in the traditional banking context where face-to-face
interaction between customer and employee was the primary focus. More recently,
banks face a situation where employees and traditional delivery functions are no longer
their first interest. Instead banks are increasingly depending on technology with their
attendant quality issues. Technology development has changed retail banking most
significantly by facilitating the creation of a new range of products and improving
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delivery channels (Thompson, 1996; Edey and Gray, 1996). New service delivery channel
options, such as automated teller machine (ATM), phone banking, mobile banking, and
recently, internet banking, have resulted in new and additional ways for banks to
provide delivery of their services to their customers. The literature asserted that
relationships between banks and their customers may change through the introduction
of new technologies (Barnes, 1997).
The investigations of the relationship between retention and service quality is well
established in the literature. Many studies have investigated this relationship within the
traditional contexts where face to face is the only interaction method between banks and
their customers. Other few studies have investigated this relationship within the
banking automated contexts. In the banking sector, customers choose different service
delivery channels in a complementary way; consequently developing a relationship with
the customer can be achieved through any combinations of these media (Al-Hawari and
Ward, 2006). No studies have been revealed into the literature taking into the
consideration the influence of the automated and traditional service quality factors on
customer retention as in one model. Furthermore, those models currently available to
measure automated service quality are limited in their focus, encompassing only one
electronic channel the internet thereby ignoring attributes of the other automated
service channels, such as ATMs and telephone banking services. Accordingly, this
research develops a comprehensive model of automated and traditional banking service
quality taking into account the unique attributes of each delivery channel and other
dimensions that have the potential to influence customer retention.

Traditional service quality

Traditional service quality is defined as customers beliefs or attitudes about the degree
of service excellence offered in the banks physical location (Castleberry and
Resurreccion, 1989). There were many examples of models which were developed to
measure customer perceptions of service quality where face-to-face interaction between
the customer and employee was the only focus. As the literature showed that there were
no absolute perfect measurement models of service quality, this research has
restructured the well service quality models to reflect the unique nature of Australian
banking context. As a result, three factors were identified: the human element; the
consistency of service delivery, and, tangibles of service. These factors were
drawn mainly from Sureshchandar et al. (2002) who adapted their items from
Parasuraman et al. (1988).
 The human element of service quality referred to all aspects of staff/customer Service quality
interaction in service delivery. Human elements play vital role in shaping the overall and retention
customer perception of service quality (Mouawad and Kleiner, 1996; Yavas et al., 1997).
Employees have an important effect on customer service as they are the key element that
customers interact with during the service encounter stage (Mouawad and Kleiner,
1996). Well trained employees are able to achieve high level of customer cognition as well
as affection toward the organisation they are dealing with (Schneider and Bowen, 1995). 457
Consequently, frontline employees factor is added as a main factor shaping customers
overall perception of traditional service quality.
Consistency of service delivery referred to the processes, procedures, and systems
that would make service delivery a seamless experience (Sureshchandar et al., 2002). In
the literature, there were a few marketing scholars who have tried to focus on the
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importance of the structural content of service delivery in service quality evaluation

(Sureshchandar et al., 2002; Danaher and Mattsson, 1998; Gronroos, 1990). Time
considers a vital element in shaping customer perception of service quality; thus,
designing a simple and seamless service delivery process help banks to shorten the
necessary time of delivering the service products. Accordingly, this factor has included
as it has an important role in shaping customers overall perception of the traditional
banking service context.
Tangibles of service were one of the few dimensions that have been consistently
used by different researchers (Bahia and Nantel, 2000). However, tangibles refer to
physical facets of the service facility; equipment, machinery, signage, communication
materials, etc. (Bahia and Nantel, 2000; Parasuraman et al., 1988). It includes the
physical evidence of the service, except the personal appearance of staff which was
included in the human element dimension

Automated service quality

After reviewing the literature intensively, it was observed that there existed no
generally accepted model of automated service quality. There have been many studies
identifying the key service quality factors in the traditional banking environment,
where interaction between employees and customers is the main communication
channel (Jun and Cai, 2001). However, there have been few studies that have
investigated automated service quality attributes in banking (Joseph and Stone, 2003).
The automated service quality model presented in this research is designed to
comprehensively include all the possible factors that may shape customer perceptions
of automated service quality. The factors of the automated service quality model were
drawn mainly from Al-Hawari and Ward (2006).
Automated service quality is defined as the customers overall evaluation of the
excellence of services provided through electronic networks such as the internet, ATM,
and telephone banking (developed from Santos, 2003). Customer evaluation of
automated service options and their intention to use a particular option are directly
affected by their perception of the attributes associated with that option (Dabholkar,
1996). That is, every service delivery channels own its unique features which make it
dissimilar to others, so it is essential to measure each channel quality separately rather
than aggregating the channels attributes (Al-hawari, 2006). The overall customer
perception of automated service quality can be established through the quality of every
automated delivery channel (Al-Hawari et al., 2005). A number of marketing scholars
 JOSM have identified ATM, internet and telephone banking as the principal automated
20,4 delivery channels for retail banking (Joseph and Stone, 2003). Accordingly, each delivery
channel has been considered as a factor in the proposed automated service quality
model.

Customer retention
458 In order to lower costs and increase their market share in an era of high levels of
competition, many firms acknowledge the need to increase their efforts to retain
customers to increase their profitability (Reichheld and Sasser, 1990). However, on
turning to the retention literature for guidance in developing retention strategies,
practitioners find that there are variations in the conceptualisation of customer retention
that confound the research findings. In general, there were three distinctive approaches to
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measuring retention; behavioural measures, attitudinal measurement, and composite

measurement (Bowen and Chen, 2001). In a service context, retention was frequently
defined as observed behaviour (Liljander and Strandvik, 1994). However, the behavioural
models that used repeat purchase as the only measurement of customer retention have
been criticised for their lack of conceptual basis; this measurement may not have
indicated an attachment to a particular brand (Day, 1996). The problem associated with
treating retention exclusively as a repeat purchase was that this did not differentiate
loyal customers (Dick and Basu, 1994). Moreover, a behavioural approach with the only
focus on repeat purchase may not yield a comprehensive insight into the underlying
reason for retention (Bloemer and Kasper, 1995). Consequently, customer retention has
also been approached as an attitudinal construct (Hallowell, 1996) to reflect the emotional
and psychological attachment inherent in retention (Bowen and Chen, 2001). This was
demonstrated, for example, by the willingness of the customer to recommend a service
provider to other consumers (Ziethaml et al., 1996). However, using the attitudinal
measure only has also been criticised in the literature (Dick and Basu, 1994).
The third approach has combined the behavioural, attitudinal, and cognitive aspect
of customer retention (Bloemer et al., 1998). The involvement of a psychological/
attitudinal construct with repeat purchases has been shown to be important in
achieving absolute retention (Oliver, 1999). In this regard, customer retention has
frequently been operationalised as the first thing that came to mind when making a
purchase decision; that is, a customers first choice among alternatives, and also, price
tolerance (Price and Arnould, 1999; Bloemer et al., 1998; Ziethaml et al., 1996; Dick and
Basu, 1994). Thus, retention was defined in this research as the degree to which a
customer exhibits repeat purchasing and price tolerance behaviour to a service
provider, and, possesses a positive attitudinal and cognitive disposition.
To match the above definition, Ziethaml et al.s (1996) battery has been adopted in
this research to operationalise the customer retention construct. They developed a
group of antecedents that reflected a wider range of behavioural intention and
attitudinal and cognitive attachments to a service provider. This battery included four
dimensions; word-of-mouth communications, purchase intention, price sensitivity, and
complaining behaviour.

Developing the study hypothesises

Organisations are operating in an intense competitive environment, thus, many firms
are trying to increase their efforts to retain customers (Al-Hawari, 2006). The concept of
 relationship marketing has received much attention in recent years as more Service quality
organisations focus their attention on how to maintain and enhance a relationship with and retention
existing customers rather than on how to attract new ones (Caruana, 2002). The focus
on customer retention is particularly true in financial sectors where deregulation has
given customers more flexibility to select their financial services (Levesque and
McDougall, 1996). Moreover, shareholder pressure to increase profitability has forced
banks to move away from a transaction and quick sales approach to maintaining a 459
good long-term relationship with their customers (Kandampully and Duddy, 1999). In
general, a two percent enhancement of customer retention can lead to a ten percent
reduction of overhead costs, which in turn improves the profitability (Jamieson, 1994).
Service quality has been found to be an important component in establishing and
retaining customers (Ranaweera and Neely, 2003). The relationship between service
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quality and retention has been investigated both theoretically and empirically over the
past few years in the traditional service context where the interaction between
the customer and the employee is face-to-face. In this context, the literature has sustained
different views on the way that service quality could influence customer retention. Some
authors have indicated that service quality influenced customer retention only through
satisfaction (Caruana, 2002; Cronin and Taylor, 1992), while others argued for a direct
effect (Ranaweera and Neely, 2003; Alexander et al., 2002). Therefore, it is expected that:
P1. Traditional service quality factors are positively related to customer retention.
In particular:
H1. Employess service quality are positively related to customer retention.
H2. Process service quality are positively related to customer retention.
H3. Tangibles of service delivery are positively related to customer retention.
Relationship marketing is a complicated phenomenon and needs to be addressed
within a specific context (Parasuraman and Grewal, 2000). However, with the rapid
diffusion and adoption of information technology around the globe, the literature
asserts that relationships may change through technology (Barnes, 1997). Customer
friendly technologies including ATMs, telephone and internet banking have become
important strategies to increase customer retention and market share in recent years
(Ribbink et al., 2004). In general, theoretical and some empirical support has been found
in the literature for the notion that automated service quality could enhance rather than
diminish relationships. Lang and Colgate (2003) determined that there were three
possible ways for automated service quality to enhance relationships: improving
customer service with the assistance of database management, providing selective and
relevant information, and, building stronger relationships. The literature showed that
if firms fail to provide channels which their customers seek and value, firms will find it
more difficult to have a strong relationship with their customers. Owing to the nature
of automated media, such as telephone and internet banking, relationships between
some parties have become closer than ever before (Lang and Colgate, 2003).
Automated delivery channel quality has the potential to make customers enthusiastic
about their bank and inclined to tell other potential customers about its advantages. Thus,
automated channel users would be more likely to comment positively about their bank to
other people, recommending the bank and encouraging others to do business with it
 JOSM (Mols, 1998). The quality and the use of automated channels as a means of delivering
20,4 banking services have become an important way of maintaining customer loyalty and
increasing market share (Joseph and Stone, 2003). However, the literature has also warned
that technology could isolate customers, provide a sense of incompetence, and enhance
disconnectivity and passivity (Grabner-Krauter and Kalusha, 2003; Mick and Fournier,
1998). In general, both theoretical support and some empirical support have been found in
460 the literature for the notion that automated services represent a positive experience for the
users and provide increased value-for-money to entice customers to have the intention of
continuing to do business with their bank (Zhu et al., 2002; Meuter et al., 2000). Despite the
theoretical background underpinning the importance of automated service quality in
retention, researchers have found little empirical investigation that examines this
relationship in the automated services context. Therefore, it is expected that:
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P2. Automated service quality factors have a positive influence on customer

retention.
H4. Internet service quality are positively related to customer retention.
H5. Telephone service quality are positively related to customer retention.
H6. ATM service quality are positively related to customer retention.
Figure 1 shows the theoretical model that is tested in this paper.

Methodology
A quantitative study, involving the administration of a survey, was conducted in order
to empirically measure and then test the relationship between variables. The survey
instrument consisted of 50 items (as shown at Table I) which were identified through a
comprehensive literature review of automated; traditional service quality and customer
retention.
Measuring automated service quality Three factors (dimensions) of automated
service quality were identified: ATM service quality, telephone banking service
quality, and internet banking service quality (Al-Hawari, 2006; Al-Hawari and Ward,
2006). Items were identified in relation to:
(1) ATM service quality was extracted from various studies such as, Joseph and
Stone (2003) and Jabnoun and Al-Tamimi (2003). Five dominant items were
selected from these studies.
(2) Internet banking service quality items were drawn from many models which
measure customer perceptions (Long and McMellon, 2004; Yang and Jun, 2002;
Zeithaml, 2002). This factor was represented by seven items originally
developed by Jun and Cai (2001) and subsequently used by Yang and Jun (2002),
Zeithaml (2002) and Long and McMellon (2004).
(3) Telephone banking service quality was generated predominately from a study
conducted by Joseph and Stone (2003) which focused upon evaluating the
impact of technology on service delivery. Six distinct items were identified from
this study.
 Automated service Service quality
quality
and retention
ATM

TEL
461
P2
INT

Retention
Traditional service
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quality

EMP

P1
PRS

TAN

Independent Dependent
variables variable

Key: ATM Automated teller machine, INT INTernet banking service quality,
TEL TELephone banking service quality, EMP EMPloyees service quality,
PRS Service delivery PRocesS, TAN TANgibles quality Figure 1.
Theoretical model
Source: Developed for this research

Measuring traditional service quality Conceptualising traditional service quality

was discussed. These three factors were: human element, tangibles, and consistency of
service delivery.
(1) Human element of service quality It was noted from the literature review that
the human element has frequently been included in measurements of different
dimensions of service quality (such as reliability, empathy, assurance, and
responsiveness). For this research, it was important to measure as many as
possible of the different aspects of the human element which might impact on
the perception of service quality. As a result, all the items that related to tellers
were extracted from the different named-dimensions of the previous service
quality models (Jabnoun and Al-Tamimi, 2003; Sureshchandar et al., 2002). This
led to the extraction of nine items in the first instance.
(2) Tangibles It was found in the literature that tangibles have been consistently
used by many marketing scholars to measure customer perceptions of service
quality. Items from different scales were extracted to form the pool for this variable.
These items were mainly extracted from those models which have usually been
used to measure customer perceptions of service quality in banks (Jabnoun
and Al-Tamimi, 2003; Sureshchanda et al., 2002; Bahia and Nantel, 2000).
 JOSM
Critical dimensions
20,4
ATM
462
Telephone banking
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Internet banking
Employee service quality
Process service quality
Tangible service quality
Customer retention
Table I.
The measurement items Notes: Items deleted in the afirst; bsecond stages
Related items
Sufficient number of ATMs
Secure locations
ATM has a user-friendly system
Conveniently located
ATM functions
Pleasant musical backgroundb
Reasonable number of voice prompts
Short waiting time
Clear instructions
Reliability
Telephone banking options
Availability of information
Easy to use
Secure
Error free transactions
Attractive web site
Website interface accuracy
Up to date information
Friendly
Inquiry responses
Feel safe and secure
Served promptly
Investments availableb
Best interest at heart
Right service
Queues
Enough tellersb
Hassles
Minimum time
Simple
Fool-proof
Pleasant environment
Physical design
Clean facilities
Well decorated
Easily accessible
Advertising materialsb
Saying positive things
Recommending your bank
Encouraging friends
Consider your bank first choice
Switch to competitors if you face problemsa
Complaining to other consumersb
Complaining to the bankb
Complaining to external agenciesb
Remove some business in the case of more attractive priceb
Remaining with the same bank if fees increase
Pay higher fees than competitors charge for the benefits you receive
from your banka
Do less business with your banka
 This process led to the identification of six items which reflected closely the Service quality
definition and aspects of service tangibles in this research. and retention
(3) Service delivery consistency From the literature review, consistency of service
delivery was identified as a single dimension. It was represented by the items
concerned with standardisation, simplification, structure, procedures and
facilities. All of the items were extracted from Sureshchandar et al. (2002).
463
Measuring customer retention The main approaches to conceptualising customer
retention were introduced, and thus in the operationalisation of this concept the degree
to which a customer exhibits repeat purchasing and price tolerance behaviour for a
service provider were considered. Recognition of a positive attitudinal and cognitive
disposition in the customer underpinned the operationalisation of the concept.
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Consequently, the items that were developed by Zeithaml et al. (1996) in their study
were adopted in this study as they adequately represented the definition and have
been used widely in the literature. This battery included four dimensions;
word-of-mouth communications, repeat purchase, price sensitivity, and complaining
behaviour.

Research design
This study was conducted in two stages. Stage 1 involved a pilot study which was
conducted to refine the test instrument. Totally 35 respondents were interviewed in the
pilot testing phase. The results showed Cronbach a above 0.7 for all variables,
indicating an acceptable level of reliability (Nunnally and Bernstein, 1994). However,
switching to another competitor and paying higher fees for the benefit items in the
customer retention battery were deleted as they had an item-to-total correlation value
of less than 0.3 (Henryson, 1971).
Stage 2 involved a sample of people from the general public. A mall intercept
method was used to administer the survey with 442 useable surveys being collected
using the face-to-face interview method. A response rate of 74 percent was obtained in
gaining the 442 completed responses.

Measurement model
Structured equation modelling was used to analyse the data and test the hypotheses.
To assess the measurement model, four analyses were conducted (Al-Hawari, 2006;
Al-Hawari and Ward, 2006). Unidimensionality was assessed first, prior to examining
reliability and validity (Hair et al., 1995). In order to test for unidimensionality,
confirmatory factor analysis (CFA) was conducted on measurement models for each of
the constructs. In this study, the Comparative Fit Index (CFI) indices for all of the seven
constructs were above the 0.9 level which indicated evidence of unidimensionality.
Second, squared multiple correlations (R 2) for each measurement item, composite
reliability, and variance extracted for each factor were used in this study to test the
construct reliability (Hair et al., 1995). The first run of the measurement model
indicated that the R 2 for the majority of measurement items was greater than 0.5,
which indicated a good reliability level (Holmes-Smith, 2001). Eight items, however,
were deleted as the R 2 values ranged from 0.20 to 0.32 which was less than 0.5 (shown
with one asterisk at Table I). In the second run of testing the measurement model R 2
values for all measurement items were greater than 0.5 or very close (Table II).
 JOSM
Composite Variance
20,4 Variable name li R2 Critical ratios reliability extracted

ATM service quality 0.84 0.52

F34 (Sufficient number) 0.678 0.460 13.949
F35 (Secure places) 0.754 0.569 14.516
464 F36 (User friendly) 0.791 0.625 14.698
F37 (Conveniently located) 0.803 0.644 14.653
F38 (Number of functions 0.800 0.639 13.675
Telephone banking service quality 0.86 0.55
F40 (Voice prompts) 0.829 0.687 16.725
F41 (Waiting time) 0.852 0.726 18.709
F42 (Clear instruction) 0.912 0.832 17.598
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F43 (Reliable) 0.879 0.772 17.256

F44 (Services range 0.868 0.754 17.456
Internet banking service 0.90 0.56
F45 (Information) 0.889 0.791 20.764
F46 (Easy to use) 0.906 0.820 19.939
F47 (Safe transaction) 0.891 0.794 18.683
F48 (Error free online) 0.865 0.748 15.194
F49 (Attractive web site) 0.778 0.605 16.495
F50 (Free error interface) 0.814 0.662 16.179
F51(Up to date information 0.805 0.648 18.345
Employees service quality 0.87 0.50
B5 (Enquiry responses) 0.843 0.711 18.473
B8 (Friendly) 0.753 0.567 20.751
B10 (Feel safe and secure) 0.813 0.661 18.756
B11 (Served promptly) 0.761 0.579 18.733
B13 (Best interest at heart) 0.760 0.578 19.688
B14 (Right service) 0.786 0.618 15.373
B15 (Queues) 0.660 0.435 19.234
Tangibles 0.84 0.52
C18 (Pleasant environment) 0.849 0.722 22.173
C19 (Physical design) 0.846 0.715 18.311
C20 (Clean facilities) 0.747 0.559 22.601
C21 (Well decorated) 0.856 0.732 19.176
C23 (Easily accessible) 0.771 0.594 19.077
Service delivery process 0.79 0.50
E28 (Hassles) 0.863 0.744 21.725
E29 (Minimum time) 0.830 0.688 20.820
E30 (Simple) 0.808 0.653 19.170
E31 (Fool-proof) 0.767 0.588 20.679
Customer retention 0.90 0.64
L58 (Positive things) 0.943 0.889 45.781
L59 (Recommendation) 0.966 0.934 40.093
Table II. L60 (Encouraging) 0.938 0.881 33.113
Reliability test outcomes L61 (First choice) 0.891 0.793 13.713
for each factor L67 (Remaining if fees up) 0.701 0.500 12.345

The values of composite reliability, variance extracted (Fornell and Larker, 1981) and
Cronbach a greatly exceeded the minimum acceptable values of 0.7, 0.5, 0.7,
respectively, (Holmes-Smith, 2001), thereby indicating the reliability of measures and
subsequently yielding very consistent results (Table II) (Zikmund, 2003).
 Evidence of convergent validity was gained as the measurement items represented Service quality
their factors significantly; the critical ratio of every item exceeded the 1.96 value and retention
(Anderson and Gerbing, 1988) (Table II). To test for discriminant validity the procedure
described by Fornell and Larker (1981) was used. The analysis showed that
the average variance extracted for each pair of variables was greater than the squared
correlation for the same pair, indicating that each construct was distinct (Table III).
Finally, CFA was conducted to empirically investigate whether the proposed model 465
reasonably fitted the data. The model x 2 is 1,589 (df 644, p 0.000). It should be
noted that if the model chi-square significance is , 0.05; this indicates a problem with
the model fitness by this criterion. However, the model chi-square criterion could be
misleading as it is so conservative and very sensitive to sample size (Kline, 1998).
Accordingly, researchers who use SEM believe that if they achieve a reasonable sample
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size . 200 and appropriate fit indicated by other fit tests such as CFI and RMESA, the
significance of Chi-square test can be disregarded and is not a reason by it self to modify
the model (Byrne, 2001). In this research the overall fit of the model was acceptable, with
a x 2 x 2/df ratio of 2.47, RMSEA of 0.058, and the (CFI) of 0.923 (Byrne, 2001).

Structural model
Assessing the model in the last section reduced the data and resulted in a manageable
number of valid and more reliable measurement items which were then used to
evaluate the structural model in this section. The overall fit indices for the proposed
structural model were x 2 1,589 (df 640, p 0.000), x 2/df ratio of 2.3, a CFI of
0.914 and the root mean square error of approximation (RMSEA) of 0.058 (Hair et al.,
1995; Byrne, 2001). These values indicated that the model fits the data well.
Having established the final structural equation model, it was possible to test the
hypotheses developed for this study. These hypotheses can be tested by evaluating the
path coefficients and the significance levels among the constructs in the model.
Analysing the results showed that telephone service quality was the only automated
service quality which had a significant relationship with customer retention (as shown
at Table IV). Thus, H5 has supported. However, the analysis shows no significant
relationship between internet service quality and customer retention as well as no
significant relationship between ATM service quality and customer retention. Thus,
H4 and H6 were rejected. It can be concluded that the overall automated service
quality-customer retention relationship has a weak influence on customer retention
disproving proposition two. On the other hand, all of the traditional service quality

a
ATM TEL INTER EMP TAN PRO RET

ATM 0.535 0.54 0.51 0.52 0.51 0.58

TEL 0.275 0.56 0.525 0.535 0.53 0.60
INTER 0.264 0.383 0.53 0.54 0.53 0.60
EMP 0.358 0.293 0.213 0.51 0.50 0.57
TAN 0.390 0.302 0.365 0.456 0.51 0.58
PRO 0.399 0.325 0.374 0.470 0.480 0.57
RET 0.298 0.306 0.230 0.549 0.403 0.518
Table III.
a
Note: The upper level represents the average extracted variance while the lower level represents the Discriminant validity test
squared correlations for every pair outcomes
 JOSM factors had a significant relationship with customer retention, which proved H1, H2
20,4 and H3 supporting the first proposition of the study. All of the customer retention
predictors have explained 0.61 percent of customer retention indicating the importance
of these predictors in predicting customer retention in the Australian banks.

Research findings
466 The aim of the study was to highlight the significance of customer retention in the
context of the twenty-first century banking environment in Australia. This paper
proposed a conceptual model which was empirically validated by perceptual data
collected from customers of banks, building societies, and credit unions in Australia.
The results of the survey provided strong empirical support for four of the six
hypothesised relationships between the constructs. Figure 2 shows the final model and
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highlights the significant relationships in bold.

The relationships between variables Standardised regression weights

ATM ! retention Not significant

Tel ! retention 0.137 *
Internet ! retention Not significant
Employee ! retention 0.385 * *
Table IV. Process ! retention 0.251 *
Results of standardised Tangible ! retention 0.116 *
regression weights (R)
for the model Notes: *p , 0.05; * *p , 0.01

Automated service
quality

ATM

TEL 0.137

INT

Retention
Traditional service
quality 0.385
EMP
0.251
PRS 6
0.11

TAN

Independent Dependent
Figure 2. variables variable
Final model
Source: Developed for this research
 The findings of this paper confirm the literature and showed that all of the traditional Service quality
service quality factors have positively influenced customer retention; thus H1, H2 and and retention
H3 were supported. Conversely, the findings disconfirm the literature in regard to the
relationship between automated service quality and customer retention. The results
find that automated service quality in general has a weak positive relationship to
customer retention. In particular, out of the three automated service quality
dimensions, only the telephone banking factor has a positive significant influence on 467
customer retention; consequently, H5 was accepted, while H4 and H6 were rejected.
Internet and ATM factors were not significantly related to overall customer retention.
These findings confirm the warning in the literature about the possibility of automated
services isolating customers from their service provider (Mick and Fournier, 1998). One
explanation of these findings is that internet banking might result in offering much
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information to bank customers about service fees and different financial products, and
that it is easier for customers to switch their banks with minimal cost (Jun and Cai, 2001;
Evans and Wurster, 1997). Accordingly, high quality internet banking service attributes
might offer better chances for customers to browse and obtain the best choice with
minimal cost. In relation to ATMs, the wide spread provision of ATMs might also make
it easier for consumers to switch banks with minimal costs. Another reason why ATMs
have no significant impact on retention is the absent of differentiation as all seem the
same. Moreover, ATM of any particular bank can be used by any customer belong to
another bank.
Telephone banking has a significant relationship with customer retention. The
explanation of this result could include the interpersonal element of telephone banking.
When customers use telephone banking they still have the option of talking directly to
bank personnel who can help with any inquiry. As telephone banking has an influence
on customer retention, and as customers have the option to talk to bank staff, banks
can utilise telephone banking to sell current customers a new financial service product
and thus gain more profit from such cross selling.

Managerial implications
The continuously growing number of automated retail bank service offerings and the
adoption of a policy encouraging customers to use automated banking services rather
than direct personal interaction channels could facilitate customer defection to other
competitors, thus placing pressure on a banks financial performance over time.
Despite automated banking services being widely used, it has been suggested that
customers might still not be very familiar with these new services, especially internet
services (Snellman and Vihtkari, 2003). Therefore, learning difficulties may impact on
the use automated services; customers might not be able to manage these difficulties
(Moore and Benbasat, 1996). Since customers lack direct contact with the bank through
personnel or the physical branch, electronic exchange presents risks to customers
(Grabner-Krauter and Kalusha, 2003). Familiarity with traditional service and the
absence of personal interaction negatively influence perceptions of automated service
quality. Thus, this research makes a contribution to current knowledge about
the difference between the impact of service quality on retention in the automated
context and the traditional context. This situation raises the issue of whether it would
be feasible for banks to build long-term relationships with their customers through
automated banking services only.
 JOSM This research showed that service quality in the traditional banking context had a
20,4 strong positive influence on customer retention. Different from some earlier studies that
raised the importance of automated service quality in increasing the rate of customer
retention, this paper concludes overall that there is a very weak link between automated
service quality and retention. Accordingly, the decision of some bank managers to
replace human labour with machines is completely unwise. This study proves
468 that replacement of people with machines is likely not to help banks to build a strong
relationship with their customers and maintain a high rate of retention. It therefore
seems that only focusing on automated service quality would not build a long-term
relationship. This research suggested that the establishment of a personal relationship
would reduce risk and uncertainty in the relationship. Thus, the quality issues of
automated services interaction with the customer should be seen as complementary to
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the quality issues of traditional service interactions rather than an alternative to them.
Banks should have as their first priority the improvement of the quality of the
personal interaction with bank customers to minimise any risk or uncertainty; then they
can move forward to the quality issues of automated services. Improving the level of
interaction quality in automated banking services is an important aspect which could be
used to improve automated services (Merrilees, 2002), which in turn might have a
stronger influence on retention, and thus on profitability. In order to enhance the quality
of automated channel interactivity, automated channels should be better able to: help
customers participate in, learn from, take action, offer a good system for two-way
communication, and, facilitate a pleasant and an enjoyable experience (Merrilees and
Fry, 2003). When bank managers consider enhancing the level of automated service
quality they should engage customers in the design process and respond earlier than
their competitors to customers needs, in order to eliminate some of the negative aspects
of automated banking service quality. Moreover, it might be essential for banks not only
to design their automated channel in order to satisfy their customers but to delight them
to insure higher level of retention within the context of online banking (Herington and
Weaven, 2007).
The paper shows that the customer perception of employee services quality plays the
most important role in retention level followed by the service delivery process quality,
and finally the bank tangibles within the traditional service context. Accordingly, the
bank management attention should be centred on Employee service quality in drawing
customer retention. Bankers need to develop of the employees services skills
consistently so banks enjoy a high level of customer retention. The continuous
improvement of services delivery process is also very important for the success of the
bank. Bankers might have to be alert all the time in making the process of delivering
their services easy through regular eliminating of unnecessary steps which doesnt add
any value to the customers. Finally, physical surroundings (tangible aspects) should be
well maintained as customers are welling to be in a convenient atmosphere while they
are served. The above guidelines should be used to bank managers in analysing the
opportunities for building better levels of retention.
This study provides the above guidelines to bank managers for use in analysing the
opportunities for building better levels of retention with their customers through the
provision of automated services. It is not an appropriate marketing strategy for banks
to ignore having a high level of face-to-face banking in favour of less expensive
automated banking because focus on automated services would be likely to result in a
 drop in a banks competitive advantage as well as a drop in the banks long-term Service quality
profitability. For that reason, the quality aspects of automated banking services should and retention
not be made the only focus for bank managers; recognition of the importance of the
quality aspects of the human factor in banking service is fundamental.

Research limitation and further study

This research covered financial institutions in Queensland, Australia. The usage 469
patterns of the different banking channels may vary among countries. Consequently, if
the findings and the managerial implications of this paper are to be used in other
regions with different cultures and governmental financial polices, additional research
has to be done to validate the consistency of this research results.
The focus of this study was on the service quality issues within traditional and
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automated contexts on retention. An expansion of this research is suggested to include

the influence of more variables such as price, customer satisfaction, customer trust, and
relationship strength within the two contexts on customer retention. The results of such
a study would contribute to improving the knowledge of bank managers on how to
increase the rate of customer retention within traditional and automated banking
contexts. Moreover, the proposed conceptual model could be applied to different service
industries to test how the results might vary among different industrial contexts.

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Corresponding author
Mohammad Al-Hawari can be contacted at: malhawari@sharjah.ac.ae

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