The Problems Of Bank Sme Relationship Business Essay Example

precedence over managerial discretion, resulting in standardized decisions. Any unexpected issues can disrupt the system and trouble managers. In contrast, SMEs typically possess an organic and informal structure referred to as a "simple structure." They make autonomous decisions, often swiftly and intuitively. A study conducted by Butler and Durkin in 1995 discovered notable differences in perceptions between small business owners and bank managers. While banks pride themselves on being procedural, systematic, and prudent, it is crucial for them to comprehend the distinct requirements of SMEs to form successful partnerships. The little house perceived certain qualities as obstructing progress, causing delays, and fearing natural commercial risks; however, it viewed itself as daringly entrepreneurial and progressive. On the other hand, the bank regarded the little house as impulsive, immature, lacking comprehension of commercial consequences. Numerous reports indicate a decline in customer satisfaction attributed to changes within financial institutions.
During its examination of financial establishments, the Wilson Committee identified specific criticisms in the relationship between small businesses and banks. These included a lack of discretion among local bank directors, inadequate understanding of local industries' needs, and the requirement of personal guarantees from business owners (Bevan, 1978). Butler and Durkin (1995) further supported these criticisms by highlighting issues with loaning standards and empathy.

To address this decline in customer satisfaction for small and medium-sized enterprises (SMEs), the European Commission (2007) has implemented new codes of behavior to enhance banking services. The Financial Services Authority (2007) in the UK is also promoting the "treating clients reasonably" initiative. Additionally, Sweden has enacted a new fiscal consultative law (Svensk FoA?rfattningssamling...).

The prevailing theory for selling fiscal services to both retail and business markets is relationship

selling theory. Several researchers including Barnes and Howlett (1998), Binks and Ennew (1997), Colgate and Alexander (1998), Ennew and Binks(1996;1999), GroA?nroos(1996), Perrien et al.(1992;1995), Tylerand Stanley(1999a,B);Worthingtonand Horne(1998) have studied this theory. Zineldin (1996) stresses the significance of developing long-term relationships with clients while Ravald and GroA?nroos's research highlights the necessity for mutually beneficial relationships.According to Walsh et al.(2004, p.469), relationship management in banks refers to attracting, interacting with, and retaining profitable or high net-worth clients. Studies have shown that "relationship lending" leads to lower interest rates, reduced collateral requirements, and increased availability of finance compared to businesses without a relationship history with their bank (Berger and Udell, 1995;Elsas and Krahnen, 1998;Harhoff and Korting, 1998). Banks consider SMEs as valuable clients due to the potential for higher profits (Bloemer et al., 2002;Zineldin, 1995). The relationship between small businesses and their banks has been extensively studied by scholars such as Binks et al.(19(1996) who emphasize the importance of trust in building and maintaining successful relationships between banks and SMEs. The shift towards centralized decision-making in banks during the 1980s and 1990s disrupted the previously preferred personal interactions between small firms and local branch managers for lending decisions (Binks et al., 1990;Middleton et al., 1992). Technological advancements and cost-saving measures played a role in this change (Tyler and Stanley, 2002). However, it is widely recognized that successful exchanges between banks and their SME clients rely on close and personal relationships (Ennew et al., 1999;Gronroos, 1990;Ding et al., 2007).(2002) argue that personal contact and strong relationships between banks and SMEs are still crucial for customer satisfaction. The value of maintaining these relationships should be questioned by banks as disintermediation

occurs due to reduced personal contact (Ding et al., 2007; Santos, 2003). However, a close working relationship between banks and SMEs leads to efficiency, consistency, collaboration, and effective communication (Dabholkar and Bagozzi, 2002; Meuter et al., 2000; Parasuraman and Grewal, 2000). This mutually beneficial relationship allows sellers of financial services to reduce risks, improve information flows, satisfy clients, and enhance loyalty (Binks & Ennew ,1997; Petersen & Rajan ,1994; Sharpe ,1990).

Trust is highlighted as an important factor in building successful bank-SME relationships by Tyler & Stanley(1999b) and Zeithaml et al.(1996). Studies conducted in 1996 have shown various benefits enjoyed by buyers of financial services such as a wider range of finance options, favorable loan rates, higher perceived service quality, reduced stress levels, avoidance of switching costs, and increased convenience. These findings are supported by other studies conducted by Binks et al.(1992), Binks and Ennew (1997), Bitner (1995), Ennew and Binks (1996, 1999), Petersen and Rajan (1994).

Despite advancements in technology within the banking industry highlighted by Curry and Penman (2004) along with Paulin et al. (2002), they argue that personal contact and strong relationships between banks and SMEs remain crucial for customer satisfaction.(2000) discovered that many corporate clients still prefer face-to-face interaction with their banks. Proenca and de Castro (2006) argue that banking should not be seen as a one-time transaction but rather as an ongoing interactive relationship between banks and customers. Therefore, it is crucial for banks to expand their relationships beyond physical branches. This shift from a transactional approach to long-term relational interaction is expected to occur in the financial services industry, particularly in corporate banking according to O'Donnell et al. (2002), Tyler and

Stanley (2002), Zineldin (1995).

Customer satisfaction theory refers to the sentiment or attitude of consumers towards a product or service after using it (Solomon 996; Wells & Prensky 002; Metawa & Almossawi 998). It represents customers' state of mind when their expectations are met. Previous studies have shown that there is a positive relationship between customer satisfaction and financial performance (Gruca and Rego, 2005; Homburg et al., 2005; Hallowell, 1996). Bolton and Drew (1991) found that customer satisfaction has a measurable impact on purchase intentions.

The satisfaction of SME proprietors with financial institutions is crucial for maintaining customer loyalty and retention. Previous research has emphasized the importance of customer satisfaction in various aspects such as product and service quality (Mittal et al., 1999; Oliver and De Sarbo, 1988), client retention (Anderson and Sullivan, 1993; Bolton, 1998).Ittner and Larcker (1998), Mittal and Kamakura (2001), Anderson and Mittal (2000), Fornell et al. (1996), Rust and Zahorik (1993) have studied the relationship between customer expectations, preferences, and fiscal performance of businesses. The market constantly evolves, which emphasizes the importance for financial institutions to satisfy SME owners in order to maintain positive relationships that lead to loyalty and retention. Many banks are dedicating significant resources towards customer retention strategies and developing specialized services for SMEs to secure a larger share of their business. Customer satisfaction has always been considered crucial in determining loyalty according to Andersonand Fornell (1994), Jackson (1985), Bitner(1990 ), Rustand Zahorik(1933). There are two types of loyalty discussed: behavioral loyalty demonstrated through actions like word-of-mouth or repeat purchases, and attitudinal loyalty referring to customers with a positive attitude towards a brand due to its unique value proposition. Measures

for attitudinal loyalty include preference or commitment to repurchaseQuestionnaires can be used to assess loyalty attitudes, helping to categorize customers into different groups. Measuring loyalty behavior is important for analyzing customer retention rates and churn rates over time, which directly impacts a bank's market share. It's worth noting that there can be a distinction between attitudes and behaviors, as individuals may feel one way but act differently. In some cases, customers may display loyalty behavior without having loyalty attitudes, especially in monopolized markets. Conversely, some customers may have loyalty attitudes without engaging in much loyalty behavior, such as infrequent purchases.

Several research studies have found a strong correlation between customer satisfaction and loyalty (Athanassopoulos et al., 2001; Hallowell, 1996; Silvestro and Cross, 2000). However, Bennett and Rundle-Thiele (2004) and Oliver (1999) argue that customer satisfaction and loyalty are separate concepts. Numerous studies on bank-SME relationships suggest that higher levels of customer satisfaction increase the likelihood of customer retention and repurchase intentions (Bloemer et al., 2002; Armstrong and Boon Seng, 2000; Patterson et al., 1997). A satisfied customer is more likely to make repeat purchases and spread positive word-of-mouth about the product (Dispensa, 1997; Metawa and Almossawi, 1998).Customers who are highly satisfied often refer other customers to their bank (Aldlaigan and Buttle, 2005). Establishing satisfactory relationships with small and medium-sized enterprise (SME) clients is expected to lead to higher satisfaction levels, resulting in customer referrals and a reduced likelihood of switching to another financial institution (Barnes and Howlett, 1998; Berry, 1995; Ennew and Binks, 1996; Morgan and Hunt, 1994; Seal, 1998; Sharma et al., 1999; Zineldin, 1996). Furthermore, customer satisfaction with a bank relationship serves as the

foundation for loyalty (Bloemer et al., 1998; Pont and McQuilken ,2005), although it does not guarantee it since even satisfied customers may switch banks(Nordman ,2004). The pricing strategy significantly influences customers' decisions to switch banks(Colgate & Hedge ,2001 ;Ennew & Binks ,999 ).(1994) suggest that satisfied customers are more likely to remain loyal over time. Therefore, banks should prioritize customer satisfaction in order to retain SME clients and maximize profitability. In summary, SMEs' sensitivity towards changes in cost of capital can impact their decision to switch banks. Organizations must prioritize retaining loyal customers as they contribute to repeat purchases and positive word-of-mouth advertising. Banks acknowledge the importance of client retention due to competition, increasing costs, and evolving customer behavior.Retaining existing clients is often more cost-effective than acquiring new ones, and properly serving loyal customers can lead to increasing profits over time. However, it should be noted that there may be cases where loyal customers are not always profitable.

In the banking industry, SMEs are considered valuable clientele for banks as they offer significant profit potential. Therefore, ensuring SME owner satisfaction is crucial for long-term profitability for financial institutions according to Heskett et al (1994). The link between customer satisfaction and loyalty, as discussed in Storbacka et al. (1994), was suggested to impact profitability in 1994. Ting (2006) also supported this idea by stating that banks can effectively increase profits by cultivating strong relationships with SME clients and prioritizing their satisfaction and loyalty.

In 2002, Bloemer et al.conducted a study which found that building strong relationships with clients enables banks to increase customer satisfaction and expand their share of the financial market. To stay competitive, it is necessary

for banks to prioritize maintaining stable and close relationships with small and medium-sized enterprise (SME) owners while delivering standardized, accurate, and high-quality services.

During the 1980s, there was a significant increase in bank lending to SMEs. Banks began using interest rates and collateral as measures to reduce default risk and moral hazard when providing loans to small businesses.The use of collateral is common in developing countries, serving two purposes: protecting against loan default and ensuring borrowers make necessary repayments through their own efforts. Collateral is required due to information asymmetry between banks and small and medium enterprises (SMEs), as banks struggle to distinguish reliable from unreliable borrowers who possess more information about their businesses. This leads to increased requirements for default from good borrowers, making borrowing more costly for them. SMEs, compared to larger companies with access to debt and equity markets, face limited options for capital funding aside from relying on banks. Accessing finance is a significant issue for SMEs without financial records or collateral, particularly in developing countries where they face greater obstacles than larger companies. This limited access negatively impacts the growth of the SME sector. Previous research by Binks and Ennew (1997) as well as Cowling and Westhead (1996) supports the viewpoint that stricter collateral requirements imposed by banks lead to lower satisfaction levels among SMEs, while lower demands for collateral result in higher satisfaction levels among SME owners with their banking experiences.According to Harrison (2001), small and medium-sized enterprises are not happy with prioritizing the sale of their own products over indirect services offered by banks they do business with. Similarly, Machauer and Weber (1998) suggest that in Germany, SMEs focus

on bank relationships where the demands for indirect services can either increase or decrease. In Belgium, Degryse and van Cayseele (2000) discovered that maintaining long-term relationships with banks can result in higher costs but lower collateral requirements for small borrowers. Berger and Udell's study (1995) also found that companies with longer bank relationships were charged lower interest rates and had reduced collateral needs. Therefore, it is crucial to investigate how the demand for indirect services affects the satisfaction of small and medium-sized enterprise owners in this research.

Customer satisfaction plays a vital role in service organizations as it relates to both satisfaction and quality of service provided (Bolton and Drew, 1991; Cronin and Taylor, 1994; Spreng and MacKoy, 1996). Hence, an improvement in service quality increases the likelihood of customer satisfaction.Improved client satisfaction has numerous benefits for businesses. These include enhanced client commitment, establishment of mutually beneficial relationships between service providers and users, increased tolerance towards service failures, as well as positive word-of-mouth promotion about the organization (Reichheld, 1996; Heskett et al., 1997; Goode and Moutinho, 1995; Newman, 2001).

In the competitive banking industry, Wang et al. (2003) emphasize the importance of providing high-quality service and products to customers for sustained business growth. Customer satisfaction with good quality service can lead to various benefits for companies such as recommendations, repeat purchases, and increased economic performance (Rust et al., 1995; Zeithaml, 2000).

Prioritizing customer satisfaction brings not only financial gains but also helps differentiate the company from competitors. It boosts sales and market share while retaining customers and employees. It reduces turnover rates and cultivates brand loyalty. Additionally, it attracts new customers through positive word-of-mouth (Lewis, 1991).

SME proprietors desire

customer-centered marketing strategies that involve personal interaction and meeting specific demands from their banks (Newman, 2001; Caruana, 2002; Wang et al., 2003). Furthermore, SMEs expect banks to treat them uniquely in a unique environment according to studies by Adamson et al.(2003), Lam and Burton (2006), and Zineldin (1995).The way SME clients perceive banking services is influenced by the practices, policies, and employees of the bank administration (GroA?nroos ,1990). However, in recent times, many SMEs have expressed dissatisfaction due to increased demands and decreased helpfulness. Traditional banks have faced criticism for their standardized approach in dealing with SME clients (Harrison ,2001). According to a study conducted by Paulin et al. (2000), as bank services become more standardized, it may be challenging for banks to meet the specific needs of SMEs. Cowling and Westhead (1996) argue that individual bankers have been criticized for prioritizing product sales instead of understanding their client's unique requirements, as pointed out by Harrison (2001). Bick et al. (2004) also acknowledge the lack of knowledge and skills among bank employees in effectively assisting SME clients. Despite these concerns, according to 2020 data, SMEs rely on banks not only for financing but also guidance and assistance. However, there is criticism towards banks for prioritizing their own interests and sales targets rather than addressing the particular needs of SMEs. This viewpoint is shared by Butler and Durkin (1998), Cowling and Westhead (1996), and Harrison (2001).The satisfaction level of small and medium-sized enterprise (SME) owners is influenced by how banks respond to their needs and whether banks prioritize selling their products. In recent years, SMEs have been seeking external advice from sources like Bennett and Robson

(1999) and Ramsden and Bennett (2005) when applying for finance from banks. These sources offer support, empathy, and guidance throughout the application process, as emphasized by Tyler and Stanley (2001). A study conducted in 2002 by O'Donnell et al. found that SME clients prefer personalized face-to-face relationships with bank directors who understand and sympathize with their demands. These clients also value the ability of the bank director to provide necessary advice (Tyler and Stanley, 2001; O'Donnell et al., 2002).

Other studies have shown that SME clients who receive specialized industry advice from their banks tend to be more satisfied compared to those who do not receive any advice (Basu, 1999; Bennett and Robson, 1999). To cater to this preference, banks are investing in improving their employees' knowledge (Kridan and Goulding, 2006; Collis and Jarvis, 2002; Cameiro, 2000), aiming to foster relational interactions. However, some SME owners believe that bankers lack the necessary knowledge and competence to address concerns beyond bank funding. Ultimately, the satisfaction level of SME owners is influenced by the advice provided by the bank.The satisfaction level of SME owners is greatly influenced by various factors. One crucial factor is the valuable advice received from their banker. The higher the perceived value of this advice, the greater their satisfaction with the bank will be. Hence, these factors collectively play a significant role in determining SME owners' satisfaction levels.