Adoption of Fintech by Financial Institution: Impact on Customer Satisfaction, Loyalty and Financial Performance

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The number of digital platform users has grown tremendously over the years and such penetration has produced a profound transformation of the behaviors and preferences of consumers. Generally, without the need to walk into the branch, consumers can compare financial products and services rendered by different providers in the market through their mobile devices, such as deposits, mortgages or investments. This has led to many financial institutions resizing their branches as well as internal operations started with the back offices and be more focused towards hybrid costumer interaction (Nu¨esch et al. 2015). For instance, since August 2015, CIMB Bank Berhad has shut down 22 branches nationwide to reduce operational costs and focus on digital banking.

As more and more consumers have adopted to digital interaction channels and rely more on digital platform when it comes to banking, it is vital for the financial institutions to encompass innovative financial services enabled by IT in keeping up with the demand. Nevertheless, in order to obtain long term competitive advantage, customer service quality must not be omitted since financial institutions are to operate in an environment of non-unique products.

Now in this new era, consumers are expected financial solutions to be accessible anywhere anytime as long as internet service is available. When lesser walk-ins and physical interaction in the branch, the biggest challenge in the banking industry is to maintain a good relationship with clients. Therefore, Customer satisfaction has become a vital factor in the decision of purchasing process (Zeithmal et al., 2011).

(Yi, 1991; Anderson and Sullivan, 1993; Boulding et al., 1993) examined the relationship between customer satisfaction and customer loyalty. Their results showed that customer satisfaction has a positive and significant impact on customer loyalty. While on the other hand, customer satisfaction has a positive correlation with financial performance (Ya et al., 2013). As a result of that, financial institutions that can successfully retain and increase satisfied customers, thus creating loyalty through customer experience would be able to significantly improve their financial performance. Meyer and Schwager (2007) proposed that the customer’s satisfaction level is highly dependent on his/her experiences, be it positive or negative, during a business transaction with the service organization. Positive customer experience offers an opportunity for business continuity and thus achieve sustainability.

By age segment, millennium generation would be the most intensive user of digital banking. In the last 12 months, exceeding 70% of the youngest segment in the United States have used digital banking services in the last 12 months, comparing only 40% of the adult segment. It is imperative for financial institutions to develop a user friendly platform to cater different age segment. The evolution of Fintech allows competition to be stretched cross border towards global banking industry. The leader in this industry will be the player who is able to create a total customer experience effect and build up a sustainable relationship with customers, from understanding the customer’s needs, addressing to the customer’s concerns, attaining to the customer’s needs, maintain customer’s satisfaction and to achieve a high level of customer retention. By enhancing current existing customer base, it serves as an opportunity to attract new customer base when the existing customer promotes directly and indirectly among their surroundings to those who have yet to become a customer.

Based on a research conducted by CIMB Bank Berhad, after a bad experience, 39% of their customers will reduce their usage of CIMB products whilst 17% will stop using CIMB altogether. In the research, customers are prone to sharing their bad experience with other people and of these, 53% are shared via the word of mouth while 21% are shared via social media, causing possibly short to long term reputation damage. Athanassopoulos (2000) cited that losing customers doesn’t only lead to an opportunity costs because of the reduced sales, but also an increased cost due to the need to increase the promotion to attract new customers which could be five to six folds more expensive than retaining a customer. Losing customers would also cause a negative impact on a banks’ market share (Colgate and Hedge, 2001). If a bank is starting to lose its clientele, it is always costly and time consuming to search for new and potential customers in order to maintain its market share.

1.2 Problem Statement

The phenomenon on how banks operate has been through a major transformation. Traditionally, customers walked into banks to seek for financial services when they did not have many options back then. But, the penetration of mobile phones and broadband networks have empowered customers to easily obtain information on the service offerings and compare between every bank before they make a purchase decision. Thus, the competition to attract and retain customer becomes very intense in an increasing competitive and liberalized global banking industry.

Based on a report by Bank Negara Malaysia, as at June 2016, there are 20.8 million internet banking subscribers; of which 20.2 million are individual users and 0.6 million are corporate users. The penetration to current Malaysian population is at 65.7%. The growing number of digital banking subscribers has steered the traditional banks to be committed to digital banking and undergo a transformation which allows them to be competitive within the new ecosystem.

But what is FinTech? At the moment there is no concise understanding or definition of this new concept. Nevertheless, development of FinTech can be differentiated along five phases, where phase 1-3 is internal digitization, phase 4 is provider-oriented digitization and phase 5 is customer-oriented digitization (Alt and Puschmann 2016, pp. 36 ff).

Phase 1: until 1960 - Single customer channel

Phase 2: 1960- 1980 - Two customer channels

Phase 3: 1980- 2010 - Multi customer channels

Phase 4: 2010- 2020 - Cross customer channels

Phase 5: from 2020 - Hybrid customer channels

Despite the digitization of the financial services industry has emerged over the last decades, literature and research on the term FinTech has evolved just recently. In this research we aim to make insights into the relationship between adoption of FinTech by financial institutions and customer satisfaction, customer loyalty and