A STUDY ON

FACTORS AFFECTING CONSUMER

BEHAVIOUR IN BANKING SECTOR

SUBMITTED BY
TYBBI ( Semester VI )
* 2018-2019*
UNDER THE GUI DANCE OF
PROF .SONAL SAWAKAR
SUBMITTED TO
UNIVERSITY OF MUMBAI
LN COLLEGE
Suman Education Societ Campus , Pl otNo.89,
Near General Kariappa Bridge, Rajendra Nagar ,
Borivali ( East ) , Mumbai -400066.

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 DECLARATION

I ,ANURADHA PUJARI of TYBBI ( Semester VI ) here by

declare that I have
completed the project on “ A STUDY ON
Factors affecting consumer behaviour in banking sector” as a part
of Examination in the Course BANKING & INSURANCE
During the academic year 2018-2019.
The information submitted is true and original to the best of my
knowledge.
Wherever the matter is taken from any published work, I have
included that
detail as‘ reference’ .

……………………………. ……………………………. . .
DATE OF SUBMISSION: SIGNATURE OF STUDENT:

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 CERTIFICATE
This is to certify that the project titled as “ A STUDY ON
Factors affecting consumer behaviour in banking sector”
has been completed by Anuradha pujari of TYBBI (
Semester VI ) as a
Part of Examination during academic year 2018-2019

………………………
……………
PRINCI PAL: COURSECOORDI NATOR:
( DR.SHARDASHRI YAN) (PROF.SONALSAWAKAR)
…………………………………………….
…………………………………. . . . . . . . . . . .
PROJECTGUI DE:
( PROF .SONALSAWAKAR) EXT ERNALEXAMI NER:

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 ACKNOWLEDGEMENT

I extend my gratitude to PROF .Sonal sawakar or providing

guidance and support during the course of project She has been
great help through the making of the project .I thank LN
COLLEGE for giving me the opportunity to work on such a
relevant topic .
I also like to thank the Principal DR.SHARDA SHRI YAN,
faculty members for their help and others who are indirectly
responsible for the completion of this project.In addition I
Would like to take this opportunity to thank our BBI Coordinat or
PROF .SONAL SAWAKAR for being the real ways to guide me
and for extending her full support .
Date
Mumbai

………………………
Signature of Student

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INDEX

No. Topic Page No

1 Introduction to the Indian Banking Sector 6

2 Customer Decision Making in Banking

2.1 Introduction 9

2.2 Influences on Customer Decision 12

2.3 Bank Selection Criteria 15

3 Behavioural Finance
3.1 Introduction 20

3.2 Principles of Behavioural Finance 22

3.3 Why Study Behavioural Finance in Banking 28

Decisions
4 The Study
4.1 Research Methodology 30

4.2 Survey 31

4.3 Research Questions 34

4.4 Sample and the Interview Process 37

5 Analysis: Results and Findings 38

6 Summary
6.1 Implications of the Study 50

6.2 The Future of The Banking Sector in 51

Relation to Customers Banking Decisions
6.3 Conclusion 53

7 Bibliography 55

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INTRODUCTION TO THE INDIAN BANKING SYSTEM

The Indian Banking Sector has undergone a whirlwind of changes since it’s inception.
During the period of British rule merchants established the Union Bank of Calcutta in 1829,
first as a private joint stock association, then later into a partnership. Its proprietors were the
owners of the earlier Commercial Bank and the Calcutta Bank, who by mutual consent
created Union Bank to replace these two banks.
The Allahabad Bank, established in 1865 and still functioning today, is the oldest Joint Stock
bank in India. Calcutta started to emerge as a growing financial city, which attracted the
attention of various International Players. The Comptoir d'Escompte de Paris opened a
branch in Calcutta in 1860, and another in Bombay in 1862; branches followed in Madras
and Pondicherry.
HSBC established itself in Bengal in 1869.
Punjab National Bank, was established in Lahore in 1894, and has been able to sustain its
competitive advantage till present day.
Around the turn of the 20th Century, the Indian economy was passing through a relative
period of stability. Around five decades had elapsed since the Indian rebellion, and the social,
industrial and other infrastructure had improved. Indians had established small banks, most
of which served particular ethnic and religious communities. All these banks operated in
different segments of the economy. The exchange banks, mostly owned by Europeans,
concentrated on financing foreign trade. Indian joint stock banks were generally
undercapitalised and lacked the experience and maturity to compete with the presidency and
exchange banks.
The period between 1906 and 1911 saw the establishment of banks inspired by the Swadeshi
movement. The Swadeshi movement inspired local businessmen and political figures to found
banks of and for the Indian community. A number of banks established then have survived to
the present such as The South Indian Bank, Bank of India, Corporation Bank, Indian Bank,
Bank of Baroda, Canara Bank and Central Bank of India. The next 20 years lead to rise and

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fall of a variety of commercial banks, which lead to the formation of the Reserve Bank of India.
The Reserve Bank of India was set up on the basis of the recommendations of the Hilton Young
Commission. The Reserve Bank of India Act, 1934 provides the statutory basis of the
functioning of the Bank, which commenced operations on April 1, 1935. The RBI began its
operations by taking over from the Government the functions so far being performed by the
Controller of Currency and from the Imperial Bank of India, the management of Government
accounts and public debt. After the partition of India, the Reserve Bank served as the central
bank of Pakistan up to June 1948 until the State Bank of Pakistan commenced operations. The
Bank, which was originally set up as a shareholder's bank, was nationalised in 1949. The
partition of India in 1947 adversely impacted the economies of Punjab and West Bengal by
paralyzingbanking activities for months. The end of the British rule in India marked the end of
the Laissez-faire regime for the Banking Sector. This also led to the nationalization of the RBI
in 1949 under the Reserve Bank of India Act 1949. During those days the general public had
lesser confidence in Banking. Indians were very sceptical about depositing their income in any
bank. Despite the general purview of the public, the savings accounts offered by the Postal
Banks started seeing tremendous success. Post 1991 the Banking sector began to face
alterations following the wave of Liberalisation in the country. The reforms covered the areas
of interest rate deregulation, directed credit rules, statutory pre-emptions and entry
deregulation for both domestic and foreign banks. The objective of banking sector reforms was
in line with the overall goals of the 1991 economic reforms of opening the economy, giving a
greater role to markets in setting prices and allocating resources, and increasing the role of the
private sector. This evolution in India’s banking sector over the centuries has developed and
contributed to the Indian banking sector, as we know it today. The integrations of foreign banks
in the domestic markethave developed a complex however competitive banking sector, which
has to constantly strive to appease the unique Indian banking customer.

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Customer Decision Making in Banking

Understanding how and why customers choose as they do, is at the heart of successful
business. “Truly successful decision making relies on a balance between deliberate and
instinctive thinking”- Malcolm Gladwell. Unless you know how customers make the choices
they do – you can’t be confident that your investments in product development, marketing,
advertising, and distribution will yield customer preference, win new market share, improve.
While most bankers have a rather precise understanding of the number of customers the bank
has, the number of accounts they hold, the average revenues from each account type, and the
trends in customer business, most bankers do not truly understand who their customer is, and
what drives their customers’ choices.
The greatest market opportunity is in being recognized as of unique and superior value –
by a specific customer segment, for a specific product. That recognition is achieved by
tailoring specific products – to meet specific and significant needs.
The greatest opportunity then, begins with an understanding of customer needs.
Choice, in financial services, is the result of a fairly complex set of decisions. The decision-
making path begins with recognition of a problem, want, or need, and ends with a conscious
(or sub-conscious) evaluation of the experience of consuming what you chose.
That path or chain of decisions is simplified greatly, in cases of genuine loyalty: When a
customer has consciously evaluated a given product or service as doing an excellent job at
fulfilling his or her wants or needs – the path of decisions to make for the next purchase,
becomes geometrically shorter, and geometrically easier. Banking has sadly slipped into
what is widely perceived as a commodity. That is, both bankers and customers have slowly
slipped into an accepted belief that there exists no real difference between banking
alternatives. A sad state, first, because it need not be the case; and second, because
commodity businesses are forced to compete on the very expensive planes of either price or
convenience (with convenience being the costly plane of bricks and mortar, and the expense

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 of increased wages and operations.) The greatest risk of such a commodity market structure
is the risk of a genuinely low cost leader entering the market – with very little to stop them.
(Banks face such a situation now with Credit Unions.) For example, in the mortgage lending
business, at its simplest level, the ladder of choice involves five basic decisions:
• The decision to move. Vs. stay at the present location.
• The decision regarding if and how much to borrow.
• The decision regarding which and what types of alternative lenders to consider.
• The decision as to which type of loan / loan package to purchase; and,
• The decision as to which lender to select for the loan.
The opportunity for differentiation and recognition as being of superior competitive value, is
in understanding the decisions, and taking a unique stand in driving one or more of the
decisions, at a deep level of influence.
The 2002 annual customer survey of the American Banker Association makes clear that
bankers are faced with both a tremendous threat and a tremendous opportunity –
When asked their financial goals, second only to retirement, customers report the desire to
have a sound financial plan; though less than 20% credit banks with being “skilled” in
helping them meet that goal. More broadly, when asked if banks are “committed to helping
the customer deal with their financial needs”, just over 20% respond in the affirmative.
(Conversely, almost 80% believe banks are NOT committed to helping with consumers with
their financial needs) On the other hand, banks are uniquely suited to step into this highest
rung of customer want and need: In measure of trust, banks are far and away the leader –
registering almost twice the level of trust as that afforded Credit Unions, over 7 times the
level afforded insurance companies, 6 times the level afforded Mutual Funds, and almost 10
times that afforded stock brokerages.
The 2002 annual customer survey of the American Banker Association makes clear that
bankers are faced with both a tremendous threat and a tremendous opportunity –
When asked their financial goals, second only to retirement, customers report the desire to
have a sound financial plan; though less than 20% credit banks with being “skilled” in
helping them meet that goal. More broadly, when asked if banks are “committed to helping
the customer deal with their financial needs”, just over 20% respond in the affirmative.

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(Conversely, almost 80% believe banks are NOT committed to helping with consumers with
their financial needs.)

Influences in Customers Decision Making

It is important for industries to understand the procedure of the customer

decision-making process apart from understanding the procedure of the customer decision-
making process, industries also try to determine what influences in customers’ lives affect this
process. There are three main categories: internal, situational and social influences.

A. Internal influences on customers’ decisions: Service-giving organizations know

that one customer’s ideal treatment can be quite different from that of another customer. People
think the ideal treatment is vigorous internet banking, while another customer dreams of a
typical fast customer service and your father is set on having a degree of friendliness of the
staff in the organization. Some of these differences are due to the way in which customers
internalise information about the outside world such as perception, exposure, attention and
interpretation.
Perception is the process by which people select, organise and interpret information from the
outside world.

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Influences on Customer Decision Making

Situational Influences
• Physical
environment Social Influences
Internal Influences • Culture
• Time
 Perception
• Subculture
• Motivation • Social class
• Learning • Group
• Attitudes memberships
• Personality
• Age groups
• Lifestyle

Decision Utilising
Process

(Source: Adopted from Sells S. (n.d.), Consumers behavior, Chief Innovation Officer,
Electrolux, Sweden, pp. 157)

A number of different factors in customers’ lives influence the consumer decision-making

process. Organizations need to understand these influences and which ones are important in
the exploit process to make effective marketing decisions. Motivation is an internal state that
drives us to satisfy needs. Once we activate a need, a state of tension exists that drives the
customer toward some goal that will reduce this tension by eliminating the need. Learning is
a change in behavior caused by information or experience. An attitude is someone’s lasting
evaluation of a person, object, or issue. Personality is the set of unique psychological
characteristics that consistently influence the way a person responds to situations in the
environment. A person’s age is another internal influence on purchasing behavior. A
lifestyle is a pattern of living that determines how people choose to spend their time, money
and energy and that reflects their values, tastes and preferences. Lifestyles are expressed in a

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 person’s preferences for activities such as sports, interests such as music, and opinions on
politics and religion. Customers often choose goods, services and activities that are associated
with a certain lifestyle.
B. Situational influences on customers’ decisions: These factors can affect what, where and
how customers utilize their choices from different organizations. It is no secret that people’s moods
and behaviors are strongly influenced by their physical surroundings such as advertising. There
one motto by the advertising archives:
“As customers are exposed to more and more advertising, advertisers must work harder than
ever to get their attention”.
In addition to the physical environment, time is another situational factor. Organizations know
that the time of day and how much time one has to make a utilize affect decision-making. Time
is one of consumers’ most limited resources. We talk about ‘making time’ or ‘spending time’
and are frequently reminded that ‘time is money’. They should provide fast service for their
customers.
C. Social influences on customers decisions: Although we are all individuals, we are also
members of many groups that influence our utilizing decisions. Families, friends and classmates
often influence our decisions, as do larger groups with which we identify, such as ethnic groups
and political parties.

Bank Selection Criteria

As defined by Janian, Kamaruddin, Bank selection criteria refer to the bank services or image
where the customers are aware of their importance in their selection of a bank for themselves.
His focus and access on how customers perceive the banks and their competitors in
comparison with various variables and attributes such as happiness, joy, cheerfulness and
delightfulness that derived from a banking services and avoid bringing emotions of sadness,
enraged and deceit to them. The competition in banking industry has become fierce with the
emergence of technology such as the ATM and mobile and electronic banking; consumers
are expecting more demand for financial services. The customer groups consider the bank
selection Many researchers such as Boyd who says that the economic

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environment nowadays is rapidly changing and has become one of the
important factors for financial institutions to determine the factors which is applicable for
customer bank selection process have investigated the issue on how consumers select their
banks.
Lastly, by understanding the customers’ banks selection criteria helps the banks in
identifying the appropriate marketing strategies to attract more customers as well as retain
the satisfied customers.

Convenience

According to some researchers convenience is one of the factors that will impact the decision
of selecting a bank by customers.When a bank location is nearby a customer it will be easy
for a customer to do their transaction and a bank with a convenient location will have an
advantage as compared to its competitors who do not have convenience location to its clients.
However, according to Zineldin “convenient location of bank might not much influence
much on decision of choosing a bank by customers because of technology customers can do
their payment via different methods such as debit card, online banking, credit cards and
mobile banking”.

Lastly some researchers stated that a bank with more branch offices or ATMs around the
country are more likely to be selected by the citizen When the number of branch office is
more it is more convenience for a customer do their transaction or deal with a bank.

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Service Quality

LeBlanc and Nguyen found that service quality of bank is the single and most significant
factors that will affect decision of a customer to select a bank. Researchers also claim that
effective service and choice of bank have significant relationship. Others researchers also
have similar ideas such as speed of transaction, and the degree of hospitality of staff will also
have affect the result of customer choosing a bank. When the services offered by bank is
wide, it will attract attention from customers in decision of selecting a bank. However
Gerrard and Cunningham claim that even sometimes a bank offers a wider range of product
services not necessary will influence the result of a customer selecting a bank because some
customers would like to become multiple bank users rather than single bank users.

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 Price of Products and Services

Beckett, Hewer and Howcroft found out that the emergence of new technology created a
situation where consumers are more aware of market conditions and are more sensitive
towards price and service in their financial services choice. Price of financial institution
products and services serve from a customer’s perspective that it must be sacrificed to obtain
the banks products or services. Banks charge fees for the services and apply interest charges
on loan, as well as paying interest on certain accounts which creates a wider meaning for
pricing in the banking industry. Researchers also found out that more than half of the
customers prefer better price perceptions and switched their bank selection choices because
of that, showing that unfavorable price perceptions create an effect on customer intentions to
switch. Customers would usually demand to have the best product and services at the lowest
price from the banks. They would compare prices, cost or benefits from the banks that offers
the similar products and services and select the bank that they perceive and provides the
highest benefits to them with the lowest cost given for their preference. This is why price of
products and service is found to be an important factor for customer in their bank selections,
as customers expect and are willing to pay the price for the better product and services
quality for it

Security

Security refers to the feeling of being safe from danger and harm. There are some common
things that customers will consider when selecting a bank such as bank reputation,
transaction security and financial performance whether it is stable or not. According to
Zineldin one of the factors that can explain the result of decision choosing a banking
customer is reputation of bank. Customers will consider a bank reputation before deciding
because customers worried whether the security of a bank whether the bank is stable or not.
The bank which is more secured will have an advantage as compared to a bank that is not

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secure In order to have customer have a strong feeling of safety towards the bank, the bank
is ensured to see that one of the main keys is to build up a trust relationship with customers.
Some researchers emphasise that trust is very important in a relationship When a bank
security is secured, it will gain the confidence and trust from the customers. Other than that,
customer would promote a bank through the satisfaction and positive relationship with the
bank and spread the attention towards others. When there is a good image and feedback from
public, it will improve the decision making process and confidence for the customer needs to
select a bank.

Technology

Technology refers to the modern life information technology that characterised by ever
changing evolution to assist and develop a better financial activity in banking industry.
According to various researchers, technology has a major influence in the way how banking
and financial services are delivered, creating wide range of alternative mechanisms such as
online banking and ATMs are reducing the dependence on the branch network as core
delivery mechanism. With the introduction of Automatic Teller Machines (ATMs) for
interacting with consumers and providing better services, banks have begun to adapt and
embrace the dynamic environment of the banking sector. Lichtenstein and Williamson also
found out that banks will be better on managing consumer experiences and satisfaction by
moving to internet banking.

Lastly, the developments of information technology and communication technology have

enabled banks to build large customer database and analysing data on consumer preferences
in a more efficient way

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Behavioural Finance: An Introduction

A theory of finance that attempts to explain the decisions of investors by viewing them as
rational actors looking out for their self-interest, given the sometimes inefficient nature of the
market. Tracing its origins to Adam Smith's The Theory of Moral Sentiments, one of its
primary observations holds that investors (and people in general) make decisions on
imprecise impressions and beliefs rather than rational analysis. A second observation states
that the way a question or problem is framed to an investor will influence the decision he/she
ultimately makes. These two observations largely explain market inefficiencies; that is,
behavioral finance holds that markets are sometimes inefficient because people are not
mathematical equations. Behavioural Finance, in contrast to classical financial theory does
not consider investors to be rational but rather as individuals influenced by their emotions or
even by their reasoning biases. Many are reluctant to accept this discipline as it is considered
complex, abstract or over intuitive but particularly because it is likely to case doubt on the
decisions of sophisticated investors and professional advice.
Anyone knowledgeable in a financial market understands that there understands that there are
numerous variables that affect prices in the securities markets. Investors’ decisions to buy or
sell may have a more distinct margin affect impact on market value than favorable earnings
or promising products.
The role of behavioral finance is to help market analysts and investors understand price
movements in the absence of any intrinsic changes on the part of companies or sectors. In
other words consumers do not always base their investment decision on the companies
financial strength but instead may be influenced by a variety of different factors.
The History of this theory traces back to various anomalies believed to affect a customer’s
decision to choose one product over another. The Winners Curse is one such problem, which
describes the winning bid in an auction to exceed the intrinsic value of the product being bid
on. Another major problem is the
Equity Premium Puzzle, which describes the difference between the Equity

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Returns, and the bond returns has roughly been about 6 % in the last century. This theory is
highly relevant in today’s competitive market as it directly relates to a consumers choice of
choosing a specific financial instrument over another when both offered have almost the
same benefits and drawbacks. A bank’s knowledge on the concept of Behavioural Finance
usually enables them to tip the scales in their favor.

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Principles of Behavioural Finance

Behavioural Finance as a concept constitutes certain principles which firms it's foundation
they are enumerated as below: -

No. Principle

1 Loss Aversion

2 Anchoring

3 Mental Accounting

4 Confirmation and Hindsight Bias

5 Gamblers Fallacy

6 Herd Behaviour

7 Overconfidence

8 Availability Bias

9 Prospect Theory

Loss Aversion

Modern brain research has determined that “when the action involves money (or actually
anything perceived as an asset), avoiding loss is a far more powerful instinct than pursuing
gain.” Previous studies have also shown that a consumer is fearful and tends to minimise the
risk he undertakes to bare minimum. A customer has been proven to risk recent gains over
long-term profits, as the fear of loss would still be kept at a minimum.

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 Principles of Behavioural Finance

Behavioural Finance as a concept constitutes certain principles which firms it's foundation
they are enumerated as below: -

No. Principle

1 Loss Aversion

2 Anchoring

3 Mental Accounting

4 Confirmation and Hindsight Bias

5 Gamblers Fallacy

6 Herd Behaviour

7 Overconfidence

8 Availability Bias

9 Prospect Theory

Loss Aversion

Modern brain research has determined that “when the action involves money (or actually
anything perceived as an asset), avoiding loss is a far more powerful instinct than pursuing
gain.” Previous studies have also shown that a consumer is fearful and tends to minimise the
risk he undertakes to bare minimum. A customer has been proven to risk recent gains over
long-term profits, as the fear of loss would still be kept at a minimum.

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Anchoring

The concept of anchoring draws on the tendency to attach or "anchor" our thoughts to a
reference point - even though it may have no logical relevance to the decision at hand. This
information could be obtained by any trusted party or could just be assumed as per common
sense. Investors base their decisions on irrelevant figures and statistics. For example, some
investors invest in the stocks of companies that have fallen considerably in a very short
amount of time. In this case, the investor is anchoring on a recent "high" that the stock has
achieved and consequently believes that the drop in price provides an opportunity to buy the
stock at a discount. Another common type of Anchoring is present when a person chooses a
specific type of financial instrument such as a gold standard bond basing his choice purely on
the assumption those gold prices rarely every fall.

Mental Accounting

Mental Accounting refers to the tendency people have to put their assets in different mental
compartments that don’t interact with each other. Usually this is seen when people set aside a
specific amount of money in case of a calamity while they are almost about to default on
their debt. This “safety money” or as it is called instead of earning an interest in a savings
account is believed to be safer kept in a locker or in the top drawer of a cupboard. The
flawed belief of keeping additional money safe is usually detrimental in the long term.

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Confirmation and Hindsight Bias

People’s belief usually relies on some kind of visual evidence, which they have noticed over
a period of time or at an instant. The Confirmation Bias suggests that a customer usually
looks for evidence to confirm his preconceived notion about a specific instrument. As a
result, this bias can often result in faulty decision making because one-sided information
tends to skew an investor's frame of reference, leaving them with an incomplete picture of
the situation.
A customer following this flawed theory usually skips pass potential red flags, which could
hinder the progress of the investment.
Another common perception bias is hindsight bias, which tends to occur in situations where a
person believes (after the fact) that the onset of some past event was predictable and
completely obvious, whereas in fact, the event could not have been reasonably predicted.
Many events seem obvious in hindsight. Psychologists attribute hindsight bias to our innate
need to find order in the world by creating explanations that allow us to believe that events
are predictable.

Gamblers Fallacy
When it comes to probability, a lack of understanding can lead to incorrect assumptions and
predictions about the onset of events. In the gambler's fallacy, an individual erroneously
believes that the onset of a certain random event is less likely to happen following an event
or a series of events. This line of thinking is incorrect because past events do not change the
probability that certain events will occur in the future. This theory is usually believed that
when a customer is in a financial slump tends to believe that his luck would turn around and
takes no measure to reduce his ongoing loss.

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Herd Behaviour

Herd Behaviour, which is the tendency for individuals to mimic the actions (rational or
irrational) of a larger group. Individually, however, most people would not necessarily make
the same choice. The crucial reason for such social pressure is conformity. This is because
most people are very sociable and have a natural desire to be accepted by a group, rather than
be branded as an outcast. Therefore, following the group is an ideal way of becoming a
member. Another major reason why most people follow the beliefs of a larger group is
because they believe that it is highly unlikely for so many people to be wrong. This is one of
the major reasons why banks usually try to draw different communities by creating favorable
schemes for a specific kind of social group. A new customer is also believed to follow his
friend circle and decide to choose a bank, which his friends are using. This theory acts as a
both a boon and a bane to a bank. The social group could draw additional customers to a
bank but in case of any kind of dissatisfaction the bank may lose the entire group.
When it comes to probability, a lack of understanding can lead to incorrect assumptions and
predictions about the onset of events. In the gambler's fallacy, an individual erroneously
believes that the onset of a certain random event is less likely to happen following an event
or a series of events. This line of thinking is incorrect because past events do not change the
probability that certain events will occur in the future. This theory is usually believed that
when a customer is in a financial slump tends to believe that his luck would turn around and
takes no measure to reduce his ongoing loss.

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Overconfidence

In a 2006 study entitled "Behaving Badly", researcher James Montier found that 74% of the
300 professional fund managers surveyed believed that they had delivered above-average job
performance. Of the remaining 26% surveyed, the majority viewed themselves as average.
Incredibly, almost 100% of the survey group believed that their job performance was average
or better.
Clearly, only 50% of the sample can be above average, suggesting the irrationally high level
of overconfidence these fund managers exhibited. Some customers also believe that their
decision is correct and that people contradicting their decision are usually jealous of their
apparent gains.

Availability Bias

This theory suggests that customers base their decisions on hearing new information, which
may not have any relevant backing. This trend is highly seen when a bank begins to sponsor
a major sporting event or team and the players of the team assure the customer that that
specific bank is safe a bet. These players although are getting paid by the bank in order to
endorse their product and hence they’re so called assurance back by a hefty paycheck in the
player’s bank account. Brand Ambassadors play a vital role in customer decision-making
process.

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Prospect Theory

A rational customer would evaluate the gains and losses of a specific bank before making his
choice. Although n 1979, Kahneman and Tversky presented an idea called prospect theory,
which contends that people value gains and losses differently, and, as such, will base
decisions on perceived gains rather than perceived losses. Thus, if a person were given two
equal choices, one expressed in terms of possible gains and the other in possible losses,
people would choose the former - even when they achieve the same economic end result.
According to prospect theory, losses have more emotional impact than an equivalent amount
of gains.
The prospect theory can be used to explain quite a few illogical financial behaviors. For
example, there are people who do not wish to put their money in the bank to earn interest or
who refuse to work overtime because they don't want to pay more taxes. Although these
people would benefit financially from the additional after-tax income, prospect theory
suggests that the benefit (or utility gained) from the extra money is not enough to overcome
the feelings of loss incurred by paying taxes.

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 Why Study Behavioural Finance in Banking Decisions

Due to the growing trend in startups and the dynamic nature of the Indian economy banks are
starting to take on the responsibility of India’s growth in the future. A regular consumer’s
direct connection to the country’s financial strength is by opening a fixed deposit or a savings
account in the customers desired banking institution. The increased amount of cutthroat
competition creates every banker’s biggest setback, Customer Acquisition. Every financial
institution window dresses their financial instruments to be able to gain an edge over their
competitors. Every bank must begin to understand that there are specific factors, which
influence a customer’s preference of choosing one bank over another.
This research project focuses on the key factors that influence a customer’s decision and their
outcome.

Consumer Behaviour has proven to be one of the most complex behavioral psychology
concepts taken up by anyone. The increasing competition among banks has lead to the
growth of innovative ways of distinguishing themselves from the lot. The study of
Behavioural Finance has been heavily undervalued by most Indian Banks. Although the
study has prevailed for decades all around the world, Indian Banks do not entirely understand
the magnitude behavioral finance e holds. These days lowering an interest rate or offering
free financial advisory services does not tick any box for the customer as every single bank
offers most of these run of the mill services.
A better understanding of behavioral finance not only boosts the banks profits but also
connects to the consumer on an emotional level leading to long-term loyalty. Family
references could also lead to a lifetime consumer for the bank as most consumers rarely
switch between their chosen banks unless they are highly dissatisfied with their services.
An understanding of Behavioural Finance has lead to stability and increased profitability of
various financial institutions namely Barclays, Credit Suisse, J.P Morgan Chase etc.

26
Research Methodology

Both Quantitative and Qualitative methods are legitimate approaches to conducting research.
Each method is different. Quantitative studies involve inquiry from the outside and inquiry
from the inside is executed through qualitative studies. Furthermore, Denzin and Lincoln
(2000) say that, “qualitative researchers study things in their natural settings, attempting to
make sense of, or to interpret, phenomena in terms of the meanings people bring to them.” It
would be difficult to use a quantitative approach to uncover and reveal the relevant
‘meanings’ required to understand the factors affecting consumers preferred banking
institution. Moreover, the research in this study also deals with consumer behavior, for which
an understanding of the individual and the values, beliefs and emotions that influence their
preference is essential. Qualitative research tends to focus on more constructive processes
that aim to build up a well-rounded description of the respondents. Unlike quantitative
research, qualitative research is pre-planned and structured in design so the information
collected can be statistically inferred on a population. The point of qualitative research is that
the study does not observe social interactions or communications between persons or
institutions in a given population, but only characteristics of the individual members
involved. There is also a qualitative way of defining and investigating variation in
populations, however. The qualitative type of survey does not aim at establishing
frequencies, means or other parameters but at determining the diversity of some topic of
interest within a given population.

27
 Customer Survey

Male Female

Q. How old are you?

a) 18-24
b) 25-30
c) 31-35
d) Over 36

Q. What is your approximate annual income?

a) Under Rs. 5 lakhs

b) Rs 5-10 lakhs
c) Rs 11-15 lakhs
d) Over 20 Lakhs

Q1. If ABC bank offers an investment option making a guaranteed profit of Rs. 5,00,000,
while XYZ bank offers an 80% chance of a Rs. 8,00,000 profit and a 20% chance of no profit
at all. Which would you choose?

a) Bank ABC
b) Bank XYZ

Q2. A bank offers a 7% interest rate on a mutual fund with a safe pool of investments. They
also offer a 9% rate on another mutual fund invested in a different sector. Why do you
believe the second interest rate is higher?

a) The second investment holds more risk

b) The second investment is offered to acquire more investors
c) The second investment is observed to be more capital intensive
d) The rate will eventually fall to match the first investment

28
 Q3. If you are looking to open a new Fixed Deposit account and need to choose between the
following:

a) Bank ABC offers a free DEMAT account on every new Fixed Deposit
b) Bank DEF offers a market Interest Rate
c) Bank PQR which has a high brand recognition
d) Bank LMN with a low interest rate

Q4. Which of the following banks would choose to take a car loan from:

a) Banks ABC offers a market interest rate

b) Bank DEF offers a free 5 gm. gold coin with the loan offered
c) Bank PQR offers a free Personal Medical Insurance Policy for the borrower for a period of 1
year
d) Bank LMN offers a tax rebate on taking the loan

Q5. If your entire friend circle begins using ABC bank, would you choose ABC Bank for
your financial decisions?

a) Strongly Agree
b) Agree
c) Disagree
d) Strongly Disagree

Q6. If you currently facing a streak of looses, would you continue in the same investment
believing that you are entitle to a win in the future?

a) Strongly Agree
b) Agree
c) Disagree
d) Strongly Disagree

Q7. If a private sector bank is involved in fraudulent transaction, would you be more cautious
while choosing a similar private sector bank?

a) Strongly Agree
b) Agree
c) Disagree

29
d) Strongly Disagree

Q8. On a scale of 1-5, how likely are you to choose a bank, which has branch close to your
home residence.

a) 1
b) 2
c) 3
d) 4
e) 5

Q9. On a scale of 1-5, how likely are you to switch banks if you are dissatisfied with their
services?

a) 1
b) 2
c) 3
d) 4
e) 5

Q10. Does Good Customer Service influence your decision to refer your preferred bank to a
friend?

a) Definitely would
b) May Not
c) Definitely wouldn’t

Q11. On a scale of 1-5, how likely are you to choose bank which offers various modes of
banking? (Internet, Mobile Banking, App Based)

a) 1
b) 2
c) 3
d) 4
e) 5

30
 Q12. If a new bank offered a better rate of interest than the one offered by your current bank,
would you switch banks?

a) Definitely would
b) May Not
c) Definitely wouldn’t

Research Questions

Q1. If ABC bank offers an investment option making a guaranteed profit of Rs.
5,00,000, while XYZ bank offers an 80% chance of a Rs. 8,00,000 profit and a 20% chance
of no profit at all. Which would you choose?

This question attempts to prove the concept of Loss Aversion discussed earlier. A person
would rather choose a bank with a guaranteed profit than a bank offering a chance of making
a loss even if the profit is higher with the risk option.
Q2. A bank offers a 7% interest rate on a mutual fund with a safe pool of investments. They
also offer a 9% rate on another mutual fund invested in a different sector. Why do you
believe the second interest rate is higher?

This question attempts to explain the concept of Anchoring. A person usually ‘anchors’ his
mind onto a specific thought even if there may not necessarily be any logical thinking for the
same

Q3. If you are looking to open a new Fixed Deposit account and need to choose between the
following:

e) Bank ABC offers a free DEMAT account on every new Fixed Deposit
f) Bank DEF offers a market Interest Rate
31
g) Bank PQR which has a high brand recognition
h) Bank LMN with a low interest rate

Q4. Which of the following banks would choose to take a car loan from:
e) Banks ABC offers a market interest rate
f) Bank DEF offers a free 5 gm gold coin with the loan offered
g) Bank PQR offers a free Personal Medical Insurance Policy for the borrower for a period of 1
year
h) Bank LMN offers a tax rebate on taking the loan

This question proves the concept of Mental Accounting. A person would usually choose the
option offering something they don’t have to pay for, over a more logical option.

Q5. If your entire friend circle begins using ABC bank, would you choose ABC Bank for
your financial decisions?
This question attempts to prove the concept of Herd Behaviour. This concept proves that a
person would be more influenced to choose a bank, which his friend circle refers him to

Q6. If you currently facing a streak of looses, would you continue in the same investment
believing that you are entitle to a win in the future?

This question attempts to prove the concept of the Gamblers Fallacy. If a person has just
gone through a range of losses they would believe a profit is in their near future.

Q7. If a private sector bank were involved in fraudulent transaction, would you be more
cautious while choosing a similar private sector bank?

32
This question attempts to prove the Availability Concept Bias. This concept shows that
someone bases his or her banking decision on finding new information even if that
information is completely unrelated information.

Q8. On a scale of 1-5, how likely are you to choose a bank, which has branch close to your
home residence.

This question helps better understand the factor of Proximity. Proximity of the Bank Branch
Alone could affect a person’s decision.

Q9. On a scale of 1-5, how likely are you to switch banks if you are dissatisfied with their
services?

This question proves that a person would switch banks if he were dissatisfied due to
increased competition between banks.

Q10. Does efficient Customer Service influence your decision to refer your preferred bank to
a friend?

This question proves that a satisfied customer leads to increased customer acquisition.

Q11. On a scale of 1-5, how likely are you to choose bank which offers various modes of
banking? (Internet, Mobile Banking, App Based)

This question attempts to prove that a persons banking decision is affected by the modernized
banking mechanisms prevalent today. Various banks have introduced innovative ways of
increasing the ease of a transaction for a bank.

33
Q12. If a new bank offered a better rate of interest than the one offered by your current bank,
would you switch banks?

This question attempts to prove that a person would switch banks just as easily if being given
a more competitive rate of interest.

Sample and the Interview Process

Previous findings into these factors have left out their application in the Indian Market. Most
Indian Banks have not completely understood the Indian mindset and what leads them to
make their current decisions while choosing their preferred banking institution.
For this study, purposive sampling was used and more specifically snowball sampling.
Purposive sampling commonly known as judgment sampling is a non-random process in
which an informant is chosen deliberately owing to certain qualities he/ she possesses.

The respondents of the survey conducted were among the age group of 19-35 and had a
specific income range of Rs. 2,00,000-20,00,000. The survey questionnaires were distributed
in and around four different private banks namely Vijaya Bank, Standard Chartered, Axis
Bank and HDFC Bank located in South Mumbai and each respondent was briefed on how to
answer all questions of the aforementioned survey. There was almost an even number of
males to females with just 12 more males than females. The entire process focused on better
understanding a person’s psyche for choosing a specific bank over its competitors. The

34
questions asked are pre-planned and simulate specific experiences to which the respondent
selects the situation most applicable to their individual personality.

35
 Results and Findings

Respondent Information

Age Group
50%
45%
45%
40% 38%

35%
30%
25%
20%
15%
10%
10% 7%
5%
0%
18-24 25-30 31-35 Over 35

36
 Annual Income

18% Under 5
22% Lakh
5-10
Lakh
11-15
Lakh
Over 20
25% 35% Lakhs

Loss Aversion

80%
70%
60%
50% 78%

40%
30%
20% 22%
10%
0%
Bank ABC Bank XYZ

37
78% of the respondents chose Bank ABC whereas only 22% of the respondents chose Bank
XYZ. From the above graph a conclusion can be made that most people would avoid the risk
of not earning a profit at all even if the odds for the profit are higher.. The Indian mindset is
relatively risk averse as compared to other populations and hence would rather make a
guaranteed profit of Rs. 5,00,000 and sacrifice the chance of making a profit of Rs.8,00,000.

Anchoring
65%
70%
60%
50%
40%
30%
12% 13% 10%
20%
10%
0%
Holds More Risk
Acquires More Capital Falling of
Investors
More Intensive Ratethe

65% of the respondents chose the most logical answer, 12% of the respondents chose the
second alternative, 13% of the respondents chose the third alternative and only 10% of the
respondents chose the fourth alternative. From the above graph, it may be concluded that
most people would choose the most logical answer of why the second investment has a
higher rate of return. Although holding more risk is the most common reason it may not
always hold true. A firm may price a safe investment at a competitive rate to draw a different
type of investors or to increase their market share.

38
 Mental Accounting

54%
60%
50%
36%
40%
30%
20% 8%
2%
10%
0%
Bank ABC Bank DEF Bank PQR Bank LMN

54% of the respondents chose Bank ABC, 2% of the respondents chose Bank DEF, 8% of the
respondents chose Bank PQR and 36% of the respondent chose LMN. From the above graph
it may be concluded that a customer would choose the bank offering a free DMAT account
for the sole purpose of him not paying for the same. A relatively large number of people also
chose a bank offering a lower interest rate, which would theoretically be the most chosen
option.

Mental Accounting

60% 52%

50%

40%
25%
30%

20% 14%
9%
10%

0%
Bank ABC Bank DEF Bank PQR Bank LMN

39
14% of the respondents chose Bank ABC, 52% of the respondents chose Bank DEF, 25% of
the respondents chose Bank PQR and 6% of the respondents chose Bank LMN. The above
graph shows that a consumer would choose the bank offering 5 grams of gold over any other
option. The Indian mindset has always been attracted to gold as a valuable investment.
Although any banking corporation easily offsets 5 grams of gold, it influences a customers
banking decision.

Herd Behaviour
57%
60%

50%

40%
26%
30%

20% 11%
6%
10%

0%
Strongly Agree Disagree Strongly
Agree Disagree

57% of the respondents strongly agreed with the statement, 26% of the respondents partially
agreed, 11% of the respondents partially disagreed with the statement and only 6 % of the
respondents strongly disagreed with the statement. The above graph shows that a consumer is
highly influenced by his social circle; hence banks could rely on building customer loyalty,
as most people tend to trust their friends or relatives on their recommendation. Further
analysis also saw that the male respondents were more likely to conform to the social group
in which they were in over the female respondents.

40
 Gamblers Fallacy

32% 31%
35%
30% 25%
25%
20%
12%
15%
10%
5%
0%
Strongly Agree Disagree Strongly
Agree Disagree

32% of the respondents strongly agreed with the statement, 31% partially agreed with the
statement, 25% partially disagreed with the statement and 12% strongly disagreed with the
statement. The above graph shows a very mixed reaction while comparing a person’s belief.
On further analysis most of the respondents were questioned on their choice and their
responses showed that people who were religious or believed in fate usually chose the first
two reactions, believing that their luck would overturn.

41
 Availability Bias

18%

Strongly
45% Agree
Agree
15%
Disagree
Strongly
Disagree
22%

45% of the respondents strongly agreed with the statement, 22% of the respondents partially
agreed with the statement, 15% of the respondents partially disagreed with the statement and
18% strongly disagreed with the statement. This graph proves the concept of Availability
Bias, as most people rely on new information discovered. A customer bases their final
decision on a single aspect of the bank and overlooks all the merits the bank may offer.

Proximity
45%
45%
40%
35%
30% 26%
25%
20%
12% 11%
15%
10% 6%
5%
0%
1 2 3 4 5

42
6% of the respondents chose the first alternative, 12% of the respondents chose the second
alternative, 11% of the respondents chose the third alternative, 26% of the respondents chose
the fourth alternative and 45% of the respondents chose the fifth alternative. The graph
concluded that a persons banking choice is highly influenced by the proximity of the branch
to the respondents residence. Further analysis proved that some respondents also trusted a
bank, which has a large network of branches.

Dissatifaction Among Customers

14%

36% 1 2 3
18%

4 5
11%
21%

14% of the respondents chose the first alternative, 18% of the respondents chose the second
alternative, 11% of the respondents chose the third alternative, 21% of the respondents chose
the fourth alternative and 36% of the respondents chose the fifth alternative. The above graph
shows how easily a customer would switch his bank if they are dissatisfied by any of the
banks services. Most consumers are loyal to a single banking institution and would like to
one bank to handle all their requirements.

43
 Customer Service
70% 65%

60%

50%

40%

30%
21%
20% 14%

10%

0%
DeWinitely Maybe DeWinitely Wouldn't
Would

65% of the respondents said they definitely would, 14% of the respondents said they may and
21% of the respondents said they definitely wouldn’t. The above graph shows that customer
service holds a very high standard in the minds of a customer. A diligent and hospitable staff
usually tips the scales of consumer when they choose their preferred banking institution.

Technology

8%
23%
14% 1 2

3 4

19%
5
36%

44
8% of the respondents chose the first alternative, 14% of the respondents chose the second
alternative, 19% of the respondents chose the third alternative, 46% of the respondents chose
the fourth alternative and 23% of the respondents chose the fifth alternative. The above graph
shows that although not by much but a modernized tech savvy bank is preferred by
customers.The major banks have already implemented various modern ways of contacting a
customer through the use of different apps and Internet services.

Prices of Products
50%
42%
40%
26% 32%
30%

20%

10%

0%

DeWinitely Would
May
No DeWinitely
Wouldn't

26% of the respondents said they definitely would, 42% of the respondents said they may and
32% of the respondents said they definitely wouldn’t. The above graph concludes a mixed
result for people switching banks. Although as previously anticipated that people would
definitely switch banks if a lower interest were offered, the respondents selected chose a
different response. On further analysis, it was seen that the respondents decided to not to
switch banks in the given situation as they believe the process of switching all their details to
a different bank is a long and tedious process which is a common misconception.

45
Implications of the Study

Lately, banks have found themselves facing more aggressive competition, uncertainty and
unlimited opportunities. A bank must examine its strengths and opportunities and take a
competitive position in the competitive marketplace. A well-integrated application of
technology and staff through operations that respond to customer needs encourage customers
to use a whole range of banking services rather than just a few. It also helps to build loyalty by
creating deeper and fuller customer relationships.
From the conclusions of the study, the following recommendations can be reasonably
forwarded for banks in India. Among the age category of below 35 years deserve particular
attention. Since this is the age category, which has the most usage and more representation in
the sample, banks should target its marketing mix toward this category. Such a technique will
ensure attraction of job-market entering people towards bank products/service and also
retention of the people who are likely to remain long-term loyal customers. In addition, banks
should try to find out some ways to better familiarise their customers with the borrowing
products for customers.
Indian banks should concentrate more on increasing the efficiency of completing banking
transactions. The expression of convenience through the use of automatic payment services
and automatic teller machines leads to another strategy implication.

Future of Banking Sector in Relation to Customer Decisions

46
The future of banking in India looks does not only look exciting but is also transformative.
Despite the somewhat difficult current operating environment, banks remain the largest
financial sector intermediary in India. In the future, technology will make the engagement
with banks more multi-dimensional even as other entities, markets and instruments for credit
and financial services continue to develop and expand.
The biggest impact of technology will be the ability to personalise delivery of products and
services to customers. Data analytics is an integral part of this ability to customise. Increasing
use of unstructured data, generated largely from social media, will vastly add to behavioural
understanding and prediction. In an environment where delivery of financial services will
become increasingly commoditized, customer experience will become the differentiating
norm for a preferred service provider. The ability to tailor financial solutions to customers
across multiple platforms will unleash a wave of product innovations and thereby demand for
financial services. Anytime, anywhere banking, using differentiated channels and
technology, will enable a multi-fold increase of reach in rural and remote areas. Coupled with
the emergence of a new class of banks—the small and payments banks— one of the biggest
impacts of technology adoption will be rapidly accelerating financial inclusion by making
last-mile access more cost effective and expanding the reach of banking to the unbanked
customer.
Banks are facing a hyper-competitive marketplace – competitors are just a click away, and
consumers expect a superior customer experience. If a bank is unable to keep their existing
customers, then they’re losing out on brand reputation. Acquiring new customers costs six to
seven times more than keeping an existing customer.
Banks are facing a hyper-competitive marketplace – competitors are just a click away, and
consumers expect a superior customer experience. And if you are unable to keep your
existing customers, then you’re losing out, not only through brand reputation, but also, your
bottom line. Acquiring new customers costs six to seven times more than keeping an existing
customer. A simple fact, especially relevant to the banking sector is that a satisfied customer
helps draw in other customers. Almost 45% of dissatisfied customers would not recommend
their bank to their which seriously hinders the banks profits. Unlike other sectors, customers
of the banking sector are not very forgiving and would rather switch banks than letting go of
the mistake faced by the current bank.

47
Banks could only target these problems by understanding customer trends and their
preferences. Although the reality is that they are at a data overload. Moving forward, they
need to be smarter on how they analyse and use the data – what data is the most important,
what makes the most business sense, what gives the most business impact?
Some Indian banks have begun to recognise Behavioural Finance as one of many factors
affecting a customer's banking decisions. This helps banks better streamline their target
customer and eventually grow their profit margins exponentially. Not only do these help in
acquiring customers but also their retention becomes fairly easier as well. Behavioural
Finance although is still a growing field and has massive amounts of potential to become a
banks secret weapon for customer acquisition.

Conclusion

Undoubtedly, no business can exist without customers. This can be explained also by the
philosophical words of Munusamy “The only value your company will ever create is the
value that comes from customers-the ones you have now and the ones you will have in the
future”. Customer value is an asset to one organization. Hence, in order to maintain the
customer, the organization needs to ensure that the right products and services, supported by
the right promotion and making it available at the right time for the customers.
The purpose of this study was to determine the importance of selected patronage factors in
choosing banks in Mumbai, and to determine the perceived usefulness of several banking
services to the customers. To survive in today’s competitive banking industry; commercial
banks must become more customer, sales and service oriented. Marketing to selective
customer segments like students might be the single most important success factor for banks
in the 21st century and a centralized database is the key to competitive advantage.

48
High customer usage exists for saving account and current account. Respondents are
also used other services offered by the banks like money transfer services and ATM
services. Though various types of borrowing services offered by banks, customers do
not have a high usage for any particular one. None of the borrowing products alone
has high usage. The high ranking of convenience, service provision, additional
services and bank’s image as most selection criteria for banking services suggest that
the banking industry in India needs to place more emphasis on opening of several
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