Service quality improves perceived bank performance through customer loyalty in Indian small finance banks

Abstract Purpose The study focuses on the mediating role of customer loyalty and the moderating role of switching costs between service quality and the performance of Small Finance Banks (SFBs) in North India, namely AU Small Finance Bank, Capital Small Finance Bank, and Utkarsh Small Finance Bank. Design/methodology/approach We used a quantitative design and collected data from 380 customers of three SFBs in northern India through structured questionnaires. Quality of service was defined as a second-order construct including tangibility, reliability, responsiveness, assurance and empathy. Three analytical methods were used: Partial Least Squares Structural Equation Modelling (PLS-SEM) to test the study’s mediation and moderation relationships and the associated conditional indirect effects; Necessary Condition Analysis (NCA) to determine the minimum threshold conditions for perceived bank performance; and Importance-Performance Map Analysis (IPMA) to prioritise managerial actions. Findings Service quality was significantly and positively associated with both customer loyalty (β = 0.340) and perceived bank performance (β = 0.231), and customer loyalty significantly mediated the relationship between service quality and perceived bank performance (β = 0.178). Switching costs showed only a weak, marginally significant, and tentative positive moderating effect on the loyalty–performance relationship (β = 0.073, t = 1.708, p < 0.10, 95% CI [− 0.016, 0.154]). Because this confidence interval spans zero and significance was reached only at the lenient 10% level, this result should be read as a tentative signal rather than firm evidence of moderation and warrants confirmation through future replication. NCA identified reliability (d = 0.347) and empathy (d = 0.273) as the two conditions with the strongest necessity effects, suggesting these are useful priorities for setting minimum service-quality thresholds. IPMA indicated that empathy showed the strongest total effect on performance, and that customer loyalty indicators showed the largest gap between importance and performance, pointing to a priority area for managerial attention. Research implications The study contributes to the service quality and banking performance literature by integrating necessity logic (NCA) and priority mapping (IPMA) into a combined mediation-moderation framework in the context of North Indian SFBs, a context underrepresented in the banking literature, reporting conditional indirect effects across levels of the moderator rather than a formally tested index of moderated mediation. Practical implications SFB managers need to focus on fostering greater empathy and on customer loyalty programmes, which are weak relative to their importance, and work towards consistently meeting the reliability standards identified by the NCA analysis as useful benchmarks for supporting SFB performance. The findings also carry implications for regulators and financial-inclusion policymakers, particularly regarding minimum service-quality benchmarks and the socio-economic reach of SFBs in underserved communities. Originality/value This is one of the first studies to use PLS-SEM, NCA, and IPMA together in a single mediation-moderation model in the little-explored domain of North Indian SFBs. While the underlying service quality–loyalty–performance relationships are individually established in the literature, the study’s originality lies chiefly in this methodological integration and in the underexamined North Indian SFB context, providing fresh empirical findings about the role of service quality in perceived bank performance via a sufficiency-and-necessity logic.