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  • Writer's pictureRoy Urrico

Alkami Research Identifies Impact of Current Interest Rate Environment on FIs and Consumers

By Roy Urrico


Finopotamus aims to highlight white papers, surveys and reports that provide a glimpse as to what is taking place and/or impacting credit unions and other organizations in the financial services industry.


Plano, Texas-based Alkami Technology Inc., a cloud-based digital banking solutions provider for credit unions and banks, released its 2024 Alkami Data Telemetry Report: State of the Industry. “The rising interest rate environment, the likes of which hasn’t been seen in decades, is creating new pressure on consumers and financial institutions alike,” claims the report.


The report also studied the implications of the current economic environment on deposits, and credit products like mortgages, home equity lines of credit (HELOCs), auto loans, credit cards and buy now pay later (BNPL), deposit, loan, and payment products at credit unions and regional and community banks.

Mark Leher, director, product management at Alkami

“Through this research, and Alkami’s other tools like the ‘Digital Sales & Service Maturity Model Assessment,’ banks and credit unions can not only assist their account holders in mitigating the effects of high interest rates to strengthen loyalty and provide the best digital banking experience, but also can be informed on where their institution may lie on the competitive curve,” said Mark Leher, director, product management at Alkami.

 

Key Findings

 

·         Housing Market. Data shows the housing market presenting challenges for homebuyers and renters. Sixty-seven percent of digital banking Americans say the rising interest rate environment has had a significant impact on their standard of living and 59% are living paycheck to paycheck. “The reality can be seen in rising housing market pricing, both in rent (where average monthly rent has increased 24.4% over the past four years, up to $971 per month in the fourth quarter of 2023) and mortgages (where the confluence of rising home prices and interest rates resulted in the average home buyer affording 52% fewer square feet in 2023 than 2019),” according to the report. “Indeed, the American dream of owning a home is being challenged by younger generations, with 26% of millennials saying that buying a home hinders wealth building, as opposed to helping it,” stated the report.For financial institutions, the result has been a 72.5% drop in mortgage originations from 2020 to 2023 and a 24.2% increase in a home equity line of credit (HELOC) originations over the same timeframe. HELOC originations peaked in 2022


·         Auto Loans. Vehicle financing faced pressure due to supply chain challenges and rising interest rates. Per the Alkami report, supply chain challenges persisting through and following the pandemic, coupled with rising interest rates, resulted in car buyers paying 32.5% to 57.1% more per month for a used or new auto loan, respectively, from 2019 to 2023. 

·         Certificates of deposit (CDs). As financial institutions turned attention to deposit acquisition, competition for CDs resulted in 11.7 times extra in interest rates for a 24-month CD opened in 2023 versus 2021. The number of CD accounts opened also witnessed a more than sixfold increase from the fourth quarter of 2021 to fourth quarter of 2023. The average term dropped 51.2% from 21 to 10 months over the same timeframe, as financial institutions, reluctant to commit to higher cost of funds for longer periods, began to offer attractive interest rates on shorter-term CDs. The convergence of all of the above resulted in CD balances more than 82% higher at the end of 2023 versus 2021. For banks and credit unions, challenges are on the horizon for retaining these transient accounts, as 87.7% of CD balances held at the end of 2023 will mature in the last quarter of 2024.


·         Deposit accounts. Overall, average consumer deposit balances in checking, savings, money market, and CDs are higher today than they were in 2019. But it appears the higher prices consumers are facing is beginning to erode balances, and the mix of CDs as a percent of deposit accounts has increased at the expense of money market accounts.


·         Credit cards. The average monthly payment made towards credit cards has been increasing since 2020, reaching $2,376 by 2023, a 19% increase over pre-pandemic levels. Though the average consumer’s total monthly payment to credit cards is up, the number of credit card payments has remained relatively flat, suggesting that, while consumers are paying more towards credit card bills, they are not adding new cards to their wallets. These converging trends represent an opportunity for financial institutions to recommend card consolidation to their institution’s own card, either debit or credit, along with financial wellness assistance to help those increasingly reliant on cards.


·         BNPL adoption shows no signs of abating. There were 5.17 times more (buy now, pay later) BNPL users in 2023 than in 2019. Nearly 60% of digital banking Americans who use online-only banks say that, in five years, BNPL transactions will exceed credit card transactions in the U.S., the highest of any primary financial provider tested.


Critical Role for Financial Institutions


“In this economic environment of uncertainty and fluidity, banks and credit unions have a critical role in supporting their account holders as they navigate financial challenges. Sixty-four percent of digital banking Americans feel like too often financial providers don’t pay enough attention to their needs,” according to this Alkami commissioned research.


The report continued: “Banks and credit unions have unique audiences within their account holder base with whom they must engage, meeting individualized financial demands. Having a data strategy and integrating data-driven insights across various digital platforms can give a financial institution a competitive edge. Transforming the digital banking platform from a primarily service channel into an integrated digital sales and service channel is the next frontier for delivering personalized banking at scale and equipping the ‘data-informed digital banker’ of the future.”


The transaction data was compiled from an aggregated panel of 22 banks and credit unions with more than 2.5 million account holders. The data was supplemented by an Alkami-commissioned research study, conducted in partnership with The Center for Generational Kinetics that surveyed 1,500 digital banking consumers in the U.S., from January 12, 2024, to January 30, 2024. In addition, 2024 FI Perceptions Research, commissioned by Alkami, surveyed 150 unique banking platform decision makers/influencers across the U.S. December 21, 2023 – January 26, 2024.

 

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