Building Growth From Uncertainty in Financial Institutions

Building Growth From Uncertainty in Financial Institutions
February 12, 2024 13 mins

Building Growth From Uncertainty in Financial Institutions

Building Growth From Uncertainty in Financial Institutions

Five ways financial institutions can balance investment with prudence in an uncertain economic climate.

Key Takeaways
  1. The current operating landscape for financial institutions demands a holistic approach to risk management to balance investment with efficiency.
  2. Companies need to streamline and review costs, leverage technology and build workforce resilience to adapt to increasing levels of volatility and uncertainty.
  3. Financial institution leaders should forge partnerships that look across the whole enterprise to identify and manage operational risks, build resilience and agility and uncover growth opportunities.

Finding stability, competitive advantage and sustainable success is becoming increasingly challenging for business leaders in the financial institutions (FI) industry. As business risks increase and become more complex, so do the number of decisions leaders face.

Interest rate increases, tight talent markets, increasing cyber security risk and rising geopolitical threats have created an operating landscape marked by heightened volatility. This unpredictability is challenging existing frameworks and strategies, leaving FIs to grapple with opposing needs. 

To capture opportunities and make smart investments for the future, FIs must also manage this expanding set of financial and non-financial risks. The cost of funds, risk and compliance are increasing while loan growth is slowing — all of which amplify the potential for more credit losses and encourage organizational conservatism. At the same time, rapidly changing technology developments and tightening regulations demand the evolution of growth strategies to ensure competitiveness.

While leaders understand the interconnectivity of these risks, the current level of decision making puts many businesses on defense, unable to build the proactive momentum needed to achieve strategic growth.

A holistic approach to risk to help leaders make better decisions, leverage the right tools, and accelerate innovation to navigate through uncertainty and grow the potential of their business is the only current certainty. A greater focus on enterprise risk management helps organizations identify, manage and insure operational risks for today’s challenges, while also building the resilience and agility needed to uncover growth opportunities and weather future storms.

“The current and future operating landscape for FIs demands that both leaders and workforces can adapt to address increasing levels of volatility. It’s never been more important for leaders to avoid the silos that inhibit a broad, strategic approach to risk and instead, work with a partner who can look across the whole enterprise to balance investment with efficiency.”

Petra Schmidt
Global Financial Institutions Commercial Leader

43%

43 percent of FIs are spending more time on higher costs and inflation management.

Source: Aon Pulse Survey

Read More

Here, we explore five steps to help FIs balance risks:

Step 1 – Streamline and Review Costs

The rapid digitalization of banking, adoption of generative artificial intelligence (AI) and the merging of traditional banking and fintech cultures require continuous upskilling, talent strategy evaluation and the development of a stable talent pipeline. Yet, seventy percent of financial organizations indicate that they are losing key digital skills.1 At the same time, a challenging economic environment demands leaner and more efficient organizational structures. Recent restructures and simplified management within the industry are a testament to this, as organizations seek to reduce costs and increase competitiveness.

Against these opposing demands, financial services companies must carefully balance cost management with the need to rapidly acquire and integrate AI talent, while also maintaining high levels of customer satisfaction and employee engagement. Building workforce resilience into operational resilience and risk management decisions will be critical to success. 

However, organizations that fail to provide stability during waves of uncertainty will struggle to build and retain resilient workforces. By creating an environment that allows agility, enables resilience and fosters belonging, firms will shape a workforce that can develop future skills at speed and pivot easily to new challenges2 — helping businesses thrive, not simply survive. 

Next steps for leaders:

  • Manage financial performance and improve workforce productivity with data-driven business intelligence and holistic analysis of financial statements and market share.
  • Benchmark financial performance for expenses and headcount against peers.

Step 2 - Leverage Technology

The generative AI industry market valuation is estimated to reach $42.6 billion in 2023 and $98.1 billion by 2026.3

Generative AI is poised to revolutionize how we work, live and interact. Its market potential is expanding at pace with a multitude of enterprise applications. 

This rapidly developing technology has the power to revolutionize the FI industry by driving efficiencies and realizing cost savings. These include improved customer service and support, fraud detection, compliance and regulatory reporting, and financial planning and recommendations. Research by Forbes indicates banks will benefit from AI more than any other industry, with an estimated boost in productivity of 22-30 percent, driving an increase in revenue of six percent in three years.4  

While investment in digital capabilities can increase competitiveness, this must be carefully balanced with the management of evolving financial and non-financial risks. For example, with increased digitalization comes increased cyber security risk and revised talent requirements. 

These advancements are set to significantly reshape the workforce. Aon’s own in-depth analysis of the potential impact of generative AI has uncovered that 14 percent of roles, representing 27 percent of headcount in FIs, are at the greatest risk of disruption from automation and technology. This accounts for more than a quarter of the whole FI workforce.

The scope to reskill existing workforces will be limited. Digital talent initiatives must be deployed strategically as businesses seek to narrow the digital skills gap. Employees will feel more empowered, motivated and engaged at the places that offer opportunities for professional development. This, in turn, will likely translate into long-term tenure.5 Likewise, hiring the talent needed to build growth in the digital age requires an evolution of strategies. Today’s workforce has demands and expectations beyond competitive pay and compensation. Flexible working arrangements, company culture and organizational values often serve as key drivers of employer choice, yet 94 percent of FIs remain mostly focused on adjusting base salaries.6 

Only 42 percent of financial organizations plan to offer increased workplace flexibility.7  

While offering competitive pay and rewards is important, so is developing a culture that prioritizes workforce resilience and wellbeing. Against challenging financial pressures, organizations must review the cost and impact of wellbeing benefits to ensure they are delivering value. In addition to supporting improvements in wellbeing and resilience, a revised employee benefit strategy can help build the talent pipeline needed for future success.

Next steps for leaders:

  • Evaluate and adapt human capital strategies to address the skills gap and attract the cyber and technology talent needed to build growth and organizational resilience.
  • Undertake a skills inventory to understand the workforce population and devise talent strategies that drive continuous upskilling.
  • Tailor pay programs and benefits to the expectations of this talent group, but also focus on what workforces want beyond compensation and benefits.

27%

Automation is putting 27 percent of banking jobs at risk.

Source: Aon, LinkedIn, 2023

Read More

Step 3 - Develop a Revised M&A Strategy

In the U.S. banking market, change is afoot and driving new opportunities for mergers and acquisitions (M&A) within the industry. In the immediate aftermath of the Silicon Valley Bank failure,8 16 percent of U.S. adults moved some or all of their money,9 resulting in $550 billion transferred from smaller regional banks to large banks and money market funds.10 While turmoil and contagion can be compounded by a loss of faith in the industry, this shift indicates a trend toward growing confidence in larger institutions. Additional pressure on the industry in the form of capital constraints, evolving regulation, environmental, social and governance (ESG) focus, and technology and data management all point toward greater market consolidation.

In the wake of rising uncertainty, larger institutions have had the opportunity to capitalize on shifting consumer and investor appetites and a rapid reshaping of the FI landscape. In the U.S. banking market, consumer studies show that large national banks are becoming a greater draw over smaller credit unions for younger generations, who desire robust and convenient digital banking tools.11

Digital acceleration has transformed the global financial ecosystem. In the fight to remain competitive, FIs continue their pursuit of smaller technology entities that enable them to scale and upgrade their technology. In a compressed market, decreased valuations could expose undervalued assets, providing new opportunities for M&A and talent acquisitions. Amid market volatility, a strong economic performance can also put organizations in the driver’s seat for M&A activity, helping build out the fundamental skills and capabilities needed for future competition.

Next steps for leaders:

  • Consider whether and how to build AI capabilities through M&A strategy, including conducting an intellectual property (IP) scan for targets.
  • Address diverse deal risks and financial challenges with cyber risk and financial risk insurance, revised human capital strategies and digital solutions.
  • Explore the ability to collateralize IP to de-risk lending deals.

Step 4 - Strengthen Cyber Resilience

In the age of accelerated digitalization, FIs are facing more cyber attacks. In 2022, 5,000 suspicious activity reports (SARs) were filed by SEC-regulated firms, a figure that was closer to 500 just four years ago.12 At the same time, recent regulatory change is reshaping the industry through more robust rules, stricter supervision, quicker remediation timelines and revised regulatory tailoring.

Aon Analysis

When reviewing the risk exposures, FIs reported steady improvement in IT controls readiness between 2022 and 2023. According to Aon’s Ransomware Supplemental Applications red flag controls data, the most significant improvement occurred in Access Management and Incident Response planning in 2023. However, backup security continues to be an area of vulnerability with almost 73 percent of clients lacking backup solutions that provide offline capabilities. About 54 percent of companies reported end-of-life software is not segregated in the security environment of FI clients.

Source: Aon’s 2023 Cyber Resilience Report

Aon continues to see a high correlation between M&A activity and cyber attacks, as cybercriminals target newly acquired entities.13 As FIs build out their digital capabilities, prioritizing cyber security investment and conducting robust due diligence has never been more critical to create and protect value from investments.

In Q3 2023 ransomware events increased 205% compared to Q3 2022.14

Balancing risk and opportunity is driving firms to consider how to make the best decisions for cyber security budgets. To provide the greatest protection against losses and rapidly changing risks, FIs must implement a holistic cyber resilience strategy. This means supporting business objectives around technological growth, while also providing the most robust protections against evolving threats.

People risks strain risk management frameworks as where and how people work continue to change, increasing the risks of fraud, cyber attacks and reputational damage. By connecting and incorporating emerging human capital risks into the enterprise risk management framework, FIs can take a more proactive approach to identifying risk and protecting future growth capabilities.

Next steps for leaders:

  • Build cyber security into the initial design of all IT development and leverage cyber security audits to close gaps in cyber resilience when evaluating key objectives.   
  • Evaluate cyber risk to ensure a balance of risk retention and transfers. Identify gaps in legacy business continuity management strategies and protect critical assets from potential financial loss with cyber insurance.
  • Improve awareness around attacks by educating colleagues and customers on current cyber risks that could impact their roles, including phishing, malware and unintentional business email compromise.
  • Accelerate incident response and reporting times to help meet evolving regulatory requirements.

Step 5 - Focus on a Greener Future

The international finance community has spearheaded new financing and partnerships to support the global effort to reduce emissions.15 Sustainable investment remains high on the agenda of institutional investors and represents significant opportunities for growth. Buoyed by increasing regulation and consumer demand, sustainable investing can improve long-term investment performance by reducing volatility, increasing risk-adjusted returns and enhancing opportunities for asset diversification.

Governments are increasing the rollout of green taxes, green cash grants and green tax incentives to accelerate their environmental goals. For example, in the U.S., as part of the Inflation Reduction Act, $161 billion has been allocated to fund the development of clean electricity, while $16.7 billion will be used to support conservation practices for private landowners.16 FIs can capitalize on new growth opportunities — strengthening their ESG reporting in the process.

In addition to uncovering new opportunities, FIs have the potential to improve their reputations and strengthen their margins with meaningful action when it comes to green investments. Research suggests that consumers are reporting growing interest in enrolling in a climate-linked financial product. Financial services customers are willing to pay 30 percent more for products and services that are environmentally sustainable,17 the highest of any sector, while one in four customers choose their bank based on environmental and social track records.18 However, against increasing scrutiny, banks must continue to deliver meaningful action on their ESG commitments.

Next steps for leaders:

  • Explore investment safeguards, such as political risk protections within emerging markets, where government actions in less mature economies can adversely affect assets, contracts and loans.
  • Consider the use of parametric products to de-risk investments and protect against natural catastrophes.

Leaders across financial institutions face multifaceted and interconnected challenges within a rapidly evolving landscape. Yet, it's clear that those who take proactive measures to remain ahead of the risks and connect prudence with investment will be best placed to remain competitive today and in the future.

1 Aon’s 1) Workforce Resilience Diagnostic Model Insights; 2) 2022 Aon Workforce Resilience Risk Benchmark; 3) 2022-23 Aon Global Wellbeing Survey
2 Aon’s To Build Workforce Agility, Look at These Six Factors
3 Vertical Snapshot: Generative AI, Pitchbook, 2023
4 The Top 10 Banking Trends For 2024 – The Age Of AI, Forbes, 2024
5 Aon’s How to Enhance the Culture of Resilience in Financial Institutions
6 Workforce Resilience: Risks and Opportunities in the Financial Services Sector, Aon, LinkedIn, 2023
7 Ibid.
8 Aon’s AA View | Silicon Valley Bank. A Canary? 
9 16% Of Americans Moved Money After Silicon Valley Bank Failure, Poll Suggests, Forbes, 2023
10 Bye, banks: Recent turmoil is spurring many to move their money, The Washington Post, 2023
11 Digital Experiences Drive More Consumers to Big Banks: Report, Credit Union Times, 2022
12 Industry Grumbles Over SEC’s Latest Cybersecurity Proposal, FundFire, 2023
13 Aon’s M&A 2023 Risk in Review
14 Risk Based Security, analysis by Aon. Data as of 10/2/2023; Claim count development may cause these percentages to change over time.
15 Aon’s Responsible Investment Services
16 Breaking Down Clean Energy Funding in the Inflation Reduction Act, NPUC, 2023
17 Average sustainability premium consumers would consider acceptable and be willing to pay worldwide in 2022, by category, Statista, 2023
18 Sustainable Banking: How Going Green Will Help Banks Stay in the Black, Insider Intelligence, 2022

Aon’s Thought Leader
  • Petra Schmidt
    Global Financial Institutions Commercial Leader, Aon

General Disclaimer

This document is not intended to address any specific situation or to provide legal, regulatory, financial, or other advice. While care has been taken in the production of this document, Aon does not warrant, represent or guarantee the accuracy, adequacy, completeness or fitness for any purpose of the document or any part of it and can accept no liability for any loss incurred in any way by any person who may rely on it. Any recipient shall be responsible for the use to which it puts this document. This document has been compiled using information available to us up to its date of publication and is subject to any qualifications made in the document.

Terms of Use

The contents herein may not be reproduced, reused, reprinted or redistributed without the expressed written consent of Aon, unless otherwise authorized by Aon. To use information contained herein, please write to our team.

Aon's Better Being Podcast

Our Better Being podcast series, hosted by Aon Chief Wellbeing Officer Rachel Fellowes, explores wellbeing strategies and resilience. This season we cover human sustainability, kindness in the workplace, how to measure wellbeing, managing grief and more.

Aon Insights Series UK

Expert Views on Today's Risk Capital and Human Capital Issues

Construction and Infrastructure

The construction industry is under pressure from interconnected risks and notable macroeconomic developments. Learn how your organization can benefit from construction insurance and risk management.

Cyber Labs

Stay in the loop on today's most pressing cyber security matters.

Cyber Resilience

Our Cyber Resilience collection gives you access to Aon’s latest insights on the evolving landscape of cyber threats and risk mitigation measures. Reach out to our experts to discuss how to make the right decisions to strengthen your organization’s cyber resilience.

Employee Wellbeing

Our Employee Wellbeing collection gives you access to the latest insights from Aon's human capital team. You can also reach out to the team at any time for assistance with your employee wellbeing needs.

Environmental, Social and Governance Insights

Explore Aon's latest environmental social and governance (ESG) insights.

Q4 2023 Global Insurance Market Insights

Our Global Insurance Market Insights highlight insurance market trends across pricing, capacity, underwriting, limits, deductibles and coverages.

Regional Results

How do the top risks on business leaders’ minds differ by region and how can these risks be mitigated? Explore the regional results to learn more.

Human Capital Analytics

Our Human Capital Analytics collection gives you access to the latest insights from Aon's human capital team. Contact us to learn how Aon’s analytics capabilities helps organizations make better workforce decisions.

Insights for HR

Explore our hand-picked insights for human resources professionals.

Workforce

Our Workforce Collection provides access to the latest insights from Aon’s Human Capital team on topics ranging from health and benefits, retirement and talent practices. You can reach out to our team at any time to learn how we can help address emerging workforce challenges.

Mergers and Acquisitions

Our Mergers and Acquisitions (M&A) collection gives you access to the latest insights from Aon's thought leaders to help dealmakers make better decisions. Explore our latest insights and reach out to the team at any time for assistance with transaction challenges and opportunities.

Navigating Volatility

How do businesses navigate their way through new forms of volatility and make decisions that protect and grow their organizations?

Parametric Insurance

Our Parametric Insurance Collection provides ways your organization can benefit from this simple, straightforward and fast-paying risk transfer solution. Reach out to learn how we can help you make better decisions to manage your catastrophe exposures and near-term volatility.

Pay Transparency and Equity

Our Pay Transparency and Equity collection gives you access to the latest insights from Aon's human capital team on topics ranging from pay equity to diversity, equity and inclusion. Contact us to learn how we can help your organization address these issues.

Property Risk Management

Forecasters are predicting an extremely active 2024 Atlantic hurricane season. Take measures to build resilience to mitigate risk for hurricane-prone properties.

Technology

Our Technology Collection provides access to the latest insights from Aon's thought leaders on navigating the evolving risks and opportunities of technology. Reach out to the team to learn how we can help you use technology to make better decisions for the future.

Top 10 Global Risks

Trade, technology, weather and workforce stability are the central forces in today’s risk landscape.

Trade

Our Trade Collection gives you access to the latest insights from Aon's thought leaders on navigating the evolving risks and opportunities for international business. Reach out to our team to understand how to make better decisions around macro trends and why they matter to businesses.

Weather

With a changing climate, organizations in all sectors will need to protect their people and physical assets, reduce their carbon footprint, and invest in new solutions to thrive. Our Weather Collection provides you with critical insights to be prepared.

Workforce Resilience

Our Workforce Resilience collection gives you access to the latest insights from Aon's Human Capital team. You can reach out to the team at any time for questions about how we can assess gaps and help build a more resilience workforce.

More Like This

View All
View All
Subscribe CTA Banner