Harnessing technology and cybersecurity defenses in community banking without losing local touch

Community banks are being pushed to innovate and adapt at an unprecedented pace. They must maintain their core strengths of local focus and personalized service that have long set them apart from larger financial institutions. They must do all of this while adhering to increasingly stringent compliance requirements, which can be difficult for small financial institutions.

The big question becomes: How do these institutions leverage emerging technology demands and strategic partnerships to enhance their offerings, streamline operations and continue to serve their communities effectively and with the community approach they’re known for, all while remaining compliant and without taking on added risk?

Cybersecurity remains a top priority

Not surprisingly, cybersecurity remains a top priority for community banks. After all, it’s a big business for criminals. It’s also very expensive. According to a recent report from IBM, the global average cost of a data breach in 2024 is $4.88 million – a 10% increase over a year earlier and the highest total ever. Beyond the hard dollars, banks also risk reputational damage.

AI-enabled phishing is also up and it’s becoming increasingly difficult to detect “deep fake” tactics. For example, cybercriminals can now easily use platforms like ChatGPT to produce emails or text messages that are free of typos and grammatical errors. They can also duplicate someone’s voice. In fact, voicemail phishing is increasing, according to the Anti-Phishing Working Group.

To protect their institutions and their communities, banks must stay vigilant and invest steadily in advanced security solutions to stay ahead of these ever-changing attacks.

Third-party risk a rising concern

Topping the list of cybersecurity nightmares are the potential risks posed by third-party vendors. One recent example is the attack last December, when at least 60 credit unions experienced multi-day outages of online banking, mobile banking and bill pay services due to a ransomware attack on a shared IT vendor. Community banks face the same risks.

This incident highlights the critical need for thorough vendor due diligence and robust business continuity planning. It also demonstrates how cybercriminals are increasingly targeting service providers to impact multiple financial institutions simultaneously, emphasizing the importance of comprehensive cybersecurity measures that extend beyond a bank’s immediate infrastructure to include third-party vendors and partners.

Evolution of digital platforms

Community banks are reimagining their approach to digital. While online and mobile banking technologies are table stakes (they’ve been around for over two decades), community banks are now exploring innovative ways to deploy these solutions across different markets.

Notably, banks that once viewed themselves as traditional are emerging as market leaders, driven by competitive pressures and strategic fintech partnerships. This shift allows community banks to maintain their local focus while expanding their reach through digital channels, enabling them to serve their communities more effectively while adapting to changing customer expectations.

One example is through specialization and niche markets. With digital, financial institutions can expand their geographical reach. But it’s impossible to be all things to everyone. Rather than serving a broad geographical area, some are focusing on specific niches or customer segments, such as former professional athletes or dentists, just to name a few. This trend towards specialization is driving the adoption of tailored technologies and services designed to meet the unique needs of these niche markets, allowing them to compete effectively against larger institutions in specific areas.

For instance, one North Carolina-based bank has become known for its focus on niche industries such as veterinary practices, independent pharmacies, renewable energy projects and more. The bank has developed expertise in understanding the unique financial needs and challenges of businesses in their community, allowing them to offer tailored loan products and services.

The role of AI in banking

While still experiencing growing pains, AI may revolutionize banking as we know it. Currently, fraud detection stands out as one of the most practical AI applications. But the potential of AI extends far beyond that. From enhancing operational efficiency to sophisticated risk modeling, forward-thinking community banks are beginning to integrate AI into their processes, viewing it as a key differentiator in their markets.

As AI technology matures and becomes more accessible, it’s likely to be embedded in standard banking products and services in the future. This evolution will allow community banks to leverage AI capabilities without necessarily developing in-house expertise, potentially leveling the playing field with larger institutions and allowing them to serve their local communities more effectively. However, it is important to remember that the Federal Reserve, FDIC, the OCC and the CFPB have all stressed that banks are ultimately responsible for how the technology is deployed, even if it is through third parties. How this technology is ultimately regulated has yet to play out.

Fintech partnerships to support AI initiatives

Strategic partnerships between banks and technology providers are critical. The most successful collaborations will occur when fintechs can articulate regulatory concerns as fluently as bankers, while offering the agility to implement innovative solutions quickly. Meanwhile, banks bring deep industry expertise to these partnerships. The synergy between fintech innovation and banking experience creates opportunities for growth and enhanced service delivery.

Fintech partnerships, in particular, are proving invaluable in supporting AI initiatives within banks. Fintechs often possess the technological expertise necessary to manage the complexities of AI implementations, thereby making banks more agile and competitive. By collaborating with fintechs, banks can quickly adopt advanced AI solutions tailored to their specific needs, enhancing operational efficiency and customer experience while maintaining their community-focused approach.

How community banks can prepare

As we move deeper into 2025, banks should prioritize investments in efficiency and security while aligning technology adoption with their core business strategies. While some institutions may position technology as their primary strategy, community banks should focus on identifying the fundamental aspects of their business model and then selecting technologies that support and enhance these core competencies.

Key areas for technological investment are likely to include enhanced security measures, improved risk management tools, streamlined customer support systems and innovative customer interaction platforms.

By addressing these five key questions, your institution can confidently pursue the right technology solutions:

How is your data reviewed and protected? Ensure you have effective measures in place to safeguard your data.

Are your cybersecurity protocols robust enough to prevent attacks? Verify that your systems are well-protected against potential threats.

Have you updated your Business Continuity Plan (BCP) documentation? Being prepared for a cyberattack requires up-to-date plans that automatically pull in regulatory changes.

Are your policies and processes current and compliant? Regular review ensures they remain effective and aligned with regulations.

How do your core vendor and third parties secure your data? Collaborate with these partners to get updated reports needed for audits and examinations.

Strategically embracing technology while preserving their community-centric values allows community banks to better navigate the digital landscape, enhance their competitive edge and continue to be vital pillars of their local communities in the years to come.

Brendan McGowan is Senior Vice President – Managed Services Service Delivery and Business Automation at UFS. Stacey Pritzl, Senior Solutions Architect, and Mike Venaccio, Senior Vice President – Architecture, Technology and Product, contributed to this article.