Executive Summary

• Small and medium‑sized financial institutions – such as community banks, credit unions and fintech companies – face a rapidly evolving threat landscape in 2025. Ransomware, distributed denial‑of‑service (DDoS), account takeover, supply‑chain exploitation, geopolitical attacks and emerging technologies like quantum computing are highlighted by U.S. regulators as key risks to the banking sector.
• The digital dependency of financial services and the surge of artificial intelligence (AI) as both a defense tool and an attack vector require mid‑market financial firms to invest in advanced technologies, cultivate a strong security culture and navigate complex regulations to protect their assets and maintain customer trust.
• 58 % of small and mid‑sized businesses (SMBs) spent more than planned on cybersecurity in 2024 and 57 % now rank it as their top business priority. Despite this investment, only 51 % have implemented AI security policies, and 73 % are not fully confident that their managed service providers can protect them from cyberattacks.
• SMB financial companies operate under a complex regulatory environment that includes the Gramm–Leach–Bliley Act (GLBA), New York Department of Financial Services (NYDFS) regulations, Payment Card Industry Data Security Standard (PCI DSS), Federal Financial Institutions Examination Council (FFIEC) guidance and emerging frameworks such as NIST Cybersecurity Framework 2.0 and CISA’s sector‑specific performance goals. The FFIEC will sunset its Cybersecurity Assessment Tool (CAT) on August 31 2025 and encourages institutions to adopt updated government frameworks and industry tools.
• Managed detection and response (MDR), virtual Chief Information Security Officer (vCISO) services, vulnerability assessments and penetration testing, regulatory compliance support and incident‑response retainers are among the most sought‑after cybersecurity services for SMB financial firms. These services address the security skills shortage, provide 24/7 monitoring and help organizations meet regulatory requirements.
• Best practices for SMB financial institutions include adopting recognized frameworks (e.g., NIST CSF 2.0 or the Cyber Risk Institute profile), implementing multi‑factor authentication and encryption, conducting continuous vulnerability management, managing third‑party risk, training employees to recognize AI‑driven social‑engineering attacks and maintaining robust incident‑response and business‑continuity plans.

Small and medium‑sized financial institutions are vital to the U.S. economy, delivering banking, credit and payment services to communities and businesses. The sector’s rapid digitalization – ranging from online banking and mobile payments to cloud‑hosted core systems – has expanded the attack surface and increased reliance on technology. A 2025 study notes that financial institutions must be agile, adaptive and proactive in their security strategies, investing in advanced technologies, cultivating a strong security culture and navigating a complex regulatory landscape to protect assets and maintain customer trust.

Unlike large banks, SMB financial companies often lack the in‑house expertise and budgets to handle sophisticated cyber threats. They face unique challenges, including limited staff, resource constraints and dependence on third‑party vendors. Yet threat actors increasingly target smaller financial institutions, perceiving them as softer targets with valuable data and direct access to payment systems. This whitepaper synthesizes current research and official guidance to help SMB financial firms understand the 2025 threat landscape, navigate regulatory obligations and implement effective cybersecurity programs.

Threat Landscape

Ransomware and Double‑Extortion

U.S. banking regulators warn that ransomware attacks continue to increase in frequency and severity across all sectors, including finance. Modern ransomware operations often employ “ransomware‑as‑a‑service,” where developers supply malicious code to affiliates in exchange for a cut of the ransom. Attackers now use double‑extortion tactics that encrypt data and threaten to release stolen information if ransoms are not paid. Small financial institutions may lack the resources to withstand prolonged downtime or negotiate with attackers, making prevention and rapid detection critical.

Distributed Denial‑of‑Service and Account Takeover

The OCC identifies DDoS attacks and account takeover as major threats. DDoS attacks disrupt online services by overwhelming them with traffic. Financial institutions must include DDoS preparedness in their incident‑response plans and deploy mitigation controls. Account‑takeover attacks often begin with phishing and stolen credentials; criminals then use compromised accounts to initiate fraudulent payments or gain access to internal systems.

Supply‑Chain and Third‑Party Risks

Supply‑chain attacks target widely used software and service providers. In these attacks, malicious code or backdoors inserted into vendor systems can spread to thousands of customers. Regulators emphasize the importance of assessing and managing risks arising from third‑party relationships. Community banks often rely on third parties for new technologies and human capital; however, reliance reduces direct control and introduces new risks. Updated interagency guidance published in 2023 and 2024 helps community banks identify, assess and monitor third‑party risks.

Geopolitical Threats and Emerging Technologies

Heightened geopolitical tensions and nation‑state cyber campaigns underscore the need for threat monitoring and public–private information sharing. Emerging technologies also pose risks:

• AI and Machine Learning (ML) as a Double‑Edged Sword: Financial institutions use AI/ML for fraud detection and anomaly monitoring, but cybercriminals leverage the same technologies to create more convincing phishing emails, automate vulnerability exploitation and develop adaptive malware. A survey of SMBs found that 83 % believe AI has raised the cybersecurity threat level.
• Internet of Things (IoT) and Operational Technology (OT): Increased use of IoT and OT devices in finance (e.g., ATMs, security cameras, branch automation) introduces new attack surfaces because these devices may lack strong security controls.
• Deepfakes and Synthetic Identity Fraud: Advances in generative AI enable attackers to craft realistic impersonations and synthetic identities, increasing the risk of social‑engineering and identity‑fraud schemes.
• Quantum Computing: While still nascent, quantum computing could one day break current encryption. Regulators advise financial institutions to monitor developments and plan for quantum‑resistant cryptography.
• Digital Assets: The OCC notes that volatility in cryptocurrencies and related services can introduce novel cybersecurity and operational risks.

Business Impact and SMB Concerns

According to the 2024–2025 State of SMB Cybersecurity Report summarized by ConnectWise, 58 % of SMBs spent more than planned on cybersecurity in 2024, and 57 % rank cybersecurity as their top business priority. However, 73 % of SMBs lack full confidence in their managed service providers' ability to defend them, and nearly half would switch providers for stronger security solutions. Only 51 % of SMBs have implemented AI‑specific security policies, highlighting a significant readiness gap. These statistics illustrate both increased awareness of cyber risk and persistent underpreparedness among smaller organizations.

Regulatory Environment and Compliance Frameworks

SMB financial institutions must navigate a complex patchwork of federal and state laws, industry standards and supervisory guidance. Compliance is not optional; regulators can levy significant fines and enforce remedial actions for deficiencies.

Reporting and Disclosure Requirements

Recent regulations emphasize timely reporting of cyber incidents. The Cybersecurity Incident Reporting for Critical Infrastructure Act (CIRCIA) will require covered entities to report significant cyber incidents within 72 hours and ransomware payments within 24 hours. Institutions operating in multiple states must also comply with state‑specific data breach notification laws and privacy statutes, increasing complexity.

Third‑Party Risk Management

Interagency guidance issued in 2023 and 2024 outlines principles for identifying, assessing, monitoring and controlling risks from third‑party relationships. Regulators expect financial institutions to conduct due diligence on technology vendors and fintech partners, ensure contract provisions address security controls and incident reporting, and monitor vendors’ ongoing compliance. The OCC stresses that banks should align their technology architectures with cybersecurity programs and develop comprehensive operational resilience and supply‑chain risk management approaches.

Strategic Cybersecurity Services and Solutions

With limited internal resources, SMB financial firms increasingly outsource key security functions to specialized providers. The most in‑demand services include:

1. Managed Detection and Response (MDR) / Security Operations Center (SOC) Services: Always‑on monitoring, threat hunting and incident response provide early detection and mitigation. Outsourcing these functions addresses the cybersecurity talent shortage and ensures 24/7 coverage.
2. Virtual CISO (vCISO) Services: Fractional CISO consulting delivers strategic leadership, policy development and regulatory guidance without the expense of a full‑time executive. Surveys indicate that demand for vCISO services is surging, especially among mid‑market organizations.
3. Vulnerability Assessments and Penetration Testing: Regular assessments help SMB financial institutions proactively identify and remediate weaknesses. Continuous vulnerability management is essential for complying with PCI DSS and GLBA requirements.
4. Compliance and Regulatory Support: Navigating NYDFS, GLBA, PCI DSS and other regulations requires specialized expertise. Compliance‑as‑a‑service offerings assist with risk assessments, documentation, policy development, audit preparation and regulatory reporting.
5. Incident Response Retainers: Pre‑arranged access to incident response teams ensures prompt containment, investigation and recovery. Regulators expect firms to have formal incident response and business continuity plans; partnering with specialists enhances preparedness.
6. Security Awareness Training: Human error remains a top attack vector. Only 51 % of SMBs have policies for secure use of AI tools. Employee training programs teach staff to recognize phishing, business email compromise and deepfake scams, creating a “human firewall”.
7. Third‑Party Risk Management Services: As supply‑chain attacks rise, vendors that provide third‑party risk assessments, continuous monitoring and vendor‑due‑diligence tools help SMB financial institutions meet regulatory expectations.

Best Practices for SMB Financial Institutions

To build resilient cybersecurity programs and satisfy regulators, SMB financial institutions should implement the following best practices:

1. Adopt a Recognized Framework: Use NIST CSF 2.0 or the CRI profile as the foundation for your cybersecurity program. These frameworks provide a structured, risk‑based approach and align with regulatory expectations.
2. Governance and Leadership: Ensure that cybersecurity is addressed at the board and executive level. Board members should understand their oversight role; the FDIC’s Cybersecurity Awareness video series helps directors and bank officers grasp their responsibilities.
3. Risk Assessments: Conduct regular risk assessments covering technology, processes, human factors and third‑party relationships. Align technology architecture planning with cybersecurity programs to maintain adequate safeguards and resilient operations.
4. Multifactor Authentication (MFA) and Access Control: Implement MFA for all privileged and customer‑facing systems, as mandated by NYDFS regulations. Employ principle‑of‑least‑privilege access controls and monitor privileged activity.
5. Encryption and Data Protection: Encrypt sensitive data at rest and in transit. Implement data loss prevention (DLP) controls and monitor for unauthorized data exfiltration. The CRI profile includes diagnostic statements focused on DLP.
6. Continuous Vulnerability Management: Regularly scan networks and applications for vulnerabilities and apply timely patches. Prioritize remediation based on risk. PCI DSS requires vulnerability scanning and secure development practices.
7. Network Segmentation and Zero‑Trust Architecture: Segregate critical systems to contain breaches. Adopt zero‑trust principles—verify and authenticate every connection and implement granular access controls.
8. Third‑Party and Supply‑Chain Governance: Perform thorough due diligence on vendors, include security requirements in contracts and monitor third‑party compliance. Follow interagency guidance to identify and control supply‑chain risks.
9. Incident Response and Business Continuity Planning: Develop formal incident‑response plans that cover detection, containment, eradication and recovery. Incorporate DDoS and ransomware scenarios. Test plans through tabletop exercises and update them based on lessons learned.
10. Security Awareness and AI‑Era Training: Provide regular training on phishing, business email compromise, deepfake detection and safe use of AI tools. ConnectWise’s research highlights that a lack of AI‑specific security policies leaves many SMBs vulnerable.
11. Threat Intelligence and Information Sharing: Engage with the Financial Services Information Sharing and Analysis Center (FS‑ISAC) and monitor alerts from CISA and other partners. Participation in information‑sharing forums provides actionable intelligence and early warning of emerging threats.

The Way Forward

Cyber threats targeting small and medium‑sized financial institutions are escalating in sophistication and impact. Regulatory expectations are also intensifying, with frameworks like NIST CSF 2.0 and CISA’s performance goals replacing older tools such as the FFIEC CAT. To survive and thrive, SMB financial companies must adopt a proactive, risk‑based cybersecurity program that integrates governance, technology and human factors. By embracing recognized frameworks, investing in managed security services and vCISO guidance, implementing robust controls (MFA, encryption, segmentation), managing third‑party risk and cultivating a culture of security awareness, SMB financial institutions can improve their resilience and maintain the trust of their customers. Continuous collaboration with regulators, information‑sharing groups and industry peers will further strengthen defenses against evolving threats.