Andy Greenawalt worries about community banks. He knows that their numbers have dwindled over the past decade — from around 20,000 nationally to around 13,000 today. That trend has been driven by more than the fallout from the 2008 financial crisis, which hit the banking sector hard, Greenawalt contends, but also by two challenges that are driving up operating costs and making it challenging for some banks to survive: complying with regulations and cybercrime.
“A typical community bank [$400 million in assets] spends on average about $500,000 a year complying with regulations,” said Greenawalt, president of New Haven-based Continuity Control, which has developed a compliance management system to reduce the time and expense of handling the more than 13,000 regulatory citations to which community banks are subject. “We can cut the cost and time of managing compliance responsibilities in half.”
Despite the strain new regulations have created for banks, it has turned into a big business opportunity for Continuity Control and other Connecticut software companies that cater to the compliance needs of community lenders. Continuity Control has more than doubled its employee count since 2013 and grew sales by more than 150 percent last year.
Since its founding in 2008, Continuity Control has raised more than $16 million in capital, including a $10 million infusion this past August, to grow its infrastructure and sales teams.
Meantime, Wethersfield’s Fortress Risk Management, a technology and service firm that helps safeguard banks and credit unions from cyber criminals, has attracted $3.5 million to expand the development of new products and services.
“Demand is growing for monitoring requirements and compliance is increasingly costly,” said Sarah Buonfiglio, the investor relations manager at Black Dragon Capital LLC, which is one of several investors in Fortress Risk Management. “We estimate the [compliance and financial risk management] industry is a $1 billion — and expanding — market,” she added.
According to a 2013 KPMG Community Banking Industry Outlook Survey, regulatory pressures and risk management issues were cited by respondents as the biggest barriers facing community banks over the next year. The report noted that 37 percent of banks in the survey were spending nearly one-third of their operating expenses complying with regulations.
Those figures don’t surprise Greenawalt. “Your typical community bank might have 12 employees and compliance reporting and reminders are typically a manual process,” he said. “That’s the most expensive way to handle compliance.”
He points, for instance, to a requirement — under the Community Reinvestment Act — that community bank employees must provide a certain number of volunteer hours in the community each month.
“In many banks or credit unions, there’s a person who emails his or her colleagues to track those hours,” Greenawalt said. “And then they have to monitor responses and send reminders [to non-responders] if they remember to.”
By comparison, Continuity Control’s system — which pulls regulatory updates from publicly available information and has a team of analysts trained to explain new regulations to clients — can automate the process for collecting volunteer hours. “And if the regulations change from collecting that data from, say, quarterly to monthly,” Greenawalt explained, “our system would adjust to the new required schedule.”
But it’s not just lost productivity that’s worrying community bank executives. Cybercrime — including money laundering, bill pay fraud, and hacking are growing threats and expenses to banks as well.
“Community banks and credit unions are constantly at risk from a growing number of emerging cyber threats,” said David Mitchell, president of Fortress Risk Management. “It is one of the most serious and potentially crippling issues facing these institutions.”
It’s a threat that Mitchell says is continually evolving as cybercriminals utilize the most advanced technologies and techniques to target community banks and credit unions.
Mitchell’s company, which tripled its revenues in the past year, is using behavioral and transactional analytics to help banks predict and identify fraudulent transactions that could result in losses. “Our advanced intelligence technology and professional expertise can predict and reduce risk from financial crimes perpetrated on banks,” he said.
