Online banks usually carry the same FDIC insurance as traditional banks.
Because they don't carry the operating expenses of traditional banks, online banks can offer more competitive APYs and better rewards.
Look for online banks with features that protect your data, such as multi-factor authentication, encryption, fraud monitoring and automatic sign-out.
To best protect your information, always use safety precautions when banking online, such as using a VPN, avoiding public networks, using a secure password and setting text message alerts for suspicious activity.
Ninety percent of consumers say that financial security is a top concern as banking becomes more digital, according to a report by security software company Entrust. Fortunately, online banks are generally very safe, carrying FDIC insurance of up to $250,000 per depositor, per bank, per account ownership type.
Additional protections can include everything from encryption and tokenization to multi-factor authentication and mobile banking alerts. With the right security measures, online banks can open up the opportunity for you to earn some of the highest savings rates on the market, and often with low or no fees.
Online banks statistics
More than 70% of consumers prefer to manage their bank accounts digitally through a computer or mobile app.
Despite the migration to mobile, 38% of customers still consider branches essential.
97% of consumers rate their banks’ digital offerings as “excellent,” “very good” or “good.”
79% believe improvements in digital technology make banking more accessible.
What is an online bank— and is online banking safe?
An online bank is a bank that offers services primarily through the internet. Without the expenses of operating a brick-and-mortar presence, it can offer competitive annual percentage yields well above the national average.
Instead of talking to bank tellers and bankers, you communicate with an online bank via phone, email, mobile app or online chat on the bank’s website.
Still, cybercrime is a financial security issue that many consumers are concerned about when debating whether online banking is safe. That can include things like online hackers, identity theft and phishing. To combat this, online banks offer a number of extra security measures to protect your finances and maintain consumer trust.
According to Entrust’s consumer survey, the top three most common security features offered by banks are username and password entry, security questions and multi-factor authentication. Bank sites also come with data encryption and tokenization, which ensures that your personal data is protected from unauthorized access.
Is an online savings account FDIC-insured?
Online banks are just as safe as traditional brick-and-mortar banks, as long as the online bank is insured by the Federal Deposit Insurance Corp. (FDIC). Confirm whether a bank is FDIC insured by using the FDIC’s BankFind tool, which permits searches by bank name or web address.
You may find that an online bank with a high yield might be related to a familiar traditional bank, sharing the same insurance, such as Citizens Access (Citizens Bank) and Bask Bank (Texas Capital Bank). Because these banks are related to other entities, FDIC insurance may be limited to a shared total sum of $250,000 in deposits per account owner (for joint accounts, each person is insured up to $250,000).
Check with your bank and use the FDIC’s BankFind and EDIE Estimator tools to ensure your money is completely covered under FDIC insurance.
How do online banks secure your data?
Online banks secure your data using a number of methods:
Multi-factor authentication: Online banks will require multiple forms of authentication before granting access to your account. This means instead of just using a password, they may also require another type of information, such as a security question, PIN or ATM card number.
Encryption: Special encryption software secures data to protect personal information and secure online transactions.
Fraud monitoring and prevention: Online banks typically use special software that monitors your account and is able to detect unusual or fraudulent activity.
Automatic sign-out: Most online banks will automatically log you out of your account after a certain period of inactivity, so information is not accidentally accessed by the wrong party.
Before opening a new account with an online bank, ask what kind of security measures they employ to protect your data.
Traditional banking vs. online banking: which is safer?
Some bank accounts come from lesser-known online banks, causing some to worry whether an online savings account is FDIC insured. However, both traditional and online banks generally carry FDIC insurance, protecting your funds should the bank fail. As long as there is FDIC protection for your funds, your online bank is just as safe as a traditional bank with the same insurance.
Traditional banks do carry the benefit of in-person service, which reduces the exchange of information over the web. Still, many online banks counteract this cyber risk with tools like multi-factor authentication and encryption. It is also important to be proactive about your security and employ certain protective measures yourself to ensure your information remains safe while accessing your account online.
Safely opening a bank account online
To open a bank account online, you’ll need a computer or smartphone, a secure internet connection and to be ready to provide personal information, such as a Social Security number, to verify your identity. The process of opening an account online is similar to opening one at a branch, but it’s best to take some precautions to ensure your personal information stays protected from cyber-attacks and other types of banking fraud.
Make sure the network connected to the internet is secure.
Avoid public Wi-Fi networks so your data is not exposed to other network users.
Consider using a virtual private network, or VPN, to help ensure your connection is secure.
Create a password that’s unique and not easy to guess. Doing so will make it harder for hackers to break into an account and commit identity theft.
Set up banking alerts. This way, your bank can easily notify you if any suspicious activity is detected on your account.
Safety precautions when banking online
Once you have safely opened your bank account, it is important to keep it safe during future use. Whether using an online bank or online banking at a traditional bank, adhering to some best practices can keep your money safe:
Directly type the bank’s web address into your browser, and don’t use a link that was emailed or received via a text message to avoid phishing scams.
Change your password regularly and don’t use it anywhere else. You may also want to see if your bank allows you to use a verbal password for further protection.
Use multi-factor authentication. The two-step process might seem like extra work, but it adds another layer of security, usually in the form of receiving a code via text or an authenticator app.
Set text message alerts to advise you of unauthorized or suspicious transactions.
Consider using a VPN on your laptop, tablet and smartphone when logging into your banking accounts.
Consider downloading identity theft-protection software, which often comes with several protective measures packaged into one, including a VPN and password monitoring.
Is an online bank right for you?
Going completely online can make some banking services — like depositing cash — more difficult, but having at least part of a banking portfolio with an online bank can add convenience and extra perks to managing finances. If you are comfortable with digital services, online banking could greatly simplify your life and save you a ton of time.
Online banks are especially attractive to many because of their competitive rates and low fees. FDIC-insured online banks can pay high APYs and keep your money safe as long as you follow FDIC limits and guidelines. You still get all the banking perks of traditional banks but with the convenience of 24/7 online service.
Some online banks provide high-yield checking accounts, which pay competitive yields and may include free checks, access to a large ATM network and no maintenance fees. An online bank can also be a good place for starting and building an emergency fund, especially if you’re keen on keeping your rainy-day fund separate from your spending money. Not seeing that money in the same place as your checking account can help deter you from transferring or withdrawing it.
If you want to benefit from the features of online banks while still maintaining some branch access, you could consider having multiple accounts with different types of institutions. For example, keep a savings account at a brick-and-mortar bank and a high-yield savings account at an online bank.
Consumers interested in the fintech sphere can find alternatives called challenger banks or neobanks. These institutions are technically not banks, but they offer financial products like debit cards and savings accounts and are typically digital-only or sometimes even mobile-only.
An online bank is a great option for consumers looking to save more with a competitive yield and fewer monthly fees. Federally-backed online bank accounts are safe to use and are insured just the same as brick-and-mortar banks.
Still, it’s always good to have some caution and protect your personal information. Consider downloading antivirus or identity theft-protection software, and make sure to keep your account details — especially passwords — private.
If you’re considering switching to an online bank, make sure to verify that it offers FDIC insurance. Also, compare savings rates, minimum balance requirements and any unique digital offerings.
