Are online banks safe?

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Online banks are safe to use as long as they’re federally insured and you take some simple steps to protect your information. This is good because online banks often offer the most competitive rates.

Here’s what to know about the safety of online banks and how to protect yourself.

What is an online bank?

An online bank is a bank that typically doesn’t have any physical locations. Without a brick-and-mortar presence, online banks can save on the traditional expenses that go along with operating a branch. This is how online banks can offer such competitive annual percentage yields (APYs).

Instead of talking to bank tellers and bankers, you communicate with an online bank via its website or by calling its customers service number. It might also offer a mobile app or a way to message a customer service representative online to get your questions answered.

Are online banks safe to use?

As long as the bank is insured by the Federal Deposit Insurance Corp. (FDIC)., it will offer the same coverage as the FDIC bank down the street, and it is safe to use. Use the FDIC’s BankFind tool to confirm the online bank is FDIC-insured. This tool allows you to search a bank by its name or web address.

Anna Sergunina, a certified financial planner at MainStreet Financial Planning, Inc., in Burlingame, California, says she’ll sometimes come across banks she’s never heard of before. The BankFind tool is the first place she’ll go to confirm the bank’s FDIC status.

Sergunina says when she doesn’t recognize a bank name, she’ll see if it’s affiliated with a larger bank.

“Doing a little bit of due diligence helps,” she says.

In some cases, the two financial institutions might actually share the same insurance. Take Citizens Access or Investors eAccess.

  • Citizens Access is an online bank that’s a division of Citizens Bank. The two are treated as the same entity, under the same FDIC certificate, when calculating FDIC insurance.
  • Investors eAccess is an online bank, and is a trade name of Investors Bank. Deposits at Investors eAccess are deposits of Investors Bank for FDIC purposes.

These banks are examples of a common trend: that the online bank you’re considering for its high yield might be related to a familiar traditional bank. Keep in mind that since these banks are related, your FDIC insurance may be limited to $250,000 between the two banks. Always check with your bank and use the FDIC’s EDIE Estimator to make sure your money is all covered under FDIC insurance.

How to bank online safely

Whether it’s using an online bank or online banking at a traditional bank, be sure to follow some best practices.

For instance, always type in the bank’s website into your browser and don’t use a link that you were emailed or received via a text message. Also make sure the bank’s website is using an HTTPS web address before logging in.

Sergunina offers these tips for safely banking online:

  • Change your password on a regular basis: And if you use a password manager, don’t forget to change that password too.
  • Use multi-factor authentication: The two-step process might seem like extra work, but it adds another layer of security to your account. This is usually in the form of receiving a code via text.
  • Set alerts for text messages: These may let you know about unauthorized transactions or withdrawals in your account.
  • Consider a virtual private network (VPN): Sergunina says that in addition to using a VPN on your laptop or tablet, you should use one on your phone.

Also, make sure your bank password isn’t used anywhere else, and see if your bank allows you to use a verbal password to further protect your account.

Pros and cons of online banks

Before choosing between an online bank and a traditional, read the pros and cons of online banks.

The pros of an online bank

Here are three benefits of online banks:

  • They usually offer a more competitive APY: That’s often the biggest advantage of an online bank. They’re typically going to reward you with the highest yield for depositing your money.
  • An online bank may offer ATM reimbursement or access to  large ATM networks: Since they usually don’t operate their own ATMs, they might offer these features. These ATM options might make it even more convenient for you than finding your brick-and-mortar bank’s ATM.
  • Maintenance fees usually aren’t found at online banks: Monthly service fees aren’t common at the best online banks. You should be able to easily find an online bank that doesn’t have a monthly service fee.

The cons of an online bank

Here are some downsides to consider.

  • They aren’t for people who want face-to-face meetings with a banker: You’re generally not able to walk into an online bank because they don’t usually operate branches. People that like to withdraw money from a teller might not like an online bank. However, you could also keep both a bank account at a brick-and-mortar bank and a high-yield savings account at an online bank to have the best of both worlds.
  • Large cash withdrawals might be challenging: Your online bank probably won’t have a physical branch where you can withdraw money. Also, some online banks might not have ATM cards for a savings account. But an online bank might provide a debit card for a checking account — and an option where you can transfer money from savings to checking. Also, the online bank might have transfer options, such as Zelle.

Should you use an online bank?

An online bank is a great option for people looking to earn a competitive yield without paying monthly fees. Online banks tend to charge fewer fees than traditional banks.

Going completely online is a tougher decision. But having an online bank as at least a piece of your banking plan is a good idea.

Some online banks provide great options for checking accounts, too. These options can include free checks, access to a large ATM network or networks, and no maintenance fees.

An online bank is also a great place for an emergency fund. Keeping your rainy-day fund at an online bank keeps it separate from your spending money. Not seeing that money in the same place as your checking account can be beneficial.

FDIC-insured online banks are a great place to earn a competitive APY and keep your money safe as long as you follow the FDIC’s limits and guidelines.

Featured image by Jose Luis Pelaez Inc of Getty Images.

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