Do online banks offer financial security?
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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, though some may have more security features than others.
Online banks are FDIC-insured just as traditional banks are, meaning each customer is protected by up to $250,000 per bank, per account ownership type.
But that’s not the only way online banks can keep your money safe. Some features online bank accounts come with to protect your finances include encryption or tokenization, 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
- Thirty percent of Americans say they haven’t opened an online savings account because they’re concerned about the security of their money.
- Nearly half (42 percent of consumers) say they’ve been notified of a personal banking or credit fraud incident in the last year.
- Fraud incidents damage customer loyalty — 67 percent of those who were notified of fraud changed their bank or credit union because of it.
- The top three most trusted authentication methods, according to consumers, are username and password entry (59 percent), security questions (51 percent) and two-factor authentication (46 percent).
- While 21 percent of consumers used a digital-only bank account in 2021, 61 percent said they were somewhat or highly likely to switch to a digital-only bank.
- The top consumer concern for financial services is security of accounts and funds, with 96 percent citing it as a concern.
Sources: Bankrate, Entrust, Galileo
What is an online bank?
An online bank is a bank that offers services primarily through the internet. Without a brick-and-mortar presence, online banks can save on the traditional expenses that go along with operating a branch. This allows online banks to offer competitive annual percentage yields well above the national average.
While the national average savings rate is 0.23 percent APY at the time of this review, nearly half (40 percent) of online banks offer savings rates of 4 percent APY or higher, according to Bankrate’s Online Savings Survey — that’s almost 20 times the national average.
Instead of talking to bank tellers and bankers, you communicate with an online bank via its email, mobile app, online chat on the bank’s website or calling the customer service number.
(See Bankrate’s picks for the best online banks of 2023.)
Are online banks safe to use?
Yes, online banks are safe. As long as an online bank is insured by the Federal Deposit Insurance Corp. (FDIC), it will offer the same coverage as the FDIC-insured bank down the street. The FDIC covers up to $250,000 per depositor, per FDIC-insured bank, per ownership category. Confirm whether a bank is FDIC insured by using the FDIC’s BankFind tool, which permits searches by bank name or web address.
An online bank with a high yield might be related to a familiar traditional bank. In some cases, an online bank division of a brick-and-mortar bank may share the same insurance with it. Citizens Access or Bask Bank are two examples:
- 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.
- Bask Bank is an online bank and a division of Texas Capital Bank. Deposits at Bask Bank are considered deposits of Texas Capital Bank for FDIC purposes.
Since these banks are related to other entities, FDIC insurance may be limited to a shared total sum of $250,000 in deposits. Check with your bank and use the FDIC’s EDIE Estimator to determine whether all your money is completely covered under FDIC insurance.
Still, cybercrime is a financial security issue that many consumers are concerned about when it comes to online banking. That can include things like online hackers, identity theft and phishing.
Online banks come with a number of extra security measures to protect your finances and maintain consumer trust, though. 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.
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 that’s being used to connect to the internet is secure. Public Wi-Fi networks should be avoided. One way to ensure your connection is secure is by using a virtual private network, or VPN.
It’s also important to 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.
Safety precautions when banking online
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. This can help you 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 a VPN, a service that encrypts your internet connection to keep it safe. Use a VPN on your laptop, tablet and smartphone when logging into your banking accounts.
- Consider downloading identity theft-protection software. These services can often come with several protective measures packaged into one, including a VPN and password monitoring.
Pros and cons of online banks
|Higher APYs||Lack of branches means no face-to-face service|
|Fee-free access to large ATM networks||May have fewer product offerings and less variety of account types|
|Typically lower or no monthly fees||It can be more difficult to deposit cash|
|Easy access to your account and virtual customer service|
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.
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 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.
FDIC-insured online banks pay competitive APYs and keep your money safe as long as you follow FDIC limits and guidelines.
If you want to take advantage of the features of online banks while still having 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, sometimes even mobile-only. They may also support specific social issues. Aspiration, for example, is a neobank focused on environmental protection.
An online bank is a great option for consumers looking to save more with a competitive yield and be charged 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 around protecting 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.