Yes, online banks are safe — here are the pros and cons

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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 important to know because online banks typically offer the most competitive rates.

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

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 allows online banks to offer competitive annual percentage yields (APYs).

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 2021.

Are online banks safe to use?

Yes, online banks are safe. As long as an online bank is insured by the FDIC, it will offer the same coverage as the FDIC-insured bank down the street. Use the FDIC’s BankFind tool to confirm the online bank is insured. This tool allows you to search a bank by its name or web address.

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

  • 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.

Safety precautions when banking online

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

  • 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.
  • Make sure the bank’s website is using an HTTPS web address before logging in.
  • Change your password on a regular basis. 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). Use a VPN on your laptop, tablet and phone.
  • Make sure your bank password isn’t used anywhere else.
  • See if your bank allows you to use a verbal password to further protect your account.

Pros and cons of online banks

Before deciding to bank with an online bank, consider the benefits and drawbacks.

The pros of an online bank

Here are three benefits of online banks:

  • Online banks typically offer some of the highest APYs nationwide.
  • Online banks may offer ATM reimbursement or access to large ATM networks. These ATM options might make it even more convenient for you than finding your brick-and-mortar bank’s ATM.
  • Online banks typically don’t charge maintenance fees. 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.

  • Online banks 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.
  • 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 the ability to 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 high-yield 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.

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