If you’re comfortable managing your finances with a computer or a smartphone -- and can do without standing in line at your local bank branch -- enrolling in an online bank or online credit union is a no-brainer. More people are seeing value in the convenience of banking online, but many brick-and-mortar bankers are still concerned about such risk factors as data security. In fact, online banks are quite safe, especially those that are federally insured.
But there are drawbacks to online banking worth noting, such as potential security vulnerabilities and fewer banking options for some banks. Here’s what you need to know about banking online and opening an account with an online bank.
What is an online bank?
For the most part, online banks provide products and services that traditional banks offer, but with the big exception that all transactions are made through the internet. There are no physical branches to visit to do in-person financial transactions. While online banks give you access to your account 24/7, all of your financial affairs are managed through the bank’s website or mobile app, and any interaction with customer service reps is through telephone, email or live chat.
Although the lack of physical branches may not appeal to some, others are drawn to online banks because they tend to offer higher-yielding rates and lower fees than traditional banks. That’s possible because online banks don’t have overhead costs, such as those needed to operate physical branches.
How safe are online banks?
Most online banks and credit unions are federally insured, which means that the US government will protect your money in the event the bank or credit union fails. Deposits at federally insured banks are insured by the Federal Deposit Insurance Corporation, while credit unions are insured by the National Credit Union Administration, each for up to $250,000 per person, per institution -- the same level of coverage you get at a traditional bank. However, before you begin banking with an online bank or credit union, confirm that it’s insured by the FDIC or NCUA.
To protect the funds in your account, online banks use many of the same data-encryption technologies that are used for online shopping such as encrypted email messaging, automatic logout functionality, two-factor or biometric authentication, continuous account monitoring and electronic signature verification.
But security shouldn’t stop there. As an account holder, you should take some simple steps to protect your information, such as using a secure internet connection and a strong password.
It’s also important to be aware of potential security threats and to take measures to ensure that you’re using a trusted and secure app.
How to stay safe when using online banking
Here are some simple steps you can take to protect your online banking information:
- Ensure that the network you’re using is secure.
- Create a strong, unique password.
- Avoid public Wi-Fi.
- Sign up for banking alerts.
- Use two-factor authentication.
- Keep personal information to yourself.
- Don’t reuse passwords for separate accounts.
Your bank likely has data security measures in place, too, such as encryption, which scrambles information when it’s sent over the internet, as well as privacy policies. Visit BankFind on the FDIC’s website or use the NCUA’s Research a Credit Union tool to confirm whether a financial institution is federally insured.
Pros
Higher annual percentage yield: Online banks tend to offer higher interest rates on savings accounts than traditional banks.
Lower APRs: Digital banks often offer lower interest rates on loans and lines of credit.
Limited maintenance fees: Some online banks offer accounts with low or no maintenance fees or monthly minimum balance requirements.
Convenience: You can open an account, transfer money and apply for loans from anywhere with an internet connection.
Cons
Fewer account options: If you’re looking for an account with specific features, such as a joint or business account, you may have a harder time finding one through an online bank.
Harder to deposit cash: If you use cash, you’ll have to find another way to deposit it without going to a physical location.
No physical bank branch: If you prefer face-to-face service, then online banking may not be right for you. Keep in mind, banks such as Capital One offer a hybrid solution -- physical branches with the benefits of an online bank -- that may serve you well.
Is online banking right for you?
There are many types of online banks that provide a variety of services. An online bank can fulfill your financial needs (just as traditional banks have done), but whether the format agrees with your tastes is a personal decision. Determining what makes the most sense will hinge on many factors, including adequate security measures, competitive APYs and your comfort level with managing your financial affairs via mobile devices.
Online banks or credit unions can supplement your overall banking strategy. Instead of replacing accounts from a traditional bank, a high-yield savings account from an online credit union such as Alliant can serve as a place to build your emergency fund. Maintaining an emergency fund that is separate from the account used to manage routine living expenses can help you avoid draining your savings for frivolous reasons.
Keep in mind, online banking can be limiting if you often deposit cash. While online banking is a safe option, it’s up to you and your banking preferences when it comes to managing your finances.
The bottom line
With some basic precautions, online banking can be both convenient and offer security features that protect your personal information and money. Many banks offer two-factor or biometric authentication, use end-to-end encryption and monitor for unauthorized access. In case of a bank failure, you’ll also want to make sure your funds are FDIC- or NCUA-insured to protect your deposits up to $250,000 per person, per institution.
However, there are some potential downsides to consider, such as fewer account options and challenges with depositing cash. Ultimately, the decision to bank online depends on your individual needs and preferences.
Before opening an account at a physical branch or online bank, be sure to ask about the security and safety features the bank offers to protect your account. Take time to understand these services for your safety.
Editors’ note: An earlier version of this article was assisted by an AI engine. This version has been substantially updated by a staff writer.
