Online banks can be just as secure as traditional banks if they are FDIC-insured. As a customer, you can also take precautions to protect your account, whether you use a traditional or an online bank.
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What is an Online Bank and How Does It Work?
Online banks operate exclusively over the internet, without any physical branches. All banking activities are conducted through a website or mobile app. According to J.D.
These banks offer many services similar to traditional banks, such as checking and savings accounts, and ATM access. Without the overhead costs of physical branches, they can offer lower fees and higher interest rates. Many highly-rated high-yield savings accounts and money market accounts are provided by online banks.
However, online banks lack certain traditional services that might provide additional security:
- No in-person interaction with bank employees.
- No access to safety deposit boxes for important documents and valuables.
- No services like cash deposits, money orders, and notarization.
What Measures Do Online Banks Take to Protect Your Money?
Online banks use several security measures similar to traditional banks to safeguard your funds:
FDIC Insurance: Most online banks are insured by the Federal Deposit Insurance Corporation (FDIC), protecting deposits up to $250,000 per depositor, per ownership category, per bank.
Data Encryption: They use strong encryption to prevent unauthorized access to your information, including card numbers and other sensitive data.
Multi-Factor Authentication: This requires multiple forms of verification before allowing account access. For example, in addition to a password, you might need to answer a security question or enter a PIN sent to your phone or email.
Automatic Sign-Out: Online banks often use automatic sign-out features to log you out after a period of inactivity, preventing unauthorized access.
Fraud Monitoring: Many online banks monitor for fraudulent activities and may contact you if they notice unusual transactions. You won't be held responsible for unauthorized transactions.
How to Verify If an Online Bank is Legitimate
Before opening an account and depositing money, it’s important to ensure an online bank's legitimacy:
Check FDIC Insurance: The FDIC offers a tool to verify a bank's FDIC insurance status. You can search by bank name, FDIC certification number, and website.
Look for Complaints: The Consumer Financial Protection Bureau (CFPB) has a searchable database of complaints about financial products and services. Be cautious if you find recurring complaints.
Read Online Reviews: Reviews from the Better Business Bureau and online publishers can provide insights into other customers' experiences with the bank.
Research Security Measures: Check what security measures the bank uses, which is often detailed on their website.
Additional Tips to Keep Your Money and Information Safe
Both online and traditional banks take steps to protect your information, but you can further safeguard your account:
- Password Protect Your Devices: Set up passwords on devices used for online banking.
- Enable Multi-Factor Authentication: Use this feature for an additional layer of security.
- Use Strong Passwords and Change Them Regularly: Create complex passwords and update them frequently.
- Avoid Public Wi-Fi: Don't log into your bank account on public networks.
- Use Only Personal Devices: Avoid logging into your account on public computers or others' devices.
- Be Cautious Sharing Information: Never send bank account or Social Security numbers via email.
- Monitor Your Account: Regularly check for unauthorized activity and set up text alerts for transactions.
- Keep Software Updated: Ensure your phone and banking app are updated to the latest versions for optimal security.
What Are the Risks of Online Banking?
The main risk of online banking is unauthorized access to your account through hacking, exposing you to potential fraud. These risks exist for both online and traditional banks that offer online services.
How Safe is Online Banking on a Mobile Phone?
Mobile banking can be safe if you take precautions, such as password-protecting your device, using multi-factor authentication, and avoiding public Wi-Fi for banking transactions.
How Safe is Online Banking While Traveling Abroad?
Online banking while traveling internationally poses additional security challenges. Use your mobile data plan, country-specific chargers, and a VPN for secure access. Inform your bank about your travel plans to avoid triggering fraud alerts.
Are All Online Banks FDIC Insured?
Most online banks are FDIC-insured. You can verify a bank’s FDIC insurance status using the FDIC’s BankFind database.
Bottom Line
Online banking introduces different vulnerabilities compared to traditional banking. While online banks can be just as safe as traditional ones, ensure the bank is FDIC-insured, check its security measures, and implement additional security steps to protect your information.