If you’re comfortable using a computer or smartphone, using an online bank can be a convenient way to manage your finances without ever stepping into a branch. People who are accustomed to visiting a bank to do business with a teller (or ATM) may find online banking strange or presume it to be risky. But online banks are quite safe to use if they are federally insured -- and you take a few simple steps to protect your personal information.
That noted, there are some drawbacks associated with online banking such as potential security vulnerabilities and fewer options in some cases. Here’s everything you need to know about opening an account with an online bank.
What is an online bank?
Online banks provide services primarily through the internet, meaning there are no physical branches to visit in person. The lack of a brick-and-mortar presence may deter some consumers, but online banks tend to charge the lowest fees and offer the most competitive APYs -- and all with a more modern approach to convenience.
How safe are online banks?
Online banks are generally federally insured, which means that the US government will protect your money in the event of a financial crisis. In most cases your deposits will be FDIC-insured up to $250,000 at most online banks -- the same level of coverage you get at traditional banks. However, before you begin banking with an online bank, make sure you confirm whether or not it is FDIC-insured.
To protect the funds in your account, online banks utilize many of the same data-encryption technologies that are used for online shopping, encrypted email messaging, automatic logout functionality, two-factor 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 take measures to ensure that you’re using a trusted and secure app. Banks must report any data breaches to regulators within 36 hours.
How to stay safe when using online banking
There are ways to protect your online banking information, both on your part and on the part of your bank:
- Ensure that the network you’re using is secure.
- Create a strong, unique password.
- Avoid public Wi-Fi.
- Sign up for banking alerts.
- Consider two-factor authentication.
- Keep personal information to yourself.
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. If a bank does not have these measures in place, it may not be federally insured.
Pros of online banks
- 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 of online banks
- Fewer account options: If you’re looking for an account with specific features, such as a joint account or a 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 interactions, you may not like the idea of online banking. While everything can be done at the touch of a button, there won’t be a brick-and-mortar branch you can stop by on your way home from work.
Is an online bank right for you?
Online banking is safe to use as long as the bank is federally insured. With the right security measures, online banks can offer competitive APYs, allowing you to get the most out of your money without having to put your financial security at risk.
But on the flip side, online banking can be rather limiting if you are someone who deposits cash often. While online banking is a safe option, it is entirely up to you and what you prefer when it comes to managing your finances.
The bottom line
If you take some basic precautions, online banking can be safe and even offer some advantages over traditional banking. However, there are some potential risks to be aware of, such as fewer account options and the potential for security breaches. Ultimately, whether or not online banking is right for you depends on your individual needs and preferences.