Online banks, when FDIC-insured, offer a level of safety akin to traditional brick-and-mortar banks in many respects. As a consumer, you can also adopt measures to bolster your account's protection while banking online, whether it's with a physical bank or an online bank, also referred to as a direct or digital bank.
Understanding Online Banking
An online bank operates solely on the internet, lacking physical branches for in-person visits. All your banking activities take place through a website or mobile app. According to J.D. Power, approximately one-third of consumers opt for digital-only banks, which analyze consumer behavior.
Online banks provide traditional banking services like checking accounts, savings accounts, and ATM access. Due to their absence of physical locations, they often offer benefits such as reduced fees and more attractive interest rates. Many of the banks featured in our best CDs, best high-yield savings accounts, and best money market accounts lists are online banks.
Nonetheless, online banks do have some limitations compared to traditional banks:
No In-Person Branch Visits: Online banks lack physical branches for face-to-face interactions with bank employees.
No Safety Deposit Boxes: They don't offer services like safety deposit boxes for storing important records and valuables.
Limited Services: Services like cash deposits, money orders, notarization, and more are typically unavailable.
Security Measures Taken by Online Banks
Online banks implement various security measures to safeguard your funds, similar to traditional banks offering online services. These security steps are standard across all financial institutions providing online banking:
FDIC Insurance: Most banks have Federal Deposit Insurance Corporation (FDIC) coverage, ensuring protection for your deposits up to $250,000 per depositor, per ownership category in each bank.
Data Encryption: Online and traditional banks employ robust data encryption, rendering your data, including card numbers and other information, inaccessible to anyone other than the bank.
Multi-Factor Authentication: Multi-factor or two-factor authentication involves multiple layers of verification before granting access to your account. This may include security questions or a PIN sent to your phone or email.
Automatic Sign-Out: Many online banks employ automatic sign-out, logging you out after a period of inactivity to prevent unauthorized access.
Fraud Monitoring: Online banks often have security monitoring systems to detect and respond quickly to any suspicious activity, and you won't be held liable for unauthorized transactions.
Determining Legitimacy of an Online Bank
It's natural to be cautious when dealing with online banks since you can't physically visit a local branch as with traditional banks or credit unions. To confirm the legitimacy of an online bank before opening an account and depositing your money, follow these steps:
Verify FDIC Insurance: The FDIC offers an online tool to verify a bank's legitimacy and FDIC insurance status. You can search by bank name, FDIC certification number, and website.
Check for Complaints: The Consumer Financial Protection Bureau (CFPB) maintains a searchable Consumer Complaint Database. Check for complaints about the online bank you're considering.
Read Online Reviews: Explore online reviews from sources like the Better Business Bureau to gauge customer experiences and identify recurring issues.
Learn About Security Measures: Research the security measures an online bank employs, often available on their website.
Additional Tips for Safety
Both online and traditional banks prioritize your information's security within your bank account. Here are some additional steps to protect your money and data:
Password Protect Your Devices: Implement passwords on all devices used for online banking, including smartphones, tablets, and computers.
Use Multi-Factor Authentication: Utilize multi-factor authentication for an added layer of security beyond a password.
Maintain Strong Passwords: Employ strong, periodically changed passwords that incorporate diverse characters.
Avoid Public Wi-Fi: Refrain from logging into your bank account using public Wi-Fi networks to safeguard your information.
Use Private Devices: Only access your bank account from your personal devices to prevent unauthorized access.
Be Cautious with Sharing: Avoid sharing sensitive bank information, like your account number or Social Security number, through email or text.
Monitor Your Account: Set up text alerts for purchases and regularly review your account for unauthorized activity.
Keep Software Updated: Ensure your phone and banking app are up to date to benefit from the latest security features.
Risks of Online Banking
The primary risk of online banking involves the potential for unauthorized access through compromised login credentials, hacking, viruses, or unauthorized card use. These risks apply to both online and traditional banks offering online services.
Is Mobile Phone Banking Secure?
Banking on your mobile phone can be secure, provided you take precautions. Password protect your device, enable multi-factor authentication, and avoid using public Wi-Fi for banking app access.
Online Banking While Traveling Abroad
When banking online during international travel, consider using your cellular data plan, country-specific chargers, adapters, and a VPN for added security. Notify your bank of your travel plans to avoid triggering their fraud monitoring systems.
Are All Online Banks FDIC-Insured?
Most online banks, like their traditional counterparts, are FDIC-insured. You can confirm an online bank's FDIC insurance status through the FDIC's BankFind database.
To sum it up, while online banking does present distinctive vulnerabilities when compared to the traditional in-person banking model, it's important to note that online-only banks have the capacity to offer a secure and convenient banking experience. Therefore, before making your decision, remember to confirm FDIC insurance, thoroughly assess their security protocols, and take proactive steps to safeguard your personal information. Your financial well-being depends on it.
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