Without the overhead of maintaining brick-and-mortar branches, online banks tend to offer lower rates on loans, higher yields on savings and fewer fees all around. However, is it safe to take your wallet for a swim in a digital-only world when there are so many cyber pirates out there?
Here’s what to know about online banking and how to protect your funds.
What is an online bank?
Online banks offer all of their services digitally — no physical branches and no in-person customer service. However, some offer video calls to conduct certain transactions face-to-face, such as when you want to open a savings account for your kiddo.
They tend to have the same products as traditional banks, including checking and savings accounts, money market accounts, certificates of deposit (CDs) and loans, and offer many of the services you’d expect, including wire transfers and ATM access. But you’ll do all your banking via a website or mobile app.
J.D. Power’s 2023 U.S. Direct Banking Satisfaction Study found that 27% of consumers in America are using online-only banks and that customer satisfaction with these banks is steadily climbing.
While almost all brick-and-mortar banks, such as JPMorgan Chase and Wells Fargo, have a digital presence, they differ from online banks in that you can visit a physical branch.
How do online banks keep your money safe?
Online banks are as safe as brick-and-mortar ones.
When evaluating a bank, online-only or not, the main thing you want to look for is that it is insured by the Federal Deposit Insurance Corporation (FDIC), an independent agency of the U.S. government. Money in accounts at insured banks is protected up to $250,000 per account, per owner. If the bank collapses, your money is insured up to that amount.
The next thing to look for is cybersecurity, which isn’t as piecemeal as you might think. Uncle Sam has one eye on banking cyber protections. Agencies such as the Federal Financial Institutions Examination Council provide best security practices regarding necessary risk assessments, authentication practices and layered security.
Mayra Rodriguez Valladares, managing principal at MRV Associates, a financial consulting and research firm, says online banks are under even more pressure to invest in online capabilities.
“They have even less scope for error because they don’t have a brick-and-mortar presence,” Rodriguez Valladares said.
Banks will often give an overview of their cybersecurity precautions, which can include:
- Multi-factor authentication: When you use your phone, email or an app to confirm your login.
- Biometeric authentication: When you sign in with a fingerprint, facial recognition or similar factor.
- Anti-virus and anti-malware: Software designed to detect and remove malignant programs that could steal your information.
- Account monitoring: This can take many forms, but one example is that in the case of a suspected fraudulent charge, the bank can alert you, freeze your card and await confirmation that it’s you before allowing the transaction.
And if someone steals your information, according to the Consumer Financial Protection Bureau, you’re liable only up to $50 for unauthorized transfers if you notify the bank within two business days or $500 within 60 days.
See our picks for the best online banks
Is mobile banking safe?
Mobile banking capabilities often have built-in features such as automatic logouts, which require you to log back in after a certain amount of time has passed if you’re inactive, and multi-factor authentication.
But it’s essential for consumers to protect themselves, too. It’s common advice not to use public wi-fi networks. Rodriguez Valladares recommended ensuring your phone is password protected so that if someone picks it up at a restaurant or on the train, they won’t have access to any personal information.
How to identify online banking scams
With more ways to bank online comes more ways to get scammed. Cybercriminals often try to steal bank information by phishing, which involves sending an email from a source that looks legitimate —like your bank —and getting you to click a dangerous link, transfer money or share personal information.
The Federal Trade Commission (FTC) warns that a common strategy is for the scammer to say your account has “suspicious activity” and ask you to confirm your creditials or to click a link and make a payment.
Quick tip: Be aware that some scammers use logos from banks and the FDIC to appear official.
If you’re suspicious of an email, contact the company directly without using the contact information included in the email. Get contact details from the official website instead.
If the email appears to come from a bank, use the FDIC’s BankFind resource to make sure it’s a legitimate FDIC-insured bank and check that the web address, name and URL match what you’re seeing in the email. You can also call the FDIC’s National Center for Consumer and Depositor Assistance at 1-877-275-3342 to speak to a specialist.
Pros and cons of online banking
Before you open an account, make sure you understand the advantages and disadvantages of online banking.
Pros of online banking
Online-only banks allow you to manage your finances from anywhere and at any time with ease and speed.
“Because online banks and digital-only banks have been created from scratch in the digital age, they’re not encumbered by the legacy platforms that a lot of the traditional banks are still encumbered by,” said Jim Perry, a senior strategist at Market Insights, a consulting firm for banks.
That means you can open an account in just a few minutes and online banks often come with the latest high-tech interfaces. They also want to attract customers with their platforms, so they offer features on their mobile apps and websites that you may not find with traditional banks. Ally, for example, allows you to easily sort your savings into ‘buckets’ for different savings goals —like a trip to Hawaii or a new car —within one savings account.
The fact that online banks don’t have to manage physical spaces also gives them the flexibility to offer higher annual percentage yields (APYs) and lower fees than traditional banks. While the average national rate on savings accounts is 0.45% as of July 15, 2024, our list of the best high-yield savings accounts includes firms offering interest rates as high as 5%.
Cons of online banking
If you’re having a customer service issue and work with a traditional bank, you can head over to a physical branch to resolve your problem —but the same can’t be said for online-only banks. These banks often have 24/7 chat services via their apps and websites as well as customer service phone numbers.
“But there are some folks who would prefer not to deal with that digital interface and they just want to talk to a banker face-to-face,” Perry said.
Online banks also have fewer account options than larger, traditional banks. Chase, for example, offers eight checking accounts. Meanwhile, LendingClub has just one.
Plus, while many online partners with networks that offer thousands of fee-free ATMs, it can be more challenging to handle cash when you’re working with an online-only bank than a bank with a physical presence, Market Insight’s Perry said.
Is online banking right for you?
Online banking us a good choice if you don’t handle a lot of cash, don’t like to visit physical branches and prefer to do your banking on the go (or from your couch). Know that you’ll be doing your financial transactions solo on your phone or computer, and if you need to reach a customer service member, you’ll have to do so through an online chatbot, email or phone.
You may also want to consider online banks if you’re on the hunt for lower fees and higher yields. If an online bank looks appealing because you’ll earn high interest on accounts, Perry recommends checking whether the online bank offers those higher rates consistently.
He adds that it’s not uncommon for people to have multiple banking relationships. Perhaps you have some money with a traditional bank, and some with an online bank that’s offering more attractive yields.
“Consumers these days are not moving entire account relationships anymore like they would 10 to 20 years ago,” Perry said. “They will move a part of their account to get a better account or greater convenience.”
Frequently asked questions (FAQs)
Online banks can be as safe as traditional banks. Make sure that the institution is insured by the FDIC so that your money is protected in case of a bank collapse. Banks take cybersecurity precautions and you can typically find information about their security approaches via their websites. Be sure to implement two-factor authentication for banking apps and password-protect your phone.
Online banking is generally considered to be when you conduct financial transactions through a bank’s website over the internet. Mobile banking allows you to use many of the same banking services as online banking, but on your phone or tablet via an app or website instead of on a computer.
If you fall for a scam in which a scammer is posing as a bank, follow the FTC’s instructions for what to do if you were scammed, which will depend on the situation.
