Are Online Banks Safe? (Keep Your Money Protected)
Joy Wallet is advertiser-supported: we may earn compensation from the products and offers mentioned in this article. However, any expressed opinions are our own and aren't influenced by compensation. To read our full disclosure, click here.
In recent years, the financial landscape has significantly transformed with the advent of online banks. With the convenience of accessing financial services from the comfort of our homes or on the go, online banks have gained immense popularity. However, as more people embrace this digital banking revolution, you may be worried about the safety of your hard-earned money.
Jump To
The evolution of online banks
Online banks, also known as digital or Internet banks, have revolutionized how we manage our finances. Traditional brick-and-mortar banks have been increasingly shifting online operations to meet the growing demands of tech-savvy consumers. These online financial institutions offer a wide range of services, including checking and savings accounts, loans, investments, and even mortgages, all accessible through web portals and mobile applications.
Are online banks safe?
While no system can be considered completely immune to risks, reputable online banks employ robust security measures to protect their customers. Here are some factors that contribute to the safety of online banks:
Encryption
Online banks utilize advanced encryption protocols to secure data transmission between their servers and customers' devices. This encryption ensures that sensitive information, such as login credentials and financial transactions, is protected from unauthorized access.
Two-factor authentication (2FA)
Many online banks implement 2FA, requiring customers to provide additional verification beyond a password. This could involve a unique code sent to a mobile device or biometric authentication (e.g., fingerprint or facial recognition), adding an extra layer of security to account access.
Fraud monitoring
Online banks employ sophisticated fraud monitoring systems that continuously analyze customer transactions for any suspicious activity. If any irregularities are detected, banks can promptly notify customers and take appropriate measures to mitigate risks.
Secure infrastructure
Reputable online banks invest in robust systems and employ cybersecurity experts to ensure the security of their networks. They utilize firewalls, intrusion detection systems, and other security measures to protect against cyber threats and unauthorized access.
Regulations and compliance
Online banks are subject to the same regulations and oversight as traditional banks. Regulatory bodies in various countries enforce rules related to cybersecurity, data protection, anti-money laundering (AML), and know-your-customer (KYC) practices. Adherence to these regulations helps ensure the safety of online banking operations.
Deposit Insurance: Many online banks are members of deposit insurance schemes, similar to traditional banks. These schemes protect customer deposits up to a certain amount, offering additional financial security.
Customer responsibility
While online banks implement strong security measures, customers also play a crucial role in ensuring their own safety. It is important for customers to use strong, unique passwords, enable security features provided by the bank, regularly update their devices and applications, and be cautious about sharing sensitive information through unsecured channels.
Related: Best Online Banks – Our Top Picks
Accredited Debt Relief Helps You Save and Simplify
- Check Your Eligibility Online.
- See If You Qualify Today.
- Bad Credit OK.
- BBB A+ Accredited and Thousands of 5-Star Reviews
How to tell if an online bank is a scam?
Identifying whether an online bank is legitimate or a potential scam requires careful evaluation and scrutiny. Here are some essential factors to consider when assessing the credibility and trustworthiness of an online bank:
- Regulatory compliance. Legitimate online banks operate under the supervision of regulatory authorities. Research the bank's website or contact customer support to determine which regulatory body oversees its operations. Verify the bank's licensing and ensure it can offer banking services in your jurisdiction.
- Reputation and history. Conduct thorough research to understand the online bank's reputation and history. Look for reviews, ratings, and customer feedback to gauge the experiences of other users. Consider the bank's longevity and whether it has a solid track record of serving customers.
- Physical presence and contact information. While online banks primarily operate digitally, reputable institutions often have a physical presence or provide clear contact information. Look for a valid mailing address, phone number, and customer support channels. Scammers may be reluctant to share this information or may provide vague or non-existent contact details.
- Website security. Examine the bank's website for security indicators. Legitimate online banks use secure connections (HTTPS) to encrypt data transmission. Look for a padlock icon in the browser's address bar, indicating a secure connection. Be cautious if the website triggers security warnings or appears unprofessional.
- Transparent policies and disclosures. Legitimate online banks provide clear and transparent information about their services, fees, terms and conditions, and privacy policies. Scammers often lack detailed disclosures or may present confusing or contradictory information. Read these policies carefully to understand how the bank operates and protects your data.
- Deposit insurance. Legitimate online banks typically provide deposit insurance coverage to protect customers' funds. Research whether the bank is a member of a deposit insurance scheme and verify the coverage limits. Lack of deposit insurance or vague information about it may raise suspicions.
- Unsolicited communications. Be cautious of unsolicited emails, phone calls, or messages claiming to be from the online bank. Scammers often use phishing tactics to deceive individuals into revealing personal information. Legitimate banks usually communicate through secure channels and avoid unsolicited requests for sensitive information.
- Online research and reviews. Conduct a broader search to gather information about the online bank. Look for news articles, forums, or discussions that highlight positive or negative experiences with the bank. Be wary if you find numerous complaints or warnings about potential scams.
- Trustworthy third-party verification. Verify the credibility of the online bank through trustworthy third-party sources. Government financial authorities, industry publications, or reputable financial websites may provide insights and recommendations regarding legitimate online banks.
- Trust your instincts. Trust your instincts if something feels too good to be true or raises suspicions. Scammers often employ persuasive tactics and enticing offers to deceive individuals. If you have doubts about the legitimacy of an online bank, err on the side of caution and explore alternative options.
How to access cash through an online bank
Accessing cash through an online bank can differ from accessing it through a traditional brick-and-mortar bank. While online banks may not have their own physical branches or ATMs, they usually provide alternative methods for cash access. Here are some considerations:
- Partner ATM networks. Many online banks partner with ATM networks, allowing customers to withdraw cash from various ATMs. These networks often include popular ATM providers such as Allpoint, MoneyPass, or CO-OP Network. Customers can typically withdraw cash without incurring additional fees by using an ATM within the partner network.
- Cash back at retailers. Many online banks enable customers to get cash back when purchasing at participating retailers. This option allows you to withdraw cash during a transaction without using an ATM. Cash back is typically limited to a certain amount and is subject to the retailer's policies.
- Online transfers. If you need physical cash, you can transfer funds from your online bank account to an account with a traditional bank that offers physical branch access. Once the transfer is complete, you can visit the traditional bank's branch to withdraw cash.
- Mobile check deposits. While not directly related to cash withdrawals, online banks often conveniently deposit checks using mobile applications. This allows you to convert paper checks into funds that can be accessed through your online bank account.
Do online banks have FDIC insurance?
In the United States, online banks can indeed have FDIC insurance, provided they are members of the Federal Deposit Insurance Corporation (FDIC). The FDIC is an independent federal agency that insures deposits in banks and savings associations up to a certain limit per depositor, per ownership category. When an online bank is FDIC-insured, it means that if the bank were to fail, the FDIC would step in and protect depositors' funds, subject to the FDIC's coverage limits.
It is important to note that FDIC insurance coverage is typically up to $250,000 per depositor, per insured bank, for each ownership category. If you have accounts with multiple online banks, each insured by the FDIC, you can potentially have coverage up to $250,000 per bank.
Pros and cons
Pros
- Convenience. Online banks provide 24/7 access to banking services from anywhere with an Internet connection. Customers can manage their accounts, make transactions, and access financial services conveniently without visiting a physical branch.
- Lower fees. Online banks often have lower overhead costs compared to traditional banks, allowing them to offer more competitive fees and higher interest rates on deposits. This can result in cost savings for customers through reduced account maintenance fees, lower minimum balance requirements, and fewer transaction fees.
- Higher interest rates. Online banks generally offer higher interest rates on savings accounts and certificates of deposit (CDs) than traditional banks. This can help customers grow their savings faster and earn more from deposits.
- Innovative technology. Online banks are at the forefront of technological advancements in the banking industry. They often offer user-friendly interfaces, mobile apps with advanced features, and innovative tools for budgeting, financial management, and automated savings. This technological edge can enhance the overall banking experience.
- Flexibility and mobility. Customers are not tied to a specific geographic location with online banks. They can access their accounts and perform banking tasks while traveling or living abroad. Online banks are particularly beneficial for individuals with a nomadic lifestyle or those who frequently move residences.
Cons
- Limited physical presence. Unlike traditional banks, online banks often lack physical branches or have limited branch networks. This can be a drawback for individuals who prefer face-to-face interactions or need access to in-person services, such as cash deposits or personalized assistance.
- Reliance on technology. Online banks heavily depend on technology and digital infrastructure. In case of technological issues or system outages, customers may face temporary disruptions in accessing their accounts or making transactions. However, reputable online banks invest in robust systems to minimize such occurrences.
- Cash deposits and withdrawals. Online banks typically do not have their own ATMs for cash deposits or withdrawals. Customers may need to rely on partner ATM networks or alternative methods, such as mobile check deposits or online transfers, which may not be as convenient for handling cash transactions.
- Limited personalized services. While online banks provide customer support through phone, chat, or email, you may prefer the personalized assistance and face-to-face interactions offered by traditional banks. Online banking may feel more impersonal, particularly for complex financial needs or detailed inquiries.
- Security concerns. Although online banks implement stringent security measures, data breaches, and online fraud concerns exist. Customers need to practice good cybersecurity habits, such as using strong passwords, being cautious of phishing attempts, and regularly updating their devices and software.
Accredited Debt Relief Helps You Save and Simplify
- Check Your Eligibility Online.
- See If You Qualify Today.
- Bad Credit OK.
- BBB A+ Accredited and Thousands of 5-Star Reviews
What happens to my money if an online bank fails?
If an online bank fails, the fate of your money depends on whether a deposit insurance scheme insures the bank. In many countries, online banks, like traditional banks, are members of deposit insurance programs to protect customers' funds. Here are the likely scenarios:
- Insured online bank. If your online bank is insured by a deposit insurance scheme, such as the Federal Deposit Insurance Corporation (FDIC) in the United States, the bank's failure will trigger the intervention of the insurance program. The deposit insurance scheme will reimburse depositors up to a specified limit per depositor, per insured bank. In the U.S., the FDIC provides deposit insurance coverage up to $250,000 per depositor, per ownership category.
- Uninsured online bank. The situation can be more complicated if a deposit insurance program does not insure your online bank. In this case, the recovery of your funds would depend on the bank's assets, the liquidation process, and the legal framework in place. Uninsured deposits may be at a higher risk of loss or may be subject to partial repayment based on the bank's available funds.
It is important to note that deposit insurance programs typically cover only individual and joint accounts, not accounts held by corporations, partnerships, or other non-personal entities. Additionally, deposit insurance coverage limits may vary across jurisdictions, so it is essential to understand the specific regulations in your country.
The bottom line
Online banks have made significant strides in ensuring customers' funds and personal information safety and security. While no system can be completely immune to risks, reputable online banks prioritize security and employ robust measures to protect their customers.
Online banks have transformed the banking landscape, offering convenience, accessibility, and innovative features. As the digital banking industry continues to evolve, the commitment of online banks to safety and security remains steadfast, empowering individuals to confidently embrace the benefits of online banking while protecting their financial assets.
Joy Wallet is an independent publisher and comparison service, not an investment advisor, financial advisor, loan broker, insurance producer, or insurance broker. Its articles, interactive tools and other content are provided to you for free, as self-help tools and for informational purposes only. They are not intended to provide investment advice. Joy Wallet does not and cannot guarantee the accuracy or applicability of any information in regard to your individual circumstances. We encourage you to seek personalized advice from qualified professionals regarding specific investment issues. Featured estimates are based on past market performance, and past performance is not a guarantee of future performance.
Our site doesn’t feature every company or financial product available on the market. We are compensated by our partners, which may influence which products we review and write about (and where those products appear on our site), but it in no way affects our recommendations or advice. Our editorials are grounded on independent research. Our partners cannot pay us to guarantee favorable reviews of their products or services.
We value your privacy. We work with trusted partners to provide relevant advertising based on information about your use of Joy Wallet’s and third-party websites and applications. This includes, but is not limited to, sharing information about your web browsing activities with Meta (Facebook) and Google. All of the web browsing information that is shared is anonymized. To learn more, click on our Privacy Policy link.
Images appearing across JoyWallet are courtesy of shutterstock.com.
Share this article
