Are Online Banks Safe?

It’s understandable that when you hand over your money to someone for safekeeping— you’d like to get it back.

That’s the relationship you have with your bank. You put your money in, with the expectation of it being there for you, plus interest. Is that a sure thing with online banks?

A few years ago when online banks were first coming, well, *online,____ * folks wondered if they were safe. Now it seems many people are again questioning whether putting their money in an online bank is a prudent thing to do. Their concerns may be the result of a few bank failures this past spring.

Banking is perhaps the most heavily regulated industry in the U.S., but it isn’t fool-proof. Managers are human and humans make mistakes. There will always be bank failures, but the system we have in place makes bank closures rare and isolated.

If you’re concerned about putting your money in a bank that has no branches, no actual buildings that you can physically walk into, you should know that there is very little difference between a so-called “brick and mortar” bank with branches, and an online bank that exists only in cyberspace.

In fact, to most customers of brick and mortar banks, there’s no difference at all, because they never go into a bank branch these days. That trend was already well underway when COVID hit, forcing many banks to close branches to walk in traffic. Since you can deposit a check with a smartphone now, many people have little need to actually go to a bank.

Brick and mortar banks, of course, have noticed this and they’ve been closing branches right and left the past few years. In 2020, there were around 90,000 bank branches in the U.S. By 2022, that number had fallen to just over 70,000. Banks need fewer branches these days because, like purely online banks, they’re now offering all or most of their services online, as well.

There’s no doubt that some people want in-person banking, the ability to sit down with a loan officer face to face, for example. But it seems a lot more people are content to do their banking completely online, often with just a smartphone.

Since folks can have that same “all cyber” experience with a brick and mortar bank, why are so many people flocking to their online counterparts and leaving brick and mortar behind? It’s simply a matter of interest. Online banks have significantly higher yielding rates and lower fees than traditional banks. That’s because they don’t have the overhead costs of maintaining dozens or hundreds of physical branches.

Still, to some people, the idea of not being able to physically go to a bank branch and take out their money is worrisome. Just how safe are online banks?

The answer is— every bit as safe as brick and mortar banks and credit unions— as long as they’re federally insured. That means they’re backed by the full faith and credit of the U.S. government, just in case a bank or credit union fails.

The Federal Deposit Insurance Corporation, or FDIC, insures deposits at federally insured banks. The National Credit Union Administration insures deposits at federally insured credit unions. In both cases, coverage is a maximum of $250,000 per person, per institution.

An online bank has the same insurance coverage as a brick and mortar bank, as long as it’s FDIC insured. You can use the FDIC’s BankFind feature to check whether your bank is federally insured or use the NCUA’s Research a Credit Union tool to check on your credit union’s insurance status.

Another concern about online banks has been cyber security. If everything is done online, doesn’t that make your account more vulnerable to hackers and thieves? Well, all financial institutions have a vested interest in maintaining a high standard of security for their customers’ accounts. They use data-encryption technologies such as two-factor or biometric authentication, electronic signature verification, and continuous account monitoring.

Still, customers have to do their part to maintain cyber security, whether they use an online or brick and mortar bank. That starts with having a secure internet connection and a strong password.

Never use public wifi to access any of your accounts, either financial or shopping. That person sitting next to you in the coffee shop could be waiting for a chance to hack into your account and clean you out.

You should also sign up for banking alerts for suspicious transactions and two-step identification. It’s also a good idea to use a password manager that enables you to use random, complicated passwords and to change them easily. Also, never repeat a password for different accounts.

To recap, the answer to the question, “Are online banks safe?” is yes, as long as they’re federally insured, they’re every bit as safe as brick and mortar banks. You can also listen to a related podcast on this topic.