Are Online Banks Safe?

Over 65% of Americans use online banking regularly, yet concerns about security remain. With cyber threats and data breaches making headlines, many people wonder—can you really trust an online bank with your money?

The good news is that online banks use advanced security measures to protect your accounts. But there are still risks to be aware of and steps you can take to keep your finances safe. Here’s what you need to know to bank securely in today’s digital world.

How safe are online banks?

Online banks use multiple layers of security to protect customer accounts and financial data. While they do not have physical branches, they implement advanced protections that rival or even exceed those of traditional banks. However, security measures can vary, and not all financial apps offer the same level of protection.

Deposit Insurance and Consumer Protections

Most online banks are insured by the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Administration (NCUA) for credit unions. This means that if the bank or credit union fails, deposits up to $250,000 per depositor are protected.

However, some fintech companies that offer banking-like services, such as prepaid debit accounts or cash management accounts, may not provide the same guarantees. It is always best to confirm whether an institution is FDIC or NCUA-insured before opening an account.

Beyond deposit insurance, Regulation E provides additional consumer protections for electronic transactions. If an unauthorized transaction occurs on your account, federal law limits your liability—provided you report the issue within a certain timeframe. Many online banks also offer zero-liability fraud policies, ensuring that customers are reimbursed for unauthorized transactions.

Encryption and Secure Data Transmission

Online banks use Secure Socket Layer (SSL) encryption and Transport Layer Security (TLS) to protect data transmitted between your device and their servers. These online banking security protocols make it nearly impossible for hackers to intercept sensitive information, such as login credentials and account numbers.

Firewalls and intrusion detection systems provide an additional layer of protection, preventing unauthorized access to a bank’s network. Some banks also implement end-to-end encryption, ensuring that even if data is intercepted, it remains unreadable to anyone without proper authorization.

Fraud Monitoring and Account Alerts

Banks use AI-driven fraud detection systems to monitor transactions for suspicious activity. These systems analyze spending habits and flag transactions that deviate from normal patterns, such as large purchases in a different state or multiple failed login attempts. If suspicious activity is detected, banks may temporarily freeze the account or send an alert asking for verification.

Many online banks also provide real-time notifications for transactions, withdrawals, and login attempts. These alerts allow customers to quickly identify and report unauthorized activity, adding an extra layer of security.

Multi-Factor Authentication

Most online banks require more than just a username and password to access accounts. Multifactor authentication (MFA) adds extra security by requiring additional verification steps, such as:

• A one-time code sent via text message or email
• Biometric authentication, such as fingerprint or facial recognition
• A hardware security key for high-security accounts

These measures significantly reduce the risk of unauthorized access, even if login credentials are compromised.

How to Protect Yourself

While online banks have strong security measures in place, customers play a key role in keeping their accounts safe. Using strong passwords, enabling multifactor authentication, and avoiding public Wi-Fi when accessing financial accounts can help prevent fraud. Regularly reviewing account statements and transaction alerts can also help catch any unauthorized activity early.

By choosing an FDIC-insured bank, enabling security features, and following best practices, online banking can be just as safe—if not safer—than traditional banking.

Potential Risks of Online Banking

Online banking offers convenience, but it also comes with risks that can compromise financial and personal information. Cybercriminals are constantly developing new ways to steal data, access accounts, and trick users into handing over sensitive details. Understanding these risks can help you take steps to protect yourself.

Phishing Scams and Identity Theft

Phishing scams are one of the most common ways fraudsters attempt to steal online banking credentials. Scammers send emails, texts, or calls pretending to be from a bank, asking users to click a link and enter their login details. Once the information is entered, hackers can gain full access to an account.

A well-known example is the 2022 Zelle phishing scam, where scammers impersonated bank representatives and tricked customers into sending money through Zelle. Victims received messages warning them of fraudulent transactions and were then directed to transfer funds to a “secure” account, which was controlled by the scammers.

SIM Swapping and Mobile Banking Risks

SIM swapping is a growing threat, where criminals take over a phone number by convincing a mobile carrier to transfer it to a new SIM card. Once they gain control, they can bypass security features like two-factor authentication and access banking apps, email, and other sensitive accounts.

Another risk is fake banking apps that look nearly identical to legitimate ones. Scammers create these apps to steal login credentials. In 2023, cybersecurity experts identified a wave of Android apps disguised as popular banking apps, which tricked thousands of users into entering their passwords.

Malware and Hacking

Hackers use malware to capture keystrokes, steal passwords, and access online banking information. Some malware specifically targets banking apps, recording logins and passwords without the user knowing. A common tactic is tricking users into downloading attachments or clicking links in fake emails that install malware on their devices.

Public Wi-Fi is another weak spot. Hackers can create fake Wi-Fi networks that mimic legitimate ones, capturing login details when users access banking apps. Even when using real public Wi-Fi, unsecured connections can expose sensitive information to cybercriminals.

Social Engineering and Manipulation

Scammers often use social engineering tactics to manipulate people into revealing personal information. They may pose as a bank employee and claim there is an urgent security issue that requires immediate action. Some fraudsters use emotional tactics, such as pretending to be a family member in distress, to get access to funds.

How to Reduce the Risks of Online Banking

Taking proactive steps can reduce the risk of falling victim to online banking fraud.

• Never click on links in emails or texts claiming to be from your bank. Instead, log in directly through the official website or app.
• Set up multifactor authentication to make it harder for scammers to access your accounts.
• Use a password manager to create and store unique passwords for each account.
• Enable transaction notifications to receive alerts for unusual activity.
• Avoid logging into bank accounts on public Wi-Fi. If necessary, use a virtual private network (VPN) for added security.
• Contact your mobile provider to add extra security features, such as a PIN for SIM card changes, to prevent SIM swapping.

Banking online is generally safe when using secure practices, but staying informed about potential risks is key to protecting your money and personal information.

Pros and Cons of Online Banks

Online banks provide a different experience from traditional banks, offering advantages like lower fees and better interest rates but also some trade-offs. Weighing the pros and cons can help determine if an online bank fits your financial needs.

Pros of Online Banks

Higher interest rates – Online banks often offer two to four times higher annual percentage yields (APYs) on savings accounts compared to traditional brick and mortar banks. Since they operate with lower overhead costs, they can pass those savings on to customers.

Lower fees – Many online banks eliminate common fees, such as monthly maintenance fees and overdraft charges. Some also reimburse out-of-network ATM fees, making it easier to avoid extra costs.

Convenience and accessibility – With 24/7 account access through websites and mobile apps, banking online allows you to check balances, transfer funds, pay bills, and deposit checks from anywhere.

Budgeting and financial tools – Many online banks include built-in tools for tracking spending, setting savings goals, and automating financial planning, making it easier to manage money.

Cons of Online Banks

Limited cash deposit options – Depositing cash can be a challenge since most online banks don’t have branches. Some allow cash deposits at retail locations or ATMs, but these services may have fees or limitations.

Customer service availability – While many online banks offer chat, phone, or email support, response times may be slower compared to traditional banks with in-person service. Resolving complex issues can take longer without a physical bank branch to visit.

Fewer account options – Some online banks focus mainly on checking and savings accounts and may not offer traditional banking services like business banking, mortgages, or in-person financial advice.

Technology dependence – Since online banking relies entirely on internet access, service disruptions, mobile app outages, or technical issues could temporarily prevent access to your money.

Online banks work well for those who value lower fees and digital convenience. However, if you frequently deposit cash or prefer face-to-face service, a traditional bank may be a better fit.

How to Choose a Safe Online Bank

Choosing the right online bank goes beyond finding high interest rates and low fees. Security, customer support, and account protections are just as important. Here are key factors to consider before opening an account.

Verify FDIC or NCUA Insurance

A legitimate online bank should be insured by the FDIC for banks or the NCUA for credit unions. This protects your deposits up to $250,000 per depositor in case the bank fails. Some fintech companies offer banking-like services but may not provide the same protections, so it’s important to check a bank’s insurance status through the FDIC’s online database before signing up.

Check Security Features

Not all online banks offer the same level of security. Look for banks that provide:

• Two-factor authentication (2FA), requiring an extra step beyond a password to access your account
• End-to-end encryption, ensuring sensitive information is protected during transfers
• Fraud monitoring and real-time alerts for suspicious transactions
• Biometric login options, such as fingerprint or facial recognition for added security

Banks that invest in strong security measures are less likely to be compromised by cyber threats.

Evaluate Customer Support Options

Since online banks don’t have physical branches, the quality of customer service matters. Some banks offer 24/7 live chat or phone support, while others rely mostly on email, which can mean longer response times. Before opening an account, check customer reviews and test response times by reaching out to their support team.

Watch for Hidden Fees

Online banks are known for lower fees, but it’s still important to check the fine print. Some charge:

• ATM withdrawal fees if you use an out-of-network machine
• Overdraft fees, though many online banks offer overdraft protection
• Dormant account fees, which apply if the account remains inactive for too long

Reading the account terms carefully ensures you won’t be surprised by unexpected charges.

Choosing an online bank with strong security, reliable customer support, and transparent pricing will help you bank with confidence while protecting your money.

What are the best online banks?

Deciding on the right online bank can be a challenge with so many options available. Each bank boasts unique attributes like no fees, free ATM withdrawals, and high APYs on savings. To simplify the process, let’s examine some top online banks to make it easier for you to compare and choose the one that suits you best.

Final Thoughts

Online banks offer a secure, convenient, and often more affordable way to manage money. With strong security measures, FDIC insurance, and features like two-factor authentication, they can be just as safe as traditional banks. However, they may not be the best fit for those who need in-person service or frequently deposit cash.

If you’re looking for higher interest rates, lower fees, and 24/7 access to your accounts, an online bank could be a great option. Compare different banks, check their security features, and choose one that aligns with your financial needs.