Are online banks less safe than traditional banks?

In today's digital age, banking has become more convenient than ever, with the majority of consumers conducting their banking transactions through mobile apps, as per a survey conducted by the American Bankers Association in October 2024.

While you may be comfortable using a big bank's digital services, you may not be fully committed to banks that operate entirely online. To determine if a digital bank is trustworthy in safeguarding your money, continue reading.

Are traditional banks safer than online banks?

Ensure that online banks are just as secure as traditional banks by utilizing many of the same security measures. To find a reputable and safe bank, look for the following security features.

FDIC insurance

The key to safeguarding your bank's security is to verify if your deposits are FDIC-insured. This means your funds are shielded by the government up to $250,000 (per individual and account category) in the event the bank collapses. Fortunately, both online and traditional banks typically provide this protection.

While some fintech companies advertise accounts online, they are not officially licensed or authorized by the government to operate as full, independent banks. Instead, they partner with banks that can provide FDIC insurance and deposit your money with those institutions.

In theory, your funds should be insured by the FDIC if the partner bank fails while holding your deposits. However, this requires the fintech to maintain accurate records and consider other factors. To ensure the highest level of security and lowest risk, it is recommended to choose an online bank that is chartered or owns a chartered bank. The FDIC's Bankfind tool can assist in finding chartered banks and simplifying the search process.

Data encryption

Both online and traditional banks safeguard your transactions and confidential information through encryption technology that translates sensitive data into a code that only your bank can decipher.

Multi-factor authentication

Banks, whether traditional or online, employ different techniques to authenticate your identity prior to granting access to your account.

• Something you know: A password or PIN
• Something you have: A physical item like an ATM card or smart card
• Something you are: Biometric verification, such as a fingerprint or facial recognition

Banks employ authentication techniques that confirm your identity without requiring any input from you, as stated by the American Bank Association.

How to keep your money safe with an online bank

To further safeguard your funds from fraud, in addition to relying on a bank's passive security measures, you can take proactive steps.

• To enhance your security, avoid using the same password for your bank accounts as you do for other accounts, such as social media. Utilize a password manager, like 1Password or NordPass, to securely store and generate strong passwords. Remember to regularly update your passwords.
• Enabling two-factor authentication adds an additional layer of security by requiring both a password and a second form of identification, such as a one-time code sent to your phone, to access your account. This significantly reduces the likelihood of unauthorized access.
• Explore your bank's security features to safeguard your accounts. These tools may include facial recognition for mobile login and alerts for suspicious activity.

How to choose a secure online bank

Numerous online banks exist that meet most criteria. For instance, Ally Bank is FDIC-insured and provides comprehensive security features, such as antivirus and anti-malware protection, firewalls to prevent unauthorized access, and multi-factor authentication. Additionally, Ally offers free antivirus and anti-malware software, Webroot® SecureAnywhere™, for up to three devices.

LendingClub, like Ally Bank, offers anti-virus protection, firewalls, two-factor authentication, and automatically logs you out of your account after a period of inactivity while actively monitoring online and mobile banking activities for potential fraud.

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