Years ago when online banks were first appearing, we got a lot of calls from folks wondering if they were safe. Now it seems we're getting that call volume again with folks wondering if putting their money in an online bank is a prudent thing to do, possibly as a 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 foolproof.
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.
Now, 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’s actually 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 was a trend 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.
Banks, of course, have noticed this, and they’ve been closing branches right and left over the past few years. In 2020, there were around 90,000 brick-and-mortar bank branches in the U.S. By 2022, that number had fallen to just over 70,000. Banks need fewer branches these days because they’re now offering all or most of their services online, as well.
Now, there’s no doubt that some people want in-person banking and the ability to sit down with a loan officer face-to-face. But it seems a lot more people are content to do their banking completely online, often with just a smartphone.
But if folks can have that same “cyber” experience with a brick-and-mortar bank, why are so many people flocking to online banks 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 brick-and-mortar 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: They’re 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 in the unlikely event that it fails.
The Federal Deposit Insurance Corporation (FDIC) insures deposits at federally insured banks. The National Credit Union Administration insures deposits at federally insured credit unions. In both cases, that coverage is a maximum of $250,000 per person, per institution.
So, an online bank has the same insurance coverage as a brick-and-mortar bank, as long as it’s FDIC insured. And you can check on that. Go to FDIC.gov and use their “BankFind” feature or visit NCUA.gov and use their “Research a Credit Union” tool to verify if an institution is federally insured. But you’ll probably have a difficult time finding one that isn’t.
Now, what about cyber-security, you ask? If everything is done online, doesn’t that make your account more vulnerable to hackers and thieves? Well, all banks, as well as online vendors, have a vested interest in preventing that.
They use data-encryption technologies such as two-factor or biometric authentication, electronic signature verification, and continuous account monitoring.
But customers have to do their part to maintain cyber security, too, and that’s 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 financing or shopping.
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.
So, to recap, the question was, “Are online banks safe?” And the answer is, “As long as they’re federally insured, they’re every bit as safe as brick and mortar banks.”
We hope that eases your concerns, so you can take advantage of the higher interest at many online banks.
On today’s program, Rob also answers listener questions:
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Remember, you can call in to ask your questions most days at (800) 525-7000. Faith & Finance is also available on the Moody Radio Network as well as American Family Radio. Visit our website at FaithFi.comwhere you can join the FaithFi Community, and give as we expand our outreach.
Remember, you can call in to ask your questions most days at (800) 525-7000. Faith & Finance is also available on the Moody Radio Network and American Family Radio. Visit our website at FaithFi.com where you can join the FaithFi Community and give as we expand our outreach.
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