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- An online bank is an institution that operates mostly or solely online.
- Your money is safe at an online bank as long as the company is federally insured by the FDIC.
- Online banks don't have as many overhead expenses as traditional banks, so they can afford to pay higher rates and charge lower fees.
- Depositing cash at online banks can be tricky, but most institutions do let you deposit paper checks digitally.
- See Business Insider's picks for the best online banks »
What is online banking?
Online banks are institutions that work mostly or exclusively online.
Many brick-and-mortar banks (meaning banks with physical branches you can visit) allow you to access your accounts through their websites or mobile apps — but with an online bank, everything happens online. Some online banks do have a few physical locations, but they still operate digitally for the most part.
Are online banks safe?
In short, yes, online banks are safe.
The most important part of shopping for a bank is choosing one that is insured by the FDIC, or Federal Deposit Insurance Corporation. (If you're using a credit union, it should be insured by the NCUA, or National Credit Union Administration.) A bank should publicize that it's FDIC insured on its website, or you can search for an institution on the FDIC site.
FDIC insurance works similarly to other types of insurance. If you have renters insurance and your home is damaged in a natural disaster, your insurance will cover the costs of damages up to a certain dollar amount. If your bank has FDIC insurance and shuts down, the FDIC will give you the money you stored in the account, up to $250,000 for an individual account and $500,000 for a joint account.
Maybe you're considering using an online banking platform, such as Wealthfront or Chime. These companies aren't technically banks, but they're backed by banks that provide FDIC insurance, so your money is still safe.
As far as security goes, online banks are just as safe as brick-and-mortar banks. But you should practice the same safety measures you would use with any other sensitive information you access online. Here are some tips:
- Don't log into your bank account on a public Wi-Fi network
- Change your password on a regular basis
- Consider using a VPN when you check your bank information online
The pros and cons of online banking
The pros of opening an online bank account
- Higher interest rates. Online banks save money by not having brick-and-mortar locations. As a result, they can afford to pay higher interest rates than traditional banks on your savings, CDs, and money market accounts.
- Lower fees. Brick-and-mortar banks can offset some of their costs by charging you service fees. Most online banks don't charge monthly fees, though, and other fees tend to be lower, too. For example, some traditional banks offer overdraft protection in case you take too much money out of your account, but they still charge you a fee for using overdraft protection. It's rare for online banks to impose these sorts of fees.
- Large ATM networks. Few online banks have their own ATMs like Chase and Wells Fargo do. Instead, they use a network, such as Allpoint or MoneyPass, which gives you free access to tens of thousands more ATMs around the US than if you used a traditional bank.
The cons of opening an online bank account
- No in-person banking. With the exception of a couple banks, such as Capital One, most online banks don't have any physical locations. If you like speaking to a banker face-to-face, you might not like online banking.
- Difficulty depositing cash. Most online banks let you deposit paper checks using their mobile apps, but online banking probably isn't for you if you need to regularly put cash in the bank. Some online banks don't accept cash deposits at all. Others let you deposit cash through Green Dot locations, which you can find at places like Kroger and CVS, but you'll pay a fee each time.
If you want to earn higher rates and pay lower fees, you might like online banking. But if you like the comfort of walking into a physical branch location or need to deposit cash, you may be better off with a brick-and-mortar bank.
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