Online banks are some of the safest places to store your money. In fact, as long as they're FDIC-insured, online banks are just as safe as traditional brick-and-mortar banks. But it's important to follow standard web best practices when banking online.
Here's a closer look at how online banks protect your money, plus tips on how to keep money safe from hackers.
What is an online bank?
Online banks operate 100% online. They don't have any branch networks, so you manage your money from your phone or computer, occasionally stopping by an ATM when you need cash.
This model lets online banks save money on running the business. Banks pass these savings along to you in the form of higher annual percentage yields (APYs) and lower fees.
Apart from this, they're pretty much the same as traditional banks. And like traditional banks, online banks take big steps to protect your money.
How online banks protect your money
Are online banks safe? You'll be glad to learn both online and brick-and-mortar banks offer two types of protection: protection against hackers and protection against bankruptcy.
FDIC insurance
The Federal Deposit Insurance Corporation (FDIC) protects consumers against bank failure. Most online bank accounts are FDIC insured. In the unlikely event your bank goes out of business, the FDIC must recover up to $250,000 per account per bank.
Joint accounts are insured up to $250,000 per co-owner per bank. So if a married couple has a joint checking account, it would be insured for up to $500,000.
If you opt for an online credit union instead of an online bank, your money may not be FDIC insured, but it's still protected. Credit unions are covered by the National Credit Union Association (NCUA), and it offers similar insurance.
Encryption and two-factor authentication
Encryption helps protect your online banking information from hackers. Online banks use the same 256-bit advanced encryption standard (AES) that brick-and-mortar banks do. This is the same encryption the military uses to protect classified information.
But encryption doesn't protect against all hackers. Hackers can sneak into your accounts by effectively pretending to be you. Tactics include guessing weak passwords or sending you a phishing link to trick you into handing over sensitive information.
That's why many online banks now offer two-factor authentication, bonus security on top of usernames and passwords. It usually means entering a code that's texted to your phone. Enabling two-factor authentication makes it way harder for an identity thief to break into your account.