Today, a majority of bank accountholders use mobile devices and computers to access their accounts. However, despite an overall trust of online banking and mobile banking platforms, many consumers are hesitant to switch to an online-only bank. An online bank is a financial institution that has no physical branches and operates entirely online. Many of these online-only entities offer more attractive rates and fewer fees than their brick-and-mortar counterparts, but the question remains – are online banks safe?
To determine how safe an online bank is, you must first understand the key differences between true online banks and “neobanks”. Let’s take a closer at online banks vs. neobanks:
Online Banks
Sometimes referred to as “digital banks”, most online banks are an online-only extension of an established, brick-and-mortar bank. Many online banks differentiate themselves from the traditional banks they’re backed by. For instance, an online bank may have an entirely different website and offer different products than its brick-and-mortar counterpart. One thing that most online banks have in common is they don’t have physical branches or ATMs. Rather, most online banks partner with an external ATM network which allows their customers to use a vast number of ATMs nationwide without incurring a fee. Some online banks even reimburse their customers for ATM fees sustained outside of their network.
Since online banks are essentially an online branch of a real, licensed bank, most are FDIC-insured. FDIC insurance protects the money in your bank account, generally up to $250,000 per depositor at each FDIC-insured institution. So, if an online bank goes out of business, your money is safe as long as the institution is a member of the FDIC.
Neobanks
First and foremost, it’s important to understand that neobanks are not actually banks. They are financial companies that offer bank-like services, but they are not regulated in the same way that banks are. They also do not need a banking license to operate. Commonly referred to as “fintechs” (short for “financial technology”), they typically have innovative products with cutting-edge features. While many neobanks do partner with licensed, FDIC-insured banks in order to pass that deposit protection on to their customers, some do not. And even if a fintech has a bank partnership, things can get murky in the event of a company collapse, as was the case with the recent bankruptcy of fintech Synapse. Before committing to a neobank, be sure to do your due diligence to understand what protections, if any, you’ll receive on your money. The FDIC recently issued a warning about neobanks for this very reason.
As the world grows ever-more digital, it’s likely that more and more consumers will consider moving to an online-only bank. While digital banking can provide an array of benefits and conveniences, it’s important to do your homework to ensure that you’re leaving your money in safe hands. Know what to look for in an online bank, including deposit protection, credibility, good customer service, and easy access to your funds.
If you’re interested in learning more about an FDIC-insured online bank with a deep history and full deposit protection (even past FDIC limits), you can learn more about Bank5 Connect here: https://www.bank5connect.com/why-bank5-connect/about-us.