Are traditional banks safer than online banks?

We live in a digital-dominated world that lets us manage many parts of our lives with a click of a button or a swipe on a screen — and banking is no exception. More than half of the country's consumers do most of their banking via a mobile app, according to a Morning Consult survey conducted for the American Bankers Association in October 2024.

But just because you're comfortable using a big bank's digital offerings doesn't mean you're all-in on banks that exist entirely online. Read on to learn how you can tell if a digital bank is up to snuff when it comes to safeguarding your hard-earned cash.

Online banks can be just as safe as traditional banks as they utilize many of the same security measures. If you're looking for a reputable, safe bank, make sure it has at least the following security features. 

FDIC insurance 

The single most important factor in ensuring a bank's safety is to check if your deposits will be FDIC-insured. This means your money is federally protected up to $250,000 (per person and account type) if the bank goes out of business. Fortunately, many online banks offer this protection, just like traditional banks. 

However, some fintechs companies advertising accounts online aren't technically chartered banks themselves — meaning they're not officially licensed or authorized by the government to operate as a full, independent bank. Instead, these fintechs will partner with banks that can provide FDIC insurance and then deposit your money with those institutions.

This is completely legitimate and, in theory, your funds should qualify for "pass-through" FDIC insurance if the partner bank fails while holding your deposits. But this requires the fintech to be diligent with its record keeping, as well as some other factors. If you want the highest amount of security for your cash with the lowest risk of something going wrong, make sure your online bank is either itself chartered or that it owns — not partners — with a chartered bank. The FDIC's Bankfind tool can help you find chartered banks and take the guesswork out of your search.

Data encryption 

Both online banks and traditional banks protect your transactions and personal information using encryption software that converts sensitive data into code that only your bank can read. 

Multi-factor authentication 

Traditional and online banks use various methods to verify your identity before granting account access. This includes: 

• 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

According to the American Bank Association, banks also use authentication methods that you may not see but help verify your identity without requiring customer input. 

Aside from relying on a bank's passive security measures, you can take the following actions to help keep your funds secure from fraud.

• Use a unique password – Avoid using the same password for your bank accounts as you do for other accounts, such as social media, to reduce the risk of compromising your security. You can use a password manager, like 1Password or NordPass, to securely store and generate strong passwords. Be sure to also regularly update your passwords. 
• Enable two-factor authentication – Adding two-factor authentication offers an extra layer of protection by requiring both your password and another proof of identity, such as a one-time code sent to your phone, to access your account. This makes it much harder for hackers to gain unauthorized access. 
• Leverage your bank's security features – Many banks offer unique security tools, so take the time to explore what's available. These features could include facial recognition for logging in via your smartphone or setting up alerts to notify you of any suspicious activity which can help protect your accounts.

There are many online banks on the market that check all or most of the boxes. For example, Ally Bank is FDIC-insured and also offers robust security features, including antivirus and anti-malware protection, firewalls to block unauthorized access and multi-factor authentication. Ally also offers free antivirus and anti-malware software where you can download Webroot® SecureAnywhere™, at no cost, on up to three devices.

Happen Bank is also FDIC-insured and offers anti-virus protection, firewalls and two-factor authentication. Like Ally Bank, Happen Bank automatically logs you out of your account after a period of inactivity and actively monitors online and mobile banking activities for potential fraud.

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