Online banking has revolutionized how we manage our finances. The convenience of checking your balance, paying bills, and transferring money with just a few taps on your phone while taking advantage of fewer fees and better interest rates is undeniably appealing. But before you completely ditch your traditional bank, it's worth considering some potential reasons not to use online banking.
While the pros are plenty, there are a few cons that might make you hesitate. In this article, we’ll explore the pros and cons of online banking, addressing any concerns so you can make an informed decision about your money. Even better: We’ll also discuss ways to navigate around these issues if you take your banking online.
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What are the risks of online banking? 6 factors to be aware of
With online banking, you can easily have 24/7 access to your finances. But this ease of access also comes with a set of challenges that aren't present in traditional banking.
“On paper, it may make sense for some Americans to leave their bank for higher rates at online institutions, but that isn’t the whole story; for many savers, not having physical branches is a big deal,” says Charlie Pastor, a Certified Financial Planner and expert at The Motley Fool Ascent.
Let's break down the main six disadvantages of electronic banking.
1. Security
What is the main problem in online banking? Security—and the potential for breaches. Storing financial data online increases the risk of unauthorized access or misuse of personal information, raising concerns about privacy and data security.
Cybersecurity threats such as hacking, fraud, and phishing attacks are genuine worries to have. When you’re managing your money online, there's always a risk that your personal information could be compromised.
How to work around it:
To protect yourself, ensure that you choose an online bank that uses strong encryption methods and multi-factor authentication. Choose a strong password, always keep your computer’s antivirus software up to date, and never access your online banking on public Wi-Fi. Contact your bank to opt for alerts for any suspicious activity on your account.
2. Lack of personal interaction
While online banking is convenient, it lacks the personal touch. When you have a question or need advice, there's no friendly face to walk you through your options. Everything is done through a screen, which can feel impersonal and isolating. These days, you'll likely have to deal with AI chatbots before actually speaking to a person.
How to work around it:
When choosing an online bank, keep an eye out for options that offer human customer service via chat or phone—some are even available 24/7. Also, you can use an online bank account from a traditional bank, allowing you to still have access to in-person services when needed.
3. Technology dependence
Relying entirely on online banking means you’re at the mercy of technology. Server outages, software bugs, or even losing your phone can all lead to a loss of access to your account, potentially leaving you in a tight spot.
How to work around it:
Keep a backup of important information like account numbers and have a secondary way to access your funds, such as a credit card or a secondary bank account. Regularly update your software and check for any app updates that can fix bugs or improve performance.
4. Limited services
Online banks may not offer the full range of services you’d find at a traditional bank. For example, if you need to deposit cash, obtain a cashier’s check, or access a safe deposit box, you may find yourself out of luck.
How to work around it:
Research online banks that partner with local ATMs for cash deposits or those that offer reimbursed fees for using out-of-network ATMs. Additionally, maintain a small account at a brick-and-mortar bank for services that online banks can’t provide.
5. FDIC insurance
One common worry when switching to online banking is whether these banks provide the same level of FDIC (Federal Deposit Insurance Corporation) insurance as traditional banks. It's understandable to feel cautious, as your hard-earned money's safety is a top priority.
There are levels to online banking. On one side, there are major online banks that established themselves as structured, reliable, respected institutions. But in a scenario where everyone is battling for the best rates, you may stumble across obscure, sketchy digital banks that get attention because they offer better deals than the average.
Major respected online banks insure accounts up to $250,000 through the FDIC just like a brick-and-mortar, ensuring your deposits are protected in case of a bank failure. But that's not the case for all.
How to work around it:
Be cautious and read the fine print with lesser-known digital banks, as your hard-earned money's safety is a top priority. Always check if the online bank you're eyeing has FDIC insurance. You can usually find this information on the bank’s website, often in the “About Us” section, or you can verify it directly on the FDIC's website. This extra step ensures peace of mind, knowing your funds are secure.
6. Small business inefficiency
If you run a small business, your banking needs might be more complex than what an online bank can offer. Traditional banks and credit unions often understand the unique challenges of local businesses, providing services like small business loans, cash management, and face-to-face support. These institutions are rooted in the community, often offering more personalized service and a better understanding of your business's needs.
Online banks, while convenient, may lack this level of local expertise and tailored services, which can be crucial for a growing business.
How to work around it:
To bridge this gap, consider maintaining a relationship with a local bank or credit union while using an online bank for more routine transactions. This approach allows you to enjoy the convenience of online banking without sacrificing the support your business needs.
At a glance: What are the pros and cons of online banking?
Online banking offers a match of better rates and fees plus the convenience and flexibility most traditional banks can’t match. “From a purely numbers perspective, it makes little sense for savers to stay with physical banks that are offering sometimes as little as a tenth of the amount of interest they could earn elsewhere,” Pastor says.
However, the risks and drawbacks are real and worth considering. By understanding these potential pitfalls and knowing how to mitigate them, you can make online banking work for you while avoiding the common traps that might otherwise give you pause.
“An online bank with a transparent fee structure and 24/7 fraud monitoring can provide good value”, says John Pace, a Certified Public Accountant and owner of Pace & Associates.
Matching your needs to the right bank
When choosing between online and traditional banks, it's important to consider your banking needs and habits. Think about your comfort with technology and the necessity of access to a broad network of ATMs.
If you value personal relationships with bank staff, need frequent in-person transactions, or require a wide range of financial services, a traditional bank is more suitable. If you prioritize higher interest rates, lower fees, and digital banking convenience, an online bank may be the better option.
“Evaluate your needs and technical skills,” Pace says. “If traveling often or living remotely, online could suit you well. If less tech-savvy, a physical bank may be preferable.”