Are Online Banks Safe? Tips on Safety Best Practices

Online banks are gaining popularity, with a growing number of people opting to bank digitally and over 300 digital-first banks around the world catering to business and personal banking needs. 

But with the majority of these online banks being unfamiliar names and relying heavily on modern technology, there are some concerns about the safety and security of your money: Is my money safe? How do I know if the online bank is legit? 

While online banks are generally safe, there are factors that can further ensure the safety of your money. This article explores the various security measures online banks use to protect your deposits and private information. We will also provide online banking security tips to help you bank online with peace of mind. 

Online banks are financial institutions that operate entirely online without physical branches. Customers can manage their accounts, make transactions, and access banking services on online platforms, typically through mobile banking apps or web browsers. 

These online-only banks often offer higher interest rates and lower fees than traditional brick-and-mortar banks. They also tend to have simpler account opening processes and provide advanced features like budgeting tools and spending analytics. 

Online banks are also sometimes referred to as neobanks, challenger banks, and virtual banks. However, it’s important to note that “virtual bank” is a regulated term in some jurisdictions, such as Hong Kong. 

Online banks rely on secure online platforms, using sophisticated software and infrastructure to provide a wide range of banking services and security features to protect customer's sensitive information, including:

• Encryption
• Fraud monitoring
• Real-time alerts
• Multi-factor authentication (MFA)
• Secure communication channels

Let’s look at how they work.

Encryption is a system that protects the data of online banking services from unauthorized access. It uses mathematical algorithms to transform the data into unreadable codes that can only be deciphered by those with the key—namely, you and the bank.

Encryption can be used for data in transit (when it is sent or received over a network) or at rest (when stored on a device or server).

Some of the common encryption methods are:

Secure Sockets Layer (SSL):

SSL (Secure Sockets Layer) is an encryption protocol that establishes secure Internet connections. It encrypts data before transmitting it over the Internet from a web browser to a web server, protecting it from hackers and other unauthorized access. When combined with the Hypertext Transfer Protocol (HTTP), it forms HTTPS, a more secure version of the protocol used for websites.

SSL also authenticates the website’s identity using digital certificates issued by Certificate Authorities (CAs). When you visit a secure website, your browser checks the certificate’s validity and displays an indicator, such as a green padlock, to confirm the connection is secure and authentic, not a fake website wanting to trick you and take your information.

SSL also prevents anyone from changing or messing with the information while it's being sent, much like a seal.

Advanced Encryption Standard (AES)

AES is a symmetric-key algorithm that uses one key to encrypt and decrypt the data, widely used to encrypt institutions' databases, files, and communications.

Public Key Infrastructure (PKI):

PKI is an asymmetric-key algorithm that uses two-key cryptography, a public key, and a private key. The public key can be shared, while its owner keeps the private key confidential. PKI also combines digital certificates to verify the validity of the key. PKI is commonly used to secure online transactions such as payment transfers and e-signatures.

Online banks employ advanced fraud monitoring systems to closely watch the transactions to and from your bank account. These systems continuously analyze your account activity for suspicious patterns, such as unusually large transfers, payments to unfamiliar vendors or in foreign currencies, or attempts to access your account from unfamiliar locations.

Some providers may implement advanced technology, such as artificial intelligence and machine learning, to detect and prevent fraud in your online bank accounts. If suspicious activity is detected, the bank will flag it for investigation and notify you to take further action, such as temporarily locking your account or credit card. 

Every secure online bank has a fraud monitoring system to detect unusual activities on your checking accounts. If there’s a suspicious transaction, the bank will notify the account holder via email, mobile app notification, or SMS. 

Unusual activity that could trigger the notifications include:

• Transactions that exceed a certain amount and frequency
• Transactions or cash withdrawals that occur in unusual locations
• Transactions that involve high-risk categories, such as gambling
• Transactions that do not match your spending patterns or habits

Upon receiving the notification, you can protect your account by:

• Verify whether the transactions are legitimate
• Freeze your account temporarily if you suspect unauthorized access
• Change your password or PIN
• Inform your bank if you suspect unauthorized access

Moreover, some virtual and online banks provide extra protection through fraud detection programs that run continuously in the background of their platform, constantly on the lookout for suspicious or hacker-like activity.

Financial institutions use multi-factor authentication (MFA) or two-factor authentication (2FA) to verify login attempts to the bank’s website or mobile banking account. This security measure usually requires you to provide an additional form of identification, such as a code sent to a mobile device or using biometric authentication like face ID or fingerprint recognition, after entering your passwords. 

Transactions may also require dynamic passwords like one-time passwords (OTP) to add another security layer.

Additionally, virtual banks often limit login attempts and analyze customer behavior to identify unusual activity. This quickly locks out hackers trying to guess passwords through brute force.

Financial institutions are often the top targets of phishing attacks. A phishing attack is a type of cybercrime, where hackers pretend to be trustworthy sources, like a bank, and trick victims into giving sensitive information like passwords or credit card details.

Online banks often prevent this manipulative tactic by offering their customers a private, secure messaging platform within their mobile app as an official communication channel. They also utilize strong encryption and authentication techniques to safeguard communications and often send out updates to keep their customers informed of the latest scam tactics. 

Even with multiple security layers, all online systems have potential vulnerabilities and hackers are constantly looking to exploit those weaknesses. Understandably, this raises concerns for customers about potential account breaches.

Plus, although online banks may operate differently from traditional banks, they can still face similar challenges, including bankruptcy. 

To ensure your money is protected, here are some factors to look for when choosing an online bank:

1. Deposit Insurance: Make sure that the bank is registered and insured under the deposit protection scheme of your local government, for instance:
   ‎
   ‎ ‎ ‎ ‎ ‎ ‎ • In the US, all banks, including virtual ones, will announce if they are registered with the Federal Deposit Insurance Corporation and are FDIC-insured and to what amount. You can also check the bank's FDIC status on the agency's website.
   ‎ ‎ ‎ ‎ ‎ ‎ • In the European Union, virtual banks are subject to the same standards as traditional banks, and deposits are protected under the Deposit Guarantee Scheme Directive.
   ‎ ‎ ‎ ‎ ‎ ‎ • In Hong Kong, every licensed bank, including virtual banks, must be part of the Deposit Protection Scheme (DPS) unless the Board grants an exemption. The Hong Kong Deposit Protection Board, an independent legal entity, is responsible for overseeing the DPS.
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2. Security Measures: Check the bank’s security features, including encryption (HTTPS in the website URL), multi-factor authentication, and regular security audits.
3. Customer Reviews: Research and read reviews from other customers to get insights into their experience with the bank’s platform and customer service, especially how fast the response is in cases of fraud reports.
4. Reputation: Research the bank’s history, reputation, and any complaints or incidents.  

Virtual banks already provide a lot of ease and security, but you can also take steps to protect yourself from the risks of online banking, including data breaches, scams, and hackers. 

Here are the online banking best practices to keep your money and sensitive information safe.

Having good password practices helps a lot in keeping your account safe. Use passwords that are difficult to guess, don't use repeat passwords, and change your password immediately if you think it's been compromised.

Do not base your passwords on common words, names, dates, or personal details.

Birthdays, pet names, and favorite movies make for weak passwords that hackers can crack using tools or personal information they gather about you online or through social media.

Instead, create random, unique passwords that contain numbers, upper and lowercase letters, special characters, etc., which are difficult to guess and differ for each account. If possible, aim for a longer password.

If your virtual bank offers fraud alerts, extra authentication, or any additional security, opt in! Additionally, update your banking application whenever the new version rolls out to get all the new or adjusted security features.

Connecting to public Wi-Fi networks can be a significant threat to the security of your bank accounts because hackers can

• Intercept your online transactions - Hackers can monitor and capture the data you send and receive over the public Wi-Fi network, such as your bank account number, password, PIN, or security code.
• Steal your login credentials - Hackers can redirect you to a fake bank website and trick you into entering your username and password.
• Install malware on your device - While connected to unsecure networks, hackers can infect your device with malicious software that can spy on your activities, record your keystrokes, or steal your data.

Using mobile data with a secure internet connection instead of public Wi-Fi is best for safety.

Additionally, you can boost security using a trustworthy virtual private network (VPN), which creates an encrypted tunnel for your phone.

However, not all VPNs are safe or offer the same level of safety. When choosing a VPN, it's important to understand the different VPN types available. Some may keep logs of activity or have weak encryption, posing risks of a data leak. Therefore, select only reputable VPN services with robust security and a strict no-log policy.

While you might want to choose the cheapest VPN available, be sure to check its security features and privacy policies first to ensure both security and affordability.

Never share your online banking credentials or account information like login details, security pin, answers to security questions, or verification codes with anyone, even if they claim to represent your bank or a trusted organization. Your bank will never randomly contact you through email or phone to ask for your personal or financial details.

Financial institutions have policies regarding communicating with and managing customer information. Often, these policies declare that they will never ask for specific details such as PINs or social security numbers.

Read your bank or financial institution's privacy policy and data security measures to understand how it collects, uses, and protects your data. This will help you recognize phishing scams.

Do not click links or open attachments from unsolicited emails or text messages that ask you to verify your account details, update your information, or resolve issues with your online banking. Instead, contact the bank to confirm that the request is legitimate.

The final and best practice to secure online banking is to know your virtual bank's total security measures before you sign up.

Read reviews from existing customers. Try searching if it has ever been a victim of a breach—and what steps the bank took to fix the issue.

Online banks are a convenient and safe option for managing your business and personal finances, provided you are aware of potential threats and take proactive steps to protect your money and personal information. Follow the security tips and look for the security measures listed above, and you can open an online bank account with all the confidence you have in traditional banks.