What Is Online Banking? Definition, How It Works & Is It Safe?
Tricia has nearly two decades of experience in commercial and federal government lending. Her expertise is highlighted throughout small business loan content on Fit Small Business.
This article is part of a larger series on Business Banking.
Online banking allows you to manage your bank accounts using your desktop computer or mobile device and the internet, which is why it’s also referred to as internet or web banking. Most traditional banks, or banks with brick-and-mortar branches, offer an online banking option to their clients.
Generally, it covers typical banking activities, such as viewing account balances, paying bills, and transferring funds from one account to another, which are done through an internet-enabled device. You can conduct your transactions from the comfort of your home or office or while you’re on the go.
How Does Online Banking Work?
For web banking, you need to have a computer or device connected to the internet, and you’ll have to register with your financial institution’s online banking service. The transactions you can perform online will depend on your provider—many allow fund transfers and bill payments while some go a step further by letting customers open new accounts and apply for credit cards and loans. You can also request check reorders, debit card replacement, and cancel check payments via online banking portals.
Is Online Banking Safe?
When banking via the internet, you’re using secure websites and services to conduct your transactions. However, there are always risks involved, and it’s possible for your information to be compromised—whether you’re banking with a traditional or online bank. As such, protecting your online password and monitoring your account regularly will keep your account safe wherever you choose to bank.
Most checking and savings accounts under online-only banks are insured by the Federal Deposit Insurance Corporation (FDIC) for up to $250,000, just like brick-and-mortar banks. You can always verify this before opening an account.
Tips on How to Bank Online Safely
Although online and mobile banking are popular for their convenience, you still want to be assured of their safety. There are a few things to consider when banking online, whether with a brick-and-mortar branch or a purely online-only bank. While banks do their best to keep your account secure, it’s up to you to take precautionary measures to ensure you’re banking safely.
1. Choose a strong password and set up two-factor authentication (2FA).
- Avoid including personal information, such as your birthday, for your password and set up a unique username that doesn’t contain your name
- Combine special characters, uppercase and lowercase letters, and numbers
- Change your password regularly
- Enable 2FA or multifactor authentication (MFA) for an added layer of security
2. Check that your connection is secure.
- Refrain from accessing online or mobile banking when connected with public Wi-Fi or using public computers
- Choose to perform online banking using 4G even if public Wi-Fi is available to limit risks
- Use a VPN whenever you’re connected to public Wi-Fi for added security for your personal information
3. Monitor your account routinely.
- Review your bank statements regularly to find discrepancies
- Set up account alerts to be notified of any unusual activity
- Report suspicious activity immediately to prevent further fraud
- Register for banking alerts
4. Don’t share personal information.
- Keep your online login information private
- Restrict access to the email address associated with your bank account to steer clear of password reset requests via email
5. Have a backup account.
- Keep a second bank account at a traditional bank in case your online bank account is compromised
- Secure your money by moving your funds to your second bank account if a data breach is detected
What Is Mobile Banking?
Mobile banking is performing financial transactions through a mobile app—you can send money, pay bills, deposit checks, and review your account balance easily. Typically, it’s available 24 hours daily, allowing you to skip branch visits. Traditional banks often offer mobile banking to provide convenience to their customers, who have to download the app provided by their financial institution.
What Is Digital Banking?
Even if it seems similar to online banking, digital banking is far more extensive. It’s broad and includes online and mobile banking services, which entails using a web browser and mobile app. It has a high level of process automation and digitizes both the front and back ends of banking. It’s offered by traditional banks, credit unions, and online-only banks.
With it, users can do much more than standard banking activities. You can use customized money management tools, open investment accounts, and apply for loans. As technology grows more sophisticated, users can expect digital banking to flourish even more. For instance, artificial intelligence (AI) is becoming increasingly popular in digital banking, and this can be observed through chatbots providing automated customer service.
What Is An Online-only Bank?
An online-only bank is a financial institution offering a variety of banking products and services, including checking and savings accounts. These banks usually don’t have physical branches and operate through digital platforms. Although the lack of physical locations means cash processing is inconvenient, most people won’t find this a big obstacle with electronic deposits and transfers. Opening a business account through an online-only bank is convenient, especially for non-cash-intensive businesses.
What Is a Fintech?
Fintech, short for financial technology, is a term that encompasses optimizing technology to make financial services available to customers. Fintechs aren’t banks but offer retail banking services and provide FDIC insurance coverage through bank partnerships. Fintech companies make payments, lending, investment, and banking efficient not only for consumers but also for businesses since they can maximize automation and digital technology to streamline their operations.
With fintechs bringing innovation to financial services, they can disrupt the banking industry easily, given their focus on consumers. Fintechs compete with traditional banks through their tech-advanced products and services offered virtually and without personal assistance. As a result, the operational cost is much lower than traditional banks. Service fees are also minimal to none.
Pros & Cons of Banking with Online Banks & Fintechs
Online banks and fintechs usually provide some or all of the banking products and services that most traditional banks offer, often at a lower cost. And while online banking offers many great benefits for consumers, it also comes with some drawbacks.
| PROS | CONS |
|---|---|
| Offer convenience; provide an easy way to monitor your account and make transactions | Lack in-person branches since all transactions should be done through the banks’ or fintechs’ websites or mobile apps |
| Typically have better annual percentage yields (APYs) | Have fewer products that lack the variety of products traditional banks offer |
| Pass on their savings from fewer overhead costs to account holders in the form of lower account costs | Sometimes lack cash deposit services; not be a good option for businesses with regular cash transactions |
Fintechs vs Online-only Banks vs Traditional Banks with Online Banking
Fintechs, online-only banks, and traditional banks offering online banking are often interchanged, but these are three different types of financial providers. The table below helps to distinguish one from the other.
Online-only Bank | Fintech | Traditional Bank with Online Banking | |
|---|---|---|---|
Financial Institution | |||
FDIC-insured | ✓ | Backed by banks that are FDIC-insured | ✓ |
Accessibility | Fully online | Fully online | Online with physical branches |
Products & Services | Checking, savings and CDs, lending | Checking and lending | Checking, savings and CDs, lending, credit cards, merchant services, and collection services |
Our Reviews |
When To Consider an Online-only Bank
Online-only banks are great for those who don’t make cash deposits or need in-person services regularly. Since most already bank online with their major banks, the transition from traditional to online-only banking shouldn’t feel much different from utilizing the online banking features with a major bank. With online-only banks and fintechs, you can still make online payments, fund transfers, and deposits.
Business owners also find online-only banks and fintechs more enticing because most of them offer low-cost accounts and higher interest rates on savings accounts. Further, even if the online-only bank you choose has no physical branch locations, it’ll likely have a large surcharge-free ATM network available for all account holders.
Bottom Line
Online banking is convenient for users since they can transact whenever and wherever they choose. But online banking is limited when it comes to large cash withdrawals and is also exposed to certain risks. However, with banks continually improving their security features and by taking proper security measures, you can conduct your online banking activities safely.
