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Budgeting & Saving

Are Online Savings Accounts Safe?

An online savings account provides convenience, enabling you to bank without ever stepping foot in a physical branch. It could also earn you higher interest rates and charge lower fees than a traditional bank account. But are they safe? Generally, yes—as long as your deposits are federally insured and your online transactions are secure.

Online savings is the latest innovation on the old-fashioned savings account, which dates back to the early 1800s. Online or not, a savings account is a pool of money you set aside safely at a bank, credit union or other financial institution. While parked in a savings account, your money is insured up to $250,000 and earns interest. Let's go through what an online savings account is, whether it's safe, and what its benefits and drawbacks are.

What Is an Online Savings Account?

An online savings account lets you conduct your banking from anywhere you can connect to the internet and at any time. You can open an account or transfer funds online, for instance, without the need to visit a branch of a bank or credit union. But since many online savings accounts are offered by companies that don't have brick-and-mortar branches, you wouldn't be able to do in-person banking even if you wanted to—a potential drawback for some.

Many traditional banks and credit unions that operate brick-and-mortar branches also provide online accounts. However, online-only banks may offer features and options that make their savings accounts stand out.

Major differences between online-only banks (also called internet banks) and traditional banks include:

  • Online banks don't have branches that you can visit, while traditional banks do. So if you're a customer of an online bank, you can get customer service help online but not in person.
  • Online banks normally don't allow you to deposit cash, while traditional banks do.
  • Online banks frequently offer higher interest rates than traditional banks do.
  • Online banks usually charge lower fees than traditional banks do.
  • Online banks often don't require a minimum balance, but many traditional banks do.
  • Online banks might make it tougher to get quick access to your money than traditional banks. In part, that's because it might take a few days to transfer money between an online savings account and an account at another financial institution.
  • Online banks might not let you write checks, whereas traditionally banks usually do.

Among the well-known names in online-only banking are Ally Bank, American Express Bank, Discover Bank, Marcus by Goldman Sachs and Synchrony Bank.

How Secure Are Online Savings Accounts?

Online savings accounts generally are safe and secure, but there are a few steps you should take before you choose a company to bank with. You'll first want to make sure to check whether it's backed by the Federal Deposit Insurance Corp. (FDIC). You can look for the FDIC logo on the bank's website or search the FDIC's BankFind database to learn more about its FDIC status. One of the risks of online banking is that criminals have set up a fake online banking website to siphon money from unsuspecting victims, but a quick check could prevent you from falling victim.

Online savings accounts are usually insured by the FDIC, just like traditional banks. If a bank carries FDIC insurance, your account is automatically insured. FDIC insurance covers your deposits up to $250,000 if the bank fails.

In terms of security, many online banks strive to keep your personal information out of the hands of hackers and identity thieves. They can't, however, prevent a hacker from getting hold of your account information through means beyond their control, such as if you access your account from an unsecured public Wi-Fi hotspot. When you use an online bank, be sure to adhere to safe internet use practices, including creating a unique and secure password, being careful about the networks you connect to and avoiding phishing attempts.

Benefits of Online Savings Accounts

Online savings accounts deliver several benefits:

  1. You can often find higher interest rates and lower fees with an online savings account than a traditional savings account. Since online-only banks save money by not occupying brick-and-mortar spaces or employing tellers to staff bank branches, they're often able to provide higher interest rates and charge lower fees. You might see an interest rate on a savings account that's 1.25%, for example. You can designate that money for an array of purposes, such as an emergency fund or a vacation fund.
  2. Anywhere and anytime, you can access your account on your computer, smartphone or tablet. (Many traditional banks also offer round-the-clock account access online, but their physical branches aren't open all day.)
  3. Online banks often offer feature-rich mobile banking apps (as do a lot of traditional banks).
  4. Since they're tech-focused, an online bank might be faster to adopt new features than a traditional bank would.
  5. Some consumers report they're happier with the customer service provided by online banks than by traditional banks. In part, that's because some low-overhead online banks can invest more money in customer service.

Drawbacks of Online Savings Accounts

Online savings accounts can be attractive to many, but their drawbacks could cause you to look elsewhere for your banking needs:

  1. You can't get face-to-face customer service at a physical branch.
  2. When an online bank's system goes down, you won't be able to access your account.
  3. Online banks normally don't have their own ATMs, although they might provide access to an independent ATM network and reimburse any ATM fees.
  4. Online banks might not offer certain services, such as mortgage loans, that their traditional bank counterparts do.
  5. If you want to withdraw cash, you might be hit with a daily withdrawal limit at an ATM. By contrast, a teller at a brick-and-mortar bank branch could hand you more cash with less hassle.
  6. You typically can't deposit or withdraw cash unless you use an ATM affiliated with the online bank.
  7. Online banks generally haven't been in business as long as traditional banks have, so customer sentiment may be harder to nail down.

The Bottom Line

If you crave convenience and are hunting for higher interest rates and lower fees, an online savings account might be a better option than a traditional savings account. But if you prefer a more personal relationship with a bank and would feel more comfortable knowing you can pop into a bank branch, a traditional savings account might be the right choice. Regardless of which type of account you pick, your money should be safe if the financial institution is federally insured.