With the rise of ransomware attacks on institutions around the globe, not just the US, you might be wondering just how safe are online, digital, or mobile banks?
The short answer is that they’re just as safe as traditional banks, if not more, if you stay alert and informed about all the dangers that lurk you and your digital bank of choice.
Lucky for you, I’m here to answer all your burning security questions as someone who has reviewed dozens of banks in the past year alone. We’ll cover the difference between e-money institutions and banks, FDIC insurance, and the impending scams and hacks.
Are digital banks safe?
Digital banks are at the forefront of security technology, and in many cases, they are leading the way for traditional banks to follow. Digital banks’ hi-tech security methods can be seen in the signup process where fingerprint scanning, voice recognition, and facial recognition are used to authenticate customer identities before approval.
They also offer instant freeze and unfreeze features that provide customers with peace of mind about their money security. Their customers’ deposits are also insured by the FDIC up to $250,000.
What are digital banks?
Digital banks are also called mobile banks, neobanks, challenger banks, online banks, and even virtual banks. They offer a digital-only bank account that you can access over a computer or a mobile app. They have no physical branches and therefore less overhead.
That means that digital banks mostly offer accounts without day-to-day banking fees and have more competitive savings interest rates. They even offer cashback, debit or credit cards, credit builder programs, loans, mortgages, and other financial products.
They’re often an excellent choice for transferring money domestically or internationally. To find the best digital banks in the US, visit our digital banking in the US overview.
E-money institutions vs banks
We can differentiate online banks into two groups:
- E-money institutions
- Fully-fledged banks
Fintechs that don’t have a banking license fall into electronic money institutions (EMIs). Some of the companies to think of are PayPal, Venmo, Cash App, Chime, Revolut, Current, or Wise, for instance.
They partner with a bank to provide their customers with banking services and cards. Using the example of Chime; Chime is a financial technology company that offers banking services provided by The Bancorp Bank or Stride Bank, N.A.; Members FDIC.
On the other hand, we have either traditional banks that have developed an app for their customers to use and newly founded fintech like Varo that started out as an e-money company and later on got granted a banking license by the FDIC.
The national bank charter is the pinnacle to which most if not all fintech companies strive. It’s a long and costly road that takes a lot of money and can last for years.
You’ll often see that after a bank’s name there’s a “Member FDIC”. The Federal Deposit Insurance Corporation (FDIC) is “an independent agency created by the Congress to maintain stability and public confidence in the nation’s financial system.”
Once you’re granted their national bank charter, your customers’ deposits are insured up to $250,000 if something happens to the company; i.e., it goes bankrupt.
“Member FDIC” offers a great deal of safety and security in the eyes of customers looking for financial institutions. Digital banks with an FDIC license also have deposit insurance. Just like traditional, brick and mortar banks.
And what about e-money institutions? That’s why they partner with a reputable bank in the US. So that they can offer their customers financial services and deposit insurance.
In Europe and the UK, for example, there’s no need to partner with a bank, and customers’ money won’t be insured by the FDIC equivalent. The deposit insurance is also much lower and stands at only £85,000 or €100,000 which is much less than $250,000 in the US.
In that case, where there’s no deposit insurance, the money will be stored in ring-fenced accounts in big banks and e-money companies can’t use them for investing or anything else that’s not connected to the original use of the deposit.
Log in best practices
You should always choose a bank, digital or traditional, that has the most secure log-in options available. That entails:
- Face ID,
- Two-factor authentication
- Combination of the above
If a digital bank follows best practices to log in their customers, there’s nothing to worry about. I prefer a combo of passwords and 2FA or fingerprint.
That being said, my former big bank still didn’t implement any log-in except a 6-digit password. That’s shocking but it’s, unfortunately, something that we’ve come to accept from these dinosaurs.
Statista reports that data breaches in the medical and healthcare sector formed 35.64% of all data breaches in the United States, 2014-2019. They also report that in 2020 alone, over 155.8 million individuals were affected by data exposures and got their sensitive information exposed.
The largest data breach was uncovered in late 2016 when Yahoo announced that hackers had stolen user information of at least 1 billion accounts in 2013. An investigation showed that it was actually 3 billion accounts affected.
I don’t want to spook you or anything, but there’s a great chance that your information is already “out there.”
And although none of the ransomware attacks and hacks affected an online bank (to my knowledge), big banks aren’t that lucky (or prepared). According to JPMorgan Chase Bank, banks are daily under cyber attacks.
Some mass hacking incidents include tens of millions of customers and users at Target, Adobe, Snapchat, Michaels, Neiman Marcus, AOL, and eBay. This just goes to show you that a well-known brand name doesn’t automatically mean more security. It’s often the opposite as they are targets of more attacks than smaller companies.
If hacks weren’t scary enough, we also have scams to worry about. Scammers will do everything in the book to get your sensitive information such as account number, PIN, and similar.
They are going to pretend they are your next love interest, try to sell you a puppy, rent out a non-existent apartment, ask you in person to make a call/send a message and send themselves money from your Cash App, etc. Listen, no one said they were boring.
Most of these tactics won’t work with traditional banks because they will reimburse you if you get scammed. But, some mobile banks aren’t that vigilant or caring. That’s why scammers will persuade you to use Cash App or Venmo, for instance, to send them money.
These kinds of apps were only intended to be used with friends, family, and people you know and trust. They’re not supposed to be used to send money to strangers. So, make sure to read the fine print before you send $500 to a random guy to buy Nikes.
Related: The 10 Most Common Cash App Scams
How to stay safe banking
The general rule is: If something is too good to be true, it probably is. Sometimes the best option is to sleep on it before transferring money to someone, or buying a product online. Try to find out more about the person or the company on the other side. Are they trustworthy?
Here are more tips on how to stay safe banking:
- Don’t share your login info with ANYONE
- Don’t save login/card info in your phone/Google
- If potential product, service, price, or apartment sound too good to be true, they probably are
- Change passwords regularly
- Use 2FA to log in
- Only transfer money to people you know and always double-check that their username is correct
- Never google support numbers for any app as the page listed on top could be from scammers
- Be wary of sweepstakes and giveaways
- Double-check the bank’s website address
- Don’t let strangers handle your phone
- Never click on links in emails that appear to be from your bank
- Don’t use public Wi-Fi
- Check your accounts regularly
Should you use a mobile bank?
A mobile, digital, online, or neobank, how they’re called sometimes are meant for everyone’s use. You shouldn’t be afraid to use them even if you don’t have much experience.
All traditional banks have moved online a long time ago and have published their own mobile banking apps that are used by billions of people around the world.
As we learned today, a big brand name doesn’t mean much these days. Traditional banks are just as vulnerable to cyberattacks as any other company.
Just as with most things in life, if you follow common sense, read the fine print, and stay alert, a mobile bank is a great way to bank, save, invest, and even take out a mortgage.
Adrian Volenik is a fintech enthusiast who loves testing and reviewing digital banking apps and financial products in general. How many digital banking accounts can one man have? Not enough, if you ask Adrian. As his wallet will soon explode if he doesn’t cut back on the number of cards.