Jim writes about personal finance at Blueprint for Financial Prosperity.
I recently had a chat with one of my friends about online banking, how she had just started checking her account online, using bill pay functions, and managing her transactions through a website. She's a pretty savvy individual, a mechanical engineer by trade, but not especially trusting of the Internet. She had heard all the email phishing stories, about people stealing your identity online, and the idea of an entirely online bank with no physical locations for her to visit was too much of a jump for her.
I opened an ING Direct account when they were first offered because the high yield interest rate was simply too hard to ignore. I jumped in without looking. I didn't look up ING and knew nothing of their history, but everything worked out for the best. My friend was not going to do this. So this is my attempt to convince her that online banks are perfectly safe and I'll use the characteristics at what I consider the best online banks as a basis for comparison.
A bank is a bank is a bank. Whether it's entirely online or entirely offline, you get the same protections under FDIC insurance as long as they are FDIC insured. You can look for the logo on the bank's website and confirm it using the FDIC's Bank Find tool. FDIC insurance means that your principal under $100,000 is protected just as it would be at a more traditional bank.
Most Run By Established Banks
Let's look at the banks I have listed on my high yield savings account bank page:
- FNBO Direct: First National Bank of Omaha was founded in January 1, 1857. Bank Find says the bank has been insured since Jan 1, 1934 because that's when the FDIC was created. FNBO pre-dates the FDIC! (here is my review of FNBO Direct)
- E*Trade: E*Trade is known more for its brokerage services but the bank has been around since January 1, 1933.
- ING Direct: They were established in August 4, 2000 but trace their origins much farther back to ING Group, a Dutch conglomerate. (my review of ING Direct)
- HSBC Direct: HSBC is a London-based bank that only recently began to make a push in the United States, so it's Bank Find listing is only a few years old. HSBC stands for Hongkong and Shanghai Banking Corporation Limited and it was "established in 1865 to finance the growing trade between China and Europe" according to its website. (my review of HSBC Direct)
- WaMu: Washington Mutual Bank has been around for quite some time but its recent incarnation/name was formed nearly twenty years ago on December 27, 1988.
- Emigrant Direct: Finally, Emigrant Direct is operated by Emigrant Bank, a New York based bank that has existed since September 30, 1850.
Only One Online Bank Failure
To my knowledge and to date, only one online bank (NetBank) has failed and all the assets were FDIC insured (up to the $100,000 limit). For all intents and purposes, the failure of the bank had nothing to do with the fact that it was entirely online and it was eventually taken over by ING Direct, one of the online banks I listed earlier. NetBank account holders were able to log into their accounts within a few days and there was hardly any interruption of services.
Take advantage of the high yields and lower overhead costs of online banks and open one up today. The only online bank promotion I'm aware of is a $25 bonus for using an existing ING Direct customer's referral (which isn't that incredible because you can get higher yields at other banks) but the higher rates probably trump whatever you're getting locally. Just open one, deposit a little money, and see that nothing bad will happen. :)
Jim writes about personal finance at Blueprint for Financial Prosperity and has a savings account at almost all of the major online banks, it beats keeping all those pennies in his mattress. He is also uncomfortable writing about himself or his mattress in the third person.
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