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Online Banking Fears


I hope my previous post doesn't scare people away from online banking. The news article that I referenced cites rare instances of fraud. If you take basic precautions, I feel online banking can be just as safe as banking at brick-and-mortar branches.

But there are concerns. This article reported on an annual survey of online banking customers that found that security concerns are affecting the growth of online banking:

After years of dramatic growth in online banking penetration, the percentage of Americans who conduct personal banking activities online remained virtually unchanged at 39% for the 12-month period ending August 2005.

Worries about Online Banks

I have several friends who have avoided joining online banks. A few do online banking with their brick-and-mortar banks, but aren't comfortable with joining a pure online bank like ING Direct.

This thread at ClarkHoward is a good example of someone who's interested in the very high savings rates from online banks but admits of being afraid of online banks.

Part of the fear with online banks seems to be the perception that these banks aren't real or don't physically exist. This shouldn't be a concern. All legitimate online banks like ING Direct and EmigrantDirect have physical offices somewhere in the US. There just may not be local branches. These online banks are often online units of large banking companies.

Reviewing an Internet Bank

There are two steps that you can take to ensure the online bank is FDIC insured and is financially sound.

First, go to the Bank Find page at and type in part of the name of the bank. For EmigrantDirect, just type in Emigrant Savings for the name. It seems that Emigrant Savings is in the process of changing its name to New York Private Bank and Trust. The FDIC page about this bank gives a brief history of the bank. Most importantly, it provides the bank's website. However, it only gives the bank's main website, not the website of the online unit, EmigrantDirect. But when you go to, you'll see a link to This is proof that is legitimate and is FDIC insured.

Next, to confirm that an online bank is financially stable, go to Bankrate's safe and sound page and find the bank using the form. For the EmigrantDirect example, I selected the bank that starts with the letter E and is located in New York, New York. I then picked Emigrant Savings Bank from the menu of New York banks. Bankrate's current safe and sound rating for Emigrant Savings is 4 out of 5 stars, the second highest rating. This indicates that the bank has a sound financial condition.

One thing nice about EmigrantDirect and ING Direct is that you can start an account with very little money since there are no minimum deposit requirements. This allows you to start small and get comfortable with the process. After you build confidence, you can then transfer in more money.

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