Is Online Banking Safe?

Customers of internet banks love the high interest rates and the convenience of banking online, but many can't escape some nagging doubts about these upstarts in the ether. Are they as safe as the brick-and-mortar branch on the corner?

The Federal Deposit Insurance Corp.'s takeover of NetBank last fall should lay those fears to rest. NetBank customers -- among them Han Uitenbroek, a Dutch astronomer who travels frequently -- continued to have access to their FDIC-insured money while their deposits were being transferred to ING Direct. "It still looks like the NetBank online account from before," says Uitenbroek.

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Internet-only banks are as safe as their traditional brethren as long as they carry the FDIC seal. But it's important to keep your deposits within FDIC limits -- up to $100,000 in accounts held in your name alone. Although NetBank customers with uninsured deposits immediately received 50% of those funds, they'll have to wait until the FDIC sells the bank's assets to recover the rest of their money. Depositors take precedence over other creditors, and the FDIC will gradually make payments on a pro-rata basis as it recoups money from NetBank.

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That process can take years. When the Bank of Honolulu closed in October 2000, for instance, customers received 65% of their uninsured deposits within a week, another 23% by January 2001 and an additional 7% by May 2001. It wasn't until March 2005 that they were completely compensated for uninsured funds.

In many cases, the FDIC never recovers the full amount of uninsured deposits. Among banks that have failed over the past dozen or so years, the average recovery has been 72 cents on the dollar.

NetBank had total deposits of $2.3 billion, says FDIC spokesman David Barr. But only $101 million in approximately 1,500 accounts was uninsured. Those customers could have been covered if they had spread their deposits among different types of accounts, or among several banks.

You can get more than $100,000 in FDIC coverage at a single bank, depending on how you hold title to your accounts. Although accounts in your name alone are insured up to the $100,000 limit, you're also insured up to $100,000 for your share of joint accounts and up to $250,000 for certain types of retirement accounts, including IRAs.

If you have more than $100,000 in a single bank, check your coverage limits using the FDIC's Electronic Deposit Insurance Estimator (or call 877-275-3342).

As the "Ask Kim" columnist for Kiplinger's Personal Finance, Lankford receives hundreds of personal finance questions from readers every month. She is the author of Rescue Your Financial Life (McGraw-Hill, 2003), The Insurance Maze: How You Can Save Money on Insurance -- and Still Get the Coverage You Need (Kaplan, 2006), Kiplinger's Ask Kim for Money Smart Solutions (Kaplan, 2007) and The Kiplinger/BBB Personal Finance Guide for Military Families. She is frequently featured as a financial expert on television and radio, including NBC's Today Show, CNN, CNBC and National Public Radio.