Can you trust your bank?

You may have noticed recently that there are more banking options than ever before. But instead of local bank office branches being built, these offers are appearing online. In the small business space, for example, there are a number of new online small business checking accounts that may offer attractive terms such as low minimum deposits or higher interest rates. 

You may be tempted to open a new account, but also uncertain. Around 5.6 million American households don’t have a bank account as of 2023. Of those in the unbanked category, the top reasons cited are not having enough money to open an account — followed by not trusting banks.

Can you trust banks you haven’t heard of before? Let's explore.

What to look for in a trustworthy bank

Whether you are considering moving banks or wanting to open an account with a bank for the first time, it can be hard to assess if a bank is trustworthy. Sure, there are the big name financial institutions such as Citi, Bank of America, Wells Fargo, and plenty more.

But besides being ‘too big to fail’ how do these banks — or smaller ones — really keep members’ funds safe? How do you even know if a bank is trustworthy?

Check that it's FDIC insured

When looking at any bank — whether it's an online bank, a more traditional bank with bricks and mortar locations or a hybrid of the two — the first thing you want to do is to make sure your accounts will be FDIC insured. The Federal Deposit Insurance Corporation (FDIC) is an independent agency created by Congress to maintain stability and public confidence in the nation’s financial system.

When you see the sign “member FDIC insured” that means that certain deposits are covered by FDIC insurance. The FDIC insures the following types of accounts, up to specific limits:

• Checking accounts
• Negotiable order of withdrawal (NOW) accounts
• Savings accounts
• Money market deposit accounts (MMDAs)
• Time deposits such as certificates of deposit (CDs)
• Cashier’s checks, money orders, and other official items issued by a bank

It doesn't cover certain financial products including stocks or bonds, life insurance or annuities, cryptocurrency, or safety deposit box contents. 

The standard insurance amount is $250,000 per depositor, per insured bank, for each account ownership category. We’ll discuss those limits in more detail in a moment. 

What else the FDIC does

In addition, the FDIC examines and supervises financial institutions for safety, soundness, and consumer protection. You can look up basic information about FDIC member banks on their website. 

In addition to FDIC insurance, you’ll want to do your own research to understand important factors that influence customer trust. For example:

• When is customer service available and how will you reach them? 
• What are others saying about that bank online and on social media?
• Has there been a lot of negative news about the financial institution and if so, what types of issues are being reported?

Keep in mind that an online search isn't always a completely reliable source of information. People who are unhappy are more likely to talk about a bad user experience than people who are satisfied. Still, a search can alert you to potential issues. 

Is there risk putting your money in banks?

There may be some risk to putting money in banks, but it can be so minimal that it ends up being far safer than keeping your money at home. That’s especially true if you remain cognizant of FDIC insurance regulations to make sure your deposit accounts are covered. 

It’s important to understand that FDIC insurance covers deposits in the case of bank failure. It does not cover you if you are a victim of scams or fraud. 

However, there are other protections that may help protect you in those situations. Here are a couple of other protections you’ll want to be familiar with: 

• The Truth In Lending Act (Regulation Z) limits liability if your credit card (or credit card number) is lost or stolen and fraudulently used. (This also covers business credit cards in the event of unauthorized use.) 
• The Electronic Funds Transfer Act (EFTA) limits liability in the case of certain types of electronic transfers. Notably, it limits liability when consumer debit cards are used fraudulently if the consumer notified the financial institution within certain time periods of the loss or theft. It does not apply to business debit cards. 
• Regulation CC covers certain types of forged or altered check transactions. 

How to minimize your risk at banks

The large majority of bank account transactions in the US are safe and secure, However, fraud is a problem. You’ll want to minimize the chances that you lose money to fraud by taking a number of steps:

1. Use a strong username and password. This is true for online banking, as well as all your financial accounts. Never reuse any  password you use for a financial services account with other providers, 
2. Do not use public Wi-Fi. When accessing your bank account online or on the bank’s mobile app, avoid public Wi-Fi to minimize potential for stolen passwords.
3. Never give out your personal information. And don't offer log in information over the phone or email. 
4. Use the official website. Always make sure you're on the bank’s website or app, and that it’s not an imposter. (That means be super suspicious about emails asking you to click on a link to log in. Look for a padlock in the URL.) 
5. Don't stay logged in. Log out completely when you are done with your online banking. 
6. Use alerts. Set up alerts to notify you of unusual activity and then pay attention to them.
7. Add two-factor authentication. Having an additional check when you log into online banking help reduce the chances of theft.

Also, try to keep instructions for contacting your bank for fraud concerns in a safe place. If you misplace your debit card or can’t get into your computer because it’s been hacked you still will want to be able to contact your bank. 

Workarounds to keep your money FDIC insured

As mentioned earlier, FDIC insurance coverage is $250,000 per depositor, per insured bank, for each account ownership category.

Note that it's not per account. You could have a total of more than $250,000 in a combination of different accounts with the same bank and depending on the account ownership category, the full amount may not be covered. 

If you maintain larger deposit amounts, you may be able to increase the amount covered by putting money in another account under a different ownership category. The most common account ownership categories for individual and family deposits are single accounts, joint accounts, revocable trust accounts, and IRAs or certain retirement accounts.

You can also put funds in a different insured financial institution. 

Are online banks as safe as brick and mortar banks?

From the insurance perspective online banking is just as safe as a bricks and mortar bank. FDIC insurance doesn’t change, whether a bank offers digital banking or in person banking. 

What is important is to make sure you understand FDIC insurance coverage and that you take precautions to keep your account secure. Generally the banking industry uses encryption and other measures to help keep your personal data secure, but it’s also important that you make sure to keep your information safe. 

Are credit unions as safe as banks for your money?

Yes, credit unions that are insured are just as safe as banks. While they are not insured by the FDIC, the National Credit Union Association (NCUA) administers the National Credit Union Share Insurance Fund (NCUSIF) which insures member’s individual accounts for up to $250,000.

In addition, member’s interest in joint accounts is insured up to $250,000 and separately, IRA and KEOGH retirement accounts are insured up to $250,000. 

It's worth noting that not all credit unions are federally insured. If they carry private insurance you may want to find out how they are insured and how much coverage is offered.