Are Online Banks Safe? Definition, Pros, And Cons

What are Online Banks?

Online Banks are also known as Online Only Banks and Digital Banks. These banks offer all their services online, doing away with all the paperwork like cheques, cash, pay-in slips, demand drafts, etc. Online Banks are completely independent banks that are licensed under the Banking Regulation Act and follow the norms of the Reserve Bank of India on par with commercial banks. So, these banks act like any other scheduled commercial bank with a primary focus on accepting deposits and giving loans.

These banks are online financial institutions that have a virtual presence for customers. Digital Banks serve their customers in a digital mode. Everything, right from the opening of an account to the disbursement of a loan, is done at a distance. With the variety of new and customised solutions, Online Banks are filling holes and flaws in the traditional banking system. Since a physical structure is absent in Digital Banks, the operational cost is low. However, acquiring new customers and cross-selling existing customers is comparatively more challenging than traditional banking.

While Online Banks and traditional banks that offer online services may sound similar and have really come close, it is important to understand that they are not the same. While Digital Banks use the suffix "bank", it does not imply that they are regulated similarly to Traditional banks. Here are the types of Digital Banks based on how they are regulated and operated:

Neo Banks:

The Online Banks or Digital Banks that do not have separate formal legislation and have to collaborate with traditional banks as a marketing platform are called 'Neo Banks'. The Neo Banks partner with traditional banks to provide licensed or regular banking services to their customers as outsourced agents or business correspondents.

Full-Stack (Licensed) Digital Banks:

The fully functional entities, regulated by the banking regulator that do not have to collaborate with the traditional licenced banks to accept deposits and give loans are called 'Full-Stack (Licensed) Digital Banks'. However, due to the lack of formal legislation, these banks are not operative in India.

Apart from these two main types of Online Only Banks, some traditional banks also provide Neo banking operations that function autonomously and compete with stand-alone Neo Banks. For example, Yono by the State Bank of India and 811 by Kotak Mahindra Bank.

What are the pros of Online Banks?

1. Higher Deposit Interest Rates:

Online Only Banks save a substantial amount as they do not have any physical branches. It eliminates costs like office rent, electricity bills, employee salaries, paperwork, security, and so on. Therefore, Digital Banks can offer customers better interest rates or Annual Percentage Yields (APYs) on bank deposits like Savings Accounts, Fixed deposits, Recurring deposits, etc. Apart from the savings from the significant infrastructure, since Online Banks are relatively new in the country, they have to attract new customers by offering comparatively higher yields.

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2. Lower Fees:

We are all aware of traditional banks' high transaction and processing fees. Since Online Banks do not have branch maintenance expenses, they can offer low or no transaction and processing fees. For example, some Digital Banks do not charge any fee for fund transfers across banks and some charge nominal processing fees on loans and overdrafts.

3. Convenience:

Digital Banks allow you to do all the banking transactions right from the comfort of your home, office, or even while travelling. Unlike traditional banking, you do not have to check the bank's working time, visit the bank, stand in a queue, fill out the paper slip, etc., to make a transaction.

4. Speed And Accuracy:

Since Digital Banks perform all the transactions online, there is no scope for human error, which is possible in the traditional banking system. Besides, all the transactions and processes are much faster than offline transactions.

What are the cons of Online Banks?

1. Lacks Personal Touch:

You get to know the branch staff when you bank with a traditional bank. As you get familiar with the bank staff and build strong banking relationships, the staff can guide you through different banking products or help you with loan and overdraft terms changes. The banker can allow some flexibility with the transactions based on your banking relationship with the bank branch. However, Online Banks lack a personal touch and the benefits associated with them.

2. Limited cash deposit and withdrawal options:

Since Digital Banks do not have any branches, depositing money and withdrawing cash could be cumbersome for customers. You can withdraw cash from your bank's ATM or any other bank's ATM, depending upon the terms and conditions related to cash withdrawal. Similarly, you will have to find an ATM that accepts deposits to deposit cash, which might not be a feasible option every time. Some Online Banks have tie-ups with curtains banks and retailers who can accept cash, but they could charge deposit fees.

3. Limited Product Options:

Digital Banks have to tie up with traditional banks to provide certain products and services. Therefore, there are restrictions on the products and services that Digital Banks can offer. For example, a traditional bank can be your one-stop for all financial services like Savings accounts, Current Accounts, Fixed deposits, Life Insurance, Health Insurance, Mutual Fund Investment, Demat Accounts, and many more. However, depending on the type of Digital Bank and legislation, Online Banks might not offer services like insurance and investment. So, if you are someone who prefers to keep all your finances under one roof, Online Only Bank might not prove to be a good option for you.

Are Online Banks safe to bank with?

When it comes to anything digital, especially money related, the first question that comes in our minds is whether it is secure. Well, the answer is - Yes, Online Banks are secure to bank with. The banks take all the necessary measures, and there are multiple layers of security to keep your hard-earned money and banking experience safe and secure. Before opening a bank account, you should check the layers of security and make sure the bank follows two-factor authentication and does not allow any transactions without your consent through an OTP, either received on a mobile number or email id. Apart from the measures taken by the banks, customers have to do their part and take necessary precautions when operating their bank accounts online. Here are a few examples of the necessary precautions you must take when banking online:

• Make sure the password is strong and difficult to guess

• Change your password periodically

• Use a secure internet connection and avoid using public WiFi

• Be careful when logging into the bank's website or downloading banking apps

• Do not share OTP with anyone

• Do not share your password with anyone

• Use antivirus software on devices you use for logging in to your online bank account

• Make sure the transaction alerts are turned on

To conclude:

While Online Banks are efficient and convenient for performing banking transactions, not everyone can have access to secure internet, electronic devices, and technical knowledge to operate bank accounts online and make financial transactions on their own. The Digital Banks in India still have the potential to evolve and are still at a nascent stage. If you are financially and technically aware and are comfortable using internet banking, mobile banking, etc., then in order to earn better APY and make banking transactions at a lower cost, you can consider banking through Online Only Banks. However, as already said, these banks are at a nascent stage and hence should not be your primary or only banking option, at least as of now.

Warm Regards,
Ketki Jadhav
Content Writer