Process Note

Introduction to Neo Banks in Canada

Neo banks, or digital banks, represent a growing segment of the Canadian banking
landscape. These institutions leverage technology to provide financial services entirely
through digital platforms such as mobile apps and websites, without the need for physical
branches. The rise of neo banks in Canada is fueled by consumer demand for more efficient,
flexible, and technology-driven banking services.

Market Trends and Consumer Behavior

A study by the Canadian Bankers Association highlights a clear trend towards increased use
of banking technologies. Over the next five years, Canadians are expected to expand their
usage of mobile apps (41%), Interac e-Transfer (40%), and Tap & Pay (32%). This trend
underscores the broader shift towards digital-first banking experiences. Additionally,
Canadian consumers show high satisfaction with digital banking services, further supporting
the demand for neo banks.

Regulatory Landscape

Canada's regulatory framework for neo banks is evolving, as the government recognizes the
growing importance of digital financial services. Neo banks, like other financial institutions,
must comply with various regulations enforced by entities such as:

●​ Financial Consumer Agency of Canada (FCAC): Mandates that neo banks ensure
consumer protection, transparency, and fairness in their dealings.
●​ Financial Transactions and Reports Analysis Centre of Canada (FINTRAC):
Requires adherence to Anti-Money Laundering (AML) and Know Your Customer (KYC)
regulations to prevent fraud and money laundering.
●​ Office of the Superintendent of Financial Institutions (OSFI): Ensures financial
stability through regulations that apply to federally regulated financial entities.

For neo banks, the regulatory environment includes several licensing options depending on
the services they offer:

●​ Full Banking License: A neobank with a full banking license can offer traditional
banking services such as deposits and loans. However, obtaining this license requires
meeting stringent regulatory standards and capital requirements.
●​ Electronic Money License (EMI): This allows neobanks to issue e-money and offer
payment services. It typically involves lower costs and faster processing times
compared to a full banking license.
●​ Money Service Business (MSB) and Foreign Money Service Business (FMSB): These
licenses are crucial for neo banks dealing with payment services, foreign exchange, or
cryptocurrency services.
Emerging Partnerships and Business Models

Many neo banks in Canada operate under a partnered bank model, where a traditional bank
provides the necessary licenses and regulatory framework, while the neo bank focuses on the
digital experience and customer interface. This model allows neo banks to innovate on the
customer experience while still adhering to regulatory standards through their banking
partner.

Types of Neo Banks in Canada

There are several prominent neo banks operating in Canada, each offering a range of digital
banking services:

1.​ Neo Financial: A digital platform offering savings accounts, credit products, and
personal finance tools.
2.​ KOHO: A neo bank that focuses on offering a modern, low-fee alternative to
traditional banking services, including a pre-paid Visa card, savings account, and
budgeting tools.
3.​ EQ Bank: Known for offering high-interest savings accounts and other financial
products, EQ Bank operates as a full digital banking service.
4.​ WealthSimple: While primarily an investment platform, WealthSimple also offers
no-fee checking accounts, and is increasingly blending banking with investment
services.
5.​ Tangerine: A digital bank owned by Scotiabank, offering savings, checking, and
investment products with competitive interest rates.
6.​ Simplii Financial: A digital banking arm of CIBC, offering online banking services with
low-fee accounts, credit cards, and loans.

These neo banks primarily operate through digital platforms like mobile apps or websites,
with services accessible directly by customers from their devices.

Payment and Financial Technologies

The Retail Payment Activities Act (RPAA), effective from November 2024, will regulate
payment service providers (PSPs) in Canada. PSPs are entities that facilitate payment
services but do not provide full banking services. These regulations are designed to ensure
the proper management of payment companies, ensuring consumer protection and financial
stability. The RPAA introduces a more straightforward registration process for PSPs
compared to more stringent regulations in other jurisdictions like the EU and UK. Notably,
there are no minimum capital requirements for PSPs in Canada, making it easier for new
players to enter the market.

Cybersecurity and Risk Management

Cybersecurity is a significant concern in the digital banking sector. The rise in cyberattacks,
including phishing, malware, and ransomware, poses a risk to both consumers and financial
institutions. In 2023 alone, the Canadian Anti-Fraud Centre recorded 63,519 reports of
cyberattacks, leading to $569 million in financial losses. As neo banks adopt more digital
solutions, they must invest heavily in cybersecurity measures and comply with data protection
regulations like:

●​ Personal Information Protection and Electronic Documents Act (PIPEDA): Ensures

Moreover, neo banks must adhere to AML/CTF (Anti-Money Laundering and

License and Registration Requirements

Neo banks in Canada, particularly those offering digital payment or foreign exchange
services, must obtain relevant licenses, including the MSB or PSP licenses. For example,
obtaining an MSB license requires a Canadian legal entity, registration with FINTRAC, a
physical office in Canada, and a local compliance officer. Although there are no explicit share
capital requirements, neo banks are typically advised to have a recommended capital of at
least CAD 10,000.

Challenges and Future Outlook

Despite the rapid growth of neo banks in Canada, challenges remain. Regulatory clarity,
cybersecurity, fraud prevention, and maintaining consumer trust are key concerns. However,
with increasing consumer demand for digital-first services, strong competition among
neobanks, and government support for technological innovation, the future of neo banking in
Canada looks promising.

In the coming years, neo banks are expected to become an even more integral part of
Canada's financial ecosystem, offering convenient, affordable, and secure banking solutions.