How Do Online-Only Banks Work in Canada?

Over the past decade, Canada has seen a growing number of online banks — also known as digital banks or virtual banks — make a mark on the country’s financial landscape.

What is an online-only bank?

While most traditional banks offer some online banking services, online-only banks, also referred to as digital banks, are different in that they usually do not have any brick-and-mortar branches and all of their services are provided virtually.

In Canada, online-only banks tend to be subsidiaries of credit unions (for example, motusbank is a subsidiary of Meridian) or traditional banks (for example, Tangerine is a subsidiary of Scotiabank). However, some online banks, like WealthONE Bank of Canada, are independent financial institutions.

Online banks vs. traditional banks

Though they rarely have physical branches, digital banks offer many of the same everyday banking services as traditional banks. The major perk of online-only banks is that they tend to charge lower fees while offering higher interest rates on savings accounts or guaranteed investment certificates (GICs) than traditional banks. Because they don’t have branches and don’t offer in-person financial services, digital banks’ operating costs are much lower, allowing them to offer customers lower fees and better rates.

One drawback of online-only banks is the smaller spectrum of additional financial services they can provide. Digital banks may not offer debit or credit cards, full investing services, financial advising services, or chequing accounts linked to ATMs so that you can directly withdraw money.

How do online-only banks work?

As the name suggests, an online-only bank allows you to do all your banking transactions online or via an app on your phone or tablet. You can handle everything, including opening an account, receiving direct deposit and paying bills online, so there’s no need to ever visit a physical location.

However, not all online-only banks offer chequing accounts or ATMs (EQ Bank is one such example), so if you need to withdraw cash, you’d first need to transfer money to another bank. If you have questions, you’ll contact customer service via phone, email or chat, since there are no branches where you can visit representatives in person.

Types of online-only bank accounts

Many online-only banks offer the same types of accounts as traditional banks, including:

• chequing accounts
• savings accounts
• high-interest savings accounts
• tax-free savings accounts
• registered retirement savings accounts 
• registered retirement income funds
• business accounts

Some online-only banks, like Tangerine, may even offer mortgages and investment accounts.

The offerings vary by bank, so before signing up, make sure you’re choosing an online bank that will meet your needs.

» MORE: How to open a bank account

Are online banks safe?

Online banks may seem less secure than a traditional bank because they’re new or don’t have physical locations where you can speak face-to-face with a representative. But by and large, fears about the safety of online banks are unwarranted. Any reputable, federally regulated bank or credit union — including online-only banks — will be a member of the Canada Deposit Insurance Corporation, which insures eligible accounts up to $100,000. To know whether or not your money is safe, simply check whether or not your financial institution is a member of the CDIC. Note that provincially regulated credit unions are not covered by the CDIC, but are protected by a provincial deposit insurer.

Pros and cons of online-only Banks

Pros

• Low or no fees for most transactions.
• Often higher interest rates on savings than traditional banks.
• Good range of banking accounts.
• Often don’t require a minimum balance for lower fees and unlimited transactions.

Cons

• Limited or no face-to-face, in-person service; customer service is often only via phone, chat or email.
• Some digital banks don’t have chequing accounts or ATMs so you must transfer money to another bank to withdraw funds.
• Online-only banks may offer fewer services and financial products.
• No in-person consultations with financial advisors.

» MORE: Canada’s 13 best online savings accounts