How Does an Online Bank Work?

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 bank?

Online banks in Canada are different from traditional banks that also offer some online banking services. Online-only banks usually do not have any brick-and-mortar branches and all of their services are provided virtually.

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

Online banks vs. traditional banks

Online banks offer many of the same everyday banking services as traditional banks, but they rarely have physical branches. As a result, digital banks’ operating costs are much lower, allowing them to offer lower fees and better interest rates to customers.

In particular, the online savings accounts and guaranteed investment certificates (GICs) offered at online-only banks tend to earn higher interest rates than traditional banks, which have a lot of overhead costs.

One drawback of online banks is the limited spectrum of additional financial services they may provide, though that has changed in recent years as they have become more established. Some digital banks may not offer certain kinds of accounts, credit or debit cards linked to ATMs, full investing services, or financial advising services — so make sure to review an institution’s offerings before opening an account.

How does an online bank work?

An online-only bank requires you to do all your banking transactions online or via an app on your phone or tablet. Everything is managed online, including opening an account, receiving direct deposit and paying bills online, because there are no physical locations.

Some virtual banks don’t offer access to ATMs, so you’d first need to transfer money to another bank if you want to access cash from your account. If you need support, you can contact customer service via phone, email or chat because there are no branches where you can get help in person.

Types of online bank accounts

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

Some online-only banks, like EQ Bank and Tangerine, may even offer mortgages and U.S. dollar accounts. Tangerine and motusbank both offer investment accounts and home equity lines of credit.

Offerings vary by bank, so before you open a bank account, make sure you’re choosing a digital bank that will meet your needs.

Are online banks safe?

Online banks may seem less secure than traditional banks because they’re less familiar and don’t usually have physical locations where you can speak face-to-face with a representative. But by and large, fears about the safety of digital banks are unwarranted.

Any reputable, federally regulated financial institution — including online-only banks — will be a member of the Canada Deposit Insurance Corporation (CDIC), which insures eligible accounts up to $100,000. To ensure your money is safe, check whether or not your financial institution is a member of the CDIC. Member banks usually include this information in the footer of their websites, and you can also look them up on the CDIC member list.

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 banks

If you’re deciding between an online bank account and an account with a traditional financial institution, make sure you consider your banking habits as well as weigh the pros and cons of a digital bank.

How to open an account at an online bank

If you’ve decided an online bank is right for you, opening an account is a relatively easy task. Note that many digital banks require account holders to be Canadian residents, be the age of majority in their province or territory, and have a Social Insurance Number (SIN). Depending on the online bank you choose, you may also need to have an active account with another bank.