The Canadian banking system is known worldwide for its strength and stability, but even so, it’s being increasingly transformed by neobanks. So, how exactly are these new, “non-bank” players disrupting the banking system? And what does that mean for Canadians?

What is a neobank? What is a challenger bank?

Neobanks and challenger banks are similar to the big banks, but they’re different in size and location. A challenger bank is a smaller financial institution, and many of its benefits lie in just that. Challenger banks may or may not have brick-and-mortar locations, so their fees can be low and all of their services are available online or in-app. Neobanks only offer services online or in-app, and their fees are considered low in comparison to the big banks. 

Another notable detail about fintech banks is how they’re licensed. Many of these new “banks” cannot actually be called banks. But before we dive into the ins and outs of these new companies, here’s a bit more about “traditional” banks and the evolving industry.

A brief history of banking in Canada

Traditionally, banks are defined as institutions whose core business is taking deposits and making loans. In Canada, banking services are principally provided by federally regulated banks and by the Bank of Canada, which carries out the government’s monetary policy, issues banknotes, holds deposits, and lends to governments and chartered banks.  

Before Confederation in 1867, banks were chartered by royal assent, a formal grant issued by a monarch using their royal prerogative. Since 1871, chartered banks have been licensed and supervised by Parliament through the federal Bank Act. Licensing banks allows the federal government to manage the Canadian economy by regulating the amount, availability and distribution of money and by influencing interest rates, which set the cost of accessing and distributing money. 

Beyond traditional banks, however, banking services are also available from other financial services institutions, sometimes called “near-banks.” These include credit unions and, mainly in Quebec, caisses populaires—financial institutions owned and operated by their members and generally regulated by the provinces. Trust companies, which may be regulated under provincial or federal legislation, also provide traditional banking services. 

Two centuries of evolution—and a tipping point

How Canadians access banking services has evolved over time. The first bank in Canada didn’t have a permanent location at all—the Bank of Montreal was founded in 1817 by nine men in a rented house, who moved their operations to a dedicated building the following year. 

While the intervening centuries saw the growth of banking and physical bank branches throughout the country, today, more and more banking services are conducted without using brick-and-mortar facilities. In November 2021, the Canadian Bankers Association reported that 76% of Canadians do most of their banking digitally. Only 12% say their most common bank transaction is carried out in person at a physical bank location. 

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