Three models, three rulebooks
A business that needs to hold money, convert currencies and make international payments has a choice of provider types. The three it will meet most often are a bank, a money services business registered in Canada, and an electronic money institution authorised in the United Kingdom or the European Union.
From the outside they can look similar. All three offer online platforms, accept payment instructions and send wires. Underneath, they operate under different laws, hold client funds on different terms and offer different protections. A bank is licensed to take deposits and lend. An electronic money institution is authorised to issue electronic money and provide payment services, and must safeguard client funds. A Canadian MSB is registered for anti-money laundering purposes to carry out activities such as foreign exchange and funds transfer.
This article explains those differences in general terms. It is written for business clients choosing between providers, or using more than one, and it does not attempt to cover every variation in each regime.
Banks
A bank is a deposit-taking institution. It accepts money from clients as deposits, which become liabilities of the bank, and it uses those funds to lend and invest. That is the core of banking, and it is why banks are subject to the most demanding prudential regulation of the three models.
In Canada, banks operate under the Bank Act and are supervised for safety and soundness by the Office of the Superintendent of Financial Institutions. Equivalent prudential supervisors oversee banks in the United Kingdom and the European Union. Banks must hold capital and liquidity against their risks, meet governance standards and submit to detailed supervision.
Because deposits are lent on, depositors are exposed to the bank's own solvency. Deposit insurance schemes exist to address that risk. In Canada, the Canada Deposit Insurance Corporation protects eligible deposits at member institutions up to set limits. The United Kingdom and EU member states have their own schemes.
Banks offer the widest range of services: operating accounts, lending, trade finance, cards, cash handling and treasury products. They are also often the most selective about which sectors and structures they will serve.
Canadian money services businesses
A money services business in Canada is a business that carries on activities such as foreign exchange dealing, remitting or transmitting funds, or dealing in virtual currency, and is not a bank or other regulated financial entity. MSBs must register with FINTRAC under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act, renew that registration every two years and run a full anti-money laundering compliance programme.
FINTRAC registration is not a prudential licence. FINTRAC supervises compliance with anti-money laundering and anti-terrorist financing obligations, not capital or solvency. An MSB does not take deposits in the banking sense, and funds it receives for a transaction are not protected by deposit insurance.
Other regimes may apply depending on the business. Certain payment service providers fall under the Retail Payment Activities Act, supervised by the Bank of Canada, which includes requirements on operational risk and the safeguarding of end-user funds. Quebec also has its own provincial licensing regime for money services businesses.
MSBs vary widely in scale and specialism. Many focus on foreign exchange and cross-border payments for particular client groups, and some serve sectors that banks find difficult.
Electronic money institutions
An electronic money institution, or EMI, is authorised to issue electronic money: a stored monetary value, held electronically, that represents a claim on the issuer and is accepted as a means of payment. EMIs can also provide payment services such as transfers, multi-currency accounts and card issuance, usually in partnership with card schemes.
In the United Kingdom, EMIs are authorised and supervised by the Financial Conduct Authority under the Electronic Money Regulations 2011. In the European Union, the rules derive from the E-Money Directive and are applied by national authorities. An EMI authorised in one EU member state can generally passport its services into other member states of the European Economic Area.
EMIs are subject to conduct rules, capital requirements and anti-money laundering obligations. They may not lend out client funds, and they may not pay interest on electronic money. Funds received in exchange for electronic money must be safeguarded.
A close relative of the EMI is the payment institution, authorised to provide payment services without issuing electronic money. Payment institutions are also subject to safeguarding requirements under the relevant payment services rules.
Safeguarding in general terms
Safeguarding is the main protection for clients of EMIs and payment institutions. Its purpose is to make sure client funds are kept apart from the firm's own money and can be returned to clients if the firm fails.
In general terms, safeguarding is done in one of two ways. Under the segregation method, client funds are kept separate from the firm's own funds, typically in a designated safeguarding account at a bank, or invested in secure, liquid assets permitted by the rules. Under the insurance or guarantee method, client funds are covered by an insurance policy or guarantee from a suitable institution that pays out if the firm becomes insolvent.
Safeguarding is not the same as deposit insurance. It protects against the firm using client money for its own purposes and ring-fences it in insolvency. It does not protect against the failure of the bank where the safeguarding account is held, and the process of returning funds after a firm fails can take time, with the costs of distribution potentially deducted.
For Canadian MSBs, how funds are handled while a transaction is in progress depends on the provider and on any regime beyond FINTRAC that applies. Clients should ask directly.
Deposit insurance
Deposit insurance is a feature of banking. It exists because banks lend out deposits, and depositors need protection if a bank fails.
Balances held with an EMI are not deposits and are not covered by deposit insurance. The same is true of funds held by a Canadian MSB. Some providers market accounts in ways that suggest otherwise, for example by pointing out that their safeguarding bank is a member of a deposit insurance scheme. That does not normally give the end client the same protection as holding a deposit directly with the bank.
For a business, the practical implication is about balances. A large reserve kept for months is best held where the protections are strongest for that purpose. Funds that pass through quickly for conversion or payment are exposed for a much shorter time, and the choice of provider can turn more on service, pricing structure and sector expertise.
A side-by-side comparison
The table below summarises the main differences in general terms. Individual firms and regimes vary.
| Feature | Bank | Canadian MSB | UK or EU EMI |
|---|---|---|---|
| Main legal basis | Banking licence under national banking law | FINTRAC registration under the PCMLTFA | Authorisation under e-money rules |
| Takes deposits | Yes | No | No, issues e-money |
| Lends client funds | Yes | No | No |
| Prudential supervision | Full prudential supervision | Not from FINTRAC, which supervises AML compliance | Capital and conduct requirements |
| Client fund protection | Deposit insurance up to set limits | Depends on provider and any further regime that applies | Safeguarding |
| Deposit insurance | Yes, for eligible deposits | No | No |
| Typical strengths | Full range of services, credit, long-term balances | Specialist FX and payments, sector expertise | Multi-currency accounts, cards, regional payment schemes |
When each fits
Most businesses do not have to choose just one. The right mix depends on what the business does.
- A bank suits the main operating account, long-term balances, borrowing, trade finance and anything involving cash. It is the foundation for most companies, where a bank is willing to serve them.
- An EMI suits businesses that need multi-currency accounts, card programmes or easy access to domestic payment schemes in the United Kingdom or Europe, and that keep moderate balances.
- A specialist MSB suits businesses that need foreign exchange and international payments handled by people who understand their sector and structure, including those in higher-risk industries, international holding structures, trusts and family offices. It may also suit businesses converting between fiat currency and digital assets with proper wallet verification and screening.
A common pattern is an operating account at a bank, with currency conversion and cross-border payments handled by a specialist, and funds returning to the bank account once each transaction is complete.
Questions to ask any provider
Whatever the type of provider, ask for the same core information before sending funds:
- The legal entity you are contracting with, where it is regulated or registered, and the public register where you can confirm that.
- What the provider is permitted to do under that regulation or registration.
- How your funds are held while they are with the provider, and at which bank.
- Whether your funds are covered by deposit insurance, by safeguarding or by neither.
- What would happen to your funds if the provider became insolvent.
- How long funds normally stay with the provider during a transaction.
A reputable provider will answer these plainly and in writing. Vague or evasive answers on how funds are held are a reason to look elsewhere.
Before you act
This article is general information comparing types of financial provider. It is not legal, tax or investment advice, and the rules for each type vary by jurisdiction and change over time.
CCYFX is not a bank, and funds it handles are not covered by deposit insurance. It provides Foreign exchange, International payments, Collections and payouts, and Digital asset conversion for businesses. Our how it works page explains how funds move through a typical transaction.
