Advantages and Challenges of Launching a Business with MSB Registration in Canada

Canada's Money Services Business (MSB) registration is gaining traction among fintech entrepreneurs looking for a swift and cost-effective way to enter the financial services market. This article explores the benefits and drawbacks of launching a business under the MSB registration, comparing it to licensing options in the EU.

Advantages of MSB Registration in Canada

1. Wide Scope of Services

Canadian MSBs can engage in various financial services. These include:

• Foreign exchange dealing
• Fund remittance and transmission
• Issuance and redemption of money orders and negotiable instruments
• Virtual currency transactions (separate approval required for crypto custody services)
• Crowdfunding platform services
• Payment services

This broad scope allows MSBs to operate in sectors that might be highly regulated or restricted in other jurisdictions.

2. Faster Registration Process

One of the key advantages of Canadian MSB registration is its streamlined approval process.

Document preparation: Document preparation typically takes less than a month.

Registration: MSBs should be registered with FINTRAC under Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA). Starting November, 2024, most MSBs should also apply for a Payment Service Provider (PSP) registration with the Bank of Canada under the Retail Payment Activities Act (RPAA). While FINTRAC registers MSBs and oversees anti-money laundering and counter-terrorist financing compliance, registration with the Bank of Canada ensures that PSPs have a framework for managing operational risks and responding to incidents.

Regulatory review and approval: Regulatory review and approval can be completed within three months for MSB registration. Approval of PSP registration is not required during a transition period that started in November 2024 and will end in September 2025.

In comparison, obtaining an EMI or PI license in an EEA country can take up to 1.5 years. This efficiency makes Canada an attractive option for fintech startups looking to launch operations quickly.

3. Lower Capital and Operational Costs

No Minimum Capital Requirements

Unlike EEA-UK payment institution or e-money institution licensing, which often demands substantial initial capital, Canadian MSBs do not have mandatory minimum capital requirements. This lowers the entry barrier for startups.

Minimal Staffing Requirements

To register as an MSB, a company needs at least one director and a compliance officer, with no residency requirements. In contrast, EEA-UK regulators require multiple local employees, significantly increasing operational costs.

4. Flexible Client Reach and Industry Coverage

Global Client Servicing

MSBs can engage with international clients under a "reverse solicitation" framework, meaning they can serve customers who voluntarily seek their services, even if based outside Canada.

High-Risk Industry Accessibility

Unlike other jurisdictions, which impose strict limitations on high-risk sectors, Canadian MSBs can cater to these industries more freely.

Challenges of Operating as a Canadian MSB

1. Difficulty in Opening Banking and Payment Accounts

• Canadian banks are cautious about working with MSBs due to the less stringent registration requirements.
• Many MSBs must rely on smaller financial institutions like credit unions, which may lack advanced API integration for seamless fintech operations.
• Unlike European EMI license holders, Canadian MSBs do not have direct access to SEPA (Single Euro Payments Area), making euro transactions more complex.

To address these issues, many MSBs establish correspondent banking relationships in the U.S., Europe, and Asia to facilitate global transactions.

2. Compliance and Regulatory Obligations

While Canadian regulations are considered more flexible, compliance remains a critical component:

• MSBs must adhere to the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA) and report transactions to FINTRAC, Canada’s financial intelligence unit.
• A well-documented compliance program is essential for gaining trust from banking partners and avoiding regulatory scrutiny.
•  Under the RPAA, a PSP holding end-user funds must safeguard them by keeping them in a trust account or an account covered by insurance or a guarantee. These funds must also be segregated from all other funds held by the PSP.
• Also, under the RPAA, PSPs have a regulatory obligation to report significant incidents that impact their services.
• Outsourcing compliance functions can be a cost-effective alternative for startups that may not want to hire full-time compliance officers.

3. Limited Domestic Market Size

Canada has a relatively small population of about 40 million people, limiting the scale of purely domestic financial services.

MSBs targeting global markets must navigate cross-border regulatory complexities, requiring additional strategic planning.

Best Use Cases for MSB Registration

Canadian MSB registration is particularly suitable for:

• Remittance service providers targeting Africa, Asia, and other regions.
• Payment processors working with high-risk industries.
• Crypto exchanges seeking regulatory flexibility.
• Businesses needing local Canadian payment rails for serving domestic clients.

Conclusion

MSB registration in Canada presents a compelling option for fintech entrepreneurs due to its quick approval process, low startup costs, and flexible regulatory framework. However, challenges such as banking limitations and compliance requirements should be carefully considered. Businesses should weigh these factors against their operational goals to determine whether an MSB license aligns with their strategic vision.

For those seeking a cost-effective way to enter the fintech sector with international expansion potential, Canadian MSB registration remains a strong contender.