Fintech companies have established themselves as viable competitors in the financial services industry, but they now face a new challenge: some mainstream banks have started offering Fintech-inspired services, such as early access to checks payroll and overdrafts free of charge.
So how do fintechs that offer banking services stay relevant? How do they compete with traditional banks that have long-standing customers and deeper pockets? Fintechs, taking advantage of their technological prowess and lower costs, offer more features that banks typically do not offer, such as analysis of customer spending and savings habits, credit-enhancing products and loan products designed specifically for consumers that banks do not offer. generally target, such as people with little or no credit history. Fintechs are also betting on promising services, such as helping consumers plan their savings, investing in cryptocurrencies and crowdfunding.
“They’re all racing to introduce additional products,” says Alex Johnson, director of fintech research at Cornerstone Advisors, a management and technology consultancy, referring to fintechs. “The question really is, what are the elements on fintech companies’ roadmaps that will continue to set them apart?”
Competitive advantages
Fintechs that offer banking services have marked advantages over banks, especially when it comes to attracting younger consumers, many of whom have traditionally been underserved by banks. Fintechs typically have more versatile technology than banks, and they have low overhead, which gives them the ability to offer more services at low or no cost than banks typically can, says Moutusi Sau, analyst at research and advisory firm Gartner. Inc.
The banks are trying to follow. In a recent example, Capital One COF 2.60%
said late last year that it would eliminate all overdraft fees and insufficient funds fees for its retail banking customers, while continuing to provide free overdraft protection. And Bank of America Corp..
BAC 1.98%
said this month it will eliminate the insufficient funds fee in February and reduce overdraft fees to $10 from $35 from May. But fintechs are generally much faster at deploying new, cutting-edge services, in part because their small size makes them more nimble. “They play on this structure at a lower cost and on the ability to iterate more quickly than the big banks,” explains Marie-Claude Nadeau, partner at McKinsey & Co.
Fintechs hope that by continuing to add free or low-cost features, they will not only attract new customers, but also become the main provider of financial services for all their customers. The bet, says Mr Johnson, is that once hooked, customers won’t return to a bank even if a bank offers an attractive new product or service.
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Among those expanding his offerings is Dave Inc.,
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a personal finance startup that charges a $1 monthly membership fee, which last year updated its cash advance product to allow advances of up to $250, up from the previous limit of $100 $. While most banks offer similar functionality, there are usually fees. Dave offers free cash advances for funds that are delivered within three business days; customers can choose to pay a fee and receive their funds within eight hours. Dave also recently added a feature that allows rent payments, cell phone bills and utilities paid through a checking account with the company to be automatically reported to credit reporting companies. Most credit reports do not include these types of payments, although there are third-party services that help consumers do this. Reporting this information automatically can help customers improve their credit scores, says Jason Wilk, co-founder and managing director of Dave. The company is also developing another feature to allow users to crowdfund their savings goals, he says.
Dee Choubey, co-founder and managing director of the digital financial platform MoneyLion Inc.,
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argues that fintechs can continue to effectively compete with banks by providing digital context and guidance to consumers, taking into account all of their linked accounts, which traditional banks typically do not. MoneyLion, which charges an administrative fee of $1 per month for mobile banking, offers other free or low-cost services, including digital tools that can help consumers answer questions such as: Should I invest? , should I repay a loan and how can I save most effectively? “That’s really where fintechs will continue to have an advantage,” Choubey says.
While banks often recommend their own products and services, one of MoneyLion’s goals is to help consumers find and access financial products more widely. To that end, it recently signed a deal to buy Even Financial Inc., which digitally connects consumers with personalized financial product recommendations from banks, insurance companies and fintechs.
Several facades
Other fintechs offer advantages over most banks on credit cards and interest-bearing accounts. Chime, for example, offers a secure credit card, backed by customer collateral, with no annual fees or interest charges, no credit checks to apply, and no minimum security deposit. Traditional secured credit cards often require a deposit of between $200 and $500. And in May, the company extended its overdraft protection from $100 to $200 on debit card purchases and cash withdrawals, with no overdraft fees. “It’s not just a product or service” that Chime relies on to stay competitive, says Aaron Plante, the company’s vice president of lending products and banking strategy. “There are a lot of these improvements.”
This month, mobile banking app Current began advertising a product that offers customers above-average interest rates. The product, which is similar to a savings account, allows customers to earn 4% annual percentage return. The return is variable and the maximum a customer can earn depends on whether they have a basic premium account or $4.99 per month, up to a total of $6,000 per year in interest. By comparison, the best yields available nationally on savings accounts and money market accounts at banks are around 0.6%, according to Greg McBride, chief financial analyst at Bankrate.com. He expects the best returns in savings and money market accounts to be 1.05% at the end of the year. Current users don’t need to maintain a minimum balance to start earning the 4% annual percentage return and no other fees are involved, says Trevor Marshall, Chief Technology Officer of Current. When asked how he could afford to pay such above-average returns for this type of account, Current declined to comment other than to say he had a “treasury feature.”
As fintechs continue to roll out new products and services, some industry watchers say they still need to be mindful of competition from banks. “Banks still have huge advantages over most fintech companies,” says Johnson of Cornerstone, including brand recognition, large existing customer bases and vast financial resources. “And it doesn’t take much for them to adopt some of these features.”
Ms. Winokur Munk is a writer in West Orange, NJ Email her at [email protected]
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