Fintech Companies, Facing Competition From Mainstream Banks, Step Up Their Offerings

So how are fintechs that offer banking services staying relevant? How are they competing with traditional banks that have a longstanding customer base and deeper pockets? Fintechs, taking advantage of their technological prowess and lower costs, are offering more features that banks generally don’t, such as analysis of customers’ spending and saving patterns, credit-builder products and lending products designed specifically for consumers who banks don’t typically target, like individuals with little or poor credit history. Fintechs also are placing bets on up-and-coming services such as helping consumers plan to reach their savings goals, cryptocurrency investing and crowdfunding.

“They’re all racing each other to introduce additional products,” says

Alex Johnson,

fintech research director at Cornerstone Advisors, a management and technology consulting firm, referring to the fintechs. “The question really is what things are on fintech companies’ road maps that will continue to set them apart?”

Competitive advantages

Fintechs that offer banking services have some marked advantages over banks, especially when it comes to attracting younger consumers, many of whom traditionally have been underserved by banks. Fintechs typically have more-versatile technology than banks, and they have low overhead, giving them the ability to offer more low-cost or no-fee services than banks generally can, says Moutusi Sau, an analyst with research and consulting company

Gartner Inc.

Banks are trying to keep up. In one recent example,

Capital One

COF 0.66%

said late last year that it would eliminate all overdraft fees and nonsufficient-funds fees for its consumer banking customers, while continuing to provide free overdraft protection. And

Bank of America Corp.

BAC 0.88%

said this month it will eliminate nonsufficient-funds fees in February and pare back overdraft fees to $10 from $35 beginning in May. But fintechs generally are much quicker to roll out new tech-friendly, in-demand services, partly because their small size makes them more nimble. “They’re playing on this lower cost structure and the ability to iterate faster than large banks,” says

Marie-Claude Nadeau,

a partner with McKinsey & Co. 

Fintechs are hoping that by continuing to add free or low-cost features, they will not only attract new customers but also become the primary provider of financial services for all their customers. The bet, says Mr. Johnson, is that, once hooked, customers won’t switch back to a bank even if a bank offers a compelling new product or service.

Among those expanding its offerings is

Dave Inc.,

DAVE 23.67%

a personal-finance startup that charges a $1-a-month membership fee, which last year upgraded its cash-advance product to allow advances up to $250, up from the previous limit of $100. While most banks offer a similar feature, there’s usually a fee. Dave offers no-fee cash advances for funds that are delivered within three business days; customers can opt to pay a fee and receive their funds within eight hours. Dave also recently added a feature that allows rent payments, cellphone bills and utilities that are paid through a checking account with the company to be automatically reported to the credit-reporting companies. Most credit reports don’t include these types of payments, though there are third-party services that help consumers do this. Automatically reporting this information can help customers improve their credit scores, says

Jason Wilk,

Dave’s co-founder and chief executive. The company also is building another feature to allow users to crowdfund for their savings goals, he says.

Dee Choubey,

co-founder and chief executive of digital financial platform

MoneyLion Inc.,

ML 1.27%

says fintechs can continue to compete effectively with banks by providing digital-based context and advice to consumers, taking all their linked accounts under advisement—something traditional banks don’t generally do. MoneyLion, which charges a $1-a-month administrative fee 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 pay off a loan, and how can I save most effectively? “That is really where the fintechs will continue to have an edge,” Mr. 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 broadly. To this 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.

Multiple fronts

Other fintechs offer advantages over most banks on credit cards and interest-earning accounts. Chime, for example, offers a secured credit card—backed by the customer’s collateral—that has no annual fee or interest charges, no credit check 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 expanded its overdraft protection to $200 from $100 on debit-card purchases and cash withdrawals, with no overdraft fees. “It isn’t just one product or service” that Chime is relying on to remain competitive, says Aaron Plante, the company’s vice president of lending products and banking strategy. “It’s lots of these improvements.”

This month, mobile-banking app Current began advertising a product that offers higher-than-average interest rates to customers. The product, which is similar to a savings account, allows customers to earn 4% annual percentage yield. The yield is variable, and the maximum a customer can earn depends on whether they have a basic or $4.99-a-month premium account, up to a total of $6,000 a year in interest. By comparison, the top nationally available yields 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 top yields for savings and money-market accounts to be 1.05% at year-end. Current’s users don’t need to keep a minimum balance to start earning the 4% annual percentage yield and no other fees are involved, says

Trevor Marshall,

Current’s chief technology officer. When asked how it can afford to pay yields so far above the average for this type of account, Current declined to comment other than to say it has a “treasury function.”

While fintechs continue to roll out new products and services, some industry watchers say they have to be ever-mindful of the competition from banks. “Banks still have huge advantages over most fintech companies,” says Cornerstone’s Mr. Johnson, including brand recognition, large existing customer bases and extensive 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, N.J. Write to her at reports@wsj.com