The Xinja fallout and the implications for neobanks
Xinja's exit could impact consumer confidence in neobanks but the success of some challenger banks highlight that not all neobanks are the same and the key lesson here, is that the budding industry needs to go beyond its proposition of technology and customer acquisition.
Xinja was the first bank to receive APRA’s full bank licence in September 2019, promising to challenge the big banks with “unbanky surprises”
But on Wednesday, Xinja announced that it would exit out of banking – effectively handing over its bank licence to APRA.
Customers were told to transfer all their funds from their savings account – the Stash account – by the 23 December.
Xinja said the bank exit will allow it of focus on launching its US share trading product, the unfortunately named Dabble – “should circumstances allow”.
RFi Group Chief Operating Officer Alan Shields acknowledges that the announcement is not great for consumer confidence in neobanks.
It also comes a day after fintech Moneytree decided to exit the Australian market.
Xinja had announced that it had closed its savings accounts to new inflows just before the pandemic began and it was known that the business had applied for Jobkeeper in May. Other challenges around capital raising were also well reported.
However, RFi Group data highlights that consumers are increasingly comfortable with using a digital bank.
Over the last 10 months there has in fact been an increase in neobank interest, with one in three consumers now indicating that they would consider a neobank.
Nevertheless, the key lesson from the Xinja exit is that a business model is not viable when based on customer acquisition or technology alone.
“It's very easy to say you can do something better and you can do it for free and get customers on board,” Shields said.
“It's just hard to make that profitable.
“Digital banking is really important in today’s world. But the proposition must be more than just about technology. These organisations need to evolve the model to lend in the market and offer a fuller suite of banking solutions. That is where the model will work.”
Xinja’s model was a standalone business unlike 86 400 or Up which are backed by established businesses – 86 400 by Cuscal and Up by Bendigo.
Up co-founder Dom Pym has acknowledged the importance of partnering with Bendigo – “an overnight success story that took eight years”.
“New ideas should create the revenue which will create a bank in perpetuity that will be around is another hundred and sixty years, Pym said at the time.
These two neobanks were also considered in the rollout of their products.
Xinja had gone into the market, offering above market interest rates on its savings product without a lending product. It was consequently forced to chew through its capital.
"Digital banking is really important in today’s world. But the proposition must be more than just about technology. These organisations need to evolve the model to lend in the market and offer a fuller suite of banking solutions. That is where the model will work," Alan Shields, RFi Group
86 400 now has a lending product in the market and has secured a number of partnerships with the large mortgage broker platforms.
Up is also considering a rollout of lending products, and to date its customer base remains sticky and loyal with the neobank the MFI for the bulk of its customers.
Other neobanks have successfully tackled a niche part of the market that remains underserved – for example Judo Bank is the bank for small businesses.
Similarly, Alex has come into the market with a personal lending product that is targeted to people with high credit scores.
There are also lessons from the UK market. Its challenger banks have garnered a five year plus track record. Monzo has five million customers andis losing money, while Starling Bank has managed to make its maiden profit this year.
Despite those challenges, RFi Group data has also found that UK neobanks have picked up primary users this year; A critical factor for success.
The Xinja exit has also highlighted the importance of the need for greater scrutiny on business models that don’t go beyond ‘acquisition of customers’.
APRA swiftly published a statement on Wednesday noting that it was closely monitoring the return of Xinja’s deposits.
“How a financial institution has been able to start up and pass the regulatory milestones and in a relatively short time say no we can’t do this and we are doing to have to give the money back is an issue,” RFi Group head of consulting Alex Boorman said.
While there were the unforeseen challenges of a pandemic, Boorman who also remembers collapses during the global financial crises – believes such failures are underpinned by flawed business models.
For Boorman, there is a fine line for the regulator to balance – that is supporting regulation that encourages innovation on the one hand but also not adopting an overly prescriptive approach.
“APRA needs to stand by a regulatory environment, which supports competition, but equally prevents this sort of thing from happening.”
Going forward, it will be important that APRA continues to issue licences to digital only banks.
The neobanks have effectively boosted competition in the industry. Initiatives such as the Commonwealth Bank’s x15Ventures and the roll out of its credit card aptly called neo are in response to the increased competition brought on by challenger banks.
It’s only last month that Bank of Queensland announced it was ready to roll out its digital bank through Virgin Money.
The strategy going forward will no doubt be more considered and one of collaboration with perhaps some “unbanky surprises”.