Challenger neobank Xinja – once the poster child for an Australian banking revolution – will return its banking license and pivot towards other markets “should circumstances allow” after concluding that this year’s COVID-19 pandemic had impacted its ability to continue its mobile-only banking products.
The firm – which pushed aggressively into the market in January with a high interest rate Stash savings account that attracted over $100m in deposits within three weeks – stopped signing up new clients for Stash accounts two months later as the COVID-19 pandemic rapidly emerged to cause global economic chaos.
Its decision to surrender its license to operate as an authorised deposit-taking institution (ADI) – which it was granted in September 2019 – marks an abrupt end to a campaign of disruption led by Xinja and neobank rivals Volt, 86400, and others.
The “incredibly hard” decision comes “after a year marked by COVID-19 and an increasingly difficult capital-raising environment, and following a review of the market in Australia”, the company said in announcing the change.
“We hope to refocus the business in other areas such as our US share trading product, Dabble, should circumstances allow.”
Designed to allow Australian investors to buy and sell US shares, Dabble was announced earlier this year – initially for an August launch – but in mid-November the launch was delayed and the product has yet to be launched.
Even as it works to chart out its future, Xinja will quickly wind up its banking operations in coming weeks.
It will pay interest on Stash accounts through 14 December, will progressively stop accepting payments and close accounts by the end of the year, and will shut off all debit cards or payment facilities on 15 January.
Customers must transfer funds from their Stash accounts by 23 December.
A reality check for neobanks
The failure of Xinja’s banking play is a body blow for Australia’s neobank movement, which has been clobbered worldwide this year by the combination of consumer uncertainty, financial instability and regulatory tightening stemming from the COVID-19.
Similar issues kneecapped European neobanks like Revolut, Monzo and N26 earlier this year, as languishing capital profiles and razor-thin profit margins were compounded by the precipitous COVID-era drop in consumer spending.
Analyses have focused on the impact of changing consumer expectations, as mobile app bugs and user-experience issues weighed down a business model based entirely on the idea of not having physical branches to fall back on.
Others suggested that, despite their high-end cachet, neobanks had failed to deliver the exclusivity, “essential” financial products, business banking products, scalable customer support, and resistance to big-bank competitors that would have been crucial to ensure their long-term survival.
The writing was on the wall for some, with Xinja’s latest ‘pillar 3’ report suggesting the company had quickly used the $10m in capital that it had raised in September – and that it was borrowing money at untenable rates to prop up its business.
Xinja’s failure as a bank fulfils the dire predictions of industry watchers like Morningstar analyst Nathan Zaia, who predicted a year ago that the emerging banks would struggle to gain critical mass and could imperil themselves by taking on high-risk debt that other institutions didn’t want.
“There are significant risks to the challenger banks and fintech start-ups that we think the market is underestimating,” Zaia said at the time. “In a downturn, spectacular growth can quickly give way to mounting bad debts.”