Neo Bank Xinja’s Failure – Why?

'Neobanks' in UK and Australia, 'Challenger banks' in the US all of these start-ups face big challenges in 2021.

It’s the exact same play book as “Digital Banks” tried in 2002-08 and again 2010-16 – which of these challengers is still around in 2020?

Digital banks delivered primarily via the internet until apps became functional in 2008/9 allowing deliver via a smart phone app.

The startup ‘Neobank’ should be distinguished from subsidiary app-based ‘banks’ launched by bigger banks that operate using the existing bank’s legacy banking system.

The failure of Xinja in Australia is a big blow to the Fintech narrative and offers a glimpse of what’s ahead .

Will neobanks survive is the key question - read this pce for an overview

https://www.dhirubhai.net/pulse/neobanks-survive-grant-halverson/

 A good view of Xinja’s failure is provided by Banking Day

Opinion: Xinja threw their chance away

17 December 2020 BANKING DAY  Ian Rogers

And there they go. Few Banking Day readers will be surprised.

Radioactive from the day they launched a wildly overpriced high yield account, the board of Xinja Bank were sinking their own boat.

At 2.25 per cent the Stash Account was best-in-market and the hot money flowed.

Millennials, the core target market, were as open-minded as expected and the customer list and deposit holdings soared.

So in no time at all the board yelled STOP.

The maths was against them. Pay 2.25 per cent on your liabilities - and earn way, way less on your own deposits in a market where the cash rate (in February) was 50 basis points and money market rates even less – well, then most of every dollar in new capital will be shredded.

Xinja Bank did not have enough capital to hold any more deposits and given the burn rate baked into the business model, from day one the Xinja board must have been uneasy at the scenarios ahead and unsure at the likelihood management could and would execute, and faithfully build an actual bank.

Neobanks and fintechs don’t want to build a business, they want to sell a business and run off with the loot.

There are many rancid layers in the Xinja Bank failure and one of the worst – PR and media – will have to wait for another time.

Accountability and liability will keep many busy at ASIC, APRA, litigation funders and plaintiff lawyers.

Allegations of materially misleading representations to sophisticated investors and funds in Australia are already circulating.

The board’s handling of the crowd-funded capital raise on Equitise early in 2020 will be especially sensitive.

The memorandum posted by the bank to this platform was brief, around 10 pages, and confined itself to highlights, basic numbers and boilerplate. An explanation of the business model and analysis of risks, badly needed language, was in short supply.

More than likely the other neobanks chugging along in Australia will weather this storm.

The likes of 86 400, Judo Bank and Volt Bank have had their heads down this year and pursued a disciplined execution of their strategy and will be making profits. They all knew Xinja was a stain on their sector.

With the board of Xinja Bank finally seeing sense and APRA for once doing its job, there is not much likelihood of any recourse to the Financial Claims Scheme, but I wouldn’t rule it out.