Last week Australian neobank Xinja announced it was abandoning retail banking after struggling to raise capital in a challenging COVID market. The startup will now attempt to pivot to non-banking areas like share trading, although even it concedes that is uncertain.

The digital only bank’s failure, after seemingly having the digital tech and experience focus so many have endorsed, underscores the need for a comprehensive business model and new revenue streams, according to analysts.

“Having great digital apps or products doesn’t automatically make a bank successful,” says Forrester senior analyst Zhi Ying Barry. 

Forrester senior analyst Zhi Ying Barry. Image Supplied.

“Banks have to consider both customer and business outcomes, and offer better products and compelling experiences to acquire, serve and retain customers.”

But Xinja’s failing does not signal the end of neobanks in Australia, where a host of digital only players are seeking to disrupt incumbents. 

“Xinja’s focus shift isn’t a signal of an end to neobanks,” says Jason Malo, research director in the financial services team at Gartner.

“There have been and will be new entrants and exits still to come,” he tells Which-50.

“But it does underscore how any company will need a comprehensive business model that can compete and be sustainable through stressful market conditions.”

Growing up fast

Xinja took an innovative approach to get up and running in 2017, being among the first to take advantage of changes to Australian laws that allowed equity crowdfunding, and developing a tech stack entirely using cloud computing.

By late 2018 the neobank had a restricted banking licence from APRA and was upgraded to an authorised deposit-taking institution less than a year later.

The company never offered a lending product, however, which would have helped offset its high interest savings account.

Jason Malo, research director in the financial services team at Gartner. Image supplied.

“To succeed, digital banks must be able to balance delivering great products and experiences for customers, while having a sound business model,” Forrester’s Barry tells Which-50.

“While Xinja offered high interest rates to attract customers, it struggled to survive because it didn’t have a compelling revenue model to fund interest paid on deposits and to cover its operating costs as the bank relied on external funding sources that didn’t come through.”

Gartner’s Malo says eventually startup banks need to also make the difficult leap to regulated entities 

“Australia has a path for new organisations to obtain licenses, but neobanks must still operate as regulated entities and not fintechs,” says Malo “That’s not easy. And it’s not always about innovative and exciting offerings.” 

Reports this week reveal Xinja’s capital situation worsened quickly in 2020, even after announcing it had secured $433 million from mysterious Dubai-based investment group.  

The neobank also needed a “secret deal” with a chinese investor to stay afloat, according to the AFR, while documents leaked to the SMH show Xinja dumped its auditor this year shortly after it warned the bank it needed more cash to stay solvent and may have breached the regulator’s minimum capital requirements.

“The macro environment we’re in makes it very challenging to be a bank not just in Australia but also globally,” says Barry. “Being in a very low interest rate environment means that banks’ net interest margins are getting squeezed. Banks have to find new revenue streams to grow, and find operational efficiencies using technology.”

Ultimately Xinja could not do that in 2020, last week revealing it would withdraw its transaction and savings products and return its banking licence, blaming the exit on COVID-19, difficulties raising capital and the outlook of the local market.

Xinja has reported having 25,000 customers and taking more than $400 million in deposits but its impact will be of little concern to the majors which still dominate the Australian market and have moved to improve their own digital offerings. 

Barry says successful digital banks offer a genuine point of difference and diversify their own revenue streams.

“Digital banks that have a robust revenue model are more likely to succeed,” says Barry. “For instance, 86 400 that offers home loan products, in addition to its transaction and savings accounts. Having diversified revenue streams, for instance moving into business banking or find ways to monetise marketplace models using APIs, will put digital banks in a better position to succeed in the longer term.”  

Fail fast

Gartner’s Malo agrees it is a challenging time to build a digital only bank. “Not only because of the pandemic, but because even traditional banks have a higher digital acuity.”

Australia’s largest bank CBA, for example, is pouring $5 billion into technology over the next five years to improvise its digital offering to consumers. 

Xinja had to make its innovation play with considerably less. But the Garnter analyst is not writing off the startup yet.

“Innovation is about research and development and sometimes you find out the approach you take is not sustainable,” says Malo.

“We aren’t so far removed from banks saying they want to employ a ‘fail fast’ approach to innovation. ‘Failure’ can be disappointing but is an important part of the process to see how to do things well. 

“For Xinja their path may take them toward successes in trading. For the rest of the industry we’ll see where single or limited product competitors may struggle in a market where traditional banks aren’t standing pat.”

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