Regulators may be lifting the bar for neobanks, but the new requirements wouldn’t have saved Xinja

Regulators may be lifting the bar for neobanks, but the new requirements wouldn’t have saved Xinja
(Business Insider Australia)
  • APRA’s newest demands on new banks wouldn’t have saved failed neobank Xinja.
  • The extra requirements are aimed at improving the quality of banks that make it to market, but the regulator needs to allow new banks to fail as well, according to Australia’s first approved neobank Volt.
  • Speaking to Business Insider Australia, CEO Steve Weston said the next generation of digital challengers will need to bring a differentiated business model to market.
  • Visit Business Insider Australia’s homepage for more stories.

After the first wave of neobanks went on to mixed success, the Australian regulator has its eye firmly planted on the next generation of challengers.

Last week, APRA announced new requirements for what it expects to see when issuing new unrestricted banking licences, the final hurdle for a new digital bank to begin operations in Australia.

It demands applicants have an “income-generating asset” such as a loan product before they can start onboarding the public, as well as contingency and exit plans.

Following the collapse of Xinja last year, it’s tempting to see these as lessons drawn from that experience. Certainly much has been made of the danger of paying interest on savings without having a revenue stream.

But the Xinja story isn’t quite so clear cut, with the neobank’s biggest problem being access to capital, according to former rival Volt.

“The issue for them quite clearly is they thought they were getting $400 million from overseas. They told everyone that would listen, that it was about to land, and you know what? It didn’t. And then it was panic,” Volt CEO Steve Weston told Business Insider Australia. “At least that’s how I see it from an outsider’s perspective.”

The promised $433 million injection from Dubai-based World Investments was heralded at the time as the “largest ever investment” in Australian startup history.

But as spending soared in other areas of the business, such as premium new headquarters and tech staff, excuses for why the funding was postponed came thick and fast. The money, promised on “highly conditional” terms, never came and would eventually prove Xinja’s downfall.

But by the time the canary began to croak, it was too late. On the one hand, it would have been difficult to convince new investors to come on board after a $433 million deal had just fallen over. On the other, a fire sale to a major bank would have taken time that Xinja didn’t have.

The promising neobank fell over with APRA still investigating the details of the capital that never materialised.

Regulation wouldn’t save Xinja

A mortgage offering and an incremental increase in starting capital could have bought Xinja more time but it is clear these new requirements would have done little to rescue the neobank entirely.

“86 400 built its transaction accounts, savings accounts and home loans all before licensing… so we are not surprised to see this is now a requirement,” 86 400 CEO Robert Bell told Business Insider Australia.

It’s unlikely any aspiring bank would have prepared for a global pandemic and its consequences as part of their contingency plan. On the other hand, APRA chair Wayne Byres’ conclusion that Xinja was a “successful failure” suggests there may not have been more to be gained from having a prepared exit strategy.

APRA knows it too, and isn’t ignorant of the fact that others could follow.

Instead, the regulator’s priority, according to Weston, is to make sure that while savings are always protected, there is room for new banks to enter.

“If you want truly innovative competition, you need to expect that some businesses won’t work out…we have to live with that,” he said. “So APRA is raising the eligibility criteria slightly but what there will be is an even greater focus on management, on the business plan and that kind of thing from here on out.”

Coming down the pipeline

The challenge is getting that balance between competition and viability right.

Australia’s next generation of banks will almost certainly have a harder time getting a licence, but by the same token any that fail to surpass the raised bar probably weren’t cut out for success either.

Many of the new names gunning for a shot at the banking market said they support the new measures.

Simon Beitz, CEO of Alex, told Business Insider Australia the approach is the right one and “should encourage competition and benefit customers” as well.

Alex is flanked by around a dozen would-be rivals, including Hay and 1N1Bank. Some of the group may be encouraged by the successful sale of 86 400 to NAB, for example.

Others will take solace in the fact that, before its woes, Xinja managed to raise more than $300 million from depositors in just six months, or “more than most credit unions do in a decade”, according to Weston.

“There are a lot of new banks coming but they’ll need to prove they have a differentiated model to succeed. They’ll need to find a competitive niche,” he said.

It is ultimately what Volt is looking to do. Still in beta testing mode, Weston has his eye on a very different market, embracing a banking as a service (Baas) model.

Volt will partner with various companies to offer banking products to their customers, including turning over mortgages in under an hour via newly acquired fintech Australian Mortgage.

“We spend a bloody long time building this banking as a service infrastructure which is complex but it’ll be worth it,” he said.