‘The model is broken’: Xinja’s rivals are troubled by its collapse – but they insist neobanks have a future in Australia

Australia now has neobanks but what are they? (Business Insider Australia)
Australia’s small group of neobanks just got smaller. (Business Insider Australia)
  • Neobanks are contemplating their future in Australia after Xinja revealed it was exiting banking altogether.
  • Douugh CEO Andy Taylor said it was more proof the model as it currently stands is broken.
  • The CEOs of 86400 and Volt meanwhile said that their focus remains on lending to become profitable businesses.
  • Visit Business Insider Australia’s homepage for more stories.

Xinja’s decision to pull the plug on banking has caused a stir amongst neobank acolytes and skeptics alike.

Undoubtedly Xinja’s biggest rival, 86 400 offered its condolences on Tuesday, noting it was Australian customers that ultimately will lose out from Xinja’s exit.

“While there’s always been healthy competition between us and the other neobanks, we all agree that choice is a good thing,” CEO Robert Bell told Business Insider Australia.

“Australians are crying out for new and smarter ways to manage their money. It’s sad to see a little less choice in the market today, but it underlines the importance of what we’re building.”

While Xinja didn’t offer an explicit reason for its decision to shut up shop, it’s understood the business was facing serious financial problems. Without a lending product, the neobank had no revenue stream to offset the more than $7 million it was paying out on deposits.

With a $433 million equity deal forestalled, the neobank appears to have voluntarily shut down instead of breaching the high capital requirements applied to all banking institutions.

86400 CEO Robert Bell and chair Anthony Thomson (Supplied)

“Running a bank is not an easy business. Even with sufficient capital, the right team and technology, there are many hurdles to overcome that simply don’t exist in other industries. But it’s vital there are companies willing to take on these risks, to help bring competition to the sector and deliver better outcomes for customers,” Bell said.

It hasn’t had the same troubles. The bank has signed almost $200 million in home loans since launching the product in November. Further growth on that front – Bell has set a goal of $2 billion by the end of 2021 – will be crucial to 86 400 turning a profit.

“We’re delivering despite external challenges and are continuing to grow our lending product. In fact, November was our largest month for home loan applications,” Bell said, noting the neo was “optimistic for the year ahead.”

Up Bank is likewise able to lend out deposits via partner Bendigo Bank.

But those the bright spots in the first wave of neobanks, with Xinja not the only one to have stumbled coming out of the blocks.

Volt CEO and founder Steve Weston Supplied

Volt, the first neobank to receive a full banking licence, has more than once delayed its own public launch. Almost two years on, it is still conducting beta testing, although its main growth driver lies with plans to offer white labelled banking services to other companies.

Speaking to Business Insider Australia, founder Steve Weston insisted the company is still chugging away behind the scenes.

“Volt’s business model has been calibrated for the current low interest rate environment and we are operating as usual with a careful eye on costs. We are pleased with our customer onboarding process and feedback to date has been positive,” Weston said, noting the bank was still testing home lending products with a view to launch next year.

“We strongly believe there is a rightful place in the Australian banking sector for a successful neobank community and we are working hard to achieve that.”

‘The model is broken’

While the four neobanks above round out the first wave of competitors that Xinja came to prominence as part of, they aren’t the only ones.

Perhaps Xinja’s harshest critic is Douugh, a fintech which has repeatedly argued that digital banks are hamstrung by regulatory requirements.

“Providing the same services as traditional banks, taking on the same overheads, but having thinner revenue opportunities, was never going to work. It’s unfortunate for customers who signed up hoping for a new and better banking experience, but it’s definitely not a surprise,” CEO Andy Taylor told Business Insider Australia.

Instead, Taylor is positioning Douugh as a ‘financial wellness app’ operating on a subscription model, thus avoiding the need to have millions of dollars tied up in reserve just to appease the regulator.

“Where a neobank is taking on the role of a deposit-taking institution, the model is broken. However, under the equally common ‘neobank’ term used in the US and Europe, where it also relates to the Banking-as-a-Service model – this is already proving very successful and has lots of potential,” Taylor said.

He believes this model will be “the saviour of the banking industry”, gearing up to launch publicly in the coming months with a buy now, pay later feature.

“Banks can focus on their vanilla banking offer and doing that really well, and fintechs can provide the technical innovation that can better service a new generation of customers.”