Hey guys welcome back to I dream of Money, the channel bringing you videos about business, economics and money.
Today I’ll be talking about investing in neobanks in Australia
In particular, you might have seen a shocking development in the neobank space recently
with Xinja announcing the end of its banking operations shortly before Christmas 2020
yet another casualty of the pandemic.
Xinja is not only well known for being one of the first neobanks to obtain a banking licence in Australia
but also for being the first ever retail equity crowdfund in Australia organised via crowdfunding platform Equitise.
In this video we’ll take a look at what led to Xinja’s downfall and consider what lessons we can learn from this.
Is this a cautionary tale about neobanks’ business models in general?
Or was Xinja’s downfall specific to how it was being run?
Now before I start, I need to make a disclaimer.
Now let's start with what is a neobank.
The definition is a bit murky
but in broad terms neobanks are online only banks not backed by the big 4 bank players in Australia
such as the Commonwealth Bank, ANZ, NAB and Westpac
Neobanks usually have slick apps with useful features to help users become better at managing their money
making them attractive to millenials who are more tech savvy.
They are also able to offer competitive interest rates because they don’t have the costs associated with having physical branches.
However on the flipside, you can’t contact them anywhere in person and their product offerings are usually quite limited.
Neobanks have been gaining popularity for a few years now, in particular in Europe and Asia.
In Australia the first neobank Volt was granted an ADI licence by APRA, the Australian banking regulator, in 2019
after a change in regulations to simplify the banking licence application process
Since then a number of neobanks have been popping up
such as 86400 and Up Bank which offer retail banking services and Tyro and Judo which offer business banking services.
One such neobank which did get a banking licence was Xinja.
Xinja was launched to much fanfare.
In fact in 2018 it was the first ever retail equity crowdfund in Australia raising over $2.4 million
Over the years it went on to raise over $200m
only to become unstuck when a A$433m investment from Dubai-based World Investments did not come through in time.
So how did they fail despite all the hype?
Well first, COVID has made the capital raising environment incredibly challenging.
They were essentially burning through all their cash trying to gain market share and developing their app and offerings and not getting the investment needed to keep going.
Secondly, Xinja hasn't achieved a viable business model.
They were offering extremely high interest rates on deposits to try to attract customers.
In particular, their Stash account was paying well above market interest rates
and they actually had to stop accepting new Stash customers a few months ago before they closed down
as the Reserve Bank's interest rate reductions meant they were bleeding too much cash.
They also had their app and transaction account where customers could link a debit card.
But aside from this, they had no real revenue streams
unlike traditional banks which offer a variety of financial services including loans, insurance, investment services and leasing.
You might be wondering now, how do other neobanks compare?
Well, unfortunately the news isn’t good for competitor Volt
which basically suffers from the same problem as Xinja.
It also offers an app and a high interest rate deposit and not much else.
In a low interest rate environment that isn’t exactly a recipe for success.
Based on this AFR article, Volt recorded a full-year loss in the 12 months to March 2020 of $40.9 million
Volt was actually planning to IPO in 2020 but had to abandon this when COVID hit.
You’d have to wonder whether it’s still planning to go ahead now with the IPO now that Xinja is dead in the water.
On the other hand, things might not look so bad for neobank 86400
as it actually has income from home loan products to offset all the high interest it pays on deposits
Similarly Judo and Tyro have revenue streams such as lending and payment processing products,
although it is worthwhile noting that Tyro, which listed on the ASX at the end of 2019, remained in losses for the year ended 30 June 2020
of almost $25m before interest, depreciation and tax.
Neobanks promised to make banking better by disrupting the key players, but so far it’s not clear whether they can even be profitable.
You would think that 2020 and remote working would only increase use of online services like neobanks
but in fact, the evidence in Europe is showing the opposite is happening.
Journalists have reported that neobanks in Europe such as Monzo and Revolut have only continued to make losses in 2020 and are getting hit with complaints from customers about service.
Overall neobanks are still a far way off from disrupting traditional banking.
Those that support neobanks have also failed to recognise that despite all the backlash against banks especially after the royal commission
people ultimately like to bank with institutions they trust because to state the obvious it’s their hard earned money.
The big 4 banks have been building that trust for decades and it's going to be a long process to build that trust
However overall for customers it is probably a good thing to have more competition in the market
so that the big players can lift their game and come out with better technology and apps.
It is hard to see how neobanks are going to capture significant market share any time soon though
when they don’t have the deep pockets that big banks do to ride it out when things get tough
like Xinja unfortunately learned.