Australia’s neobanks’ future is clouded after Xinja’s fall, but here’s how entrants could succeed
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The collapse of Australia’s most famous neobank Xinja has provoked questions about the remaining players and the sector more broadly.
Other neobanks in Australia include Volt, 86 400, Up and Judo. While recently listed fintech Douugh (ASX:DOU) was often put in that category, the company distanced itself from that moniker preferring to call itself a “financial wellness platform”.
Xinja and other banks argued being digital only could provide a better experience for customers. In particular it could offer some form of higher interest rates on deposit accounts, having no legacy costs.
But after a tough 2020 that saw venture capitalists and retail banking customers become more picky about where to put their money, the bank told customers it was handing back its licence.
Xinja spent much of 2020 seeking over $400 million in funding from Dubai-based World Investments but this never eventuated.
The company says it still intends to operate its proposed US share trading platform Dabble.
Of course neobanks are far from the only industry to have plans for 2020 disrupted thanks to COVID-19. But was the pandemic the sole catalyst or just the straw that broke the camel’s back?
Stockhead contacted all Australian neobanks, including Xinja, for comment on their 2021 outlook but only one, 86 400 responded. 86 400 promised to provide answers but didn’t in time for this article’s publication.
It is anyone’s guess if the remaining four neobanks survive. But Stockhead spoke with three industry experts about whether the neobanking model generally could still succeed in Australia.
The first was Zennon Kapron, who is the founder and director of fintech consultancy Kapronasia.
Speaking with Stockhead from Singapore earlier this week, he said the aspiring entrant’s best hope was to start as something else, build a large customer base and then pivot.
“Because the cost of customer acquisition is so high, the players that have successful in building a digital bank or finance infrastructure have started from something else and then moved into that space,” Kapron said.
“Ant Group started with ecommerce, WeChat started with social and gaming and then moved into that. And conceivably in the next 5-10 years we could see a company like TransferWise move into more traditional banking services; they already have a debit card and cross border payments.”
Earlier this month Singapore’s financial regulator awarded four digital banking licenses. One was to Ant Group, another licence went to Singtel and Grab which are a local telco and ride-hailing services.
Kapron said Singtel and Grab had incredible customer bases that held them in good stead to enter the space.
“Singapore is only 5 or 6 million people but a couple of million would be customers of both of those platforms so from that basis it makes it easy to expand on top of that,” he said.
“I think the challenge to pure plays starting from scratch is you have to add customers but that’s expensive.
“So appetite for venture capitalists to keep putting money into pure-play digital bank is probably waning especially as we see other companies such as TransferWise with better return on capital.
“Increasingly, if there’s new digital banks, its going to be difficult to attract funding unless they have some kind of competitive advantage already in place.”
The second was Bradford Kelly – a 25-year payments industry veteran who has served stints with NAB and Mastercard among other companies.
Stockhead spoke with him earlier this week prior to Xinja’s collapse and he said Xinja was “probably on life support”. But, Kelly saw several problems that affected the broad sector, not just Xinja.
“They [Australian neobanks] are all going after the same customer which is travelling millennials that want to do lots of budgeting and like debit cards,” he said.
“That’s just a stupid market because with all due respect to millennials they haven’t got any money.”
Other countries, such as Britain, have more mature neobanks and Kelly noted Australia’s own were trying to replicate their models but couldn’t.
“In the UK they can make interchange revenues off debit cards – Revolut makes 60 per cent of its revenue from the interchange fee, [but they] can’t do that in Australia because the fee is capped,” he told Stockhead.
“You can’t just … shoot all these models overseas into Australia and expect them to work.”
Kelly said the Big 4 banks had noticed neobanks but were hardly worth swatting at. This was because Australia’s neobanks never entered the area that made profits – namely, home loans.
“The Big 4 are not rattled. They are getting pissed off that their forex business are being impacted a bit but not really,” Kelly said.
“What’s happened is with COVID, people have gone to quality. They’ll look for safe havens and put their money with Westpac, NAB, CBA, Citi. They don’t want to put it with Xinja or whoever, as in their view it’s too risky.
“The problem is they [Australia’s neobanks] were all doing victory laps but look at what they’re doing it about – there’s no profit.
“Revolut says ‘We’ve got 30,000 on our waiting list and we’ve got all these downloads’. That’s great but how many are transacting and how many are making any money? Not many.”
The former two statistics relate to Revolut’s plans to enter Australia but it has not yet been awarded a digital banking licence.
There seems little chance now that the four remaining neobanks will become the new Big 4. But they may not necessarily suffer the fate of Xinja.
But of course as Nature’s Melbourne partner Justin Connally noted, being their main ‘go-to’ service is another matter.
“What we have seen is this readiness for more Australians to try a digital bank. But there’s a degree of wanting to have a product or service with a digital bank before moving everything they have over,” he told Stockhead.
“More are keen but they want to get the experience before they commit to moving to them as institutions.
“During COVID-19 more Australians, whether it’s [through] a neobank or traditional provider – they’re becoming more accustomed to digital banking and transactions and will be open to it in the future.”
However this has not necessarily been to the advantage of Australia’s neobanks.
The survey also found that 67 per cent of Australians were not aware of neobanks as a term. Furthermore, Connally noted traditional banks have been accelerating their digital offerings.
“They have done a good job of doing that and I think they have the advantage of that trust Australians have in traditional banks, so I think there’s an opportunity for them to continue to service their customers using digital channels and continue their adoptions,” he said.
This has been particularly true as open banking has been eased in.
“The emergence of open banking and neobanks is entirely designed to create a more competitive marketplace where consumers can do that [shop around] more easily,” Connally said.
“That’s going to put more pressure on traditional banks to continue to innovate and offer those products and services to customers.”