Lost in the COVID-19 panic was news of the ASX’s first neobank listing, but experts are not confident that now is a good time for neobanks, let alone listings.

Two weeks ago neobank Douugh said it was backdoor listing via Ziptel (ASX:ZIP), a telecommunications business that has been suspended from the ASX since mid-January.

Douugh originally said it would list in July last year and raise $10m, and planned to have 100,000 customers by June this year.

But in the wake of the WeWork crash and the dramatic shift away from high cash burn startups, investors told Douugh they wanted to see a sustainable business model first.

So it delayed the big “growth” capital raise and secured a reverse takeover with Ziptel over Christmas instead and committed to a $3.5-5m raise at 2c a share, chief executive Andy Taylor says.

The capital raising period is set for May and a listing date provisionally set for June 3.

Taylor aims to raise the big round of growth capital within 12 months of listing, once Douugh has fully launched its products and can show investors that it can deliver strong growth before asking for more money.

“It’s the more prudent approach in today’s market” Taylor says.

Douugh calls itself a fintech rather than a bank. It partners with local banks to offer its services; in Australia its partner is Regional Australia Bank.

Using a freemium model, Douugh offers free saving and cheque accounts and makes money from card transactions in the US, and once launched from a subscription service for people who want to access services such as financial and money management advice.

It doesn’t make money from net interest margins, or the difference between what it pays out on savings deposits and makes from lending.


All spending, no lending

Douugh is listing just as the banking sector has been asked to commit heavily to financially supporting Australia through an economic crisis caused by the COVID-19 pandemic.

And while all banks are covered by the government’s banking guarantee, which backstops deposits up to $250,000, neobanks’ business models could mean they are a risky bet right now.

Douugh relies on subscriptions to its money management service and card interchange fees in the US, but most neobanks offer high savings deposit rates to attract customers with the expectation that a debt product such as mortgages or credit cards will provide the funding for those rates.

Only 86 400 is active in the Australian mortgage market, offering a variable home loan rate of 2.74 per cent as well as a three-year fixed loan with a rate of 2.59 per cent.

With the Australian cash rate at record lows of 0.25 per cent, neobanks have been forced to lower their rates or, like local favourite Xinja, close the accounts to new customers.

Xinja is currently paying 2.25 per cent interest for deposits up to $245,000.

“If you think about a lot of these neobanks at the moment they’re not even lending… they’re paying interest on the deposits and they’re losing money,” Morningstar banking analyst Nathan Zaia told Stockhead.

He says neobanks are in a catch-22 situation: if customers start taking money out, they will be in a better financial position. But investors will cry off if they see client numbers declining, which also raises questions around whether it will ever be profitable.


Swimming naked?

Neobanks also have a customer problem: people are not yet using those accounts for their salaries.

Swinburne University professor Steve Worthington cites research from the UK that showed in the second half of last year neobanks had 20 million customers. However, the average deposit rate slipped by 25 per cent from £350 ($700) to £260 ($520).

He says the annual average income per customer for neobanks was £9 per customer for 2019, compared to an average of £270 at the incumbent banks.

“The neobanks are living by the seat of their pants,” Worthington says.

“They’re trying to challenge the incumbents by offering good interest rates but they’re not getting people’s monthly salary going in there. They’re not getting the mortgages in there and that leaves them exposed.”

All banks in Australia are required to hold capital of up to 8 per cent of their risk-weighted assets, meaning that’s the minimum amount of cash needed on hand to cover unexpected losses arising out of the inherent risk of its assets.

Stockhead reached out to Xinja, Volt, Judo, UP, and 86 400 with questions on the impact of lower rates and the coronavirus on customer acquisition targets, and on capital raising needs in this environment.

Only Xinja responded, but it did not address the questions.