Xinja, the neobank launched amid an Australia banking crisis and with a vision to be different, has announced it will quit banking just a year after being licenced to start.
“Please note that Xinja has decided to exit banking business and return its ADI (authorised deposit-taking institution) licence,” said a note on the bank’s home page on the morning of Wednesday December 16, under its usual headline ‘How money should be’.
Two products, the Xinja Bank Account and Xinja Stash Account, will be discontinued on December 23, the bank said.
That is a shame.
I first interviewed founder Eric Wilson in 2017, as Commonwealth Bank of Australia was reeling from scandals in its life insurance and financial planning arms, and momentum towards a reputation-shredding royal commission gathered pace.
Wilson himself had come through the ranks at National Australia Bank, running one of its subsidiaries, National Australia Trustees.
A combination of that role and the stories his father-in-law told him about being a bank manager in small bush towns for the Bank of New South Wales 40 years earlier had ingrained in him a sense that banks ought to be doing better with people’s trust.
Cold banking economics have little respect for intentions
“The position of a trustee is the highest form of legal obligation you can get,” Wilson told me in Sydney that day. “We managed about A$1 billion ($758 million) of vulnerable people’s money, people who have been hit by a truck or had a brain injury and couldn’t manage it themselves.”
He didn’t see that trust being reflected in modern banking.
“Over 20 years, my industry has not behaved well,” he said then.
He had been discussing the matter with a friend, he recalled; in the end that friend had told him: “Stop whinging and start a bank.”
He did, teaming up with several former Macquarie bankers and others with experience of starting banks in the UK.
Cool banking
The next time I met him, in April 2018, it was clear that the idea of a bank doing things differently had struck a chord: Xinja became the first financial institution in Asia Pacific to raise equity through crowdfunding.
It would go on to raise a total of more than A$5 million through that route, alongside A$45 million from private and institutional investors.
The team was different – and almost cool.
Wilson projected decent calm, while customer innovation officer Van Le was an image of progressive urban style.
Photos from that time of them alongside treasurer Verity Froud look like album covers – Le in ripped jeans, Wilson seated on the wooden benches of a city wharf in the sunset.
But could they actually run a bank?
It took another year before the Australian Prudential Regulation Authority (Apra) granted Xinja Bank an unrestricted banking licence in September 2019, after which Xinja launched a saving account called Stash, and said it would add loan products in the first quarter of 2020, starting with overdrafts, then personal loans and home loans.
But that was the problem.
By the time Covid dislocated everything and everyone, Xinja was paying out plenty of interest in its savings products, but unable to start a lending business.
In March 2020, the bank stopped taking new deposits after being swamped by demand for a savings account that was paying the highest rate in the industry (2.25%) at the same time that the Reserve Bank of Australia was making emergency rate cuts.
Later that month, it confirmed an A$433 million injection, A$160 million up front, from the Dubai-based investment group World Investments.
But the Covid pandemic delayed the cash injection and Xinja lost A$36 million in the year to June 30.
On December 14, crippled by paying out interest without any income from lending to offset it, the bank stopped paying interest on Stash accounts.
Withdrawals
Xinja’s announcement encourages people to withdraw their deposits, reassuring customers that funds are safe and guaranteed by Apra.
Incongruous beneath the vibrant purples of the neobank’s site branding, the text asks people to cancel their direct debits as soon as possible and transfer all funds out of the accounts by January 6.
Cards and payment facilities will no longer work from January 15.
“After a year marked by Covid-19 and an increasingly difficult capital-raising environment, and following a review of the market in Australia, Xinja has decided to withdraw the bank account and Stash (savings) account and cease being a bank,” Xinja said in a statement. “This was an incredibly hard decision.
“We hope to refocus the business in other areas such as our US share-trading product, Dabble, should circumstances arise.”
Apra put out a statement of its own, saying that “Xinja’s decision to exit the banking industry and pursue other business opportunities is a commercial decision for Xinja.
“As Australia’s financial safety regulator, Apra will closely monitor the return of deposits to ensure all funds are returned to Xinja depositors in an orderly and timely manner.”
What can we learn from this?
Not, necessarily, that neobanks can’t work.
Just the obvious fact that banks can’t give generous rates of interest on deposits without a decent lending business to support it.
In that respect, Xinja seems to have been chiefly a victim of timing, having got the first part of the business up and running before Covid hit, but not the second.
It is a pity to see a bank launched with apparently noble intentions in a cynical industry hit the rocks in this way. But cold banking economics have little respect for intentions.
