Does Xinja’s downfall mean neobanks are dead?

Neobank Xinja is officially closing its doors today. Are neobanks dead, or is this an isolated case in the banking sector?

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Rewind to this time last year, and so-called neobanks were getting a lot of attention.

The big four were ‘dinosaurs’ that were burdened with’ old-fashioned’ costs like physical banking branches, accepting cheques and employing thousands of staff. Not to mention the recently-revealed mountain of misconduct charges that had just come out of the 2018 banking royal commission.

To this day, it’s arguable that few of the ASX’s financial institutions, such as AMP Limited (ASX: AMP) and Westpac Banking Corp (ASX: WBC) have yet to fully recover. This was a sector, a comfortable oligopoly, that was ripe for disruption. Or so we were told.

The last few years have seen the rise of the ‘neobank’ – a slimmed-down, tech-based bank for the future (or so we were told). No physical branches, no century of existence and bureaucracy to haul into the 21st century, and an app where you could fulfil your every banking need.

We saw the rise of a plethora of these new-age banks. Xinja, 86 400, Up, Volt, Judo, Douugh Limited (ASX: DOU)… These neobanks all promised a new way of banking.

New banks, old problems

But fast forward to the present, and the picture isn’t quite as rosy. Perhaps Neo wasn’t the one, after all.

Last month, neobank Xinja told its customers that it would be effectively shutting up shop and handing back its Australian banking license.

According to reporting in Business Insider this week, Xinja is effectively closed for business, as of today incidentally. According to the report, the primary cause of this collapse is good old-fashioned cash burn. The company was reportedly going through “more than $7 million a year” in interest costs just to service the $484 million in deposits it had on its books at its peak. Even a new bank can have old problems, it seems.

The report also alleges that Xinja’s “predicament was exacerbated by poor decision making”, evidenced by the lease of the former headquarters of Facebook Australia. That reportedly cost the company $1.6 million in rent annually. And all this was taking place when Xinja wasn’t actually making any money, since it only offered deposit facilities and no lending or credit products (which is how banks usually make money).

A separate report in the Australian Financial Review (AFR) at the time states that Xinja “lost $36 million in the year to 30 June [2020]”. That was after accepting a “$433 million lifeline from a mysterious Dubai-based investment group back in March”.

So is Xinja the proverbial ‘canary in the coal mine’ for neobanks?

The future of neobanking

Well, not all neobanks have gone down Xinja’s path. The report also states that 86 400 offers home loan products, whilst Judo has “managed to turn itself into a unicorn”.

Not only that, some neobanks have the backing of large friends in the banking sector. Up has partnered with Bendigo and Adelaide Bank Ltd (ASX: BEN), whilst National Australia Bank Ltd (ASX: NAB) has its own ‘in-house’ neobank with Ubank. 

So perhaps Xinja’s demise isn’t a herald of the futile future of the neobank in Australia. Perhaps it’s just an indication of what happens when you don’t run a business well.

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Motley Fool contributor Sebastian Bowen owns shares of National Australia Bank Limited. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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