2020 marked 2 big events for the Australian fintech industry. One was the 25th anniversary since the country’s banking system switched to internet services, and the other one was the failure of the first licensed neobank there – Xinja.
For those who are unaware, neobanks are app-based startup banks (other examples include Up Bank and the European Revolut). They started becoming more and more popular across Australia about 3 years ago. Currently, many of them partner with some of the biggest traditional players in the field.
Xinja first opened its doors in 2017. The ambitious startup had the vision to disrupt the banking sector and provide a first-class deposit experience, specifically targeting millennials.
Since both investors and customers were generally attracted to this innovative field, Xinja managed to raise a total of A$204.7M ($146.6M USD) in VC (venture capital).
The very first Xinja product was a prepaid bank card that was linked to an app, tracking the user’s expenses and helping them build a better saving routine. Even though it sounded practical, the product was not accepted well by the market. The users simply did not find enough value in getting emojis and being reminded in a friendly manner to be more cautious about their savings. Many people required more practical features from their banking experience.
Surviving on the back of their impressive fundraising efforts, Xinja lived on and continued its search for product-market fit. About 2 years later (and 1 year before closing doors for good), the company obtained a banking license and launched “Stash” - its star product.
The “Stash” bank account had an aggressive approach, offering the highest interest rate on deposits across the entire country – 2.25% compared to an average of below 1%. What’s more, right after the launch, the startup decided to quadruple its spending on branding and advertising in an attempt to draw as many customers as possible. The marketing budget reached nearly $2.1 million.
It came as no surprise that Australians were flocking to the bank. About $200M of savings were injected into the deposit accounts just within a month. Not bad for а startup, many would think.
Despite this massive interest from customers, it quickly became clear that this business model was not that beneficial for Xinja. It can even be argued that it was one of the main reasons for its demise.
Xinja stepped down from the neobank scene in December 2020, retuning its banking license, freezing the customers’ accounts, and returning all their deposits. The startup blamed its failure mainly on the coronavirus pandemic and the “increasingly difficult capital-raising environment”, as the CEO Eric Wilson pointed out in an email to customers.
Nevertheless, many of Xinja’s rivals like Up Bank and Volt kept thriving, attracting investments, and launching new products throughout the pandemic. 86 400 was even acquired by the National Australian Bank shortly after Xinja’s unfortunate faith. So, discounting the pandemic which is the most convenient scapegoat for recent startup failure, it’s worth exploring other reasons that might have contributed to Xinja’s demise.
What now seems quite obvious, apparently was elusive to Xinja back in the time. The company started taking deposits before it made loans. In other words – Xinja quickly jumped to paying the highest interest rate in the country, without having any revenue from loans yet.
As a result, the startup burned through millions of dollars before succeeding to monetize its business. It was just a matter of time before this model led the company to its inevitable faith. Going back to Xinja’s rivals – one of the key differences between them and Xinja was that they already had functioning loans businesses, which meant they could function sustainably or at least lower their burn-through rates and capital investment requirements.
While Xinja was operating on negative margins in full swing, the founders made another illogical move that raised many eyebrows. The startup moved its office to a flashy new building in Sydney that previously served as a headquarter to tech giants like Facebook. It was obvious that the newly created company could not afford the new rent. This, in addition to the ludicrous amount of cash spent on ads and marketing mentioned above, was another clear sign that the budget distribution was irrational. It seemed like, for Xinja, brand image was more important than an efficient business strategy.
While it could be argued that for high-growth-rate winner-takes-all economy startups aggressive expansion is much more important than financial prudence, there is a difference between a high-growth mindset and wishful thinking.
It was not long before the negative margins began having implications. In an attempt to make a pivot, Xinja dropped the interest rates 4 times in a year. In March 2020, Stash’s interest rate fell to 1.8%, then again to 1.65%, and then to 1.5%. The cap on the interest-earning portion on deposits also dropped from $150,000 to $50,000. All this brought the company in line with the standard rates in the country, basically losing the competitive advantage.
Around the same time in March, Xinja announced a deal with Dubai-based World Investment for $433 million. The first cash injection of $160 million was agreed to be drawn down immediately. The rest was supposed to be transferred in tranches over 2 years, as the bank was evolving. Unfortunately for Xinja, the COVID-19 outbreak happened shortly after. The large deal faced some unexpected delays, and in the end, was never fully approved by the respective regulators.
In December 2020 the company made an official announcement that it was handing back its banking license and moving away from the neobank realm, as the World Investment deal was their saving grace.
All the deposits were successfully returned to customers, which is a noteworthy achievement for Xinja – when plans spiral out of control, as can be seen from many of the other failed startups we explore in our newsletter, it’s usually hard to defend the interest of the multiple stakeholders in the business.
Following Xinja’s demise, the Australian national regulator APRA made some updates to the requirements for acquiring a bank license. They took effect in 2021, and according to them, all newly created banks should have a tested “income-generating asset” such as loans.
Startups often fail at the validation phase in their struggle to find product-market fit. It could be argued, however, that Xinja stumbled on the efficiency phase, in which startups try to find a sustainable business model that can be scaled. Scaling operations before you have an economically sound business model is a very risky move, and for the Australian neobank, it proved to be a bad decision.