Dec 17 2020
One of Australia’s prospective disruptors in the National and Regional Commercial Banks industry has thrown in the towel this week. Xinja, a neobank with an online-only platform that had focused on seizing market share, will return funds to deposit holders and shutter its customer accounts this month.
‘Xinja’s failure has highlighted the enormous difficulty new entrants have when attempting to disrupt the Australian banking landscape, given the massive scale and entrenched competitive advantages of the big four banks,’ said IBISWorld Senior Industry Analyst Yin Yeoh.
Commonwealth Bank, Westpac, ANZ and National Australia Bank account for a combined 74.3% of the Australian banking sector. Other than Xinja, several other neobanks have attempted to disrupt the banking sector, including Volt, Judo and 86 400.
A disruptive business model
Xinja’s failure can be traced back to its delay in launching revenue-generating loan products. Instead, it purely focused on attracting funds by offering above-market interest rates on deposit accounts.
‘Xinja offered 1.5% interest on deposits, which was above the rate provided by Australia’s major banks and was unsustainable. Unlike the major banks, Xinja relied heavily on investor funds to raise capital, and that source of funds dried up amid the COVID-19 recession,’ said Ms Yeoh.
Other neobanks have been faster to launch revenue-generating products and have adopted new business models that may disrupt the industry.
‘Other neobanks may have better luck compared with Xinja. Volt is pivoting to offer white-label Banking-as-a-Service through a partnership with Microsoft, and Judo has shown success with SMEs, growing their loan book throughout the COVID-19 pandemic,’ said Ms Yeoh.
Consumer uptake of new banking products
Xinja’s experience shows that some consumers are on the lookout for alternative banking service providers and may not have high loyalty to their existing bank.
‘Xinja secured close to $500 million in deposits across 47,000 accounts by offering above-market interest. As deposits up to $250,000 are covered under the Financial Claims Scheme, consumers appear to be willing to seek out better banking alternatives in Australia,’ said Ms Yeoh.
As consumers increasingly conduct business online, the neobanks business model may become more viable. Banking is forecast to increasingly transition online over the next five years, with fewer banking functions requiring a physical branch presence.
‘Amid the ongoing low interest rate environment, Australia’s major banks are looking for ways to cut costs and preserve margins. They will likely focus on replicating the strategies of successful neobanks and online-only operators, which seek to operate at a lower price point by avoiding the high costs associated with physical branches,’ said Ms Yeoh.
The National and Regional Commercial Banks industry is expected to grow at an annualised 5.1% over the next five years, to $183.0 billion.
Banks are already investing heavily in digital platforms, and will need to continue doing so to preserve market share over the next five years.
‘Neobanks remain a minor element of the National and Regional Commercial Banks industry, with minimal market share. However, major players may face much larger threats over the next decade. For example, disruptive entrants backed by large-scale entities with access to significant funding could be a major force,’ said Ms Yeoh.
Technology giants have become increasingly willing to move into service areas typically controlled by banks. For example, in August 2019, Apple launched its own credit facility called Apple Card in the United States. In June 2020, Amazon unveiled a partnership with Goldman Sachs to provide revolving credit lines to small businesses.
‘Neobanks may be the beginning of a larger disruptive force. Australian banks will need to be ready to compete with powerful prospective entrants in the industry over the next five years,’ said Ms Yeoh.
IBISWorld reports used to develop this release:
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