Eighteen months before fallen neobank Xinja froze its customers’ bank accounts and returned its banking licence, it moved into a flash new office on Sydney’s King Street.
The iconic building was once home to Facebook’s headquarters, and former employees say Xinja’s founders wanted to project the company’s image as being on par with the world’s largest technology companies.
One former employee says the decision to move into the building that real estate agents describe as having a “sleek facade” and being “associated with innovation” raised eyebrows within the company.
“The CFO at the time was like ‘this is ridiculous, you don’t have any money’,” they said.
Xinja says it was expanding and spent no money on new furniture but the most recent financial records show its rent increased seven-fold this year, from $224,000 to $1.6 million. This was at a time when the company was hemorrhaging money through its high-interest bank accounts, was warned by auditors of insolvency risks and had pinned all hopes on a lifeline investment from sheikhs in Dubai.
“They made very bad decisions about the way money was spent while not a lot was delivered,” the employee says.
Xinja burst onto Australia’s neobank scene in 2017 promising to shake up the banking industry by offering a tech-focused savings experience targeted towards Millennials. But three years later, it’s closing all bank accounts, refunding customer deposits and handing back its banking licence.
So what went wrong?
App-based startup banks, known as neobanks, became popular in Australia in 2018 following budget reforms that simplified the application process to enter the deposit market. Many of Xinja’s competitors – Up Bank, 86 400 and Volt – have big backers or partner with major banks.
However, Xinja was known for its viral crowdfunding which helped it raise close to $5 million. Its first round in March 2018 saw it raise $500,000 within hours, reaching $2.7 million before the offer closed.
One investor, Will Rosewarne, put $2000 into that first fundraiser – his first foray into investing in startups. “They had subsequent rounds,” Rosewarne says. “But I did not invest.”
Rosewarne was new to investing but not to business. He’s a company secretary at a recruitment firm who has written a thesis on shareholder class actions at the University of New South Wales.
The 33-year-old attended various Xinja meetings in Melbourne and became a customer of the bank but says he was never impressed by the products and even less convinced by the business model.
The first product launched by Xinja was a prepaid bank card linked to an app that tracked expenses and made recommendations to save.
“All I got was a bunch of funky emojis that were smiling at me, that’s not what I want out of a banking product,” he says.
Fast forward two years and an unknown number of capital raisings to January this year. Xinja had gone through the gruelling process of obtaining a banking licence and launched its flagship product – the ‘Stash’ bank account.
The account paid 2.25 per cent interest, with “no strings attached”. Xinja ran an ad campaign to coincide with the launch, where triumphant music was played over a sequence of middle-aged men doing daggy handshakes, exercise routines and dances.
“Ditch Dad Banking,” the ad said. “Join Xinja Bank.”
As Xinja’s rent increased, so did its marketing budget. In 2018, the group spent $561,000 on branding and ads and this year that almost quadrupled to $2.1 million.
The Stash accounts hit the market during a time of historically low interest rates so hundreds of thousands of Australians poured $200 million of their savings into the accounts within the first month.
The Reserve Bank of Australia kept the cash rate at 0.75 per cent in February, and made its first mention of COVID-19.
“Another source of uncertainty is the coronavirus, which is having a significant effect on the Chinese economy at present. It is too early to determine how long-lasting the impact will be,” the RBA said.
The pandemic, and a “tough capital raising environment”, would come to be the scapegoat for the hopeful disruptor’s decision to exit banking.
“Obviously, this has been an incredibly tough call as all of us here wanted to be able to offer you a new, amazing way to bank, but after COVID-19 and an increasingly difficult capital-raising environment affecting who is willing to invest in a new bank, we are convinced that the best thing is for Xinja is to pivot away from being a bank,” Xinja chief executive Eric Wilson said in an email to clients.
But why didn’t other neobanks fall?
Only a few days after Xinja’s shock decision to exit banking, any concern that Australia’s neobanking sector is facing a crisis was cleared up.
Judo Bank, despite almost doubling its losses last financial year after making provisions for rising bad debts from its small business customer base, confirmed this week that it raised another $280 million to fund its expansion plans.
COVID-19 and investor support was not a problem, according to one of its co-founders and co-chief executives David Hornery.
“This year alone, we have raised over half a billion dollars in funding across two rounds in the most challenging market conditions in living memory, with funding coming from some of the best-known and most widely respected private and institutional investors in the world,” he said.
Investors were clearly focused on the fact the bank was picking up market share from the big four and other rivals in the small business lending space.
Judo said it had added nearly a billion dollars of lending to its portfolio during COVID as small business customers became frustrated with big banks and the lack of access to staff.
According to Australian Prudential Regulation Authority (APRA) statistics, bank lending to small business shrunk more than 2 per cent while Judo’s lending grew 40 per cent to a loan book of $2.5 billion.
One handy advantage that rivals like Judo and 86 400 enjoy over Xinja is that they both actually have a functioning loans business. Xinja was burning through millions of dollars in cash and had almost no revenue coming through the door.
To sustain its operations, Xinja became desperate for capital. Auditors Grant Thornton warned the neobank had already breached APRA’s capital requirements once, and it was at risk of doing so again if it did not develop new products or raise more cash.
However, one former employee, who could not be named, said a weak business plan saw doors slamming in Xinja’s face.
“Part of the reason they had to go abroad for their investments was there was a lot of smoke and mirrors,” they said. “And there wasn’t VC [venture capital] available in Australia for this.”
Wilson and his partners turned their sights to a small outfit in Byron Bay – First Penny Investments run by Adelaide-born Michael Gale whose company director’s file with the corporate regulator lists involvement in 56 companies, 32 of which are now deregistered.
The Age and Sydney Morning Herald have spoken to more than a dozen former and current business partners of Gale’s, the bulk of whom have negative things to say but few wanted to go on the record because it could hurt them financially.
“No one will talk about him negatively because it might throw a deal,” says one former partner. “He always charges upfront big fees to do a full assessment but he’s very clear in his Ts and Cs that it’s OK if he doesn’t do anything.”
The former Xinja employee says Gale introduced the company to investors from China and the Middle East. Gale’s business dealings span four continents and more than three decades and he prides himself on his global connections.
But many people who know Gale say he over-promised and under-delivered. “The truth is usually straight and simple and logical,” says one former colleague who spoke on the condition of anonymity. “Every time we had to have explanations of why things weren’t working out, they were so complicated. Like there was this random stream of thoughts.”
Gale did not answer questions about his firm’s dealings this year although he denied any wrongdoing. “All I can say is that what you claim below is simply untrue and defamatory. I will not hesitate to take action for defamation.”
But this time, Gale pulled through and brokered a mammoth deal for Xinja with a Dubai-based firm named World Investments. Or so it seemed.
As the coronavirus pandemic gripped the nation in March, Xinja announced the Dubai firm would invest $433 million over 24 months, with the first $160 million to be invested “immediately”.
Both parties “expressed their gratitude” to Gale in a press release, for sealing the deal after “over two years of discussions”.
The deal was so large it needed to be approved by the Foreign Investment Review Board, APRA and the Emirates Security and Commodities Authority.
A confidential investor presentation, obtained by The Age and Sydney Morning Herald, that was circulated among First Penny Investments staff in April said COVID-19 had resulted in “unforeseen delays” in obtaining the regulatory tick of approval.
“The first tranche of money is now expected to close in August 2020,” it said. “None of the parties believe there is any reason to suggest full approvals will not be forthcoming.”
August came and went and the money never materialised. In a statement provided to this masthead in November, Wilson remained positive the money would come good.
“Recently we have signed an updated Fund Agreement, and there has been a significant acceleration in activity again. We have a team of four in Dubai working on our behalf with them, and they are progressing their way through various internal and external due diligence requirements. We remain very excited to welcome them as investors to Xinja,” Wilson said.
A Xinja spokesman said the deal had not yet been terminated but World Investments’ due diligence had not been completed before the neobank made the decision to return deposits. Gale also maintained the deal was not dead, but gave a hint the terms might vary.
“I really can’t comment about their intentions following Xinja’s change of business model as that is something they would have to confirm or not,” Gale said of World Investments.
Wilson said it had been a tough year and delays in World Investment’s capital had forced the company into “hibernation” – in March, it stopped accepting new customers and in May, it cut Stash’s interest rate to 1.8 per cent.
But these cost-cutting techniques didn’t work and ultimately Xinja pulled the pin on banking. Its shareholders were shocked, saying no warning was given and many now believe their shares are worthless.
Some ‘Founding Xinjas’, as they’re called, are supportive – saying failure is healthy in the start-up world and innovation means taking big risks. Others are not so optimistic – saying it’s clear Xinja had no business case and put all its eggs in one basket.
“They came across as a nice, Millennial ready bank – they sure as hell kept up with the communication,” says Sergei Serjienko, who bought $20,400 of Xinja shares.
“As far as I knew, everything was going great,” he says. “It’s a little bit of a kick in the guts of sorts.”
When asked if Xinja’s shares were worth nothing, a spokesman said it was too early to tell where the company would stand once all deposits are returned. All but $5.8 million has now been returned, out of $250 million, and the spokesman said the team was focused on finishing the job.
Xinja’s senior management has gone to ground. Social media accounts have been deleted and phone calls have gone unanswered. But the company still harbours hope it can retain customers in a new venture in US share trading.
“I’m gutted not to be able to continue this service for you but I hope you might consider using us if we launch new services next year,” Wilson told clients in his parting email.
Charlotte is a reporter for The Age.
Colin Kruger is a business reporter. He joined the Sydney Morning Herald in 1999 as its technology editor. Other roles have included the Herald’s deputy business editor and online business editor.