Xinja Bank Failure: Lessons for Depositors

Xinja Bank announced its decision to wind up its banking operations shortly before Christmas 2020 and it returned all customer deposits in January.  In doing so it became the first “banking failure” in Australia where depositors did not lose money.  In total, $252 million was returned to over 37,000 customers.  Xinja relinquished its banking licence in December 2020.

Equity holders in Xinja were not so fortunate.  Collectively, investors poured around $100 million into the neo-bank only to be told their shares are now worth “close to or actually $0”.  Xinja is expected to file for voluntary administration in the next month unless it can attract new investors to re-capitalise and concentrate on US share trading operations. 

There are widely circulating allegations of misconduct and fraud with claims centering on Xinja management’s raising of equity for its operations from retail investors potentially falsely promoting it had secured $433 million from Dubai based World Investments when this deal was still “subject to approvals”.  These approvals never eventuated as due diligence conducted on behalf of World Investments showed Xinja’s technology architecture to have “issues that were deeply wrong” resulting in the recommendation no investment should be made until Xinja’s App was completely overhauled.

The bank’s collapse came when Xinja’s auditors found it had temporarily breached APRA’s minimum capital requirements and was dependent on securing additional capital to continue to operate lawfully.  Xinja has blamed the COVID-19 pandemic for its collapse, but the high interest rates paid on its deposits needed to attract funds also contributed to its demise and clearly doubts over its unproven technology was also a factor.  Xinja was the second neo-bank to obtain a banking license, but it lasted only 15 months.

For term deposit investors looking to earn higher returns by investing in unrated start-up neo-banks there are some salient lessons. 

Positively, no depositor lost money and APRA’s banking supervision and capital adequacy rules (that likely forced its wind up) acted as they should have to protect depositors.  However, given equity holders were effectively completely wiped out showed the margins were very fine and it was a close call.  Wholesale investors who deposited monies above the government guarantee of $250,000 had a lucky escape. 

Xinja’s business model was always very high risk with unproven technology and a plan to expand the balance sheet quickly by relying on securing uncommitted additional equity capital to fund losses until sufficient scale and efficiency for profitability was achieved.  Amicus believes for conservative term deposit investors providing funding to these high risk neo-bank start-ups for a small amount of additional yield is imprudent and akin to the well used metaphor of picking up pennies in front of a steamroller.

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