Xinja emerges from budget shadows as potential new start-up bank

Less than a fortnight since the federal budget introduced reforms to facilitate the entry of startup banks in Australia, Xinja has emerged as the first to attempt to build a new bank for digital natives from the mobile phone up. 

Xinja (the name was made up by a creative type) has just completed a seed raising of almost $3 million and is talking to regulators about gaining a restricted banking licence. The application will use streamlined licensing procedures announced by the government in the budget and the prudential regulator the following day. 

“We are building full-service retail banking in your mobile phone,” says Eric Wilson, Xinja’s founder and chief executive and the former head of National Australia Bank’s public trustee business and leader of NAB’s Future of Financial Advice implementation program. He has assembled a team that includes three former Macquarie bankers: Verity Ford is Xinja’s treasurer, while Lindley Edwards, who spent nine years in Macquarie’s corporate bank, and Craig Swanger, Macquarie’s former chief investment officer and head of innovation, are on the board of directors. 

Also on the Xinja board is Jason Bates, the co-founder of two of the startup banks in the UK, Starling and Monzo. While it is still early days for the UK’s so-called ‘neobanks’, which also include Atom and Tandem, Monzo now has 175,000 customers. Wilson knows Bates from working together at professional services firm Accenture. 

Xinja will target technologically savvy customers in the 25 to 45 demographic and begin by issuing 5000 of them a pre-paid debit card (for which a banking licence is not required). If licensing is approved, it will move to deposits and then mortgages. 

Wilson says the timing of the budget policies are fortuitous. In the past decade, only one new bank has been awarded a licence, Tyro. But the day after the budget, the Australian Prudential Regulation Authority said it would create a “new centralised unit tasked with ensuring APRA’s licensing activities are suited to the increasingly diverse range of applicants that wish to engage with APRA”. The budget also endorsed recommendations made by the committee chaired by Liberal MP David Coleman to remove both the 15 per cent ownership cap for substantial shareholders in banks and the requirement banks have at least $50 million of capital before they call themselves a bank.

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Wilson says removing the 15 per cent cap “is a huge step forward for startups”. After four or five years, none of the founding shareholders are likely to own more than 15 per cent due to dilution through raising more funds but he says the new policy “critically allows us to sell equity to investors in an orderly, commercially driven process”. He adds he has already been laughed out of several meetings with venture capital investors after seeking $50 million of capital under APRA’s previous requirements. 

The government has also asked APRA to introduce a “phased approach” to new entrants, a process that has been modelled on the UK’s Financial Conduct Authority, which gives new banks the equivalent of “L plates”, that limit the total amount of deposits and deposits per customer, monitors risk controls and performance, and then move the startup to provisional licensing before full licensing. This contrasts with a traditional process in Australia that has been more “all or nothing”. 

Open API strategy

Wilson says while he is confident Xinja could have gained a license under the old regime, the new measures should help. He hopes the company can get some sort of restricted licence in the next 12 months. Xinja will also offer the regulator a window into its operations via an open application programming interface (API), that would let APRA monitor the bank’s loans in real-time. 

“We want to treat the regulator as a partner. If ASIC or APRA don’t want us to be doing something, we shouldn’t be doing it. Of course we would offer them an API, why would we have anything to hide from the people keeping the financial system safe? We want to built a bank that is regulated. We don’t want to be a shadow bank.” 

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Meanwhile Xinja is collaborating with a Silicon Valley-based firm to make its front-end systems using machine learning and artificial intelligence technology. 

While the new measures in the budget should assist Xinja, its challenges are still great. The UK’s startup banks have found it tough going to build scale against the incumbents. Similarly in Australia, Xinja will be attempting to take on some of the biggest brand names in the country.

To help with this, Wilson says a  “guerilla marketing campaign” will be conducted, designed by Xinja’s digital officer Camilla Cooke, the strategist behind the Kevin07 digital campaign for former prime minster Kevin Rudd. Xinja also has a customer innovation director, Van Le, an expert in human centred design who formerly worked at APRA. 

Wilson says while the big banks do a lot of talk about customer-centrism, they also each spend around $1 billion each year maintaining their legacy IT systems. Xinja will be able to benefit from plunging costs of technology. It is currently assessing potential cloud and core banking providers.  A core banking system can be rented these days for less than $20,000 a month.

Having raised almost $3 million in a seed round backed by high-net worth investors, Xinja will look to raise capital again next year and will consider crowdfunding options, a fundraising strategy also used by Monzo in the UK. A wholesale fundraising program is also being developed. 

Wilson says he hopes that in a few years Xinja is not the only start-up bank to have emerged in Australia. “The experience in the UK is that neobanks steal from incumbents, not each other. The more players there are, the more customers are educated about alternatives. Commercially and ethically, it is good if there is competition. We hope in three or four years there will be three or four of us.” 

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