Australia's neobanks need to find new profitable products and steady revenue streams to be able to make a dent in a market dominated by existing lenders, experts said after the abrupt exit of one player and the acquisition of another within weeks of each other rattled the fledgling industry.

Xinja returned its banking license in December 2020, while 86 400 was acquired by National Australia Bank Ltd. in January. Analysts said the remaining neobanks and any potential new entrants will need to be more innovative and generate enough revenue to survive.

"Xinja's focus shift isn't a signal of an end to neobanks. There have been and will be new entrants and exits still to come. But it does underscore how any company will need a comprehensive business model that can compete and be sustainable through stressful market conditions," said Jason Malo, research director at global technology research firm Gartner.

The concept of neobanks, or digital banks that are typically app-based and have no physical bank branches, came to Australia in 2019 after Volt Bank was granted a full license to operate as an authorized deposit-taking institution. Such institutions face the might of the so-called big four of Australian banking: NAB and its rivals Commonwealth Bank of Australia, Australia and New Zealand Banking Group Ltd. and Westpac Banking Corp.

"To remain in the market, a neobank has to be profitable. In order to be profitable, these banks have to launch loan products that are profitable, including personal loans [and] mortgages," Yin Yeoh, IBISWorld's senior industry analyst, told S&P Global Market Intelligence. "Xinja's failure was due to its delay in launching revenue-generating products."

Xinja was founded in 2017 and got its full banking license in September 2019. It offered transaction accounts at launch before expanding to savings accounts, though it didn't offer a loan product. On Dec. 15, 2020, the company announced its exit from banking, citing the difficulties of raising funds, particularly during the COVID-19 pandemic.

Limits of current model

The current neobanks model in Australia is not workable, said Bradford Kelly, an independent payments consultant. He said neobanks should start with products such as remittances and then build out their capabilities.

"Xinja failed because they weren't offering anything you couldn't get anywhere else. They were paying over market for deposits. They weren't lending. They were burning through cash," Kelly said.

Judo Bank and Volt Bank are the remaining two neobanks with full banking licenses. Judo Bank reported a A$1.8 billion loan book for its fiscal full-year ended June 30, 2020, and a deposit book of A$1.4 billion with more than 9,700 customers. It reported a loss of A$50.8 million for the year but said it is rapidly approaching its first month of profitability in the first half of fiscal 2021. Volt Bank in its disclosure for the quarter ended Sept. 30, 2020, reported deposits of A$67.8 million.

"I think the upside for neobanking in Australia has never been bigger than it is today," Steve Weston, founder and CEO of Volt Bank, said in an emailed statement. "It is complex to build and takes a little bit longer to come to market, but it is the model that will be the next big disruptor in banking," he said.

Volt Bank is different from its competitors with its service model that bank allows business partners to integrate banking and payments into their customer experience, Weston said.

Judo Bank's focus lending to small to medium-sized businesses will help improve its chances of success, Kelly said. Judo Bank offers business loans starting from A$250,000 to small and medium-sized businesses, with flexible repayment options.

Facing the challenge

Meanwhile, Australia's big four banks have stepped up digitalization to defend their over 70% market share. For example, CBA has invested in its technology infrastructure as part of CEO Matt Comyn's A$5 billion drive to become Australia's digital leader. Bendigo & Adelaide Bank Ltd. teamed up with software development company Ferocia to establish Up Bank, a digital-only unit.

"The arrival of neobanks has led to traditional banks accelerating their digital offerings. This is expected to create more competition for neobanks," Yeoh said.

Neobanks could differentiate themselves from traditional banks by targeting younger customers who are more open to adopt digital services, said Andrew Haslip, head of content for Asia Pacific at GlobalData Financial Services. A survey by GlobalData showed that 68% of millennials in Australia would prefer to open a new transaction account via mobile or a personal computer, he said.

Neobanks can also promote "easy, real time or near real time purely digital lending and account opening," Haslip said, adding: "This is currently something that many banks in Australia struggle with or have only partially addressed."

Other products that neobanks could aim to provide include analysis of customers' spending and offering foreign exchange and travel money without the markups seen at more traditional banks, Haslip said. They can also act as white-label providers to smaller banks or even institutions that want to step up their digital channels or get into banking, he said, pointing to companies that are trying to convert existing retail customers into banking customers.

Overall, the future of the neobanking model is to "actually monetize their customers," Haslip said.