Eric Wilson, Xinja Bank CEO
The much-hyped and much-needed capital injection promised by Dubai’s World Investments for Xinja Bank seems to be taking forever to materialise.
At the very least, the first tranche of A$160 million labelled on March 31 as being committed “immediately” and later redefined as expected to land by the end of May, is now confirmed as …. whenever.
The remainder of the $443 million …. never?
An often candid and typically upbeat Investor Update circulated yesterday by Xinja’s CEO Eric Wilson frames the fate of the capital support for a neobank with a monster burn rate in the context of coping with COVID-19.
“A number of the parties involved in our transaction have had their staff infected with COVID, and have had to deal with the personal trauma and organisational disruption that has caused,” Wilson wrote.
“This has obviously lengthened the timelines for our deal to complete.
“Whilst everyone is publicly and privately very much still looking forward to getting the deal done … everyone over there is working hard to beat the virus, and it’s quite right that Xinja takes a backseat to that for a while.
“Of course, that doesn't change the economic realities of a pre-revenue startup like Xinja, which needs to raise capital continuously to grow and survive until it starts generating revenue and profit,” Wilson said.
Interestingly, Wilson does not specifically mention any details around the regulatory processes (and delays) in the UAE and Australia to enable the WI investment, though his worries on this topic was front of mind in an interview a month ago with the Fintech Insider by 11:FS podcast.
Pivoting to the recent low-ball capital raise from domestic investors to keep Xinja trading, Wilson explained to his shareholders that “we had intended to close off the Series D round by now with the WI investment completing, but with the changing circumstances we decided to raise an interim $10 million to see us through.
“I am happy to say that the raise was successful with $9.5 million raised as of the time of writing from both existing investors as well as welcoming some new investors to the Xinja family.”
Who these driven investors might be is guesswork, but more than likely include many of those that chipped in $2.8 million for the Series A Fundraise in May 2017; being “founders, High Net Worths and Family Offices.”
Then in the most surprising nugget in his letter, Wilson said: “It was conducted at the unchanged Series D price of $4.08, and we expect to go a bit beyond the A$10m over the next few weeks.”
This was the valuation Xinja said (at the end of March) that WI had agreed to buy new shares in the bank.
Banking Day has heard from industry sources over many weeks (including again yesterday) that Xinja’s shares trade at a deep discount to this price level in the secondary market, or are at least on offer at these much lower values.
Wilson leaves his owners to read other source material on the complexities in the bank’s capital position. These latest disclosure documents shows Xinja had a CET1 ratio of 18 per cent at the end of March 2020, down from 99 per cent at the end of December.
This largely reflects the capital needed for its popular (but no longer open for new business) high-yield Stash account.
A second telling factor in the plunge in the bank’s capital ratio is that the capital requirements for operational risk ballooned over one quarter from $11.3 million to $39.3 million, being a reflection of Xinja’s public admissions in mid-March around its tenuous deposit-harvesting strategy.
Given the burn rate, this means the bank must proceed with care before it can introduce a personal loan product.
In light of this history, and the ongoing pandemic, Xinja’s board and management are cutting costs hard, for instance “making redundant five staff in areas that are directly impacted by COVID,” Wilson said, a smaller number than heard on the rumour mill.
The Xinja elite are wearing some of the pain.
“All of my exec team and many of the co-founders took voluntary pay cuts of up to 50 per cent and I stopped drawing a salary after the impact of the COVID pandemic became apparent,” Wilson said. Xinja also recently applied for the JobKeeper wage subsidy.
The bank’s income statement may in a few months begin to at last incorporate genuine revenue, with Wilson naming two planned products while cagey about the other.
“Our secret squirrel new product should be ready to go in July, our personal lending product should be doing its first friends and family loans in late August, and our fledgling neobank technology and consulting business has its first bank client and should be earning revenue shortly,” he said.
On the other hand XInja has had to push back development work on a critical, basic banking function – real time payments via the New Payments Platform.
“The delay in the WI investment arriving has caused us to de-prioritise implementation of NPP to focus our resources on the upcoming new product releases,” a status update appended to the Wilson letter shows.
In the concluding phase of his update Wilson takes a reflective turn, scoffing at the industry debate that’s engulfed Xinja Bank these last three months, one in which Banking Day has taken an active part, reporting and analysing an ADI subject to conjecture as to its viability in the industry.
“One of the downsides of trying really hard to be transparent is that you provide plenty of material for people to twist and put an unpleasant spin on,” Wilson mused, surely with Banking Day and this writer partly on his mind.
Then another surprise, one which Wilson’s crew thankfully resolved with an eye on the public interest and franchise value.
“We have considered as a team simply stepping back from communicating like this, closing the community forum, and sticking to the legally prescribed annual report once a year,” Wilson wrote.
The bank’s blog has served as a primary source for many articles this year, with a number of cynical shareholders vocal on the forum. Even Wilson, in his 11:FS podcast last month, admitted: “There is a very great risk in Australia of neobanks and fintechs and open data stumbling and falling.”
Reverting to form, Wilson continued in his letter yesterday: “In the great Aussie tradition we decided ‘Bugger them!’,
“Backing down from bullies doesn't change anything.
“As we try and threaten the status quo, some of those who have an interest in maintaining the status quo will step up their attempts to drag us down.
“Like us, I suspect as investors, you are going to have to get used to this rather unpleasant development and try to just tune out the haters.
“The best revenge is to try and be as successful as we can!” Wilson declared.
A motto for Banking Day and every fintech disruptor out there.