By realising too late that the bank needs to work on products that give it a sustainable future, rather than features that aren’t essential, Monzo faces being the first UK challenger to be forced out of banking unless it changes its approach.

It is easy to see in hindsight why Xinja failed in banking. Any bank offering above-market deposit rates while not being able to deploy them back as loans was going to have problems. Add to this a financial regulator reluctant to let it lend and a struggle to raise enough investor capital, and it’s clear it was all going to end in tears.

However, these are just symptoms of something bigger. Research from GlobalData’s Beyond the Hype: Insight into Digital Challenger Banks report has shown that behind all of these problems was an underlying cause: the lack of focus on the essential and the seeming inability to think several steps ahead.

Even recently, Xinja still had big plans for the kind of features it wanted to offer. These included using data to personalise the banking experience, such as warning customers in real time when they enter a shop that they don’t have enough money for their normal groceries.

As interesting as this sounds, it is a ‘nice to have,’ not an essential. The bank did not prioritise early on trying to create a sustainable future with revenue-generating products, and when it finally dawned that it needed personal loans and wealth services instead, it was too late.

Not the only bank… 

However, Xinja was not the only bank to make this mistake, with several challengers also currently in this mess. One of them, Monzo, having woken up last year to this predicament, is struggling hard to get out.

For Monzo, the problems are only slightly different, though not much better. By creating a leading current account product that generates practically no revenue, either from merchant or marketplace fees, its business has become an increasingly expensive charitable cause for the UK market. And while the bank has raised $717m of capital to help fund new products and cover a potentially lucrative US expansion, the result is annual losses of around £100m ($131m) that need to be dealt with now.

Monzo’s response is to monetise with a range of premium accounts, combined with new restrictions on the free, basic version. However, with little appetite from UK consumers to pay for banking and with Monzo not legally able to charge for accounts in the US, this direction seems misconceived.

While Monzo has done well to attract and engage with its customers, it threatens to throw that away by not concentrating on the essential. Instead of trying to sell what was once free, Monzo should focus on unit economics, bringing out and making the most of revenue-generating products such as loans and wealth services.

The bank should also learn from the likes of Chime in the US, who have given low-income customers the tools to help them manage their money easier on conditions such as using their cards or receiving customers’ monthly salary. Failure to learn from these examples will condemn Monzo to the same fate as Xinja.

The above analysis comes from an in-depth review of 11 digital challengers banks present in GlobalData’s latest report Beyond the Hype: Insight into Digital Challenger Banks. It offers the reader an incisive analysis of the business models each bank has followed, the strategies they have taken and their short- and long-term future prospects. This includes analysis about why mistakes were made, how banks have dealt with problems and what each challenger needs to do now to survive and thrive.