My 7-year-old son was fortunate to be given some money for his most recent birthday. He was particularly excited when I told him that if he put his money in the bank, he would earn even more money by way of interest. He dwelled on this for a while and the other day he said to me “Dad, I need to take my money out of the bank” and I asked him “Why”? He said, “Because if the bank is paying me and everybody else interest, they’ll eventually run out of money themselves and they won’t be able to give me my money back, let alone pay me any interest”. It was a great question. So I explained to him how banks work and how a well-run bank would then lend his money out to other people and charge them even more interest and that would allow the bank to pay him the interest that he is entitled to. Now that’s what a well-run bank would do.
Today we are going to talk about Xinja. Xinja was one of Australia’s first Neobanks or Digital banks. They launched with much fanfare and a wonderful marketing campaign. They had some very clever advertisements around “Can*t-free banking” and then another series of advertisements around “You don’t dance like your dad” and “You don’t holiday like your dad”, “So why would you bank like your dad”, very very clever with the advertising.
Then off the back of their very successful advertisements, they launched a promotion where they decided to pay an interest rate of 2.25% on deposits.
Now keep in mind that the Reserve Bank only has an interest rate of 0.25% and this was the highest interest rate of any bank in Australia at the time and the money flooded in. They had hundreds of millions of dollars worth that came in to their deposit product paying 2.25%. There was only one problem. And that is that they didn’t have a lending product. They didn’t have anybody to lend to. And as a result, they started losing money.
Now this is a really good indication of what happens when you don’t price your product properly. And if you price it too attractively, for most businesses that would be too cheap. In the case of a bank that means paying too much interest. If you price your product too attractively, you’ll actually get too many customers, more than you want, and you won’t maximise your profit. And if things really go badly like they did for Xinja, getting your pricing wrong can actually kill your business entirely because that’s what happened to Xinja. They actually shut up shop because they ran out of money.
My 7 year old could have told them what would happen. But they couldn’t work that out for themselves. So there is a really important lesson here for pricing and that is – Make sure you price your product properly. If you haven’t got your pricing right, then use Dynamic Pricing and update your pricing on a regular basis. Xinja didn’t do that. They kept their interest rate at 2.25% and even when they knew they were losing money, they wanted to continue to pay the 2.25% and eventually they ran out of money completely.
Bye Bye Xinja.
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