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OakNorth: The Lending Bank of the Future

Interview by ALEX VERGÉ (Editor)

Launched in 2015, UK based bank OakNorth provides fast and flexible debt finance to fast-growth businesses and established property developers and investors. The company recently announced closing a $100m funding round, putting it at a valuation of $2.3bn. We spoke to OakNorth’s CEO, Rishi Khosla, about the company’s unique proposition, its place in the market and the future of the banking industry as a whole.

Firstly, tell us more about OakNorth. What made you and Joel create it and what are you working to achieve?

Joel and I started our first business in our 20s, in 2002 – it was called Copal and did financial research outsourcing for investment banks, asset managers, PE firms, etc. About four years into that business, we were looking for capital to grow. We had strong cash flow, a great client list and were profitable, but the best offer for debt finance that we could get from a UK high-street bank was £100k, and only if we could secure it against a property. This was in 2006, so pre-financial crisis and before the days of crowdfunding or P2P lending. We went to the US several times over the next 12 months and eventually decided to do a dividend recap with an institution there, providing us with the breathing room to continue scaling the business without having to dilute. This negative experience of trying to borrow money is what first got us thinking about the ACORN OakNorth proposition. In terms of what we want to achieve – for OakNorth, we want to build a leading bank here in the UK that provides fast, flexible and accessible debt finance to the country’s strongest businesses. And for ACORN machine, we want to provide lenders around the world with the tools needed to unlock the potential in bespoke lending to SMEs in their own markets.

What aspects of OakNorth do you attach particular importance to in terms of determining its success?

Our speed: the fact that we’re able to complete loans in weeks rather than the months that it takes traditional lenders provides us with a huge competitive advantage. Our transparency: we give every borrower the opportunity to meet the Credit Committee and discuss their borrowing needs directly with the decision makers. This has not only been hugely impactful in terms of developing stronger relationships with our borrowers, but it has also enabled us to make even more informed credit decisions. Our flexibility: unlike incumbent lenders, we’re willing to look beyond traditional assets (i.e. real estate) and consider alternative assets (stock, debtors, plant and machinery, art, intellectual property, etc.) to widen the collateral pool. Our technology: because without it, we wouldn’t be able to do any of the above! The people we work with: whether that be our team, our clients, our investors, our partners, etc. they’ve all played a vital role in our success.

Have you noticed other banks operating similar flips of their infrastructure?

When we became the first UK bank to be fully cloud-hosted back in May 2016, it paved the way for other banks to follow suit. Since then, I believe that Starling, Monzo, Metro Bank and Redwood are now all fully cloud-hosted. A full cloud migration would be harder (if not impossible) for older / incumbent institutions due to their legacy systems, but they can migrate certain ancillary services (such as their CRM, email, etc.) to the cloud.

What’s different about your technology, ACORN machine, to other financial technologies?

The first point to note is that our technology is fully cloud-hosted, which makes it dramatically different to any other financial technology that’s not, as we’re able to make changes faster, more securely and at a lower cost. However, I don’t think it’s about the tech so much as what you do with it. Our platform is built using algorithms that are available to anyone. They’re on open source – i.e. not proprietary – but the machine learning and training we apply to those algorithms is. This is what makes our technology different. I heard that you were expanding internationally by licensing your technology to other banks.

Why that approach, rather than expand OakNorth itself?

Firstly, because obtaining one banking license was time-consuming and expensive enough. Having to get multiple licenses to operate in multiple markets would be extremely expensive and would take years. Secondly, because we’re not as familiar with the credit market or regulatory framework in other countries as we are in the UK, and we don’t have the same relationships with SMEs in other markets as we have here. We’d rather leave it to the banks who are the experts in that market and do have the relationships with SMEs, and simply provide them with the technology to operate even more effectively in their markets. By licensing out our technology, we don’t take any of the credit risk in markets we’re not familiar with and can scale our proposition (and help millions more SMEs than we’d be able to on our own), in a much more effective way.

Yourself, OakNorth’s CFO and also your director of growth and communications, have all at various points spoken about how it’s larger banks, not the new banks, who are the ones coming to you and buying your technology. How surprising have you found that? Are you able to tell us which banks have been particularly keen to adopt your tech?

It’s been very surprising – when we first began licensing out our technology last year, we expected the majority of the conversations we had to be with small, new banks who were keen to build an OakNorth in their own market. However, what we’ve actually found is that the majority of interest has come from larger banks who are keen to use the technology to improve their SME lending – whether that be by being able to offer more bespoke lending structures, reducing transaction times, broadening their portfolios, or improving their monitoring capabilities. We currently have about a dozen different banks using the platform across North America, Asia and Europe, and $5bn of assets under service. One of our clients, NIBC Bank, actually invested in us in our most recent funding round which closed in September. That’s a pretty clear demonstration of their belief in the strength of the platform’s proposition and its value to lenders globally.

OakNorth combines a traditional and entrepreneurial approach on a number levels, do you think that more fintechs should be thinking in those terms?

I think every business must find a combination that works for them. We’re entrepreneurs so we love building things and like to challenge the status quo. At OakNorth, we adopt a very traditional banking model – i.e. we use the deposits to help fund our lending – but use technology to offer savings and lending products that are dramatically different to traditional banks.

Do you have some advice for other challenger banks in the UK? Not necessarily lending banks, but retail banks like Monzo, Starling or Revolut?

It’s not the market we operate in, so I wouldn’t want to presume that I know more about their market than they do. They’re all showing great growth so hopefully it continues – ultimately, the more challenger banks that succeed, the better it will be for competition and consumers.

What’s next for OakNorth? How do you see OakNorth evolving and developing over the next few years?

Well, with ACORN machine, we want to continue growing the business with more new clients across the world. We have a fantastic team made up of data scientists, engineers and developers from some of the world’s most renowned institutions (Palantir, Amazon, Intel, etc.) and will continue expanding this team. With OakNorth, we expect to lend at least another £500m this year and want to continue building our robust SME loan book in the UK. To date, our loans have directly helped with the creation of 8,500 new homes and 8,000 new jobs in the UK. With every business we help, we can increase this number further.

What about banking as a whole – what do you think the future holds there?

There is a lot of noise in the fintech / banking space and a lot of hot air – solutions without problems. There have been a few successes, especially at the consumer and smaller SME loan level, but I think we’re going to see some dominant players emerging in the next few years. Several incumbent banks want to start up digital banks, but they don’t appear to be doing it for the right reasons in my view. Rather than spending millions of pounds setting up a new bank, they should focus on trying to improve their existing propositions for the tens of millions of customers they already have. Given their size and heft, the tech behemoths are likely to make a more significant and obvious play in this space over the coming years.

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