Global Fintech Interview with Valentina Kristensen, Corporate Affairs Director at OakNorth

Could you please tell us a little bit about the history of OakNorth and the journey to date?

OakNorth was founded in September 2015 with one fundamental purpose: to serve and empower small-to-medium sized businesses (£1m-£100m turnover) that were seeking to scale but were routinely underserved or overlooked by traditional banks: what we call “scale-ups”. Our founders, Rishi Khosla and Joel Perlman, had experienced this first-hand while scaling their previous company – Copal. In 2005, three years after launching that business, they applied for a bank loan and the ‘computer said ‘no’’, despite their business being profitable and having strong cashflow. As entrepreneurs, their response was to build the digital bank for entrepreneurs, by entrepreneurs, ensuring businesses like they had been get the products, services, and experience they need to succeed and scale.

What’s your core offering?

Today, our core offering is focused on two areas – we offer a range of easy access, notice, fixed-term, and cash ISA savings accounts to retail customers, which help fund the other part of the business – commercial lending. We provide loans of £250k up to tens of millions of pounds to businesses (£1m-£100m) across a variety of regions and sectors. In the latter part of last year, we also began lending to US businesses, completing about $200m of lending there and we hope to continue building on this. We also announced last year, the broadening of our core offering to include a range of additional banking products and services for businesses – current accounts, savings cards, credit card, FX, payments, etc. This is still very much in beta phase, but we hope it will become a core part of our offering in the future.

Fintech Insights: Hyper-personalization in Banking: The Tech Journey to Serving a Segment of One

What makes OakNorth different from other fintechs / digital banks?

Several things:

• The part of the market we’re focusing on – i.e. scaling businesses with £1m-£100m turnover. Most other fintechs are focused on retail customers or small/micro businesses or start-ups.
• The way we service our customers – today, c.80% of our origination comes from unpaid referrals, which speaks to the quality of service and type of experience we provide.
• How we leverage data and analytics – by taking a highly granular, data-driven, and forward-looking approach to serving our customers, we’re able to provide insight-driven solutions that speak directly to their jobs to be done, solving for what they need to do to run their businesses today, and grow it tomorrow. This is the opposite of what most banks do which is to offer products based on where a business has been vs where it’s going.
• How we look at the business world – rather than splitting the economy into a dozen or so sectors, we’ve developed an analytical framework powered by hundreds of billions of dollars’ worth of commercial loan data, covering over 270 industries. By looking at businesses through this lens, we’re able to identify the winners which is why our credit quality stands apart from other commercial banks, and why the businesses we support continue going from strength to strength every year they’re with us. Other banks simply don’t have the willingness or wherewithal to analyse these businesses in this way, which is why they’ll often veto or pull out of entire sectors at different points in the cycle.
• We’ve always cared about balancing high growth with profits – we reached cash flow break even within 11 months of launching, and have been profitable every year since, making £187.3m pre-tax profit in 2023.

Could you tell us about the biggest factors impacting the SMB Lending landscape and how OakNorth fits into this landscape?

• Economic conditions: economic factors such as interest rates, inflation, the cost-of-living crisis, Brexit, the technical recession, etc. can all impact SME’s ability to repay loans, as well as lenders’ willingness to lend to them. What we tend to see in an economic downturn is that many banks retrench from SME lending (according to Bank of England data, SME lending is down 16% y-o-y). So, how OakNorth fits into this is by being a trusted, reliable, and consistent lender through cycle, continuing to lend and support customers come rain or shine. For example, in 2023, we did c.£1.7bn of lending to SMEs.
• Global events: similarly to the point above, global events such as the COVID-19 pandemic, the Russia/Ukraine War, the Israel/Hamas War, etc. can impact both lenders’ risk assessments, as well as SME’s ability to repay. From OakNorth’s perspective, given the businesses we lend to are all in the UK bar a small portion in the US, we have less exposure to this than many other lenders, but we still monitor global events closely as it can impact supply chains, labour, etc. which can then have a ripple effect on our customers.
• The use of data and analytics: advancements in technology and data analytics enable lenders to assess credit risk more accurately and efficiently, potentially expanding access to credit for SMEs. As explained in the response to the previous question, by taking a highly granular, data-driven, and forward-looking approach to serving our customers, we’re able to provide insight-driven solutions that speak directly to their jobs to be done, solving for what they need to do to run their businesses today, and grow it tomorrow. This is the opposite of what most banks do which is to offer products based on where a business has been vs where it’s going.
• Government Policies and Support: government initiatives such as loan guarantee programs (e.g. Bounce Back Lending Scheme, Covid Business Interruption Loan Scheme, Covid Large Business Interruption Loan Scheme, etc.), tax incentives (e.g. SEIS and EIS), and SME development policies can influence SME lending by providing incentives for lenders or directly supporting SMEs. At OakNorth, we participated in both the CBILS and CLBILS programmes during the pandemic, providing c.£650m across the two schemes.

Banks and financial institutions are increasingly looking at technologies such as AI to build a competitive edge over their competitors. How is OakNorth leveraging technology such as machine learning to maintain a competitive edge?

We started off with statistics. We went from statistics to machine learning. Now, we’ve gone from machine learning to experimenting with GenAI. How much was AI truly part of what we did from day one? Not at all. In 2017, 2018, we started bringing in machine learning. Those days, most people would use the terms ML and AI interchangeably, but it was really ML—not AI. Today, there are absolutely places where we’re using GenAI. But again, I would say we’re experimenting in many more places than we’re actually using it. What we do is split the economy into 274 industries. And for each of those industries, we’ve got both the ML model and the fundamental model, which work together. That gives us a forward-looking view of those industries, which enables us, as we get a new potential client, to create on the fly a forward cash flow model of that business, and we do that across our whole loan book on a monthly basis. That’s what enables us to underwrite more rigorously, but also then monitor and manage positions in a much more rigorous manner.

New digital banks often have an edge when it comes to their tech stack as they’re unburdened by legacy technology like large incumbents. Talk us through your tech stack.

Ultimately a neobank, at least how we look at it, is a bank which is built on a digital architecture, using modern technology, not using legacy technology. Whereas when you look at traditional banks, they have web technology as a layer, but underneath they’ve got a lot of legacy pumping through. In our short history—eight and a half years since launch—we’re already on our third refresh of our tech stack. This means we’re able to service customers in a much more delightful manner and give them the tools to enable them to self-service. If we look at the experience that we deliver to our customers, versus what traditional commercial banks deliver, it’s dramatically different in the same way that a consumer app delivers a different banking experience for customers at an incumbent bank.

Your predictions for the future of fintech and views on why the UK is a hotbed of innovation when it comes to fintech.

The UK has so much to offer: we have world-class research universities (four of the world’s top 10 universities are here); forward-thinking regulators with an open approach to innovation; a strong framework of common law and a common language; and a timezone that allows true global operations across EMEA, APAC, and the Americas. The result is that the UK has created more tech unicorns than any other country, bar the US and China, and is a world leader in terms of attracting investment. London is particularly unique being home to a global finance centre (including the London Stock Exchange), a tech centre, and a policy / regulatory centre all within a few tube stops of one another, making it an exceptional place for innovative companies to be born and thrive.

In terms of some predictions for the future of fintech:

• AI and ML: will play an increasingly significant role in fintech, enabling more personalised customer experiences, improved risk management, fraud detection, and increased automation in processes such as underwriting and customer service as we’ve seen with Klarna for example.
• Blockchain and cryptocurrency integration: with increased regulatory focua and scrutiny, these are expected to become more integrated into traditional financial services. This includes applications such as cross-border payments, smart contracts, decentralised finance (DeFi), and central bank digital currencies (CBDCs).
• Open banking: will continue to grown in popularity and use, fuelled by efforts such as the Government’s recent launch of its open finance taskforce chaired by the Centre for Finance, Innovation and Technology (CFIT).
• ESG: environmental, social, and governance considerations will continue to grow in importance within the world of fintech, not only because businesses and the economy will be making efforts towards achieving the net zero 2050 goal, but also because consumers are becoming more conscious of things like sustainable investing and green finance.

Your hiring and expansion plans for the next two years.

As announced in our recently-published 2023 annual report, we have plans to expand our offering to the US. We have put in a request for a US representative office and are exploring M&A opportunities there, so this will form part of our expansion. As mentioned previously, we’re also expanding our offering in the UK to provide a broader range of commercial banking products and services, so are also continuing to broaden our team and expertise there. You can view all our c.40 open roles globally

Fintech Insights: Global Fintech Interview with Matt Bird, Chief Technical Officer at Lemon