Given how the Covid-19 pandemic has influenced the need for banks and fintechs to collaborate more closely in order to meet changing global demands, there will be a better strategic relationship between the two over time; in this interview Sean Hunter, CIO at OakNorth shares a few thoughts on this while talking about the idea behind and growth of the OakNorth Platform.
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Can you tell us a little about yourself Sean? How did the idea of the OakNorth Platform come about and can you tell us a little about the upcoming innovations? How has the platform been modified to suit changing needs during the Covid-19 crisis?
“I’m Sean Hunter, CIO of OakNorth. Before joining OakNorth, I was one of the first commercial engineers at Palantir Technologies in Europe where I led trader oversight partnerships with large financial institutions, particularly Credit Suisse, which led me to being co-head of the JV called Signac. I’m also an advisor to entrepreneurs at Antler, the social impact start-up Kamayi, as well as bring on the editorial board of the Journal of Digital Banking.
“In 2006, our Co-founders Rishi Khosla Joel Perlman were trying to secure a loan to scale their first business (Copal Amba). Despite healthy cash flows, and strong projections for the future, they struggled to secure working capital because they didn’t have traditional assets, such as property, to act as security. As Copal Amba kept growing, they encountered more businesses around the world who’d faced similar struggles as they did in trying to secure a bank loan that’s bespoke to their needs, quickly.
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“The idea for OakNorth began to form…
“After scaling Copal Amba to almost 3,000 employees across 11 markets, and selling it to Moody’s Corporation in 2014, they launched OakNorth.
“For more on our story, take a few minutes to watch this video –
“In terms of tackling the current crisis, we’ve developed a “COVID Vulnerability Rating” (CVR) Framework, which integrates over 130 proprietary subsector-specific COVID-19 stress scenarios with regional overlays, incorporating assumptions for impacts on key financial metrics such as revenue, operating costs, working capital and capex. The Framework enables commercial lenders to re-underwrite loans and bring consistency to their credit approach through the crisis, running risk analysis on a consistent basis.
“Based on the Framework, the OakNorth Platform helps lenders undertake portfolio diagnostics to rate loans from 1-5 based on their vulnerability to the new economic environment, with 1 being least vulnerable, and 5 being most vulnerable. The ratings are based on multiple factors including liquidity, debt capacity, funding gap & profitability, and can be dynamically customized to reflect the lender’s credit risk criteria and appetite.
“The Framework enables commercial lenders to identify the high vulnerability loans re-underwrite at depth and bring consistency to their credit approach through the crisis, running risk analysis on a consistent basis, as well as monitoring all credits more closely – given that sectors have become more volatile post-COVID-19.”
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Fintech has evolved at a rapid pace over the last decade, there’ve been significant enhancements in the business-to-business and peer-to-peer lending space as well: can you share your thoughts on some of the biggest / latest innovations within this niche that according to you were (and are) game changers?
“When it comes to commercial lending, credit analysis is an essential part of the process. Banks use it to assess the ability of a business to sustain a certain level of debt and repay its loan. A bank can only lend money if it understands the viability of the business and therefore the risk of potentially not being repaid. This process involves a combination of skill and human judgement and has always encountered difficulty in comparing one business to another.
“Credit analysis therefore faces three related challenges:
- how to find all the data required to answer a credit question
- how to make sense of this data – given both the volume of data that exists and the gaps in that data – and derive insights from it
- how to apply these insights to understand a business and answer specific credit questions about it
“Unless these challenges are met head-on, credit analysts can end up spending the vast majority of their time trying to find data and massage it into a useable format, rather than actually doing analysis. At OakNorth, we’ve innovated and created a framework to tackle these challenges known as “Credit Science”:
“The foundation of the pyramid is data. We are constantly looking for additional data sources to enhance our understanding and just as importantly, for ways to join these data sources together to form an intelligible whole. We combine data from numerous sources into a common data platform which can be used to benefit the bank partners using our platform, whilst ensuring their data is fully confidential.
“We build on this with the use of data science, which derives insights from this data in a robust and scientific manner:
- We construct predictive models to forecast future performance of companies.
- We use clustering to group companies and find outliers.
- We look for drivers – leading indicators which might help us foresee when a particular company or even a whole sector may run into difficulties.
- We use data science to join the dots between data sources, filling in the blind spots using inference and deduction so the picture of a business that emerges is much more focused and filtered than anything available in a single source.
“We call the people on our team who are able to combine the disciplines of credit analysis, data science and all the data available – the three layers of the pyramid – “credit scientists”. Through leveraging credit science, we are able to help bank partners using our platform make better lending decisions – a true game changer in our eyes!”
Could you elaborate a little on how your technology works and how it is different than others in the market?
“Our Platform leverages machine learning, decades of credit expertise and massive data sets (including unconventional and previously unavailable data) to enhance the human. The platform enables our bank partners around the world to do the in-depth credit analysis that enables them to provide businesses with the type of bespoke deal structuring that’s typically reserved for large corporations. In doing so, the platform enables our partners to have fundamentally different conversations and engage with borrowers in a dramatically different way.
“It brings credit insight about borrowers’ businesses back to the front line, democratising this knowledge so that the banks relationship managers have a deep understanding of the individual business, its industry and its sub-sector. As a result, they have more relevant and thoughtful conversations with the business owner and can build much more meaningful relationships with them. Instead of wasting time on the things that don’t matter, they are able to spend more time on the things that do – structuring a loan for our borrowers’ needs in the time frame they need it, as well as exploring cross-selling opportunities.
“As a result, the benefits for lenders include:
- Improved efficiency – origination team who can transact up to 8X more deals per year
- Faster growth – targeting a wider portion of the market and completing deals in less time
- Premium pricing – higher pricing and better risk-reward
- Better credit experience for the borrower – faster transaction completion (weeks vs months) and highly customised loan facilities
- Attractive economics – structural reduction in cost income ratio”
How according to you will the lending space shape up in terms of new tech capabilities in future? How much of the impact of Covid-19 pandemic will play a role in creating a shift here?
“Businesses need liquidity to overcome the challenges being presented by COVID-19 which could trigger a recession and impact them for the next few years. They are looking to banks and lenders to support them in this crucial period – either directly, or through Government loan programs.
“Given the unprecedented scale and dynamics of this crisis, trying to assess credit risk based on previous risk ratings doesn’t make sense as all previous correlations are broken. As a result, lenders need to be able to:
- Reassess credit risk based on forward-looking scenarios which factor in the impact that COVID-19 is having on businesses and then follow through on these stress scenarios on a granular, loan-by-loan basis, rather than just at the portfolio level;
- Monitor all credits more closely as sectors have become more volatile post-COVID-19, and;
- Re-underwrite these loans at depth and bring consistency to their credit approach through the crisis, running risk analysis on a consistent basis.”
How according to you will emerging tech create an impact in this space and what are your predictions for fintech in general for the near-future?
“I fully believe AI will have a huge significance on the fintech sector and on commercial lenders. The benefits to the lender from the adoption of big data, AI and machine learning technologies primarily stem from what they allow them to do. Firstly, because they can analyze more complex credit situations, they are set free from the shackles of their rigid credit product suite. They should therefore be able to gain market share by having a differentiated product offering. Secondly, enhanced analysis and better use of external data should lead to better credit outcomes from a more objective, data-driven credit assessment process. Thirdly, they should see greater efficiency from a streamlined, automated process where computers do what they do well (process large amounts of data) and humans do what they do well (provide judgement and expertise). The benefits from the borrowers’ perspective are in getting a bespoke facility in a shorter time frame so that they can get back to running their business.
“In terms of predictions for fintech sector for the near future, I believe the current crisis has shown what fintechs have to offer, with many companies within the sector showing their worth and how best they can adapt to support economies through this difficult time. Looking forward over the next decade, I believe we’re likely to see a fundamental shift in the way fintechs and high-street lenders interact. Gone will be the days that big banks and fintechs will compete to lend to the multi-trillion Missing Middle. Instead we’ll start to witness a symbiotic relationship form between the two.”
Before we wrap up, would you like to share specific finance management or business tips for Marketing and Sales or Finance teams struggling through this uncertain time due to the Covid-19 pandemic?
“Make sure you have a clear vision and value proposition, as well as a core value focused on delighting the customer. Everything you do should be with the customer in mind and how you can make the experience better, faster, simpler for them.”
OakNorth is the next-generation credit analysis and monitoring Platform.
Within the UK, they leverage the Platform to lend off their own balance sheet via OakNorth Bank. Since the bank’s launch in September 2015, it has lent over £4bn to several hundred businesses across the UK, helping with the creation of 15,000 new homes and 19,000 new jobs.
Outside of the UK, they license the Platform to lending partners, providing them with the insight and foresight they need to more holistically and profitably lend to the “Missing Middle” – growth businesses who are the backbone of economies and communities globally, but who have been in banking’s blind spot for decades.
Sean Hunter, is the CIO at OakNorth
