OakNorth, the challenger bank, has established itself as on the leading UK-based fintechs. In a startup sector where making a profit remains something of a rarity OakNorth has gone from strength to strength, increasing its loan book in its domestic lending business and successfully selling its intelligence software product to overseas banks, most recently signing deals with Capital One and Fifth Third Bank in the US.
Started by Rishi Khosla in 2013, the bank was profitable even before the Covid-19 pandemic. Last month, the London fintech published its 2020 Annual Report, revealing that despite the ongoing challenges of the ongoing pandemic, it lent £1.1B to the Missing Middle in 2020 and made £78M in pre-tax profit.
It has, however, also been able to take advantage of the Coronavirus Business Interruption Loan Scheme. The fintech unicorn has substantially increased the size of its loan book, offering these loans of up to £5 million, alongside its usual portfolio offering.
A UK bank with an international offer
OakNorth is rare in the fintech sector because it has a different business domestically and internationally. Operating as a licensed bank within the UK, they operate as a normal lending bank specialising in the SME market. However, rather than trying to compete in a large and dynamic market globally they are, instead, selling their software to other banks.
Their mission, with their software, is to increase SME’s access to finance by taking a more intelligent approach to the lending decision. Rather than looking purely at the past, such as a previous trading history or performance, their software also looks to the future, making an assessment on the business’s prospects.
The difference can be significant. A sit-down restaurant and a delivery service could, on paper, look very similar at the end of 2019, but lockdowns and the changes in consumer behaviour meant the next year was unprecedented for them. OakNorth’s product takes a more nuanced view of businesses, considering their exact market sector and its prospects to help inform the lending decision.
This more nuanced view is, often, very helpful to SMEs looking for finance. In a banking sector that tends to take a broad-brush view that considers the macro rather than the micro, SMEs will frequently find their own business models or unique circumstances overlooked.
Sean Hunter, the company’s chief information officer, highlights that this is not just a business decision, but also a reflection of their vision as a company. By adopting this model, they can help more businesses. Hunter tells UKTN, “in getting banking licences in other markets, fintechs are trying to build a global bank. We’re taking the view that the fastest and most effective way to address the funding gap to the missing middle of businesses is by collaborating with incumbents and giving them the tools to lend more effectively.”
Adoption in the US
The software has been so successful OakNorth has its own ‘bought the company’ story. Sumitomo Mitsui, one Japan’s biggest banks took a $30 million stake in the company after licensing its credit intelligence software. The Japanese giant, however, has not been the only high-profile name for OakNorth, who have been focusing on the European and American markets.
The most recently announced deal, with Capital One and Fifth Third banks means it is now licensing its software to three of the US’s top-twenty banks. Given the infrastructure that major banks already have to support their lending operations, it is a significant indicator of the strength of OakNorth’s offer; major names are lining up to access it.
Building on profitability
Being a profitable business, with or without the boost given to it by CBILs, puts OakNorth in a strong position. There has been rumours of a public offering, but these have been dismissed by the bank. However, their financial strength means they are not looking at further funding rounds but, instead, to use their profitability to fund their growth.
“We’ll look at what vehicle makes sense at the time,” said Hunter discussing potential IPOs. “Right now, we don’t need to raise capital. We’re not burning, we are profitable. We raised $440 million in our first funding rounding, and it’s actually quite hard to spend that when you are already profitable!” While public or direct offerings might be in OakNorth’s future, it is currently operating self-sufficiently.
The British bank has found a successful market. Serving the SME sector, rather than consumers, has given it a fast track to profitability. And by using its software as a product, it has opened markets that would be incredibly difficult, perhaps even impossible, to penetrate on their own. OakNorth’s software will be involved in a combined US loan book volume that will far exceed what they could have expected as a US-licensed bank. The model appears to be working well and could be a model for other unicorn startups start to emulate.