A challenger challenges back

After writing quite a lot challenging the challenger banks, one reached out to me asking for a slight correction of view. OakNorth.

Now, this is a bank I like, as they've been doing so much under the radar, so I said that if they wanted to raise their head above the parapet, why not write a guest blog for The Finanser ... and so they did! Here it is ...

OakNorth: the challenger that’s trying to enable banks rather than compete with them by Valentina Kristensen, Director, OakNorth

In recent weeks, Chris has written quite a bit about challenger banks, questioning whether they’re genuinely living up to their promise to upend the traditional banking sector and whether they can become sustainable, profitable businesses.

As one of the only profitable challengers, he was kind enough to let us weigh in on the debate…

For those who may not have come across us before (we’ve never done any tube advertising after all!), OakNorth Bank was launched in September 2015 by entrepreneurs, Rishi Khosla and Joel Perlman. They were inspired to launch the business following the experience they had in trying to secure a loan for their previous business, Copal - a financial research firm they’d founded in 2002. They approached numerous high-street banks in the UK and kept getting variations of the same response – ‘No’.  Despite being a profitable business with strong cash flow and retained clients, none of the commercial banks were willing to lend to them. It was too small a ticket to offset the costs the bank would incur in doing a fundamental assessment of their business and structuring a finance facility for their needs.  A few months later through one of their institutional client’s special situations desks, they managed to secure 100x the amount of debt for a dividend recap. So, an institutional division of a bank was able to support them, but the commercial lending part of the bank would not.

This experience stuck with them. So, after they had scaled Copal to a 3,000+ person business and sold it to Moody’s Corporation (NYSE: MCO) in 2014, they set out to address the funding gap for growth businesses. They wanted to develop a product that would enable banks to more holistically and efficiently lend to these businesses, but first prove it within their own bank – i.e. OakNorth Bank – before licensing it to others.

Five years on, OakNorth Bank is one of the most successful new lenders, achieving performance metrics that place it amongst the top 1% of banks globally – an ROE run-rate of 23%, an efficiency ratio run-rate of 26%, a borrower NPS of 80.5, an pre-tax profits that increased 95% in 2019 to £65.9m. It’s lent over £4.5bn to hundreds of businesses across the UK (without a single credit loss to date) and has continued lending throughout the COVID-19 period, approving an average of £150m in new loans every month since March. It’s participating in both CBILS and CLBILS and is currently seeing twice as many deals going to credit committee compared to this time last year, so expects its profitable track record to continue.

Sure, it still only has a fraction of market share compared to the big five UK banks, but it is a profitable, sustainable business and ultimately, its scaling strategy (unlike many other challengers), isn’t to obtain licenses in multiple markets and in effect become a global bank to replace incumbents. Rather, it hopes to become the go-to enterprise software solution to help banks make faster and more-informed credit decisions and enable a better borrowing experience for businesses. Meanwhile, OakNorth Bank will continue to lend in the UK, providing the Platform part of the business with a unique proof of concept and a way to continue developing and iterating as a fully licensed bank using it. It’s the type of real-time, two-way communication most SaaS companies dream of having with their clients.

And maybe therein lies the key to fintech success – don’t try and replace institutions that have stood the test of time for centuries. Instead, try to work with them to ensure they can continue effectively supporting customers for the next 200 years.