OakNorth CIO: UK success means European banks take us seriously
OakNorth, the UK bank which lends to small and medium-sized enterprises (SMEs), is scaling its two-part business model off the back of its disruptive success in the UK.
With £2.3 billion in the pipeline for 2020 and beyond, the challenger – which cuts down big loan application times from six months to 40 days – sits down with FinTech Futures to discuss how its UK status is helping its second business: outsourcing its lending technology to European banks.
“Going to a bank as a software company is hard, banks don’t take you seriously,” says chief information officer (CIO) Sean Hunter. “But we have a lot credibility and a successful use case in the UK.” OakNorth has had a good run in the UK so far, despite its default on two loans since its inception in 2015.
The defaults represented less than 1% of the bank’s £3 billion in net lending and did not lead to any credit losses. “We’ve never said to prospective clients that we ‘won’t have defaults ever’,” says Hunter. “The key thing we’ve tried to do is to provide early alerts and talk to borrowers early.”
Despite the defaults, OakNorth remains a strong player in the UK’s SME lending arena. Unlike many fintech start-ups it is profitable, making £34 million in 2018 and holding more than $17 billion in assets. Earlier this month, it signed a deal with Netherlands-based real estate lender Oimio to license its lending technology.
So far, 14 banks in six different countries have signed up to test or implement the bank’s credit technology. Oimio and NIBC – both based in the Netherlands – are the only two bank partners to be named publicly.
Hunter believes having a “purely disruptive” model with no fallback revenue streams – like a lot of the European challenger banks – is “much harder” to make successful. He points out that user experience “does not equal profitability”.
“Disrupting in the UK allows us to have a much more effective platform for the partner part of our business – the bank was like our crash test dummy” for acquiring bank customers in Europe, says Hunter.
Instead of referring to its second revenue stream as simply “outsourcing”, OakNorth prefers to call the banks using its lending technology “partners” who are part of the OakNorth Academy. This academy offers an onboarding process which sounds as if the UK challenger becomes a quasi-consultant in their digital transformations, though OakNorth does not call the service that.
“Lots of banks are going through a re-imagining of what they can be,” says Hunter. “They begin by talking about the platform and how they can license it, then they realise we can be a big catalyst for this development. It starts off as a conversation about the platform, but it often turns into a bigger conversation.”
Confident that this approach to European expansion – working alongside rather than going against the establishment – is a big part of the challenger’s early success, Hunter says the biggest challenge that comes with it is how OakNorth handles integration with all the initiatives banks have.
“A lot of them are doing credit re-engineering and massive projects,” says the challenger’s CIO. “They are often crushed by the weight of these tasks, because in the meantime they need to be making money. It’s very difficult for people at banks, they have to balance infrastructure development with persistently good results. We try and work in parallel, so as not to make things harder for them.”
Operationally, Hunter says OakNorth is an “incredibly simple” bank with a much easier internal IT landscape to navigate which is “not huge”. By opening the bonnet on its own infrastructure, the neobank solves another hurdle facing many start-ups, which is getting customer feedback. “If you’re constantly there solving their problems then you find this [feedback] out each day,” he says.
Last month, the challenger secured former UK chancellor Philip Hammond as an adviser. Hunter says his appointment further cements the bank’s ability to tap into Europe with its lending technology. “Philip has a great contact book which will help us establish ourselves globally”.
As the UK moves out of Brexit uncertainty, it seems OakNorth’s local business customers could face some challenges. Despite initial Brexit uncertainty resulting in OakNorth’s loans tripling in the first six months after the vote to leave because banks slowed down lending, many of the UK businesses it lends to are in the hospitality sector.
With a third of their workforce coming from the European Union, it remains to be seen whether tighter immigration policies will stunt their expansion and consequent demand for more loans.