How a three-year-old banking startup has pulled off a perfect lending record

OakNorth co-founder Rishi Khosla says the bank will expand in the US.
OakNorth co-founder Rishi Khosla says the bank will expand in the US.
Image: Reuters/Dylan Martinez
We may earn a commission from links on this page.

Even by lofty fintech standards, OakNorth is soaring. The London-based startup bank’s $440 million funding round, led by SoftBank’s Vision Fund, was the biggest ever for a European firm of its kind. Less than four years since it launched, the company is profitable and valued at $2.8 billion. OakNorth says not one of its customers has ever defaulted, or even had a late payment.

OakNorth’s founders, who sold their analytics startup to Moody’s in 2014, say the company is designed for entrepreneurs. Its customers are small- and medium-sized businesses such as Leon, a restaurant chain, as well as bars, hotels, property developers, and private equity firms. The company plans to use the money it recently raised for expansion in the US and abroad.

But what about the perfect lending record? It sounds almost too good to be true. The bank has lent out more than £2 billion ($2.6 billion), which it funds mainly through equity and deposits from more than 30,000 savings customers.

Sean Hunter, CIO of OakNorth’s analytics unit, said about one in 10 companies makes it through an initial screening before getting signaled to apply for a loan. The prospective borrower then goes to a credit committee, where about 90% of applicants get approved. Roughly speaking, the approval rate is about in line with broader small-business lending in the UK, according to BBA trade association data.

Hunter says the bank uses artificial intelligence to automate as much of its credit analysis as possible. Machines are adept at sorting through mountains of data to identify patterns. And so one example is finding statistics for comparable borrowers.  For a hotel company, it might identify property values for similar businesses. “There are lots of little sub-jobs you can get AI to do,” said Hunter, who previously worked at Silicon Valley data science company Palantir.

The company also uses outside data like TripAdvisor ratings and sentiment analysis based on Yelp reviews. Its OakNorth Analytical Intelligence business licenses its tech platform’s services to other banks.

But not every borrower behaves as expected. In a “handful” of cases, Hunter said OakNorth has modified a customer’s loans. Another strategy is to simply jettison the weakest credits. Co-founder Joel Perlman told a London conference recently that the company has on occasion urged a customer to refinance elsewhere. “We’ve said, ‘go renegotiate with another bank and refinance,'” Perlman said. “And they’ve gone and refinanced and then a few months later they’ve gone into default.”

It’s a technology problem

OakNorth says its loans are specifically designed for each customer, similar to the treatment a large company would expect from a top Wall Street lender. Humans make the lending decisions, but they’re able to improve the analysis and speed up the process using AI. Hunter said the technology helps it bring the cost of customized service down to a level where it can be used for relatively small loans.

The company also continues monitoring the customer, either by plugging directly into accounts to access operating data, or by having customers provide documentation that gets uploaded. The idea is to detect problems before the customer runs out of options. “Getting all that data in different formats from different businesses is complicated,” Hunter said. “That’s a technology problem that we’ve taken on.”

Big banks with vast portfolios aren’t always able to inspect each every loan on a regular basis, said Francesc Rodriguez Tous, a finance professor at Cass Business School in London. Instead, they might focus on their most important accounts unless there are obvious red flags coming from the smaller clients.

But if every company that seeks to refinance an OakNorth loan is already in trouble, other banks will eventually notice, he said. They’ll be less likely offer refinancing, making it harder for OakNorth to unload problem debts in the future (and besmirching its perfect lending record). Without specifically pointing to OakNorth, he noted that loan modifications are fine unless they’re simply reclassifying a borrower who still can’t afford to service a debt. And a key question, of course, for every startup lender is how well they will withstand a downturn, following a long stretch of relatively benign economic conditions.

The company points out that some of its clients have already been through a slump. For Perlman, profitability—it reported a £10.6 million profit in 2017—is a key to withstanding a potential slowdown. “We don’t believe in that story about building revenues and eventually we’ll make money,” Perlman said at the conference. “When the downturn comes, being profitable is a big thing.”

Image for article titled How a three-year-old banking startup has pulled off a perfect lending record

The future of finance on Quartz

  • Apple and Goldman Sachs are teaming up on a credit card linked to the iPhone’s digital wallet. Expect them to position this as a “healthy” financial alternative, with fitness-app-like spending features.
  • The debate about a cashless Britain is getting louder. That’s a good thing because the UK, like most countries, doesn’t have a plan for what happens when it ditches notes and coins. Just letting it happens risks leaving the most financially vulnerable behind.
  • Amazon, meanwhile, isn’t letting a lack of payments cards get in the way of making a sale. It started a service in Kenya and as well as in Asia and Latin America that lets customers buy online and pay in notes and coins.
  • Quartz member exclusive: Don’t fall for JPMorgan’s crypto hype. If UBS’s interbank coin, which has gone very quiet in recent years, is anything to go by, last week’s announcement is more sensation than game changer.
  • A French court ordered UBS to pay the largest-ever fine for a Swiss bank. The company is accused of illegally concealing billions of euros belonging to French clients.
Image for article titled How a three-year-old banking startup has pulled off a perfect lending record

Heard on headphones

Jo Hannaford, head of technology for Goldman Sachs Europe, says in the Exchanges at Goldman Sachs podcast that a teacher challenged her class to write a finance program for Mother’s Day: “So, the very first program I wrote was to basically take all of the kind of utility bills in her house and I produced a program that would look, you know, basically automate them for my mom. And when I look back at that, she was a bit kind of bewildered.”

Image for article titled How a three-year-old banking startup has pulled off a perfect lending record

The future of finance elsewhere

  • Mega-fintech Ant Financial will start charging some customers fees for large credit-card payments. The Chinese company, which handled more than $10 trillion in payments in the 12 months to September, cited increasing operating costs as a reason for the fee hike. It also has a deal with Apple to provide iPhone financing in China.
  • Officials in Lithuania (paywall) are questioning whether they have the expertise to oversee financial licensing for companies like London-based Revolut. Officials are calling for another licensing investigation into the British fintech.
  • Smart phone wallets aren’t taking over in the West—it’s all about fancy payment cards.
  • Some investors are complaining about the high prices SoftBank’s Vision Fund has paid for tech companies. One claims that SoftBank sometimes invests in companies first and later transfers the stakes to the Vision Fund at a higher price (paywall).
  • Goldman splurged on another fintech firm, and this one is a construction finance startup called Rabbet. GoCardless, meanwhile, raised $75 million. And PayPal (naturally) thinks payments could become a $100 trillion industry.
Image for article titled How a three-year-old banking startup has pulled off a perfect lending record

Previously, in Future of Finance Friday

Feb. 15: A fintech startup founded by Palantir veterans envisions a one-tap mortgage

Feb. 8: Revolut is riding the record-setting boom in fintech investing

Feb. 1: Apple should issue a debit card