How a UK-based startup is finding success with SME banking

January 20, 2020 10:17
Rishi Khosla, co-founder and CEO of OakNorth, a British startup that specializes in providing business and property loans. The startup also licenses its platform for other banks for their own loan books. Photo: OakNorth

As big banks have looked to de-risk their balance sheets and receded from SME lending, Britain’s OakNorth, a banking startup that specializes in providing business and property loans, is leveraging new technology and data streams to drastically shake up the way banks lend money to SMEs.

In an exclusive interview, co-founder and CEO Rishi Khosla told EJ Insight that his firm is proving that lending to SMEs can be an effective business model, with OakNorth acknowledged as a success story in the fintech space.

Founded by Joel Perlman and Khosla in 2015, OakNorth is a scale-up business lender which uses an artificial intelligence (AI) model to provide loans, from £0.5 million to £50 million (about US$0.65 million to US$65 million), for small and medium-sized companies to be able to grow their businesses.

The startup is finding growing traction with investors, raising a total of US$1 billion in total equity funding since its creation, as per Crunchbase data. Heavyweight investors include SoftBank Vision Fund, Singapore's sovereign wealth fund GIC, EDBI, Future Fifty, Coltrane Asset Management, Clermont Group, and Dutch bank NIBC.

Using big data and machine learning to assess the risks and monitor its portfolio, the company has enabled its subsidiary, OakNorth Bank, in the UK to become a fast-growing bank in the country, lending several billion pounds to hundreds of lower mid-market businesses since its launch, and there hasn’t been a single default or late payment.

“As for the other part of OakNorth’s business, we license our platform to other banks and lending institutions around the world and they pay us a fee for that. That's how we make money for the platform,” said Khosla.

OakNorth’s credit platform is deployed seamlessly alongside its bank and lending partners' existing credit processes, enabling them to more holistically and profitably cater to the lower mid-market business segment, said Khosla. Its underlying technology allows the lender to make customized lending decisions in days or weeks, not months, while also promising a lower risk of default by spotting warning signs early.

"Our platform supplements the traditional method of relying on backward-looking historical data sourced from the borrower, and scenario analysis based on standard haircuts that are not necessarily linked to industry drivers (Level 1 and 2 analysis), with technology and massive data sets, to model a forward-looking view that's informed by industry benchmarks, macroeconomic drivers, and scenario analysis specific to each business (Level 3 and 4 analysis),” Khosla said.

He noted that the platform doesn’t use a “credit score/black-box system”, and it is “always a human who makes the final decision about whether to lend, not a computer.”

When it comes to credit analysis, OakNorth’s platform works by collecting millions of data items on SMEs across various parameters, sectors, and markets, and uses machine learning algorithms to identify data that lenders need to make more informed credit decisions through detailed line item underwriting.

OakNorth believes unorthodox data sets provide a wealth of information for the firm in credit analysis in relation to a company’s business model. Take an example of a restaurant chain, the platform summarizes qualitative text data, like its online review scores on a popular restaurant rating site, the sentiment of text in the reviews, its social media following, among other things, and turns that into scores which are more readily included in its holistic credit analysis.

A team of credit analysts and data scientists manage the process, training the machine learning algorithms, so that the platform continues to evolve and get smarter, according to Khosla.

Moreover, what differentiates OakNorth’s platform is the monitoring process. “Our platform proactively monitors the financial and operational data of every borrower in our portfolio,” said Khosla. “If from the data, it can predict or see a trend towards a late payment or covenant breach, it flags this up to the relationship manager for that loan and they can then have a conversation with the borrower to hopefully resolve whatever the issue is.”

OakNorth Bank has had about 20 conversations with clients where the platform has foreseen a potential issue, since the bank began lending in 2015, according to Khosla. “In all but maybe two of the cases, we've been able to address the issue with the borrower and avoid a late payment or default. In the other two cases, they chose to refinance with another lender.”

Growing its lending book in the UK from zero at the start of trading in September 2015 to several billion dollars today, OakNorth Bank has recorded no credit losses, and yields that supported a profit of US$40 million in 2018.

While OakNorth Bank doesn’t provide a checking account, individuals and businesses can open various savings accounts - fixed term, easy access, and notice accounts with the bank, helping it attract close to 60,000 savings customers.


Rather than setting up subsidiary banks all around the world, OakNorth simply licenses its platform to existing banks for which SME lending is a gap in the market. Banks can leverage OakNorth’s platform for their own loan books, from origination to credit analysis and portfolio monitoring.

"We only license out our platform's technology to banks outside of the UK where we don't lend, so there is no competition with other lenders. Instead, it's a partnership where we're helping them to lend to lower mid-market businesses more effectively,” said Khosla.

Among the partners is Dutch-based lender NIBC Bank, which is said to be one of the 12 institutions using OakNorth’s platform in Asia, North America, Australia and Europe. Khosla declined to name other banks that already use the platform.

As other banks and lenders use the platform, OakNorth will get access to the data of their borrowers and financing applicants. The platform uses all of the data, which is anonymized and fully GDPR-compliant, purely to do credit analysis, according to Khosla.

After a US$440 million funding round from SoftBank’s Vision Fund as well as the Clermont Group last year, OakNorth has reached a US$2.8 billion post-money valuation, making it Europe’s most valuable private fintech group.

The four-year-old firm has gone beyond the UK and significantly expanded the growth plans for its platform business, especially in the US, by establishing partnerships and loan origination for banks.

It currently has platform offices in New York City, London, Singapore, Hong Kong, Shanghai, Gurgaon, Bengaluru and Istanbul. "We have a relentless focus on helping small and medium-size businesses across the world that are in growth mode access better financing to fund their development - and we will ensure this continues in all regions, including Hong Kong, by partnering with banks globally who license our platform."

Hong Kong has seen the introduction of virtual banks after the city's de facto central bank, the Hong Kong Monetary Authority (HKMA), granted eight virtual banking licenses last year. Elsewhere in the region, Singapore also plans to set up digital banks, with authorities receiving 21 license applications. 

However, Khosla has no intention to apply for Hong Kong or Singapore digital bank licenses. “Our model is not to scale by trying to become a global bank and compete with banks around the world, but rather to be a platform business that helps other banks around the world improve their lending to SMEs.”

Gaining market traction, Khosla expressed confidence about his firm's prospects despite the economic uncertainties and recession risks.

"I always believe that the best businesses thrive in times of economic turmoil so there will always be businesses needing capital to grow. As a result, we expect to continue seeing growth of our loan book via OakNorth Bank in the UK, as well as ongoing interest from banks around the world looking to license our platform."

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EJ Insight writer