The rapid rise of OakNorth Bank

OakNorth has gone from start-up to unicorn in a flash – but what do investors see in the challenger bank?

It launched in September 2015. A little over two years later, it had raised £250m at a valuation north of a billion dollars, marking its entry into the UK’s increasingly crowded stable of ‘unicorn' businesses. Among its investors is Singapore’s sovereign wealth fund, GIC, which boasts over $100bn in assets under management.

By March this year, OakNorth had topped £1.2bn in gross lending in the UK – up from just £300m in March the previous year – while simultaneously posting £10.6m in profit in 2017.

But how has the bank been able to hit profitability while growing so rapidly? And what do investors see in the challenger to warrant so lofty a valuation?

At its core, OakNorth is a savings and loan bank, but it also makes money by selling its lending technology (the 'ACORN machine') to overseas banks.

This model is not uncommon within the world of fintech. New York Stock Exchange-listed OnDeck (which, bear in mind, is not a bank) operates a similar business, lending off its balance sheet to small businesses in the US while at the same time selling its technology to JPMorgan Chase, thereby helping it to service its millions of small business customers. OnDeck was founded in 2006 and has deployed over $8bn in loans to date. Its current market capitalisation is a touch over $400m.

Clearly OakNorth benefits from having a banking licence, but that can’t be all that’s going on here. Speaking to AltFi, the bank’s chief financial officer Cristina Alba Ochoa (pictured) explained that its chosen niche is a major factor in its successes to date.

“On the bank side here in the UK, the reason we grew so fast is because we were solving a problem,” she said. She explained that while solutions exist for larger businesses and fintech firms like Funding Circle are plugging the gap for smaller firms, everything in between is badly served. OakNorth has attacked this missing middle and has been rewarded with an “overwhelming response” – from investors and borrowers alike.  

Alba Ochoa boasted that the bank’s portfolio is as remarkable for its performance as for its size; there have been no defaults thus far. Meanwhile, OakNorth’s flexible terms and conditions, including adaptable repayment terms and speedy processes mean that its customers are often ready to pay a premium for its loans.

The perceived resilience of its loanbook has also helped to lure investors. Every loan originated by the bank is secured on a senior basis, and additionally 92 per cent of the loan book is collateralised. The average loan-to-value (LTV) ratio across the book is 52 percent, while the maximum LTV is 75 per cent.

Alba Ochoa said that the “only way from here is down” for the economy, making resilience all the more important. “We fundamentally believe we’re in a position to be resilient in a downturn because of the low leverage ratio of the borrowers and the comfortable LTV that we have,” she said.

The challenger bank’s investors seem to share that belief, but also see value beyond its banking operations. “We’ve had different types of investors… Some of them have been looking at the combination of parts, and others have been looking at the value of OakNorth the bank and not factoring in the value of ACORN,” explained Alba Ochoa.

She said that OakNorth’s backers – which, in addition to GIC, include The Clermont Group, Toscafund and Coltrane – fully believe that its solution can work in other markets around the world, and can drive long-term returns.

Not all fintech lenders buy into the licencing model. John Mould, who runs one of the UK’s biggest P2P business lenders, ThinCats, is sceptical.

“I would find it odd at the moment that a lender would sell some of their lending technology to someone else,” he said.

“On the credit analysis, there are very few lenders out there who have big enough data sets on their own that they could make a difference. Let’s take the example of [ThinCats]. We have eye-wateringly good credit analysis. However, what we’re doing is we’re taking data from Experian and a bit of our own but mainly from Experian, and then we’re running our models and algorithms on it.”

“Am I selling the data or am I selling the model, the algorithm?”

Mould is CEO of both ThinCats and ESF Capital, prior to which he was chief operating officer at New Star Asset Management.

Stefan Klestil, a partner at European venture capital firm Speedinvest, told AltFi that he sees a strong desire among banks to cooperate with fintech firms. But he is yet to be convinced that fintech-bank partnerships can work.

He admitted, however, that OakNorth seems to have found a way of scaling outside of the UK via such deals.

“That’s really interesting because I haven't seen that many partnerships with banks work – and this seems to work in various places in the world,” he said.

“Maybe there’s something for us to learn here, because from the outset the banks have a lot to offer, but so far it’s been really difficult for them to get their distribution people in the branch networks to push customers into that digital funnel of the fintechs.”

OakNorth’s licensing model is to allow other banks to pay to leverage ACORN for credit underwriting and portfolio monitoring purposes – providing support from origination until the point that loans are fully repaid. At present, five institutions have signed up to the service – three in North America, one in Europe and another in Asia.

Valentina Kristensen, director of growth and communications at OakNorth, said that ACORN has proven especially appealing to large banks. “We thought when we came to market with ACORN that it would be mostly [of interest to] new banks like us that are building banks in their own countries, but it’s been the opposite,” she said. These larger banks are signing up in the hope of saving the huge amount of time and resource that would otherwise be required to bring their existing systems up to speed.

“For every £1 a bank spends on innovation in IT, they spend £9 on maintaining their existing systems. So ultimately it’s going to be much more cost-effective for them to leverage our technology,” said Kristensen.

OakNorth Bank’s impressive financial performance in the past three years has proven a useful shop window for the group. Kristensen conceded that the implementation process is not always straightforward, with numerous regulatory hurdles, demos and proof-of-concept phases to clear – but she added that “very long-term relationships” can be built so long as the system performs as advertised.

At present, OakNorth’s processes are partially automated, leveraging big data and machine learning through ACORN, but there is still a significant portion that’s manual. Its intention is to reach 80 per cent automation in the future. “The composition is shifting and it’s going to be owned and created by ACORN,” said Alba Ochoa.

OakNorth’s primary software is ACORN – its software-as-a-service (SaaS) business (Alba Ochoa calls it a platform-as-a-service) – which incorporates other SaaS firms and third-party suppliers.

Alba Ochoa said that OakNorth’s mix of integrations is optimal for now, but that the bank will seek to take these services in-house over time. “The vision is that in time everything is going to be ACORN intellectual property,” she said.

When first asked about the ACORN business, Speedinvest’s Klestil said: “I don't know exactly how it works, but it seems to work.” OakNorth is yet to divulge the names of its ACORN customers, but with major investors so willing to throw money at the bank, it’s tough to disagree with Klestil’s diagnosis.