Decoding Financial Disruption: An Exclusive Insight with OakNorth's CFO

After our recent coverage on OakNorth we had the privilege of engaging in an in-depth discussion with Rajesh Gupta, the CFO of this transformative institution. Based in London, OakNorth stands apart in the vast financial landscape. Crafted with a tech-first vision by entrepreneurs for their peers, its primary aim is to rewrite the rules of lending.

The bank's central mission? To serve the 'Missing Middle' – established small-to-medium enterprises (SMEs) who are seeking to scale, but are routinely overlooked or underserved by incumbent banks and alternative lenders. Beyond its lending prowess, OakNorth also offers business and personal savings accounts.

To put its impact into perspective: OakNorth has extended over £10B in loans to visionary entrepreneurs throughout the UK. This sizable financial endorsement has been instrumental in spawning 40,000 new jobs and ushering in the development of 29,000 homes. Notably, just two years after its inception, the bank celebrated its first full year of profit in 2017. By December 31, 2022, their customer base had swelled to an impressive 214k+ savings customers. Their financial trajectory is nothing short of meteoric, with a 682% surge in their net income over half a decade, peaking at a whopping £221,090 million in 2022.

Tailoring its product arsenal to the specific credit requirements of SME businesses, OakNorth's offerings are diverse. They encompass SME lending, collaborations with other digital banking platforms for personal and business savings, and the avant-garde ON Credit Intelligence (ONci). A highlight of its suite? Its lending product that empowers businesses to commence with funding from £250,000 and swiftly navigate their lending journey within days.

In our conversation with Rajesh Gupta, we peel back the layers of OakNorth's meteoric rise. Dive in with us as we decode OakNorth's distinctive approach to SME lending, its advanced risk management techniques, credit underwriting acumen, its technological vanguard, and its aspirations for the road ahead.

Q. What factors do you believe have contributed most to OakNorth's success and competitive advantage in the neo-banking space?

A. “OakNorth was founded in September 2015 with one fundamental purpose: to serve and empower established small-to-medium sized businesses (SMEs) that were seeking to scale but were routinely underserved or overlooked by traditional banks: what we call the ‘Missing Middle’.

Our founders, Rishi Khosla and Joel Perlman, had experienced this first-hand while scaling their previous company - Copal. In 2005, three years after launching that business, they applied for a bank loan and the ‘computer said ‘no’’, despite their business being profitable. The products, services, and experience needed to make their lives as a scaling business easier, and enable them to reach their full potential, were ‘missing’ from banks’ offerings. As entrepreneurs, their response was to build what was missing: a neobank for entrepreneurs, by entrepreneurs.

Other neo-banks largely ignore the Missing Middle, choosing instead to focus on retail customers and micro businesses. Why? Because their needs can be easily met through the automation and apps these companies build upon. The often-complex legal entities, ownership structures, and diversified banking needs of the Missing Middle are perceived as too difficult to address.

Meanwhile, in recent decades, traditional banks have moved away from Main Street banking based on building trust and value in the local community, to Wall Street banking with centralised decision-making and “relationship managers” who ironically don’t seem to have meaningful relationships with anyone. They’ve closed numerous branches and invested in their digital offerings, but have focused on designing them for the mass consumer and micro business market.They continue to see value in their lucrative corporate clients, deploying large teams to spend time getting to know the business so they can understand its unique pain points and future growth potential, but Missing Middle businesses are considered too small to qualify for this experience. Instead, their business is unhelpfully reduced to numbers entered into a computer. More often than not, it says “no”.

So, what has contributed to our success and competitive advantage is the fact that we’re focused on businesses (the Missing Middle) whose needs have been largely overlooked and underserved, and we’re addressing their needs with products and services tailored to their unique needs”.

Q. What distinguishes OakNorth Bank's SME lending approach from traditional banks and challenger bank peers, like Starling Bank, which offers a Software-as-a-Service (SaaS) product to other banks?

A. “One of the core elements that sets us apart in terms of our lending approach is how we look at the business world. Rather than splitting the economy into a dozen or so sectors, we’ve developed an analytical framework powered by hundreds of billions of dollars’ worth of commercial loan data, covering over 270 industries. This enables us to take a highly granular, data-driven, and forward-looking approach when it comes to serving our customers. No off-the-shelf products, cookie-cutter services, or computer-says-no decisions. No matter what a NAICS or SIC code says about a business, we understand that the needs of every business are unique”.

OakNorth developed the ONci suite to help banks that give 360° highly granular, data-driven, and forward-looking approach view, assess the risk of the business of the borrowers and address the needs of the SME without saying “NO”. This is the Core element of OakNorth that is expanding globally, especially in the US where the market for lending is larger.

Q. Can you share insights into OakNorth's approach to risk management and credit underwriting that has helped it achieve high-quality loan books and minimized defaults?

A. “As described above, OakNorth’s risk management and credit underwriting processes have been developed and strengthened by our analytical framework that’s powered by hundreds of billions of dollars’ worth of commercial loan data, covering over 270 industries. This enables us to take a highly granular, data-driven, and forward-looking approach to lending, helping us to achieve our high-quality loan book”.

Q. How has OakNorth managed to strike a balance between leveraging cutting-edge technology and maintaining a personalized approach to customer service?

A. “Rather than overwhelming our customers with a menu of products and services and leaving them to figure out a combination that may work for them, we start with their pain points and work backward from there, adapting our offering based on what’s relevant for their business. It’s the difference between being told what’s available Vs being asked what you need and then being presented with solutions to address these needs”.

Q. Looking ahead, what are OakNorth's key strategic initiatives and growth plans to further strengthen its position in the neobanking market and expand its presence in other regions or markets?

A. “Our mission remains to empower the missing middle and provide them with the banking they need to succeed and scale. No matter what happens in the economy, we remain 100% committed to this and will continue to support our customers and lend through the cycle, whilst also supplying UK savers with award-winning and competitive savings accounts.

Lastly, I can’t tell you the number of times a customer has said, “borrowing from you guys is such a great experience, I wish you could do all my banking” so, we’ll also continue to explore other opportunities to support our customers and are certainly open to expanding the products and services we offer if it makes sense for our business”.

Reflecting on OakNorth's Innovative Journey: A Glimpse into the Future of SME Banking

As we conclude our examination of OakNorth Bank and our detailed interaction with CFO Rajesh Gupta, it's evident that OakNorth has carved a unique space for itself within the financial sector. With a deliberate focus on SMEs, particularly the 'Missing Middle', OakNorth seeks to address some of the gaps present in traditional banking systems. Their notable growth in net income over the years suggests their strategies are resonating within its target market.

Its methodology in lending, complemented by the use of advanced technology, offers an alternative to traditional banking routes for SMEs. Its diverse product range and emphasis on adapting to client needs indicate an evolving approach to modern banking.

Reflecting on OakNorth's trajectory, it presents an interesting case of how new-age banks can leverage technology and a focused mission to address specific market needs. For SMEs navigating the complexities of the UK's financial landscape, institutions like OakNorth offer additional avenues to explore.

To learn more about OakNorth, check out our deep-dive report OakNorth: SME Lending in Modern Banking

Corporate subscribers can access the comprehensive report through C-Innovation member’s area.