Reinventing financial services for SMEs: OakNorth Bank

SME Banking
18/01/2023 Interview
profile picture of Rajesh Gupta

Rajesh Gupta

OakNorth Chief Financial Officer

We often read that the offers of traditional banks are not adapted enough to SMEs. So, we set out to discover new players dedicated to SMEs. Rajesh Gupta, CFO of OakNorth Bank, gives us his point of view and shares with us what OakNorth Bank offers its customers.

In which countries do you operate and how do you perceive the banking offer to SMEs there? In your opinion, does the offer from existing financial institutions meet the needs of SMEs?

Launched in September 2015 and founded by entrepreneurs Rishi Khosla and Joel Perlman, OakNorth Bank is a fully-licensed UK bank. This is the only market OakNorth Bank currently offers savings and lending products in, though it has teams in India and the US.  

In terms of how we perceive the current offering for SMEs, we believe this segment of the market has been underserved for decades. One of the main reasons behind this is that innovation in commercial banking has been limited to loan origination systems and modern core banking systems, which means the way that scale-up/mid-sized businesses are served hasn’t evolved for decades and much more innovation is needed.

Compare this with what’s happened in the consumer and micro-SMB space, where the customer experience has dramatically improved over the last 10-15 years, and where there are now highly customized products at the point of sale and embedded within other journeys. The issue is that most lenders and financial institutions simply don’t have the data and analytical capabilities to bridge the techniques used in the consumer and SMB space with the analytical rigor of corporate lending – i.e. taking a granular, forward-looking view of each business. As a result, they default to the same approaches which have been used for decades, relying on broad sector assumptions and a heavily manual approach that provides an (a) inconsistent, (b) slow, and (c) poor experience for customers.

Furthermore, once these micro-SMEs become larger, the existing players capturing these customers can no longer serve their needs, as they will require more differentiated and complex solutions, which are foreign to traditional banks. As a result, many SMEs view themselves as overlooked and underserved when compared to consumers, micro-SMEs and corporates.”

What is your business model and your core value proposition for SMEs?

OakNorth Bank is a neobank which provides the UK’s fastest-growing and most ambitious businesses with the fast, flexible debt finance (loans of £250k up to tens of millions) they need to scale, while also helping savers make their money go further, via a range of award-winning and competitive saving accounts.

To date, we’ve lent several billion pounds to businesses across the UK and throughout a wide range of sectors, achieving performance metrics that place OakNorth among the top 1% of commercial banks globally in terms of ROE and efficiency. Our loans have helped build schools, support pub companies with acquisitions, and provide bridging loans to SME housebuilders to turn vacant buildings into new homes. They have directly contributed to the creation of tens of thousands of new jobs, as well as tens of thousands of new homes across the UK – the majority of which are affordable and social housing. And with flexible repayments across fixed terms or revolving credit facilities, we’re able to put our borrowers in control of their own futures, without them giving up equity.

Furthermore, our data-led approach allows us to look at the future, rather than just fixating on the past, meaning we avoid making decisions based on outdated financials. Using data and analytics, we build up a granular view of every business in our portfolio, combining this with forward-looking scenario analysis, to enable us to be a trusted funding partner as the business scales, and continue confidently lending through economic cycles and unprecedented events.

How’s the experience at your institution different compared to other players? What are the unique features you offer to your customers?

Our lending approach is powered by our four unique selling points, which make us stand out from other lenders operating in the market. These are:

• Speed – we offer quick ‘yes’ or ‘no’ decisions so that we don’t waste businesses’ time. We will always try to find a path to ‘yes’ and will never take a computer-says-no decision.

• Flexibility – we take the time to get to know a business and structure a bespoke facility for its unique needs. No off-the-shelf solutions or ready-made products – we look at each deal with a fresh pair of eyes.

• Transparency – every business we consider lending to is given the opportunity to meet our Credit Committee and discuss their borrowing needs directly with the decision-makers.

• An entrepreneurial approach – we were founded by entrepreneurs, not bankers, so have a unique understanding of the opportunities and pain points facing businesses and speak the same language as them.

Our growth to date has been primarily driven by word of mouth, with 80% of our new lending coming from non-paid referrals. In addition to this, more than 40% of our borrowers are repeat customers.

Being a banking provider without physical branches, customers only interact with you remotely. How do you ensure an excellent sales and service model leading to a great customer experience with interactions being 100% digital?

Our customers drive everything we do – we aim to delight them at every stage of their journey with us. The differentiators above are how we delight customers, and the result of this is that on the lending side of our business, our growth to date has been primarily driven by word of mouth, with 80% of our new lending coming from non-paid referrals. In addition to this, more than 40% of our borrowers are repeat customers.

On the savings side of the business, our award-winning savings platform has attracted over 160,000 customers and achieved a Trustpilot rating of 4.5/5 stars.

However we know we can never rest on our laurels, which is why we always look to 10X everything we do – meaning we aim to offer our customers products and services that are 10 times better than the competition.

We set ambitious goals and work to deliver outsized results on a daily basis.

Where do you see your institution in five years? What impact or difference are you trying to achieve for small business owners in your portfolio?

Our mission is to empower entrepreneurs and provide them with the access to capital 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.

Can you specify some major milestones accomplished on your institution’s journey?

Despite experiencing not one, but two unprecedented events – Brexit and Covid-19 – since OakNorth Bank’s launch, we’re proud to have continued supporting growth businesses across the UK. We’ve achieved some great things over the past seven years, including:

• Obtaining the third new banking charter in the UK in 150 years (March 2015)

• Reaching cash flow break-even just 11 months after launch

• In May 2016, we became the first bank in Europe to be fully cloud-hosted, after months of working with AWS and the UK regulator to help drive the regulation forward. This paved the way for other neobanks to follow suit and also move their core banking and other systems to the cloud. The Financial Times described it as a ‘landmark move’ for the industry.

• Creating a flywheel effect whereby satisfied customers refer new business to us, so the majority of our new lending comes via referral

• Named as the fastest growing business in Europe in 2020 by the Financial Times’s ‘FT 1000’ survey

• Achieved performance metrics, outlined in our 2021 Annual Report, that placed OakNorth amongst the top 1% of commercial banks globally, including pre-tax profits up 73% to £134.5 million, a ROE of 30% and an efficiency ratio of 26%

• One of the first neobanks globally to achieve net zero for scope 1 and 2 emissions, with a commitment to achieve this for scope 3 by 2035.

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