IBS Journal talks Brexit, core banking software innovation and the challenges facing new entrants with OakNorth Bank co-founder and CEO, Rishi Khosla

IBS Journal: OakNorth is one of many UK challenger banks jostling for prominence. What sets you apart from the rest?

Rishi Khosla: I think what sets us apart from other banks – both established and new – is the fact that we’re a bank founded by entrepreneurs, for entrepreneurs, which means our entire proposition is focused around how best we can service entrepreneurs who are building their companies. We know how frustrating it can be trying to secure growth capital because we experienced it first-hand when trying to secure a loan for our previous business, Copal Amba. We therefore set out to establish a bank that would be dramatically different and take entrepreneurs’ unique needs into consideration.

Instead of defaulting to property as collateral and a computer-says-no approach like most banks, we focus on properly understanding and underwriting the businesses we lend to. Our lending directors take the time to understand the business and will consider multiple collateral types such as stock, debtors, plant and machinery, intellectual property, etc. We also aim to complete deals (from first meeting to disbursement of cash) in weeks rather than months, appreciating that funding delays have a material impact on growth business’s opportunities. We also invite borrowers to present their company directly to credit committee allowing for greater transparency and feedback directly from the decision makers. This entrepreneurial approach is completely different to what businesses experience with larger banks where they’re one of hundreds of clients that their relationship manager deals with.

IBS Journal: What can you tell us about the technology underpinning the bank?

RK: Our core banking software is provided by German company Mambu. In May, we became the first bank in the UK to have its core system fully hosted on the cloud. We chose Amazon Web Services as our platform partner and worked with them for several months to drive the development forward with the UK regulator. We helped design policies related to access to data, business continuity, as well as data protection and security provided by cloud systems. Having our core banking system based in the cloud enables us to scale up more quickly and safely with fewer resources, and enables us to launch new products and services more efficiently.

IBS Journal: You were the first bank in the UK to have its core system fully hosted in the cloud. What has been the experience thus far and do you see other banks following your lead, both challengers and incumbents? 

RK: It’s still very early days but so far the experience has been very positive from a cost, flexibility, and scalability perspective. The fact that the policy is now written and the regulator is onboard means that other banks are very likely to follow suit. I don’t think larger players will be able to take advantage of this development to the same extent as their legacy IT prohibits them from doing so, but certainly some of the new digital players should be able to.

IBS Journal: What is OakNorth’s position on Brexit and how it might affect small specialist lenders?

RK: The outcome of the vote came as a shock to me. For the record, I voted to remain believing that for business owners and entrepreneurs in the UK, access to the EU’s significant markets (750 million people vs 60 million in the UK) was too beneficial to relinquish.

As we’ve already seen since 23rd June, a number of lenders have faced some challenges following the vote. From our perspective, we are still very much committed to continuing to grow our loan book and support UK businesses during these times. We are one of the best capitalised banks in the UK and, given the careful credit decisions we have made thus far, are in a strong position to continue leading at a time when many banks are retrenching from the market. This creates an opportunity for us; since the vote, we have closed over £100 million in deals (including a £19 million deal with restaurant chain Leon), and in fact, the day after the vote, we had two opportunities come in as a direct result of larger banks pulling out of deals.

IBS Journal: The Competition and Markets Authority (CMA) has recommended the introduction of a new API tool which will allow SMEs to view a bespoke comparison of transaction charges they would have incurred over the past year. What is your take on this?

RK: The key issue with a price comparison site is that it is trying to resolve adverse pricing in a market where the fundamental problem is lack of supply. If you push down prices in a supply-constrained market, you will have even less supply, therefore worsening the situation. What’s more is that price comparison websites tend to ‘commoditise’ the products they compare and encourage market participants to compete on price, ultimately leading to a computer-says-no approach.

That is why we were glad when the CMA acknowledged that a price comparison website is not an appropriate solution for larger SME loans which need to be tailored to the individual characteristics of the business at hand. However, the fact that finding a solution when it comes to larger loans will now be passed to the Treasury who will only look to review whether the proposed remedies have worked in two years’ time, is very disappointing news. Thousands of SMEs are seeking finance to grow and were hoping this investigation would finally deliver a solution to a problem that’s been going on for decades.

IBS Journal: The CMA also recently announced proposals to reform the retail banking landscape. Where do you stand on this?

RK: In our view, the CMA’s report has fallen short and failed to deliver solutions to a number of the key issues it identified, in particular those facing SMEs seeking larger loans. The CMA explicitly stated in its report that a combination of factors make it difficult for new entrants and smaller banks such as OakNorth to effectively compete. Yet despite this, the solutions it’s provided for SME lending are limited to unsecured loans of up to £25,000, so won’t address the issues facing SMEs that need secured or larger loans.

The fact that the CMA is simply going to pass the buck to the Treasury, who won’t look to launch their own investigation until two years from now, is extremely disappointing. There are millions of SMEs that are struggling to secure growth capital who may now need to wait up to four years for the situation to improve.

This is exactly the same approach the CMA took following its investigation into the competitive impact of replacing the Bank Levy with the Corporation Tax Surcharge. Instead of getting on the front foot and trying to address the competitive issues with larger SME loans now, it is choosing to wait and see if the benefits from its proposed remedies for other products will have a ripple effect.

The CMA should work with the Treasury and the regulators (PRA and FCA) to create a more favourable regulatory environment for new entrants such as OakNorth. Unlike large banks, we do not pose a systemic risk so should not have to adhere to the same capital and regulatory requirements as them. The Corporation Tax Surcharge should be removed for smaller banks as this will genuinely move competition in the right direction and create the ‘revolution’ in banking the CMA wants to see.

IBS Journal: Looking at the year ahead, are there some milestones we should be looking out for?

RK: We recently celebrated our one-year anniversary since we began trading and have broken even financially, which is a pretty significant milestone considering we’re only a year old. It has been a phenomenal year for OakNorth – our loan book including deals in documents now stands at around £200 million and the aforementioned deal of £19 million with Leon to enable the business to open 50 new sites and create 1,000 new jobs over the next four years. Hopefully over the next year, we’ll have the opportunity to work with other fantastic entrepreneurs and businesses and help them achieve their growth ambitions.

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by Scott Thompson
Scott is Senior Editor at IBS Intelligence. You can follow him on Twitter and contact him at: Scott.Thompson@ibsintelligence.com