Among the UK’s 13 unicorns is a challenger bank which you have probably never heard of.
Yet with a $1.4 billion valuation just three years after its foundation, OakNorth is a trailblazer in digital banking.
After obtaining its banking licence in early 2015, it became the first UK bank to be fully cloud-hosted on Amazon’s AWS. However there was one sticking point which slowed things down a little.
As Valentina Kristensen (pictured below), director of growth and communications, explained to BusinessCloud: “We got our licence and wanted to launch – but the regulation didn’t exist at that point!”
She continued: “We were able to work with the regulator and AWS to push the legislation forward which has paved the way for the likes of Monzo, Starling and now even Metro Bank to be fully cloud-hosted as well.”
London-based OakNorth is a bank run by entrepreneurs for entrepreneurs. Its target market for loans is the 15 per cent of businesses which are fast-growing and profitable rather than all SMEs.
Kristensen says 99 per cent of businesses have acceptable loan options, for example from the likes of Funding Circle, and can get an answer within 24 hours. OakNorth meanwhile provides high-growth companies desperate for a quick answer with more substantial loans of between £500,000 and £30 million.
“If you’re a fast-growing business and are profitable, established and don’t want to be forced to go down the equity option and dilute, you potentially could get a loan from a traditional bank – but it would take several months,” she said. “The opportunity cost of waiting is very high.”
OakNorth does not offer current accounts or credit cards, meaning clients can keep their traditional clearing bank and gain an answer on their OakNorth loan within weeks rather than months.
“The beauty of OakNorth is it’s trying to do just one thing really well,” CFO Cristina Alba Ochoa told us. “You get economies of scale so much faster and management doesn’t have distractions from other areas.
“The management team of say Barclays in the UK would spend more than 50 per cent of their time either in claims or issues with HMRC, the PRA (Prudential Regulation Authority) or FCA (Financial Conduct Authority).
“Our business model is so simple that we can explain it to regulators, tax authorities and government very fast, which allows us to be nimble and means we don’t have compliance issues.”
The boss of Revolut recently criticised “lumbering” traditional banks for “living in the past” in an interview with BusinessCloud.
In 2016 OakNorth, founded by Rishi Khosla and Joel Perlman, was the first digital bank to break even on an annual basis while in 2017 it made £10.6m profit. Ochoa was central to the company’s £250m fundraise at the end of last year which saw it acquire unicorn status.
Rather than securing complex banking licences in markets outside the UK, OakNorth is partnering with established existing banks to deploy its ACORN Machine platform. Five are currently using the platform – two in Europe, two in the United States and one in Asia – while it is in talks with another 50 institutions.
The ACORN OakNorth group, which includes ACORN Machine, employs 250 people, 70 of them in tech roles – including 20 data scientists – across offices in New York, Berlin, Singapore and Istanbul.
Being cloud-hosted saves 30 per cent in terms of IT costs, says Ochoa, while allowing greater flexibility as well as improved scalability and security.
“On business continuity tests we’ve been able to rebuild our entire core within five hours in a new location. That’s the kind of stuff that the big banks dream of,” she said.
“When you look at what happened with TSB very recently, you can see why they’re very nervous about changes to IT systems. These legacy systems are often built up over several decades and if something goes wrong, it really goes wrong.”
Regulators have given UK banks a three-month deadline to demonstrate their operational resilience in the event of such IT breakdowns and cyber-attacks.
“We licence out using ACORN because our main strength is our credit analysis capability,” continued Ochoa. “We have our technology in blocks which communicate with each other rather than one big tech platform which processes everything.
“Everything is moving so fast that there is no time to say ‘I’m going to launch this product in 18 months’. If you do that, you’re history.”
Using machine learning techniques, ACORN takes data from previous loans and third-party sources such as Companies House to automatically build a highly-detailed picture around a loan application which humans can then take an educated decision on. The data is then anonymised and fed back into the system.
“A question I am often asked is: ‘surely a big bank has plenty of data already?’” said Ochoa. “Yes – but it might be in a physical server, in a CRM in the cloud or in the form of physical documentation in one of the branches.
“They do not have an efficient way of accessing it.”
OakNorth’s initial aim was to launch up to £200m worth of loans in two years, but it far exceeded that with £850m – and no defaults to date.
“It has proven the hypothesis that there was a niche and underserved area in the market for us to cover,” said Ochoa.
“It’s also repeatable in other markets, which we are proving through ACORN.”