Like many fintech firms, United Kingdom-based OakNorth’s roots are based in a difficulty a founder had with traditional finance, CIO Sean Hunter said.
OakNorth cofounders Rishi Khosla and Joel Perlman has bootstrapped a previous company through personal savings and loans from friends and family. While they eventually sold that company to Moody’s, the duo struggled to obtain a 100,000-pound expansion loan, with banks telling them to get additional mortgages.
Once that company got larger Mr. Khosla and Mr. Perlman had easier times obtaining finance, but the early experience never left them.
“The problem with SME financing was something they wanted to solve,” Mr. Hunter said.
So the pair took a weekend off and when Monday came around OakNorth was formed and began to address the problem businesses have not starting but scaling.
Finding financing between $500,000-$20 million is worldwide problem for SMEs, Mr Hunter explained. Looking for less than $500,000? A host of platforms are ready to crunch your numbers, and as they’ve proven successful the establishment has also come to the table. The key to their success is in automating as much of the process as possible, to make it as efficient as possible.
Looking for more than $20 million? Large institutions will put together a team to do the deal to your specifications.
The problem is the large model doesn’t scale downward and the smaller model doesn’t scale up, Mr. Hunter said. The work it takes for a large player to deal with a smaller amount isn’t worth their time, while the smaller models rely on plenty of comparable data points, comparisons which are harder to find as we near seven figures.
“$2-$3 million is too small for the big institutions and too large for the marketplace lenders,” Mr.Hunter said. “So banks try and shoehorn you into existing products.”
What OakNorth does instead is blend data science, technology and the human element to produce a credit analysis for these types of loans. Inside of the United Kingdom OakNorth is a registered bank, while outside of it they are a platform service which works with other banks.
While OakNorth doesn’t make the actual lending decision outside of the UK, they obtain conventional and unique data sources which enable others to make their own. Should the decision be made to fund, OakNorth then monitors the loan for any warning signs.
One key feature of this process is the provision of proactive alerts, Mr. Hunter said. Maybe a borrower’s performance is lagging their peers in some key area. An alert will be generated allowing the lender to have an earlier conversation when more viable options remain. Perhaps problems can be fixed before they grow larger through refinancing or other change of terms. That saves lenders significant resources which they can redeploy into managing borrower relationships. OakNorth’s technology also allows them to easily glean key data from a variety of programs and formats. If it wasn’t easily available, lenders wouldn’t have time to chase it and valuable data would be ignored.
“One of the things I see as our mission is to use technology to allow these banks to be much more like a traditional bank,” Mr. Hunter said. “As a platform business we are taking that load off you so you are spending more time with the customer.”
The most visionary lenders are developing ways to use data to look forward and predict future behavior, not just compare a borrower’s performance with others in the same boat. OakNorth does this but also takes more steps than that, Mr. Hunter explained.
A simple first step is to up the monitoring frequency. For many lenders, they’re happy as long as a borrower doesn’t miss any payments. A check every few months suffices, as staff are burdened to check thousands of borrowers employing their own unique recording systems. OakNorth simplifies the process by connecting to the borrower’s financial system and deploying their own models.
Another key tactic is the deployment of sector specific KPIs, Mr. Hunter said. In shipping, for example, analysts can tap into 7,000 different data sources to improve decision accuracy.
Combine these elements together and you have an attractive proposition. Investors certainly think so. In February OakNorth announced a $440 million raise from SoftBank, the largest ever for a European fintech.
SoftBank delivers value beyond the funds, Mr. Hunter said. They challenge models and assumptions. Along with other OakNorth funders, they provide introductions to key figures who can help grow the business.
In conclusion Mr. Hunter stressed OakNorth’s ultimate goal isn’t to remove humans from the lending equation.
“We use AI to help humans to synthesize all of the data and to help them do analysis and make decisions better.”