Fresh off a $100 million funding round last year, the British startup OakNorth is preparing to license its business lending technology to U.S. banks and beyond.
The 3-year-old small-business lender is entering the U.S. at a time when fintechs and banks have stepped up their digital business lending efforts. Though OakNorth has not announced any official partnerships in the U.S., CEO Rishi Khosla said there's appetite for what the firm is offering.
“People look at what we’ve done in the U.K. and they say there’s real proof,” Khosla said in a recent interview. “To have built an institution from scratch, which is now providing 20-to-30% return on equity, there aren’t many in the banking space to have had that type of return.”
Following is the interview with Khosla, who was in New York as OakNorth gets set to enter the market. It has been edited for clarity and length.
What’s the objective behind this initial international push?
RISHI KHOSLA: Our whole objective when we started the business was to focus on what we call the "missing middle." We built a platform that we felt gives us the ability to significantly reduce the cost of the underwrite and also the quality of the underwrite as far as how much insight we can actually get around a particular company, around a particular credit, and then monitor it in a proactive matter after making the loan.
After creating the platform, we were very clear that we wanted to take one market and prove it out ourselves — that the platform works, the market opportunity exists and that it’s a good market with a potential return perspective. We also wanted to prove the platform can have a positive effect on the economy by playing in that sector because of the productivity of those businesses. They’re not microbusinesses, they’re growth businesses.
Having got to a point where we felt like we got a fair level of proof in the U.K., it was very clear to us to start licensing it to other markets. As we built the platform, we built it in a very nimble way so that transferring it into different markets wasn’t a challenge. That’s how we decided, almost 12 months ago, to actually start looking internationally with a platform-as-a-service model.
Our view is to continue to build what we have in the U.K. as our proof of concept because it’s a good business and continues to prove the model. In addition to that, we’re offering people who license the platform with actual flow because they themselves, especially when you get down to community banks, may not have the origination muscle to be able to go out and originate these types of loans even with the tool.
As far as the U.S. in particular, why come here now with this credit cycle and other companies somewhat dealing in this space already?
When you look at all the activity in this space, it’s been in microloans in the tens of thousands, sometimes as much as $200,000. You see a lot of players like Kabbage and OnDeck. In that market, from a borrower’s perspective, it is now getting to the point where it’s reasonably efficient. And from a lender’s perspective, it’s reasonably competitive.
When you look at what we do, we’re focused on loan sizes from $1 million to $25 million. It’s a totally different space and it’s relatively underserved. It hasn’t had the activity that has happened on the micro end. It doesn’t have the direct lending funds of the bigger banks. If you map out the different parts of the credit space, this area specifically still is the purveyor of community and regional banks. That’s where we believe there’s an opportunity.
Why come into the U.S. this way as opposed to coming in with a banking charter?
If we were to get banking charters in every market we want to operate in, the speed at which we can do that and scale the business, it wouldn’t be efficient. Given we think we really have something that’s highly differentiated with our platform, we want to scale quickly and in the most efficient manner. We don’t think setting up banking charters in every market is the most efficient thing for us to do.
What kind of institutions will you target in the U.S.?
The target here for the licensing the platform-as-a-service actually goes from the large money- center banks to the super-regionals and to the community banks. It’s a combination.
However, the banks which have the issue around origination and therefore would value the diversified origination will be the community banks and some of the smaller regional banks. I think that’s where the sweet spot is going to be for the institutions that want more than a platform.
What is unique about the technology behind your offering?
I think it’s important to understand two aspects about it.
One is that, at my previous company [Copal Amba, a research firm for investment banks], my business partner and I had spent 12 years focused on the research process and we built that company to 3,000 employees. Roughly 1,300 are focused on credit. When you have an organization that does that kind of credit analysis, you have a pretty good sense of how to do that at scale.
The second aspect of it is saying, "How do you add the data science to that to make things more efficient and use larger data sets as you run your analysis and doing all of that at speed?" When we look at fundamentally what that technology is, it’s around exactly that: "How do I take an institutional approach to credit analysis?"
But as I take that institutional approach, how do I actually do that extremely efficiently with more even more data than they would use? It’s a question of using hundreds of data sources, pulling in data from those sources and benchmarking every single line item. By doing that, you can ultimately service the client so much better in terms of the loan package you provide that.
One of questions that seems to come up with the kind of fintech partnerships you’re seeking is, "Why can’t the banks do this themselves?" There are a lot of factors at play, but what do you think?
What I always say to that is, "Why hasn’t any other technology company been able to come up and build themselves in IBM’s backyard?" Or Microsoft’s backyard? Or Google?
By that extrapolation, any business that is smart, large and well-resourced can do anything. But you know what? They can’t.
Sometimes it comes down to focus, but I say that it comes down to entrepreneurial execution. If you’re focused on one specific problem, which for us is this particular area and that’s all we’re focused on, competent and well resourced, we can probably execute it better than an institution that has 20, 50, 80 different priorities.
That’s my view. I think by that analogy, you would never get competition in an industry and whoever is the largest will remain the largest.
