OakNorth’s Rishi Khosla: ‘Our track record isn’t sustainable forever’

Despite the pandemic taking a significant toll on some of its peers, fintech firm OakNorth managed to continue growing its profit margin in 2020. 

Earnings at the bank rose 18% last year to £77.6m, while customer deposits jumped to £2.3bn. The unicorn facilitated £1.1bn in loans to small and medium-sized businesses during the period, some of which were supported by the government’s coronavirus business lending schemes.

Some of OakNorth’s more recent tumbles, such as the appearance of 10 loan defaults on its previously spotless track record, have begun to resolve themselves. OakNorth said that of the 10 defaults, six have now been repaid in full, meaning that the bank continues to have no loan write-offs to date with £5m set aside for the remainder. 

READ  Pandemic lending powers up OakNorth profit to £78m

The bank was last valued at $2.8bn two years ago, but a secondary share sale in November resulted in one shareholder selling its stake at a 25% discount — meaning OakNorth’s valuation would be approximately $2.1bn.

In a Q&A for Fintech Files, OakNorth’s co-founder and chief executive Rishi Khosla gave his thoughts on the past year for the business, what lies ahead and what challenges the fintech sector might face in future. 

These responses have been edited and condensed for clarity.

Q: 2020 was a rocky year for everyone, but fintech seemed to prevail. Why do you think that is?

RK: While fintech broadly may have performed well compared to other sectors, it is important to remember the unique dynamics within each business and each sub-sector of fintech – whether it’s commercial lending, buy-now-pay-later, savings or investments. This has led to varied experiences, with some faring very well while others have found it more challenging.

As a whole, I think fintech has weathered the storm better than many other sectors due to the pandemic dramatically accelerating the rate of digital adoption in financial services and continued support from investors, with global fintech investment reaching $44bn in 2020. The need for emergency capital during Covid-19, supported by government schemes, in turn created an opportunity for many fintechs to offer support.

Q: OakNorth continued hiring during lockdown when others in fintech slowed down, or even laid off staff. Do you think you will have a more flexible approach to the office post-pandemic?

RK: The pandemic has demonstrated that many individuals and teams are as productive, if not more productive, when working from home, so we’ll aim to have a hybrid working environment post-pandemic.

Importantly, we are constantly rethinking how we best support and enable our staff in this ‘new’ – or ‘evolving’ – ‘normal’, from work-from-home equipment and support services to reimagined physical office configurations. As a scaling business, we need to be flexible and ensure we’re setting our team up for success, so a hybrid model that allows each team and individual being able to choose what works best for them, makes sense.

And even in this flexible environment, we still see real value in having a physical space for us to come together to convene and collaborate – for some this may be two or three times a week, for others it could be less or more frequently. Ultimately, what matters most is ensuring we delight our customers, are advancing productively towards our vision, and providing a strong employee experience – regardless of where or when our teams choose to do their work. 

Q: OakNorth’s recent loan defaults have put the bank in the spotlight after so many years with a spotless track record. Do you think OakNorth will be able to maintain that record in future? 

RK: Since our launch five-and-a-half years ago, we’ve experienced not one but two unprecedented events [Brexit and the withdrawal process that followed, and Covid-19]. We have continued to lend throughout both, lending over £5bn to date.

We’ve managed to do that with only a cumulative 10 defaults since inception, six of which have been resolved with 100% recovery and therefore, we have had no realised losses to date. So, we think that’s pretty good.

One day we will, of course, make some losses as the above track record isn’t sustainable forever.

Q: Your annual report says OakNorth has mapped out being able to survive future natural disasters, even those caused by climate change. What could the bank’s doomsday preparedness look like?

RK: Yes, our Covid Vulnerability Rating framework involves using proprietary, subsector-specific, stress scenarios with regional overlays, and incorporates assumptions on impacts for key financial metrics such as revenue, operating costs, working capital and capex.

We’re now developing and using our forward-looking scenarios to ensure we’re well-equipped from a credit and risk management perspective for future unprecedented events, such as natural disasters resulting from climate change.

The major difference is that for climate change, there’s no vaccine, so we need to be doing all we can now to avoid a worst-case scenario in the future.

Q: As one of the very few profitable fintech companies around, what is your advice to others who are still loss-making? Why is it important to you to remain profitable?

RK: When it comes to business, I’m a traditionalist – I believe a venture should make money. Having raised over $1bn from investors, I’m also a firm believer in investing for growth and I don’t believe the two have to be mutually exclusive.

Too much money in the bank when starting out is a bad thing. When a company has too much capital available upfront, it tends to be built on fundamentally bloated cost structures. Spending more money than is necessary becomes a part of the company’s DNA and changing this is hard. Having little to no money forces businesses to operate from a mentality of scarcity, and these businesses end up operating much more efficiently.

As a result of being profitable, we’ve not had to spend the last year worrying about how to survive but have instead been able to focus on supporting our customers.

Q: What are your thoughts on the growing trend of Spacs? Would you ever consider going public that way?

RK: I can understand why Spacs are interesting from an investor’s perspective.

However, the fact that in one quarter, more Spacs have been raised than in the whole of last year (which was a boom year for Spacs), makes it feel like the market’s a bit heated!

The challenge for investors participating in Spacs will be in knowing when the music stops.

Q: What does the future look like for OakNorth? 

RK: Our mission is to empower the Missing Middle, so in my mind, we’re just getting started.

The first five years of OakNorth’s journey have seen us secure one of the first new UK banking licences in 150 years, achieve performance metrics that rank the bank in the top 1% of commercial banks globally, and bring the benefits of the Credit Intelligence Suite software to other commercial banks.

If that was ‘Season One’ of the OakNorth story, the title would be ‘Build’. Season Two has now started!

To contact the author of this story with feedback or news, email Emily Nicolle

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