Inside the Bank Selling Its Own Fintech Software

OakNorth Bank originates small business loans while its fintech sibling distributes loan software to PNC, Capital One and other U.S. banks. Less than a decade old, the bank is profitable, a rarity among neobanks. The OakNorth model substantiates another path forward for banking's future.
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The banking industry in the 21st century has a mixed bag of players. There are digital banks, traditional institutions, fintechs and neobanks. There is heavy competition between all these players, but also partnerships.

But then there’s OakNorth, which is taking a far different approach. OakNorth Bank is a growing lender to small and midsized businesses in the U.K. But OakNorth is also a fintech selling credit analysis and loan portfolio monitoring software primarily to U.S. banks.

OakNorth (the fintech) sells the same lending software the bank uses. “We don’t compete with the bank,” says Peter Grant, President and Chief Commercial Officer of OakNorth, adding the fintech caters solely to the U.S. market because “it is the largest commercial lending market in the world.”

The pair have made waves in their respective markets since they were collectively launched in 2015, when the bank received its banking license. The two units, both headquartered in London, are owned by OakNorth Holdings, a private company.

Bucking Three Trends:

Most neobanks strive for scale, rely on interchange and don't lend (with profits to follow). OakNorth has few customers, lends and is profitable.

OakNorth Bank has originated more than $9 billion of business loans since its inception. The neobank also offers personal and business savings accounts. The average OakNorth Bank customer deposited $18,019 at the bank at the end of 2020, according to Moody’s April 2022 challenger bank report. The next highest average customer deposit was Sony Bank with $16,206 per customer and Klarna was the lowest at $43.

OakNorth Bank is also profitable, one of the few neobanks worldwide that are. At the end of 2020, the bank reported net income of $78 million, according to Moody’s, even though it only had 200,000 customers in the same reporting period.

The fintech side of OakNorth launched its loan product, ON Credit Intelligence Suite, at the same time the bank opened for business and now boasts customers such as PNC Bank, Capital One and Fifth Third Bank. Grant says the fintech company looks to serve banks with loan portfolios exceeding $1 billion, which he argues is a typically underserved market

Grant spoke to The Financial Brand about the companies’ success, where it is headed and what sets OakNorth apart from the rest of the digital banks and fintechs in the banking industry.

OakNorth the Fintech vs. OakNorth the Bank

If you Google ‘OakNorth’, the fintech pops up first in the search results. OakNorth Bank, whose website is differentiated from the fintech by only a few characters, comes up next.

OakNorth (the fintech) targets about 700 banks in the U.S., Grant says. “It’s a more competitive market in the U.S. I’d argue than it is in Europe.”

The fintech’s president explains there is more opportunity for growth too in the United States, especially as fintechs and non-traditional providers like Amazon, Plaid and PayPal disrupt the legacy banking space.

“[These companies] now understand the transactions and they are prepared to make automated decisions to give [customers] smaller credits,” he says, adding there is plenty of room for improvement for existing banks to upgrade their automation technology.

Grant stresses OakNorth Bank is a customer even though it shares the same name. It pays the same fees and rates as the fintech’s other banking customers.

Double Play:

If you write your own loan software and it works, why not sell it to other banks? Your bank then becomes a test case for upgrades, and you're assured of at least one customer.

At the same time, however, there is a competitive advantage to having OakNorth Bank as a built-in customer of the Intelligence Suite: the fintech acts as a test bed for new technologies and software updates.

“We treat them as customer zero,” Grant says, “Definitely noncompetitive, definitely complementary, but we do keep them at arm’s length and treat them as a fully bona fide customer. They pay us normal rates like everybody else, but they are in the family so we can test products with them before we bring them to market.”

He explains OakNorth Bank is also a case study for the technology the fintech sells to its other banking customers. Since it launched, the bank says there have been only 12 cumulative defaults out of its $9 billion worth of loans originated. The bank has a 26% efficiency ratio (with a goal of 20%) and four-fifths of new customers come via customer referrals.

The neobank’s relationship managers are able to transact several times more deals a year than they’ve been able to at other banks, says Ben Barbanel, Head of Debt Finance at OakNorth Bank, on OakNorth’s website. “The technology unlocks efficiencies for them at the back end, so they have more time to originate new deals at the front end.”

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A Bumpy Ride for the Fintech and Bank

The inspiration behind OakNorth is not so different from that of other fintechs and neobanks. When co-founders Joel Perlman and Rishi Khosla set out as entrepreneurs in 2005 to jumpstart their research firm, they went to all the big banks to secure a loan. After multiple failed attempts, they realized a gap existed in the banking industry. After selling the research firm, the two decided to form a company that would address the lending gap — small and midsize businesses that were often ignored by traditional banks.

“Large banks don’t have the analytical capabilities or access to data to be able to understand how these businesses work,” Jackson Hull — Chief Operating Officer at OakNorth — told Jim Marous on a Banking Transformed podcast. He says OakNorth tries to help banks get from “No,” to “Why can’t we? ”

Both OakNorth Bank and the fintech have succeeded in their respective markets. But, the journey hasn’t been perfect.

For the first several years of its life, OakNorth boasted a 0% default rate, but that came to a rocky halt in February of 2021, when the Financial Times reported OakNorth Bank had nearly $100 million of defaulted loans from ten customers. FT found eight of the ten loans were property development related.

Khosla told the news outlet that the bank had already recovered debts on four of its loans and could expect at least a 90% recuperation on the other six loans.

The downslide didn’t last long for OakNorth. By 2022, the bank had recovered and reported a 73% jump in its 2021 year-over-year profits.

“The company has not had a write-off,” Hull says. “We’ll probably have a write-off this year, but in the history of seven years of the bank, it’s quite a feat. And we owe that to this style of analysis and ultimately, a real keen focus on monitoring and working with clients after the loan has been made.”

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Data and The Future of Loan Risk Analysis

The butter on the bread of OakNorth is its data aggregation and risk analysis technologies. Grant says the two companies overall were set up well for the Covid environment. In fact, OakNorth was modeling stress testing for the pandemic in January of 2020, several months before Covid hit either the U.K. or the U.S.

“In the cloud, you have a new ecosystem,” Sean Hunter, former Chief Information Officer of OakNorth, told Diginomica. “Because of the pandemic, the banks have realized that it would have been so much easier to respond to the lockdowns if they were fully in the cloud. For example, when [OakNorth] had to become a virtual business, we did a one-day test and then went into lockdown with no problems. In a way, the crisis has been a catalyst. A lot of our clients have revealed they could not move as fast as we did.”

Read More: The World’s Biggest List of Digital Banks

One of the models OakNorth designed for small- to- mid-sized banks can be set up on bankers’ desktops. Grant says the software breaks the U.S. economy into 273 models and applies those (and subsector models) to the data aggregation tools.

Looking forward, Grant told The Financial Brand neither the bank nor the fintech has an interest in diving into the personal loan market. Both companies have plenty of runway left where they are now, he says.

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