OakNorth, backed by SoftBank, claims to have a perfect loan record – Quartz

Even by high fintech standards, OakNorth is thriving. The London-based startup’s $440 million funding round, led by SoftBank’s Vision Fund, was the largest ever for a European company of its kind. Less than four years after its launch, the company is profitable and valued at $2.8 billion. OakNorth claims that none of its customers have ever defaulted or even had a late payment.

The founders of OakNorth, who sold their analytics startup to Moody’s in 2014, say the company is built for entrepreneurs. Its clients are small and medium-sized businesses such as Leon, a restaurant chain, as well as bars, hotels, property developers and private equity firms. The company plans to use the money it recently raised for its expansion in the United States and abroad.

But what about the perfect loan record? It almost sounds too good to be true. The bank has lent more than £2 billion ($2.6 billion), which it is funding primarily with the shares and deposits of more than 30,000 saving customers.

Sean Hunter, CIO of OakNorth’s analytics unit, said about one in 10 companies pass an initial screening before being asked to apply for a loan. The potential borrower then goes to a credit committee, where about 90% of applicants are approved. Broadly, the approval rate is roughly in line with small business loans in the UK, according to data from trade association BBA.

Hunter says the bank is using artificial intelligence to automate its credit analysis as much as possible. The machines are able to sort through mountains of data to identify patterns. And so an example is finding statistics for comparable borrowers. For a hotel business, it can identify property values ​​for similar businesses. “There are a lot of little sub-tasks that you can get AI to do,” said Hunter, who previously worked for Silicon Valley data science company Palantir.

The company also uses external data such as TripAdvisor ratings and sentiment analysis based on Yelp reviews. Its OakNorth Analytical Intelligence business licenses its technology platform services to other banks.

But not all borrowers behave as expected. In a “handful” of cases, Hunter said OakNorth modified a customer’s loans. Another strategy is to simply drop weaker credits. Co-founder Joel Perlman recently told a conference in London that the company has sometimes urged a customer to refinance elsewhere. “We said, ‘Go renegotiate with another bank and refinance,'” Perlman said. “And they went and refinanced, and then a few months later they defaulted.”

It’s a technology problem

OakNorth says its loans are specifically designed for each client, similar to the treatment a large corporation would expect from a Wall Street lender. Humans make the loan decisions, but they are able to improve analysis and speed up the process with AI. Hunter said the technology is helping him reduce the cost of personal service to a level where it can be used for relatively small loans.

The company also continues to monitor the customer, either by directly logging into accounts to access operating data or by requiring customers to provide documentation that is uploaded. The idea is to catch problems before the customer has no options. “Getting all this data in different formats from different companies is complicated,” Hunter said. “It’s a technological problem that we took care of.”

Big banks with large portfolios are not always able to regularly inspect every loan, said Francesc Rodriguez Tous, professor of finance at Cass Business School in London. Instead, they might focus on their most important accounts unless there are obvious red flags from smaller customers.

But if every company looking to refinance an OakNorth loan is already in trouble, eventually other banks will notice, he said. They will be less likely to offer refinancing, which will make it harder for OakNorth to offload problematic debt in the future (and taint its perfect loan record). Without specifically pointing to OakNorth, he noted that loan modifications are fine unless they simply reclassify a borrower who still cannot afford to repay a debt. And a key question, of course, for every startup lender is how resilient they will be to a downturn, after a long period of relatively benign economic conditions.

The company points out that some of its customers have already gone through a crisis. For Perlman, profitability – it posted a profit of £10.6m in 2017 – is key to weathering a potential downturn. “We don’t believe in this revenue story and we will end up making money,” Perlman told the conference. “When the recession comes, being profitable is a big thing.”

  • Apple and Goldman Sachs are teaming up on a credit card linked to the iPhone’s digital wallet. Expect them to position this as a “healthy” financial alternative, with spending features similar to a fitness app.
  • The debate over a cashless Britain is heating up. This is a good thing because the UK, like most countries, has no plan for what happens when it abandons notes and coins. Simply letting things happen risks leaving out the most financially vulnerable.
  • Amazon, meanwhile, doesn’t let a lack of payment cards get in the way of making a sale. It has launched a service in Kenya as well as Asia and Latin America that allows customers to shop online and pay in banknotes and coins.
  • Exclusive for Quartz Members: Don’t fall for the JPMorgan crypto hype. If UBS’s interbank coin, which has gone very quiet in recent years, is anything to behold, last week’s announcement is more of a stir than a game-changer.
  • A French court has ordered UBS to pay the heaviest fine ever imposed on a Swiss bank. The company is accused of having illegally concealed billions of euros belonging to French customers.

Heard through headphones

Jo Hannaford, chief technology officer at Goldman Sachs Europe, says in the Exchanges at Goldman Sachs podcast that a teacher challenged her class to write a financial plan for Mother’s Day: “So the very first plan I wrote was basically taking all the utility bills in her house and j I produced a program that would be like, you know, basically automate them for my mom. And when I think back on that, she was kind of puzzled.

The future of finance elsewhere

  • Mega-fintech Ant Financial will start charging some customers fees for large credit card payments. The Chinese company, which processed more than $10 trillion in payments in the 12 months to September, cited rising operating costs as the reason for the fee hike. It also struck a deal with Apple to provide iPhone financing in China.
  • Lithuanian (paywall) officials wonder if they have the expertise to oversee financial licensing for companies like London-based Revolut. Officials are calling for a new probe into UK fintech licensing.
  • Smartphone wallets aren’t taking over in the West – they’re sophisticated payment cards.
  • Some investors are complaining about the high prices SoftBank’s Vision Fund has paid for tech companies. One claims that SoftBank sometimes invests in companies first and then transfers the holdings to the Vision Fund at a higher price (paywall).
  • Goldman has splurged on another fintech company, and this one is a construction finance startup called Rabbet. GoCardless, meanwhile, raised $75 million. And PayPal (understandably) thinks payments could become a $100 trillion industry.

Previously in The Future of Finance Friday

Feb. 15: Fintech Startup Founded by Palantir Veterans Considers One-Click Mortgage

February 8: Revolut surfs on record fintech investment boom

February 1: Apple is expected to issue a debit card

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