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In Conversation With...OakNorth Bank

In this month's episode of 'In Conversation With...' xDesign Managing Director, Ben Hutton, talks with OakNorth's Director of Growth and Communications, Valentina Kristensen, about OakNorth's growth and how it's come to be one of the UK's leading challenger banks.

In this short extract, Ben and Valentina discuss the founding of OakNorth, how the bank is changing its risk assessment framework to fairly support businesses during Covid-19 and how they've built business resilience. Watch the full episode at the bottom of the page.

Valentina, thanks for coming along. Let's start by having you tell me a little bit about OakNorth.

OakNorth was founded by two entrepreneurs, Rishi Khosla and Joel Perlman off the back of the experience they had trying to secure a loan for their previous business, which did financial research outsourcing.

They were looking to grow their business and despite being profitable, having great cash flow and a good list of clients, none of the commercial banks or lenders were willing to take the time to structure a facility and look at their business or consider it, because from their perspective, the time taken to do a loan of £100,000 is the same amount of time taken to do a loan of £1,000,000.

So they kept getting the same answer: no. They went to the special situations desk of a client and were able to get a loan 100 times the size of the one they were looking for from a commercial bank. That experience really stuck with them and after eight years of scaling that business to 3,000 people, they sold it in 2014.

Then they started OakNorth to address, what they call, the missing middle funding gap. If you think about funding today, it's everything from peer to peer crowd funding, debt and equity crowd funding and a lot of new players.

These platforms are effective for smaller loans from tens of thousands to hundreds of thousands and that's really where the funding for technology has been.

There hasn't been much in the missing middle, where you typically have loans of around 25 million and these are the businesses that are impacting the economy in terms of growth, job creation and homes being built. They're the ones that are making a significant difference with the multiplier effect of £1 into those businesses is £4 back into the economy.

OakNorth has leant just over £3.4 billion with only a handful of defaults and never had a credit loss and that's in five years of lending and going through Brexit and the last few months of Covid-19.

Talking about the missing middle, does that map directly to your audience not just being the missing middle but essentially entrepreneurs?

I think it's more scale up businesses, rather than the start ups. they have to be profitable and in the next stage of growth where they're too big to go to a peer to peer lending platform but are too small to be an interest to a very large bank.

The reason it takes so long now \[to get loans from commercial banks] is because the amount of work and due diligence and credit checking that you have to do for a loan of £1 million is the same as what you need to do for a loan of £100 million, so you fall right to the bottom of the priority list.

Now, we won't get away without talking about Covid-19 a little bit, such is the nature of it all. We talked about past financial crisis and I'm old enough and ugly enough to have gone through that and the phrase that gets bandied around now is the one that got used then - the new normal. But the new normal in 2008, this is an over simplification, was that everyone suddenly had much less money but wanted the same services. That was something that was rough on a business but one you could come to terms with.

The new normal people refer to now is an uncertain mixture of working from home, not being able to see your friends and family, and means different things to different people. The one part of the new normal we can all agree on is uncertainty and in lending, which involves past data and past performance to make future decisions, how does a bank cope with disruption to that data that helps choose who you should and shouldn't lend to.

I think that's such an important question and as you say, you would have heard numerous banking executives from the largest banks in the world saying that new correlations are broken and the risk models that have been built up over decades don't hold in this environment.

In the same way you might run a scenario for climate change or natural disasters, each one is really different. The extent of a tsunami like that which happened in Thailand about a decade ago is very different to one on a much smaller scaler. You can have some idea but you have to look at a scenario on an ongoing basis. If you look at Covid-19, not only is the lockdown measures, globally, been unprecedented but also the stimulus from Government, which has sort of delayed the recession that everyone has been expecting.

In the UK the economy shrunk by 20% but at the same time house prices were up 10% and the markets were doing phenomenally well and there was a mismatch there.

This extract has been edited for length and clarity. Watch the full interview here.