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.

By Garret Reich, Editorial Associate at The Financial Brand

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.

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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