As part of the 'Businesses after COVID-19' webinar series, UCL FinTech Society interviewed Rishi Khosla OBE (Co-Founder and CEO at OakNorth).
Sonia Chui covers key discussion points about OakNorth's business mission, lending opportunities in the middle-market space and finding success in entrepreneurship in this interview transcript.
OakNorth's business model
1. What is OakNorth’s main mission and what makes the business model unique?
OakNorth is a business that services what we call the ‘missing middle’ — these are businesses which are larger than micro-businesses but smaller than large cap businesses. They have generally been the blindspot of banks and lending institutions for decades. We built a technology platform to support this and we also have our own bank where we use our platform in the UK to service this particular segment.
2. What makes OakNorth special is its integration with technology. Could you tell us more about the technology that OakNorth uses and how these innovations can add value to the services you offer?
If you look at commercial lending generally in terms of credit analysis, decision making and monitoring loans, they are generally usually done manually. This is very different from ‘small-ticket’ loans which tends to be automated. The initial revolution which happened to credit cards is now coming through to lending.
Within this segment, what we’ve developed is a platform to help conduct the credit analysis and the monitoring of commercial loans using data sources which tap into both traditional and alternative areas. These are very specific to industry sub-sectors — we’ve divided them into 1600 sub-sectors. We’ve identified data sources for each individual subsector: traditional and alternative.
We pipe these data sources into our platform which helps us, as we get a particular opportunity in one of these subsectors, run scenarios and complete the right type of analysis. This allows us to be able to come out with what a credit view looks like of a particular loan and then monitor it on that basis. The process ultimately involves combining analytical technology with large data sets.
If you look at commercial lending in terms of credit analysis, decision making and monitoring loans, they are generally done manually.
3. Would you say that the talent that FinTechs such as OakNorth are seeking are different to traditionally-focused financial services companies?
Massively — we have what we call ‘Credit Scientists’, which are a combination of Credit Analysts and Data Scientists. Wherever we’re touching data, our objective is to get to a point where machine learning can automate roles and much less work gets done manually.
The effects of COVID-19 on businesses
4. What characteristics would you identify in a ‘resilient’ business model?
If you build a business model that is making money profitably and hitting cash flow positive in a short period of time that gives you resilience. Any businesses that doesn't have that, you need the benefit of substantive capital and investors who are willing to fuel that capital in order to sustain a business that has large accrued losses before reaching the point of profitability. Ultimately, resilience comes with the boring traditional business model of making money.
5. How are middle-market businesses handling the crisis compared to SMEs and large cap companies?
A lot of bigger companies have always had better access to capital and even for SMES, through the last five to ten years with the advent of peer-to-peer lending platforms and other lending businesses, have benefited from better financial support. The ‘missing-middle’ market segment has not gained benefits from either of these trends and are somewhat left behind.
In the UK, the government has covered financial support for all segments. But the Bounce Back Loan Scheme loans (BBLS) are 100% guaranteed loans which fundamentally have a very basic eligibility criteria. So if you’re a very small business, your ability to gain access to these loans would be easier than the Coronavirus Business Interruption Loan Scheme (CBILS). Overall, I would say getting lent to in the ‘missing middle’ is still the hardest segment [in terms of accessibility] today.
6. Which fields do you think will be particularly impacted by coronavirus?
It’s definitely true that Tech and FinTech companies specifically get an accelerant out of this situation. Physical retail will also get an accelerant on the trend [of digitalisation] which was already being played out [even before the crisis] — a negative trend that is.
We can also ask how it [the pandemic] is going to play out for commercial office space — the answer is unclear. There are other industries in the short and maybe even the medium term who will be hit but might be rebounded like parts of the hospitality sector.
Advice for students
7. For students who know they want to become an entrepreneur, where can they find mentors and seek advice? Or is it a trial and error process where you ‘do it yourself’ and ‘fail it yourself'?
The value from good mentors is incredibly high. Go and find the best mentors for whatever you’re going to do and just approach them and ask them for 10 minutes of their time. It’s amazing when you ask what you can get and sometimes those relationships can evolve. UCL has access to lots of great alumni which can be helpful — so there are lots of avenues to find a good mentor. The main thing is to have the desire to go out and hunt for help.
Go and find the best mentors for whatever you’re going to do and just approach them and ask them for 10 minutes of their time. It’s amazing when you ask what you can get and sometimes those relationships can evolve.
8. Is there a place for undergraduate and postgraduate students with a non-computer programming degree who want to start a FinTech career? Would you recommend students to find some kind of skill set related to data science and quantitative analytical methods?
Data science is absolutely valuable and its applicability is broad across a lot of different domains. But to answer whether it’s a ‘need to have’ for every graduate would be difficult. There are lots of roles within any FinTech business or even any industry like product specialist, marketing and client-facing roles etc. Yes, the coding is a core part, but there are lots of functions around the business.
9. Final advice for students?
The best time to start a business is now and the toughest times always teach you the best lessons, so if you’ve got an idea you should go for it.