EXCLUSIVE: ‘Bottom line thinking’ – Valentina Kristensen, OakNorth and Andy Renshaw, Feedzai in ‘The Fintech Magazine’

Is it time for loss-making challengers to plot a slightly different course? Valentina Kristensen from (the very profitable) OakNorth and Andy Renshaw from financial software specialist Feedzai, share their thoughts

Fintech was born out of a mission – to free consumers’ finances from the shackles of incumbent banks. Typically powered by the smartphone in people’s pockets, we’ve had one hell-of-a-ride of a products revolution in the last decade. But incumbents have retained one huge advantage, and it’s, ultimately, the most important advantage of all – profitability.

Almost a decade on, the fintechs that burned that technology path are, for the most part, still addicted to fundraising cycles just to keep skin in the game – they can’t drive growth from revenue. And that means the price tag that the market puts on those companies is key.

“Many firms are chasing the valuation, rather than the value they’re actually delivering for customers,” observes OakNorth’s Valentina Kristensen. She speaks from a position of strength: OakNorth Bank is that rare thing – a profitable neo that delivered a 2020 pre-tax profit of £77.6million, a rise of 18 per cent on the previous year. So, the views of its executives are worth listening to. And you see a lot of fintechs still trying to be all things to all people, whether that’s crypto exchange, selling gold, etc,” Kristensen adds.

The implication being that over-diversification is contributing to their perpetual lack of profitability.

Valuations in the fintech sector recently have been stellar – in July, Revolut was valued at £24billion, ranking it higher than high street rival NatWest. N26 was pegged at £9billion when it went into a £900million series E round in October, giving it a higher market cap than Germany’s second biggest bank. Both are currently operating at a net loss.

Money is not the only issue. Since the incumbents began launching a flotilla of speedboat banks, the challengers are themselves being challenged, which, says Kristensen, only reinforces the argument that neos should double down on what drove them into business in the first place – answering a specific customer need. That increases the chance of building a game-changing product which is difficult for rivals to copy, she says.

“It’s better to ask ‘how can we do what the iPhone did to the mobile phone market?’ and create something that is so much better than what went before, not something that’s incrementally better.

“If you’ve only developed features, the big banks can come in and replicate them. Whereas, if you create something that’s exceptionally better, the moat that will give you – that competitive advantage – gets wider and deeper.”

Kristensen puts OakNorth’s success – the bank has lent £6.5billion to UK firms since gaining regulatory approval in 2015, and made just over £1billion of net new loans last year – down to having just such an unwavering mission. That and the use of Cloud technology, which has seen OakNorth develop and license software to customers including Capital One, Fifth Third Bank, SMBC Bank and ABN AMRO.

Agile say and agile do

A particularly smart thinker (Albert Einstein, in fact) said: “The measure of intelligence is the ability to change.” Andy Renshaw, SVP of product strategy and management at AI and financial software specialist Feedzai, believes that neos, having long preached agility in their tech stacks, should practise it in their business models, too.

“There’s the notion that what got you to here, won’t get you to there, and some organisations are at that inflection point – they need to evolve and adapt,” he says. Which rings true as much for incumbents
as challengers, of course.

Stick to the mission

Before joining Feedzai in 2019, Renshaw’s career had included an 11-year stint at Capital One, a firm he says that was game-changing when it entered the UK’s credit card industry. Like OakNorth, it had, and continues to have, a single-minded mission and did indeed put a very deep moat between itself and established players.

“We had a single product that was launched in a way to disrupt the big players,” says Renshaw. “We didn’t undercut by five or 10 per cent; we undercut by 50 to 60 per cent, so we completely disrupted the market. But I’ve seen in some of the larger organisations I’ve worked for, that mission can get lost; often there are multiple causes, or there are causes by department or product line. There can be too many.

“Also, in a crowded market, differentiation is obviously valuable, but simply doing that around the nature of the financial products, I think, no longer really resonates. If you’re not careful, all it really does is drive a race to the bottom.”

Renshaw was impressed by another feature of the culture at Capital One – a willingness to ditch projects that were failing.

“Where they were good, and probably still are very good, was taking a data-led approach to experiments,” he says. “If it wasn’t working, they knew exactly on what basis they were going to kill it, and they killed it quickly and decisively. Emotion didn’t come into it.”

An agile technology platform allows a business to pivot and thereby avoid mission creep, and both Renshaw and Kristensen cite Cloud-based systems as being key to adaptability. Kristensen says OakNorth from the outset wanted its bank to be fully Cloud-hosted, not just to use it for ancillary services such as email or customer relationship management – although that’s pretty much all that was available at the time of the bank’s launch in September 2015.

“But OakNorth worked with AWS, our Cloud provider, and the regulators, and it became the first UK bank to be fully Cloud-hosted in May 2016,” she says. “What that has enabled us to do is bring new products and services to market very quickly. We can now scale up and down as needed, and we avoid wasting money by paying for server space that we don’t need.

“In terms of cybersecurity and operational resilience, the ability to rebuild our core in a new location within a matter of hours is something that is not possible for the traditional high street lenders, with their legacy technology.

We’re kind of comparing spaghetti with lasagne: we have nice clean sheets versus the muddled spaghetti structure that you’ll find in those organisations.

“Another factor was that whilst building our Cloud stack, we were willing to be first movers with the partners we worked with. I think we were the first European bank to partner with Cloud banking businesses Mambu and nCino. That first-mover advantage meant we got to play a big role in feeding back on the product – what’s working, how it can be improved and so on.

“Being a first mover perhaps wouldn’t be possible for some of the larger institutions. They often want to see others test the water, be the guinea pigs, and then, if it all turns out OK, they may be willing to give it a go.”

Feedzai’s solutions are also Cloud-first, and Renshaw says another benefit of that is ‘we can share best practice very easily.’ “We’re able to leverage central models, central solutions, and ultimately achieve better outcomes,” he says.

“As Valentina says, you can scale up and down, and for a fast-growing organisation that doesn’t quite know where it’s going to grow, or how, then that’s key in protecting the cost and risk position. Cloud removes a lot of that tension. And because, once data is there you can use it propositionally, you can use it to provide better service.”

Sadly, for fintechs, what they can do – in time – incumbents can do, too, as the arrival of speedboat banks, such as JP Morgan’s Chase, or NatWest’s Mettle, demonstrate. So, what can a native fintech do to avoid bobbing helplessly in their swell? Relook at the business model, thinks Renshaw.

“Creating market share isn’t difficult; it’s sustaining it in a profitable way that’s compelling for the customer and the organisation,” he says. “We’re seeing businesses try the subscription model, which I really like. They’re trying to create a compelling monthly or annual fee service. It’ll be interesting to see how that plays out.

“The other model we’re seeing is simple reward-type structures. A number of larger organisations have rewards, but they’ve become very complex, maybe they’ve layered them or they’ve removed areas where those rewards weren’t good for the organisation. But what you’re left with is a slightly diluted offering.

“So, I would say rewards, subscriptions, or another way of creating a new financial proposition is the way to go – although I wouldn’t be so bold as to predict whether they’ll be successful or not!”

This article was published in The Fintech Magazine #22, Page 49-50