EXCLUSIVE: “Steadfast&true” – Rajesh Gupta, OakNorth in ‘The Fintech Magazine’

UK challenger OakNorth has grown from the acorn of an idea into a flourishing fintech, more than capable of withstanding harsh conditions. We spoke to its CFO Rajesh Gupta about profitability, resilience… and expansion

OakNorth planted its feet in fintech soil in 2015, when interest rates were low, digital fever high and capital cheap. Five years later, two of those key metrics, at least, have reversed.

The fully licensed bank passed major milestones at breakneck speed: the first UK challenger bank to make a profit (in 2016, just 12 months after launch), the first to achieve unicorn status (in 2017), and one of the first globally to achieve carbon neutrality for Scope 1 and 2 emissions (in 2019). And then the world changed in 2020. So how has the bank fared since COVID?

Like its namesake, it’s sturdy. Despite lockdowns, navigating the consequences of Brexit and fighting recent economic headwinds – including UK inflation hitting a 40-year high, 14 successive monthly interest rate rises, and the ongoing Russia-Ukraine war – the bank built by entrepreneurs for entrepreneurs, and its lending platform, have thrived.

Pre-tax profits in 2022 were £152.3million, it completed more than £1.5billion of new lending, and its depositor base grew to more than 214,000 customers. The bank’s loan book, including its key domestic and commercial property segments, stands at £5billion, with an industry-leading cost-to-income/efficiency ratio of 26 per cent. Given a reported loan default rate of just 0.07 per cent versus a sector average of 0.32 per cent, as recently as 2021, there remains plenty of cushioning, despite its exposure to a weakening UK property sector.

While a strong return on equity is obviously a key metric, according to CFO, Rajesh Gupta: “More important is the fact that we’ve been able to lend out £10billion(in total) to UK clients – these clients in turn referring customers to us,“ he says.

He adds: “More than 80 per cent of our customers come through referrals, where we pay nothing to the intermediary. Equally, 30 to 40 per cent of the loans we write every year is repeat business of some sort or other. So the customers don’t just come to us, they stick with us.“

And that gives OakNorth a certain resilience. Hitting profitability as quickly as it did was an important testament to its discipline and its philosophy, according to Gupta: “Whilst we’ve had our own capital raising rounds, a lot of the capital we generate (in order) to grow ourselves comes from our profits. That’s a very fortunate position to be in.”

That said, he knows the best form of encouragement for any industry is being able to access capital so that innovators and entrepreneurs can spend their time thinking about customer solutions, rather than running after investment.

“That is critical and it applies whether you’re in a seed round, in a series 1, 2, 3 round, or even later on, when embarking on an IPO roadmap,“ he says.

Capital and how you manage your treasury risk are bread and butter issues for OakNorth, their importance highlighted by the US Silicon Valley Bank (SVB) debacle.

“They got their asset and liability management wrong and probably made a few mistakes along the way,“ observes Gupta.

“We fund our loans with either term deposits nor 90-day-plus notice accounts; a very, very conservative way of running a liquidity policy”

The demise of SVB in March 2023 has subsequently led to the bringing forward of proposed (and punitive) legislation in the US. This includes the Failed Bank Executives Clawback Act (FBECA) 2023 and the Recoup Act. Taking on board many of the features of FBECA, the Recoup Act would allow the FDIC to recover senior executive pay where banks with assets of $10billion or more go bust. For banking executives in the US, at least, the message is clear – get your management wrong by taking unnecessary risk and your bonus payments could disappear in a puff of smoke.

The decision to hand SVB’s profitable UK business to HSBC – on the grounds of shoring up market confidence – at the expense of a bid from a specialist lender (OakNorth was a strong contender) may yet have negative longer-term implications. Some commentators have suggested that it could undermine the UK’s ambitions to become a technology superpower. Irrespective of how the consequences of that decision play out in the longer term, for Gupta, as CFO in the here and now, liquidity is king.

“From my vantage point, more than anything else, we watch liquidity all the time, making sure that the liquidity we take to run the bank is as safe as possible. We fund our loans with either term deposits or 90-day-plus notice accounts; a very, very conservative way of running a liquidity policy,“ he says.

It’s straightforward and simple financial management. As Gupta puts it: “It’s preferable to provide better service to your customer, and get a little bit of a premium on price, than work out incredibly complex structures to get a little bit of pop in your profits. It’s an important philosophy of the bank and one that we apply in OakNorth Finance, as well.“

That’s not to say his role as a CFO is any easier. Like most of his peers, Gupta’s is changing in response to technology and a dynamic macroeconomic landscape.

“Five, seven, 10 years ago, a CFO could sit back, and rely on history to be an accurate predictor of what the future was going to bring. That’s no longer the case,“ he says. “I have moved from having very definite plans, targets, and being able to operate step by step, to being someone who operates on scenarios, because the future is difficult to call. You have to say ’OK, the scenario could be Y, or it may be Z,’ understand each one and determine how you’ll play it.“

THE AMERICAN DREAM

The state of the specialist and mid-market banking system in the US in the wake of SVB hasn’t dulled OakNorth’s ambitions regarding expansion there. Plans, which have been talked about for some time, are still in their early stages. But, like most things OakNorth does, it’s well thought through.

“On the one hand, going west is smart for most fintechs, because it’s a great market, a large market, and business thinking, in many ways, isn’t dissimilar to how it is (conducted) in the UK, and in the way they make decisions. But, equally, the US is a very, very different marketplace when it comes to regulations,“ says Gupta.

A case in point is having to deal with 50 state-wide specific regulations in areas such as taxation, licensing, etc.

“As a new entrant, you need to be very clear what you’re doing,” he adds. “It is one currency in the US, but multiple laws and multiple tax implications that one needs to understand. For any bank considering the move, it’s also worth remembering that while in the UK there are relatively few banks, the US currently has more than 5,000, many of them community-based.

“In the UK, banks tend to be generic,” says Gupta. “We do have some that look at specific communities, in specific areas, but the products and solutions we develop, tend to be far more generic. The difference between that and the US has a significant impact, not only in terms of behaviour, but also the networks you need to tap into – finding out where your customer is, and what the customer need is.

“So, yes, we can take OakNorth across border, but we need to be aware that it’s a far more complex legal and tax situation. We need to understand how the US conventions differ between states, and between different communities, and figure out how that can help us determine what our customer solution needs to be. None of that should be underestimated.”

It wouldn’t be going into the States blind, though. OakNorth already has a US presence via its whitelabel banking platform with banks such as PNC, Capital One, Fifth Third, Customers Bank and Old National, having leveraged its credit monitoring and analysis software. Longer term, an IPO is still a possibility for OakNorth. But, while no definitive timeline has been set, the bank has indicated that if it does pursue a listing, it’s now leaning towards the US rather than the UK, due to the lack of an investor base focussed on highgrowth technology here.

IPO or not, it’s looking to increase the number of US technology clients it services and, if it were to expand its bank to the US in the future, it may seek a banking licence, possibly via an acquisition. When asked about its US plans in March, OakNorth CEO and co-founder, Rishi Khosla, said it was keeping an ’open mind.’

In 2019, OakNorth was valued at $2.8billion – when SoftBank injected $440million into the group. Continuallyimproving metrics since, mean OakNorth is now a very well-seasoned bank. And seasoned oak is always more valuable.

This article was published in The Fintech Magazine Issue 29, Page 73-74