He’s one of the most respected voices in Britain’s fintech industry.
Challenger banks have reported heavy losses this year as the pandemic wreaked havoc on young start-up businesses.
But Rishi Khosla’s OakNorth has not only shrugged off the impact of the coronavirus but actually excelled in it. What’s more. He remains bullish about Brexit, despite a looming no-deal scenario.
Five years ago, alongside his co-founder Joel Perlman, he set out to alleviate the struggles faced by SMEs in landing debt finance from high street banks.
Since then, OakNorth has lent £4bn to UK businesses and Khosla’s personal wealth has soared to £650m.
The company’s dedication to profitability makes it an outlier in the fintech sector.
‘When it comes to business, I’m a traditionalist — I believe a venture should make money,” he says over a Zoom call from his sitting room.
All three fintech banks saw increased net losses in 2019 compared with 2018
The 45-year-old proudly declares his business has been profitable almost from day one — a feat that seems almost impossible to retail challenger banks.
“In the last few years, the balance has shifted in favour of extreme growth at all costs – in large part, due to the huge amount of capital available,” he says.
“Against this backdrop, profits and in some cases ‘business models’ have almost become a nice to have, rather than a need to have, but this year has demonstrated to numerous fintechs, that this can no longer be the case.”
This year has increased difficulties at some of the country’s retail-facing fintechs. In July, Monzo reported that losses had risen to £114m and warned that the pandemic had threatened its ability to operate. Losses also climbed at retail banking start-up Starling Bank last year, rising to £52m. Revolut, another consumer-friendly banking app, reported a trebling of losses in 2019 of £107.9m.
Khosla and Perlman, who owe much of their wealth to their majority stake in OakNorth, will undoubtedly be relishing in the company’s rapid growth, having posted a £66m gain in 2019, almost double that of 2018. The pair previously founded Copal Partners in 2002, which they ultimately sold in 2015 to ratings agency Moody’s for a “nine-figure sum”.
If they decided to sell OakNorth in the morning they’d likely make a multiple of that, with the business most-recently valued at $2.8bn in a round that included Japanese investment giant SoftBank.
Despite the uncertainty caused by Brexit, Khosla remains insistent that his business will remain steadfast even without a deal.
“We’ve built our loan book in this environment, we’ve always run stress tests related to Brexit,” he says remarking the vote happened just nine months after the birth of the business.
“Therefore we built a book that we feel like can take the head off of no deal. Fundamentally we feel like we’re in a good place.”
The London fintech scene
OakNorth is largely split into two different areas. The first lends to SMEs in the UK with amounts ranging from between £500,000 and £25m. The other is an automation system known as “Credit Intelligence” that helps banks make quicker and more accurate decisions around how likely a loan was to get into trouble.
“The way that commercial banking has been done hasn’t changed whereas retail changed so much,” he says with a smile as his dog, Simba, darts into the picture.
“Small business has changed materially, as soon as you go to commercial banking it’s the same as it was in the nineties and eighties.”
Khosla believes there are thousands of banks in the market for his software, particularly in the US. So much so in fact that he believes the lion’s share of OakNorth’s revenue will eventually come from its American business.
Despite the company’s intense international expansion, another funding round is not on the cards. He insists that the business is “fully-funded” and has been since SoftBank came on board.
In order to keep growing however, more needs to be done to help stimulate innovation in the sector in the UK.
“If you take the challenger bank sector and OakNorth Bank as an example – from a regulatory perspective, we believe we should be treated differently to a new bank that’s only just received a license and is yet to make a profit,” he says.
“At the same time, we also can’t be treated in the same way as a low growth incumbent institution or a systemically important institution which has much bigger regulatory teams and resources.”
The OakNorth chief believes that certain requirements, like regulatory reporting for growth banks, should be simplified. He also says that new requirements should be implemented in a “proportional manner” for new and growing banks, nodding to the requirements put on fintechs around operational resilience.
The Prime Minister’s now-ouster advisor Dominic Cummings had outlined desires for Britain to build trillion dollar tech giants, like the ones found in the US. Khosla is hopeful that the UK can eventually build a tech titan of its own.
“I have no doubt that we have the capability to build global champions in the sector, but there’s a lot of work to be done if we want to build global tech companies like those seen in China and the US,” he says.
He points out that while Britain is great at starting businesses, it starts to fall down when it comes to scaling them.
Khosla himself will face those very challenges as he begins to scale his business into a truly global operation. Given the company’s performance in the midst of a pandemic and its bullishness around Brexit, it might be foolish to bet against him.
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