Fresh off a sizable capital raise, U.K. challenger bank OakNorth Bank PLC is looking to take its digital small-business lending model across the pond and partner with U.S. banks.
OakNorth launched in 2015 and its digital lending business has made more than $3.7 billion in loans to British small and medium-sized enterprises. It is one of a number of new entrants in the market competing with more established U.K. banks through the use of financial technology, often referred to as challenger banks.
In February, OakNorth received $440 million from Japan-based SoftBank Group Corp. and Singapore private equity company Clermont Group in a deal valuing the company at $2.8 billion. It plans to use those funds for international expansion.
While OakNorth is a balance sheet lender in the U.K., at least initially, it is not looking to obtain a U.S. bank license, CFO Cristina Alba Ochoa said in an interview. Rather, it plans to partner with banks and lenders that will underwrite loans utilizing OakNorth's platform, which can connect depositories to customers and provide origination, analytical intelligence, credit analysis and portfolio monitoring services.
OakNorth initially thought small banks would show the most interest in a partnership aimed at lending to SMEs, but about 80% of its partnership conversations and agreements have been with "very large institutions," said Valentina Kristensen, OakNorth's director of growth and communications.
OakNorth's push into the U.S. comes as many big banks are pursuing a wider digitization strategy in an effort to reach new customers, predominantly through online deposit-gathering initiatives. Online lenders such as On Deck Capital Inc. and Fundation Group LLC also have arranged partnerships with U.S. banks to help them expand their small business lending services.
Banks have historically been ambivalent about pursuing SME loans because the due diligence costs associated with the lending are similar to larger loans that they traditionally target, said David O'Connell, senior analyst at Aite Group.
O'Connell said many in the industry thought banks would form more partnerships soon after alternative lenders emerged in the market, but a robust trend has not emerged. In interviews with banks on this topic, he found banks were concerned that partnerships could raise customer service issues, stemming from higher rates that alternative lenders tend to charge. Depositories also do not want to give up underwriting control, he said.
That said, O'Connell added that OakNorth's partnership model could work as it provides an online "storefront" for its bank partners.
SoftBank Investment Advisers' Munish Varma said OakNorth delivers "a highly differentiated service to a key segment of the market that has historically been underserved by commercial banks," adding that it had a "clear and ambitious vision" for its global expansion.