20th Sep 2017
It seems like RBS has finally received its ‘punishment’ for its state-backed rescue in 2008. The bank will front £750m to help the new generation of challenger banks boost their business banking capabilities.
At least, that’s what the official story is. As the FT reports, it’s far murkier than RBS’s PR blitz would suggest. Many of the upstart ‘challenger banks’ would most likely have preferred RBS to have gone bust and have its market share naturally dispersed.
But even if this is all a hollow gesture, it does point to the fact that the challenger banks are now firmly on the banking radar. This seems a long way from just a few years ago, when these upstarts were just nascent ideas.
OakNorth is one such bank. The brainchild of the serial entrepreneurs Rishi Khosla and Joel Perlman, the bank focuses specifically on business lending. Despite only getting its banking license in 2015, it has now has a loan book of £700m.
“We lend between £500k and £20m. We’re also sector agnostic,” explains Ben Barbanel, OakNorth’s head of debt finance. “The average ticket size across our loan book is £6m. If we had a choice it would be lower than that. It’s just because we’ve had a number of larger deals, and that’s bumped the average higher.”
It’s complete fiction that businesses aren’t wanting to borrow money. It’s a political excuse that the mainstream banks hide behind.”
OakNorth’s entire premise comes from the difficulties that Khosla and Perlman faced in the past with raising debt. In the UK’s small, cloistered banking sector, dominated by a coterie of big players, the trouble of accessing finance is well known.
Especially for fledgling businesses, the difficulty has led to a proclivity for equity finance, as opposed to borrowing. But for Barbanel, the trend is spurred by a misconception. “If you tell a business enough they can’t borrow money, they’ll believe it,” he says. “It’s complete fiction that businesses aren’t wanting to borrow money. It’s a political excuse that the mainstream banks hide behind.”
The insinuation from established banks would be that the challenger banks are a sort of debt Wild West, spending less time strenuously vetting their customers’ loan applications. It’s an accusation that Barbanel bristles at.
“Having spent 15 years of my career working for the big banks, I’d say our analysis both in terms of depth and breadth is significantly deeper and detailed than the mainstream banks. We use IT and outsource to speed up the process, although all our decisions are made here in the UK."
Normally banks won’t look at accounting data unless something has gone wrong.”
After initial vetting, accounting data in particular plays a vital role in OakNorth’s modelling. “Normally banks won’t look at that data unless something has gone wrong,” says Barbanel. “Because we monitor it on a month-by-month basis, we’ve had times where we’ve been able to warn a client about an emerging problem and fix it before it became an issue.”
Sharing your accounting data with OakNorth is a prerequisite for a successful loan application. And not just for monitoring the borrower’s financial health, explains Barbanel. “It helps us with underwriting for different sectors. So if we have the data from a number of businesses within a given sector, we can look at the data from existing clients to decide new loans.”
It’s the accounting data that allows OakNorth to offer an early yes-or-no policy on its loans. Customers approaching the challenger can expect a quick yes-or-no answer on their applications, along with a brief explanation as to why the decision was made.
“We started with the hypothesis that banks can lend to SMEs efficiently, quickly and help grow businesses where they’ve been led to believe the only solution is external equity,” says Barbanel. “We’ve looked at the lending horizon and this is where we see the gap in the market.”
About Francois Badenhorst
I'm AccountingWEB's business editor. Feel free to get in touch with comments, tips, scoops or irreverent banter.