Challenger bank OakNorth launched a mortgage product earlier this month. Just a few years in, the bank uses a different playbook than other challengers. While firms like Revolut and N26 embark on a global expansion strategy by getting local banking licenses, OakNorth spun off its technology and is pursuing a software strategy. While other challengers are hustling to sign up checking accounts, OakNorth is really a lender at heart, providing debt finance to English growth-stage entrepreneurs. It’s into this demographic that the challenger banks has now launched a mortgage product.
OakNorth CFO Cristina Alba joins us on the podcast to talk about the consumer finance product and whether it really is a departure from the challenger bank’s product strategy. We delve into the core product, its target market and the borrowers it serves. Lastly, we frame out to get a bigger view of where OakNorth is planning for growth in the future.
The decision to get into mortgages
Our mortgage product isn’t a departure from our SME strategy — it’s just another way to service our clients, our target market, our other people who face challenges when applying for a mortgage. We created this product for people with revenue streams that aren’t 100 percent predictable and they don’t perform well in scorecard solutions.
We’re successfully underwriting complex business cashflows for entrepreneurs, so we can use the same type of underwriting for the acquisition of their home. Our borrowers are asset-rich and cash-poor for the short term. We look at those assets for our underwriting.
Mortgage can also be a gateway to business borrowing
We’ve already let our existing customer base know about this product and how we can help them personally with their home. We expect this to attract people who aren’t necessarily clients of OakNorth now, and in years to come, they may look to expand their business and we’ll be well-positioned to lend to them. Also, we can help entrepreneurs who immigrated to the UK from other countries. We are targeting a part of the mortgage market we think is quite underserved.
Challenges in commercializing a mortgage product
We need to align our technology and data to extract exactly what matters. You have to be very clear what you’re targeting — in this case, the potential borrower’s debt levels and his ability to successfully replay the mortgage and keep his home. We look at a lot of factors.
At the moment, we’re focused on launching the mortgage product in the UK. Globally, where we license our technology out to partners, it will depend on them whether there is interest in mortgages or not.
Our bespoke debt financing solution for SMEs provides flexible terms that meet the cash flow needs of our clients, taking into account any type of collateral. In the UK, we’ve already originated £3 billion, of which half a billion pounds have already been repaid with no defaults. Our global strategy is to license out our SME technology, data and platform to partners globally via OakNorth AI.
OakNorth’s deposit strategy
In the UK, we offer deposits that help fund our lending. Our retail product is all digital without any branches. Most of our deposit accounts are retail savers and some business clients. They’re interested in clear products with no risk and no structured products.
We also have a partnership strategy. There are current account providers, payments, and many fintechs in the UK that provide a customer-friendly client experience. They haven’t invested in building a savings product, though. With them, we partner to offer OakNorth deposit products which pay much higher interest rates than current accounts right now. It gives us access to a segment of the market that’s not shopping around — they’re looking for an integrated product.
2019 is about continued execution in our lending and our AI expansion. We have to make sure our investment in the bank is deployed the way it should be.
We’re also focused on the deposit side in the UK to partner with fintechs to allow them to use our deposit product. You’ll see more of that coming in 2019.