Whilst we are still at the very start, low cost technology, innovation and the ability to compete with the establishment will change the face of banking over the next 20 years. The great debt cycle that is nearing its end reshaped banking globally. Banks became the centre of western and eastern economies but now that dominance can be attacked and broken down into its components for a better deal for society. The following article is but one small example of what’s possible and coming.
by: Emma Dunkley for the FT
OakNorth, a UK challenger bank that focuses on lending to small businesses, has broken even in its first year in a sign of strength among the wave of recent digital-only entrants to the British banking market.
OakNorth, which appointed former regulator Lord Adair Turner to its board last year, is the first such digital lender to turn a profit within 12 months. The bank has not disclosed the financial details but confirmed to the FT that it had made its first pre-tax profit.
Doubt has been cast by some analysts about the ability of start-ups to attract customers from established banks, as well as increase lending amid uncertainty in the wake of the UK’s vote to leave the EU.
OakNorth said that it had nearly doubled lending in the two months following the Brexit vote, however, approving more than £100m of loans to small businesses.
A number of other digital-focused start-ups, such as Monzo, Starling and Tandem, have gained licences in the past few months. Atom, the UK’s first app-based lender that launched in April backed by Spanish bank BBVA, has said it expects to break even in two to three years.
OakNorth, which has lent £180m since launch last September, focuses on serving entrepreneurs within the smaller business sector. In the past few weeks, for example, it closed a £19m deal with the healthy fast-food chain Leon. Other specialist lenders focused on the small business sector have also become established in the past six years, such as Aldermore, Shawbrook and OneSavings, and again have posted strong recent results. Shawbrook reported a 14 per cent rise in pre-tax profits for the first half, while Aldermore posted a 50 per cent increase, and One Savings Bank 36 per cent.
Rishi Khosla, co-founder and chief executive of OakNorth, said: “We have a fundamentally different approach to the other challenger banks — we are a bank for entrepreneurs.
Atom Bank, the UK’s first app-based bank, has registered nearly 40,000 potential customers of which only 2,000 have opened accounts, in an early sign of the challenges start-ups face as they attempt to exploit the shift to mobile banking.
“We’ve taken a disciplined frugal approach to building the organisation while not compromising on technology, people, and processes. If you look at the technology we have built, it’s more flexible and scalable than other challengers who have used much older technology.”
Earlier in the year, OakNorth opted to use the cloud for its core systems by using Amazon web services. OakNorth said the move allows it to scale up more quickly with fewer resources, enabling it to launch new services and products more efficiently. The cloud is a virtual way of providing an outsourced range of IT services over the internet, rather than through a physical computer server.
An adviser to challenger banks told the FT that OakNorth has benefited from being able to keep costs low owing to its simple business model. Other new banks focused more on current accounts and transactions are required to build more complex and costly technology infrastructure.
He said: “There’s an achievement in building a loan book of sufficient size to cover costs, and it shows you can build a profitable bank in a year.”
Copyright The Financial Times Limited 2016. All rights reserved.