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Case Study Homework - Markdown

OakNorth AI Case Study

Prepared by Jeneia Mullins

Overview:

  • Founded in 2014, OakNorth Bank is a commercial and business bank headquartered in London, UK. The company provides financing solutions in the form of debt financing, property funding, capital for recapitalizations. Oak North also offers business deposit savings solutions.

  • The company was founded by Rishi Khosla based on his own frustrations accessing capital from commercial banks when he had successfully built his prior firm, Copal, into a fast-growing growth company. Rishi was able to obtain a credit facility from an institutional desk but not from a commercial bank. He noticed that the system was broken due to the disconnect in lending appetite between the various financial institutions. As a result, he decided to create his own company to address the problem.

  • According to Crunchbase, as of August 26th, 2019, OakNorth has received over a billion in funding from nine investors. The most recent fundraise for $440 million from the SoftBank Vision Fund in February of 2019.

Business Activities:

  • Key objectives: OakNorth recognizes that loans in the $1k to $500k loan size are highly automated, where as loans over $25 million are well-served by large banks. OakNorth recognizes that loans ranging from $500k to $25 million is an underserved market. OakNorth is trying to find a middle ground solution to automate the underwriting process for loans in this underserved market.

  • Primary customers and value proposition: The Company targets small to medium sized businesses, which are typically under $500mm in revenue. It was initially targeting solutions for these businesses in Europe, but it is now trying to offer its solution as a turn-key offering to banks across Europe and the United States. OakNorth's value proposition to banks is that it helps to automate a highly manual process of underwriting by leveraging big data solutions.

  • Product solution: OakNorth is the first UK bank to be fully cloud-hosted after spending months working with Amazon Web Services and the regulators to drive regulations forward. When working with banks, OakNorth uses nCino to capture the loan data about a mid-sized company. This type of information might include the loan size, tenor, rate, and key covenants. For each client, OakNorth sets up a Virtual Private Cloud exclusively for each customer. The Company uses elasticsearch to process unstructured data along with PostgreSQL to analyze structured information. When the data is structured properly, it uses an in-house AI solution to evaluate the data insights. According to Builtwith, it appears that OakNorth also extensively uses the Google Analytics platform for tagging, hosting, and computing analytical insights.

Landscape:

  • Industry domain: OakNorth started working in the Commercial Lending Segment, but is expanding into Software as a Service so that banks and other financial institutions can utilize their program. Commercial Banks typically lend to Middle Market companies; according to the National Center for the Middle Market, these companies are defined as firms between $10 million and $1 billion in revenue and represent approximately 200 thousand companies across the United States. According to McKinsey & Company article from May 2018 about the Corporate Bank of the future, the North American Corporate Banking Industry represented approximately $247 billion in revenue as of 2016. Within that figure, lending represents $123 billion (OakNorth's target product), treasury services represents $94 billion, and investment banking and other ancillary products represent $30 billion.

  • Industry Trends: Over the past five to ten years, the lending industry has transformed significantly in the peer to peer and small business lending segments. The analysis on the lower end (by dollar size) tends to be more simplistic with fewer variables. As a result, small business lending has lower barriers to entry and has presented opportunities for automation. The commercial lending and investment banking segments have seen limited automation to date. OakNorth is one of the first companies driving significant advancements. As it relates to growth trends, the lending segment, within North America, is anticipated to grow between a 0-5% CAGR over the next five years (per McKinsey & Company, May 2018).

  • Competitors: Major companies in this domain include traditional commercial banks: JP Morgan Chase, Bank of America, Citibank, Capital One, Fifth Third, Wells Fargo (not exhaustive). The non-bank market has established several debt funds to provide loans to small and medium sized businesses. Several peer to peer lenders and small business loan companies, such as LendingTree and LendingClub, offer digitized and online solutions for small business owners needing to access capital.

Results:

  • Business Impact: OakNorth has been able to source large quantities of third party data and analyze the data to better predict risk ratings and default rates. With better tools and insights, the Company boasts (and rightly so) that it has a zero percent default rate on all of the loans that it has provided to date. That being said, the Company has not been through a dramatic recession, but the stats are still impressive.

  • Core Metrics: A few of the core metrics that debt fund managers or commercial banks use to analyze are assets under management, percentage of defaults, average debt to EBITDA, and return on investment.

  • Performance vs Peers: OakNorth is outperforming traditional competitors in part because it is analyzing performance under new metrics - it is analyzing speed to process an underwrite, default rates, reduced probability of defaults, and capital allocation strategies vs assets under management. Evaluating only the latter could encourage lenders to provide loans to companies that do not warrant them.

Recommendations:

If you were to advise the company, what products or services would you suggest they offer?
  • I would suggest that OakNorth choose a path to either be a bank, competing with other commercial banks across Europe or the United States, or continue to offer their solutions to financial institutions as a service. Unfortunately, because OakNorth is also a bank, they have an inherent conflict of interest when trying to sell their solution to the banking industry.
Why do you think that offering this product or service would benefit the company?
  • I believe that picking a domain (a bank, and competing with other financial institutions to provide loans is a strong avenue because they have a competitive advantage). If they choose to continue competing with banks, while selling their services to banks, I think it will be difficult for them to gain real traction (selling their platform as a service to financial institutions) while maintaining a competitive advantage.
What technologies would this additional product or service utilize?
  • The solution would require either continued partnership with nCino (software platform that sits on top of Salesforce to track loan details) or for the firm to build an in-house solution that is customizable real-time.
Why are these technologies appropriate for your solution?
  • Several companies are talking about machine learning, AI, and advanced technologies that can automate several jobs. What I'm discovering is that several large institutions are hiring advanced machine learning data scientists that are spending 70-80% of their time cleaning data and trying to get it into the right structured format to run analytics. If I knew how to structure the data in the right way to run the analysis, I could potentially build my own data analytics firm and expand into several products outside of loans.

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