Branching out: The AltFi interview with Rishi Khosla

This is an excerpt from the October edition of AltFi's new magazine The Financial Innovator, which is available for free here.

Despite co-founding one of the most successful and profitable digital banks in the UK, Rishi Khosla is not slowing down.

“I count my minutes and my hours very carefully,” the CEO tells me as he paces around his glass-walled Soho office, a movement which continues for the entirety of our conversation.

The remnants of his previous meeting just moments earlier are still scattered across the whiteboard beside him, markings he hastily clears as we start to talk. “You never know what you might have written on a whiteboard,” he smiles.

At the age of 48, Khosla's journey has been nothing short of remarkable. After selling his first venture, Copal Partners, an offshore financial research and analytics firm, to Moody's in 2014, he swiftly pivoted to create OakNorth the following year. Khosla's vision for OakNorth was clear: to build a socially impactful business by supporting the underserved "missing middle" of SMEs in the UK with financing ranging from £1m to £40m.

“Our view was supporting businesses in the missing middle is a great place to actually focus because those businesses tend to drive productivity, employment growth, GDP growth, etc, in an economy disproportionately,” says Khosla. “We also thought it would be a good business and, so far, we haven't been disproven.”

OakNorth became the UK’s third new bank in 150 years when its licence was awarded in 2015 — the same year as a handful of other neobanks debuted including Monzo, Revolut and Atom Bank.

OakNorth The Business

Unlike his consumer-focused peers, Khosla bet that the UK’s scale-up SME sector (of which Copal Partners was part of), was underserved by traditional high street lenders, particularly for larger finance packages.

The bet on high-growth SMEs paid off handsomely, last year helping the bank turn a pre-tax profit of £152m, with £900m of lending in the first half of 2023, cumulative lending to-date of £9.7bn and no signs of slowing down.

“I think the trajectory that we had for the first half [of 2023], you can safely assume that continues,” Khosla says, hinting that OakNorth is likely well on track to surpass £10bn in cumulative lending in the weeks or months ahead. As well as the size of its financing packages, Khosla also wanted OakNorth to support its customers throughout the economic cycle.

“We observed that many banks will lend all the way up in an up-cycle, over-lend at the peak, and then hit the brakes as hard as they can,” he says. OakNorth’s answer was a suite of technology eventually commercialised for international markets as OakNorth Credit Intelligence. Credit Intelligence helps banks monitor their portfolios and continue lending, during a downturn or even a global pandemic.

When Covid struck, OakNorth’s unique advantage with Credit Intelligence came to the fore, with the lender anticipating problems its clients would face, whether in their supply chains or in the impact of the construction industry, in order to proactively manage its loan book.

“We were actually identifying that [customers will] have working capital pressure through the analytics we do, before they come asking for it, then we’re starting to talk to them about putting a solution in place,” Khosla explains. “That's why we exist.”

The technology was a hit, not just for OakNorth, but especially in the US where it picked up traction among regional banks like PNC, Old National and Customers Bancorp who raced to support their customers.

“We're at a point now where we've got about half a trillion dollars worth of US lending on the product, which gives us one of the biggest data sets in terms of commercial lending, which is incredibly helpful to build and improve our models for the benefit of all customers.”

Today however Khosla admits the growth of Credit Intelligence will be a “slow burn” going forward, the catalyst of the pandemic now in the rearview mirror for most financial institutions. 

Economic Expectations

The state of the UK economy is clearly a point of deep consideration for Khosla, unsurprising given OakNorth’s raison d'etre is to support those hundreds of growing businesses that make up the backbone of the economy.

“Our focus very much mimics the UK economy’s focus,” the CEO explains. “If you look at the UK, roughly 60 per cent of the economy is around stuff to do with real estate. Well, roughly 60 per cent of our business is to do with real estate.”

Khosla sees no need to diversify OakNorth’s lending, as in his mind it’s correctly balanced for the market it operates. Does that mean he’s bullish about the UK economy? “No, I’m not” is his frank response.

“I think import inflation because of Brexit, the tightness of the labour market and therefore persistent inflation and need for higher rates, is a concern.”

So he’s downbeat then? “No, I’m not,” he counters. “But I do think we are lagging.”

One area where the OakNorth boss sounds far more upbeat is the political state of the nation, an area where Khosla has personally donated hundreds of thousands of pounds to the Conservative Party and where OakNorth counts former chancellor Lord Hammond as an adviser.

“We're in a position where both leaders of both the main parties have a very pro-business, pro-economy slant… they’re singing from the same hymn sheet,” he says.

That’s a stark contrast from the previous leaderships of both parties, which in Khosla’s view from 2016 up until last year were far more focused on their own ideological machinations.

“That’s very positive in terms of confidence, at least policymakers are all aligned that business is important and is a focus area...”

Keep reading? Get the full interview in the October edition of AltFi's new magazine The Financial Innovator, which is available for free here.