UK digital bank that beat peers to an annual profit ‘will go into’ China — eventually

Key Points
  • OakNorth CEO Rishi Khosla said the start-up "will go into" China: "It's just a question of when and how rather than if."
  • China is home to some of the most valuable fintech companies in the world.
  • OakNorth is already in "open conversations" with multiple countries about its global expansion plans, Khosla said.
Alex Rumford

British digital-only lender OakNorth is looking to expand to one of the biggest markets for financial technology (fintech).

OakNorth, a start-up bank based in London, recorded a pre-tax profit of £10.6 million ($15 million) in 2017 and is considered to be the first U.K. digital-orientated bank to reach such a milestone.

Rishi Khosla, chief executive and co-founder of OakNorth, told CNBC that the firm will eventually grow its reach to China.

"It's a hyper-competitive market, there's immense amounts of capital flushing around it," Khosla said at a fintech conference in London last week.

"It is going to be a market that we will go into. It's just a question of when and how rather than if."

China is home to some of the most valuable fintech companies in the world, including established giants like Alibaba-owned Ant Financial, ZhongAn, Qudian and Lufax.

Ant Financial, the most valuable fintech company in the world with a market capitalization of $60 billion, raised an eye-watering $4.5 billion in 2016. That same year, online lender Lufax raised $1.2 billion from investors, in a deal which reportedly lifted its market value to $18.5 billion. Both companies are targeting an initial public offering (IPO) this year.

However, there was a slight decline in venture capital flows into Chinese fintech start-ups last year. The total value of deals fell from $10 billion in 2016 to $2.8 billion in 2017, according to research by consultancy Accenture.

Nevertheless, foreign lenders looking to access the Chinese market could get a boost from the country's new central bank chief. Yi Gang, who was made governor of the People's Bank of China earlier this month, said Sunday that the country will open its financial sector up to international firms and give them equal treatment to domestic companies.

Will China miss out on fintech-related investments?
Will China miss out on fintech-related investments?

Khosla said his firm is already in "open conversations" with multiple countries about its global expansion plans, including the U.S., Canada, Spain, Italy, Germany, Singapore, South Africa and Australia. The company has already established offices in some of those countries, he added.

OakNorth is expanding abroad by licensing its technology platform, ACORN, to banks in other countries. The platform uses big data and machine learning to optimize credit for small-to-medium sized enterprises (SMEs).

"What ACORN does is it allows you to take a bespoke approach to lending while still driving meaningful cost efficiencies," Khosla said.

"So given that we've proven that here in the U.K., we then took the approach that, as we want to scale across multiple countries at the same time, the way to efficiently do that is to actually license our platform to different banks and lenders."

Although OakNorth's business model is different to popular U.K. consumer-focused, app-only banks like Revolut and Monzo, it is ranked among the many so-called digital "challenger banks" which have taken the burgeoning sector by storm. Challenger banks are smaller firms set up with the aim of competing with bigger banks.

OakNorth offers loans between £500 and £30 million to SMEs. It was granted a banking license by U.K. regulators in 2015.

When asked whether he was concerned by competitors, Khosla said: "I don't spend my time worrying or thinking about what other people are doing."

'No firm views' on IPO

OakNorth is currently valued at $1.4 billion, which puts it in the ranks of the U.K.'s "unicorn" companies — firms valued at $1 billion or more.

It raised a total of £244 million last year in a combination of investments — the "largest U.K. fintech financing to date," according CEO Khosla. Singaporean sovereign wealth fund GIC took a 10 percent equity stake in the firm.

How fintech and bank partnerships can be a win-win
How fintech and bank partnerships can be a win-win

The company is not considering a listing on a stock exchange any time soon. Khosla said OakNorth had "no firm views" on a float at present.

"At some point it clearly may make sense but our interest isn't to be a a micro-listed business, it's to be a — if we do go public — a substantive business when we go public."

In a speech last week, U.K. Finance Minister Philip Hammond made his bid to make Britain the "most attractive home" for global fintech firms. "Our doors will always be open to the innovators and inventors," he said.

Some businesses worry the country's decision to leave the European Union — in particular, a potential exit from the single market — will damage their ability to trade freely across the bloc. The single market is a group of countries established by the EU which allows free movement of goods, capital, services and labor.