Conrad Ford
Allica Bank Chief Product & Strategy OfficerConrad Ford is Chief Product & Strategy Officer at Allica Bank, a British modern relationship bank, committed to empowering established SMEs to succeed. He tells us more about the bank's positioning and explains how it quickly became profitable.
In which countries do you operate and how do you perceive the banking offer to SMEs there? In your opinion, does the offer from existing financial institutions meet the needs of SMEs?
Allica Bank operates in the UK. We are focused on a segment that we call established SMEs, this means businesses typically with 10-250 employees, which we find are underserved both by fintechs and traditional banks.
Although the UK has about five million micro-businesses and only half a million established SMEs, the established SME segment is much bigger, representing more than 30% of the economy. When you look at financial services revenues, the difference is even more stark, as most micro-businesses are consumer-like in their financial behaviors, and can typically only support small amounts of debt. Ironically, the venture capital market – which tends to be very herd-like in its behavior – has poured huge investment into fashionable fintech offerings in the micro-business segment, and has yet to wake up to the much larger opportunity from established SMEs.
There are structural reasons why our segment of established SMEs is underserved in the UK. The most important is that established SMEs sit awkwardly between tens of millions of easy to serve consumers and a few thousand valuable large corporates. Incumbent banks find established SMEs too complex to serve on a consumer banking platform, yet not high enough value to give a corporate coverage model. This has been exacerbated by thousands of bank branch closures across the UK, which have undermined their traditional SME servicing model.
What is your business model and your core value proposition for SMEs? How’s the experience at your institution different compared to other players? What are the unique features you offer to your customers?
As the vast majority of SME finance is relatively prime secured lending, most of the market is only really accessible to banks due to their funding structures. This is ever more relevant as we trend towards a more normal interest rate environment, from the historically low rates that allowed a boom in non-bank fintech lending over the last decade.
The UK has a number of first-generation SME challenger banks that emerged during the collapse in bank lending after the Global Financial Crisis (GFC). These earlier challengers are essentially specialist lenders with a bank licence, typically operating on third-party technology dating from earlier in the century. On the other hand, traditional high street banks have often drastically reduced service levels to established SMEs in the last decade. Ten years ago, a UK business with a dozen employees could expect an experienced relationship manager in their local bank branch. Now they often struggle to get a straight answer from anonymous call centers.
The only way to unpick this huge problem – and opportunity – is to completely rebuild the operating model for established SME banking around modern technology. This can’t just be a mobile app, as that doesn’t work for complex larger SMEs. Instead, what if you reimagine relationship banking through the latest technology? We’re confident that will work.
As such, we’re a totally new type of fintech challenger bank, and seeking to replace the incumbent high street banks in our large market, rather than just play around the edges as GFC-era bank challengers have done. In practice, this means that we’re building a full service relationship bank for established SMEs, covering not just lending but also current accounts and savings. It has also has meant building our own proprietary technology and data models for the established SME segment, as we’ve not found anyone doing this well enough yet.
Being a banking provider without physical branches, customers only interact with you remotely. How do you ensure an excellent sales and service model leading to a great customer experience with interactions being 100% digital?
Before Covid there was a healthy debate about whether bank branches were still relevant for most SMEs. Post-Covid that debate seems to be over, with many branches feeling like an expensive and obsolete legacy. But that doesn’t mean that relationship banking is no longer relevant. SMEs still care about banking relationships, even though most banking activities can now be done online. In fact, more than 40% of UK SMEs say that access to a relationship manager is important when choosing their bank. Barely a fifth of SMEs would make a digital-only bank their first choice.
So the question we’re answering at Allica Bank is what if modern technology allows your banking relationship to be delivered at your business premises, or at your favourite local coffee shop? Indeed, many business owners – like most of us – seem to be happy to do more videocalls in the aftermath of Covid. In short, we’re reinventing and reimagining relationship banking for SMEs, with the latest technology.
Where do you see your institution in five years? What impact or difference are you trying to achieve for small business owners in your portfolio? Can you specify some major milestones accomplished on your institution’s journey?
Allica Bank received its UK bank licence at the end of 2019, and started lending in spring 2020 during the onset of Covid. More recently, we launched a business current account which is intended to reward our customers – rather than punish them with high fees and poor rates, as is unfortunately the norm in our segment.
We are now profitable, and scaling rapidly in what is a very large and underserved market. Earlier this year we passed £1 billion in lending to established UK SMEs, but the total market we operate in is closer to £200 billion in lending, so it feels like we’re just getting started. We intend to be the SME fintech challenger for the decade ahead.
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