Allica Bank chief bets on rapid growth to force improvement in SME finance

At Allica Bank’s headquarters in Bishopsgate, just a stone’s throw from Natwest, a bright orange bowler hat sits conveniently placed on the conference room table.

Chief executive Richard Davies says the “money hat” used in Allica’s advertising signifies its fresh take on two very old concepts. The first, old-school bankers who had deep relationships with their business-owning customers. Secondly, the many hats business owners themselves wear in running their enterprises.

Allica only launched in 2020 but has quickly become a certified fintech darling thanks to its popularity among this clientele. It was named by Deloitte as the UK’s fastest-growing technology firm last year and in April posted its first annual profit of £16.1m.

But for Davies, there’s still plenty more to do.

“It’s gone pretty well, I guess,” he tells City A.M. “Yes, we’ve executed well, but it also backs up the theory that this segment is under served. It goes to show how either inefficient or a rip-off the current account market is for established businesses in the UK.”

Allica focuses on small and medium-sized enterprises (SMEs) with between five and 250 staff – a market Davies says represents around a third of the British economy.

“I really believe that this is the last big underserved opportunity in the UK banking market”

Davies says Allica is trying to do for SME banking what Revolut and Monzo have done for consumer offerings and Starling and Tide for microbusinesses.

“You’ve had a lot of fintech activity there,” he explains. “You go to the opposite end of the spectrum, the corporates are still done reasonably well by the large banks.

“But there’s a bit that’s awkwardly in between – these established SMEs – that are sort of neither because there’s quite a lot of them, but they’re quite complex, like a corporate.”

Davies knows a thing or two about this market. A two-decade career has seen him head up business banking units at big players like Lloyds and HSBC, but he also served shorter stints as chief operating officer at Revolut and CEO of Oaknorth, which focuses on larger SMEs.

Forcing change

High street banks are facing criticism for pulling back from small business lending despite high demand and implementing “harsh” practices, prompting investigations by the Treasury Committee and Financial Conduct Authority.

SMEs are now increasingly turning to specialists, which have boomed in popularity and soared to the top of customer review league tables in recent years.

“Focus helps to really understand customer need in depth,” Davies explains. “Our target customers love the fact that we are continuously week by week doing more things for them, more features. They can see that constant progress.”

In contrast, he argues the bigger players have become complacent.

“It’s almost like we’ve done this thing for hundreds of years, these customers are going to stick with us whatever, so we’ll basically put all our investment into consumer because that’s where we’re being attacked by Monzo, Starling, et cetera,” Davies says.

“The reason I want us to get to 10 per cent-plus penetration of the market is that only if you get to double-digits do you really force the market to go ‘Oh my god, we’ve got to do something here and invest and respond’.”

Allica is currently around a quarter of the way towards this target, Davies says, having grown its loan book by 47 per cent to £2bn and customer deposits 75 per cent to £2.6bn last year on the back of juicy savings rates.

Digital-only banks like Allica are partly able to offer the best rates on the market because they have lower overheads and do not operate costly branch networks like their high street rivals.

“The add to that for us is that typically these business customers don’t just want an app at their size – they want a person to speak to as well,” Davies notes.

“And so we do prioritise cost towards the person that can speak to the client because they value that. But then make everything else efficient in the background.”

He touts Allica’s progress on machine learning, with the bank looking to build models that will eventually make around half of its lending decisions.

“There’s going to be some really complex ones, and we haven’t got the vast amount of training data you’d have in Google Ads or something,” Davies says. “But the ones that are quite clearly yeses and quite clearly nos really should be instant.”

‘Lone voice’

Allica is actively putting pressure on the big banks to pass on higher interest rates to customers through a campaign backed by major lobby groups including the Institute of Directors, Federation of Small Businesses and British Independent Retailers Association.

The firm estimated last year that businesses were losing out on more than £7.5bn of interest annually due to this “savings penalty” and the fact that around £150bn of SMEs’ deposits languish in no-interest current accounts.

Banking trade body UK Finance has said SMEs should shop around the wide range of products in the “very competitive” business savings market.

But MPs are sceptical. In a scathing report on Wednesday, the influential Treasury Committee accused banks and regulators of hamstringing growth by making borrowing more difficult, unfairly “debanking” legitimate firms and setting up an inadequate dispute resolution service.

Writing to the committee in March, Davies urged the government to force lenders to notify their SME customers about better rates.

He also called for the £85,000 deposit protection limit under the Financial Services Compensation Scheme to be raised, arguing it makes businesses nervous to hold their money outside of a “too big to fail bank”.

Even still, Davies is not optimistic the landscape will radically improve anytime soon.

“I’m not that hopeful overall to be honest. But I guess you’ve got to stand up and be counted and see what happens,” he says.

“We deeply care, but it takes a lot of campaigning for a lot of time to create real action. And we are currently a bit of a lone voice on this as a bank.”