Ep. 126 - Why Allica Bank Is Betting on Established SME's, Not Startups

Liam Gray (0:05)

Hello and welcome.

I'm Liam Gray, co-host of The Payments Shed Podcast, live from FinTech Meetup here in Lisbon. And I'm joined today by Conrad Ford, Chief Strategy Officer at Allica Bank. Welcome Conrad.

Conrad Ford (0:17)

It's great to be here.

Liam Gray (0:18)

Thank you for joining us. Could you give the listeners a quick intro?

Conrad Ford (0:24)

So yeah, Allica is a bank. We are a bank. It's a misused term in our world. We are a bank, a UK regulated bank for what we internally would call established SMEs. So there's many fintechs that have focused on the microbusiness segment. These are the really tiny one person, two person businesses. But nobody's really gone with a full service banking proposition, fintech led banking proposition for the larger SMEs. So a typical Allica customer might have dozens of employees rather than being really small.

We currently operate just in the UK, but it was recently announced that we were moving into Sweden as part of a wider European plan.

Liam Gray (0:56)

Absolutely. Let's focus in on that demographic that you focus on, that segment in particular. So you've built your whole proposition around established SMEs rather than that broader group. Why focus on established SMEs rather than the startups?

I'm guessing for the vast majority of people who move into this space, they see a massive market in startups, so they go there first. You decided to do something different.

Conrad Ford (1:18)

Yeah. I'm purely with my strategy hat on, so the head not the hearts. I think there's two fundamental reasons. The first one, the vast majority of financial services revenues or revenue pool from SMEs sits in our segment.

Just to put that in context, in the UK, and the UK by the way is roughly representative of most Western economies.

Although only about 10-20% of SMEs are the larger established SMEs, they are a much bigger part of the economy.

Micro businesses, millions of tiny businesses are about 10% of the UK economy. Our segment is a third. Actually, when you apply that to financial services revenues, it's even more acute because banking revenues, which are often driven by balance sheet, the balance sheet of larger SMEs is just much, much bigger. So for example, the current account balances of our customers would be typically approaching 50 times more than the micro business segment. So that's kind of the revenue pool opportunity. The other one which is equally important is that the incumbent banks really struggle with our segment.

So they have really two major divisions, the big universal banks. They have the corporate division, which is a small number of very high value bespoke customers, the Vodafone, the BP's of this world. And then the mass market, which is primarily consumers, tens of millions of individuals. But it's also millions of micro businesses, which are very similar. They're simple, homogenous and they can self serve. Our segment is really awkward for the big banks because it's awkwardly stuck in the middle. They're too low value for corporate banking, what the big banks called coverage, people in suits. But they're also too complex for the mass market. As a result, the NPS, the net promoter scores in our segment tends to be low. So it's a very large segment and it's very underserved by the incumbents and that's the strategic opportunity for us.

Liam Gray (2:59)

In terms of their needs, you've mentioned that there's a lot of complexities around actually servicing this specific group. What are the needs that need to be met for this group in particular and how do Allica look at that?

Conrad Ford (3:10)

Yeah. So we tend to talk about the problem statement or for us opportunity is the volume times complexity problem. So there's quite a lot of businesses in our segment. In the UK, there's hundreds of thousands approaching a million.

So there's a high volume of them, just not as high volume as micro business or consumer. There's a high volume, but they're individually very complex. Now that manifests in many ways. So firstly, KYC, knowing your customer, it's complex in our world. So more often than not, there'll be an edge case. There'll be an overseas director, an overseas shareholder, there'll be a company shareholder. So you need to be able to deal with that complexity elegantly rather than do everything on spreadsheets, which is what the big banks end up doing. When you look at the financial needs of the business, lending is a good example here.

There's literally dozens of lending products aimed at our segment. In working capital alone, so cash flow lending, there's a couple of dozen different product categories. So to serve them well, you need to serve them with a wide range of lending products. And that's, we have actually arguably a wider range of lending products for our customers now than the incumbents do, because they've been shutting down lots of stuff. So it's that ability to deal with their complex needs, financial services needs, but also the complexity of dealing with the customer. That's the kind of, we see that as our competitive moat. We're extremely good at that because we built everything, our own technology, our processes, our people, everything was built around that problem statement, which is very hard to solve. And as we get bigger, it drives our competitive advantage.