In looking at this question, its important to start by breaking down the SME market. When people talk about SMEs, they generally mean the millions of micro businesses, which have seen strong focus from the likes of Starling, Monzo and Tide. Allica, on the other hand, is exclusively focused on the established SME (ESME) segment. These are companies with, say, 20 or 50 employees that have some of the complexity of a corporate, but rarely the depth of in-house finance expertise a corporate has.
This ESME segment is huge, representing over 30% of the economy. Yet it’s been left behind by the incumbents. For them, ESMEs sit awkwardly between their mass market personal and micro business customers – who are very high in volume and low in complexity – and low volume- very high complexity corporates. And despite the fact ESMEs represent >30% of the economy, we’ve seen the high street incumbents pulling back as a result of it falling in between their operating models, exacerbated by the acceleration of digital adoption by SMEs in the pandemic.
Allica’s sole purpose is to transform banking for this neglected but critical segment of the economy. To do so we invest heavily in developing proprietary software to solve the [volume x complexity] challenge that ESMEs present. We develop our technology in house as we deeply care about product excellence and no third party software does a great job for this segment (mirroring the incumbent banks, third-party software is built for either mass market or corporate customers).
Our solution for this segment involves providing a breadth of services that means Allica can fully replace a high street bank for an ESME customer – this means a wide range of lending, current accounts, cards, and savings products (and, in future, extensions beyond just banking). In consumer fintech this might be called the ‘super-app’ approach.
By designing Allica’s service and products specifically to serve established SMEs, it allows us to create digital solutions that solve the needs of ESME customers in an intuitive way. This often comes as a breath of fresh air for our customers, who have become used to using services built for a different type of business, which they have to try and repurpose to meet their needs.
We also believe in a high tech, high touch model. ESMEs continue to say they value a relationship manager (RM) to help them access finance and who understands the complexities of their business. Yet incumbent banks have been cutting back hard on their RM teams. Nowadays, RMs in major banks typically only spend around 15% of their time with clients, because of high friction, time-consuming operating and admin processes.
When it comes to risk, we are not taking materially different risk to the incumbents in winning the ESME segment – looking at our loan default rates, these are very similar to those the incumbents report. However, Allica does seek to be flexible where appropriate and, in particular, holds a massive speed advantage in lending over the incumbents due to our proprietary technology. For instance, on a commercial mortgage we provide an instant decision-in-principle and a full decision typically in two days. It’s the sort of thing that can take many weeks with the high street banks.
A final big differentiator is value. When it comes to payments and savings, we offer dramatically better value than the incumbents – for example, our current account doesn’t charge account or payment fees, pays 1%+ cashback on card spend, and 4.33% AER interest on an embedded instant access savings pot. This compares to high fees, no cashback and low interest from the high street banks. Indeed our research shows that SMEs are missing out on more than £7.5bn per annum in savings interest alone.
Considering the size of the Established SME segment and its importance to our economy, it’s critical for the UK that these businesses have the financial support to help them invest and grow. We believe that Allica’s combination of speed, experience, relationship and value puts us in a unique place to be able to do that.
