Amid a crowded field of UK challenger banks, Allica’s function-over-fashion approach is serving it well, says CEO Richard Davies
Last year was “one of those rare moments when everything comes together”, says the chief of Allica Bank, Richard Davies.
In a year defined by war, rapid interest rate hikes and soaring costs, it’s not perhaps a view shared by many business chiefs. But a look at the books of the London-based challenger bank and Davies’ rosy view of 2022 becomes more understandable.
Allica Bank reported what it called a “landmark year of progress” yesterday as it notched a near £800m jump in small business lending and 500 per cent surge in revenues, alongside posting its first £3m profit in the second half of the year.
That came as the firm finalised the acquisition of a £600m small business lending portfolio from Allied Irish Bank and raised a £155m from investors against a torrid backdrop for fundraising.
Key to shrugging off the wider downturn, says Davies, has been avoiding the latest whims of the fintech market over the past two years.
“We didn’t have a Web 3.0 angle or whatever. So [we weren’t] in the latest hype bubble that was going on…. It was about how you create really good long term fundamentals,” Davies tells City A.M. in an interview.
“We’ve been doing the same thing since I joined three years ago. If you have a genuine, substantial sized customer problem you’re trying to solve, and you put together ingredients to execute against that, it will produce results,” he says.
Allica was founded in 2011 but did not win its full licence from the regulator until 2019, just before Davies was parachuted in from Revolut to head up the firm.
Unlike his alma mater and a host of other challenger banks in the UK, the lender has carved out a core focus on the more established end of the small and medium sized business market, typically serving firms with around 20 to 250 employees.
Conversely, Davies says a central part of providing a good digital product for that area of the market is making sure the human side of banking remains key.
“These business owners don’t want app only. You’re running a 50 person business, it’s complex and they value that they can speak to someone,” he says.
“It’s not a branch. It’s not in person. It’s remote. But I think the pandemic completely adjusted people to that being the norm.”
This approach helped swell Allica’s deposits by 78 per cent to £1.5bn last year, up from £846m in 2021, while its loan book surged 139 per cent to £1.35bn.
The speed of its lending has been a key selling point to customers to tempt them over from high street lenders. But Davies admits that has been a cause of some sleepless nights over the past 12 months.
As businesses felt the squeeze of soaring costs and rate hikes at the end of last year, the prospect of a wave of defaults and a “nasty recession” were “very high on my mind”, he says. And those fears morphed into even greater concerns as what looked to be a full scale banking crisis reared its head this year.
However, on both counts, those fears have not materialised. While the collapse of Silicon Valley Bank triggered fears that customers would rush to withdraw their cash from smaller banks, he points to a live graph showing the bank’s deposits and a smooth looking line upwards.
“You can’t spot any banking crisis on that, right?”
The credit should go to the regulators, he says. UK banks have avoided the worst impacts of the recent banking turmoil by a more sensible approach to capital buffers ushered in after the 2008 financial crash.
A rules overhaul in the wake of that crisis heralded the creation of challenger banks like Allica, and they have largely created an environment in which those upstart lenders can flourish over the past 15 years.
However, that standing is now in doubt, Davies warns. Regulators are looking to tweak rules governing how much cash banks have to hold on their balance sheet to shore themselves up against losses. While the plans tabled by the PRA and Treasury make sense for most of the banking sector, Davies says, he claims it could now scupper a major chunk of small business lending in the UK.
“There’s up to £44bn pounds of SME lending at risk under the current PRA proposals. And some nonsensical stuff comes out of it.”
He points mainly to the fact that secured loans will be deemed more risky than unsecured loans under the plans. Allica is loudly lobbying for changes to the rules and has been meeting with MPs and industry movers and shakers to try and affect change, with the efforts already garnering support from lobbying groups including the Federation of Small Businesses and the National Association of Commercial Finance Brokers.
But even with those gripes in the background and wider fears of an exodus of innovative firms from the UK, Davies says Allica is now doubling down on growth at home.
“My personal ambition is to be ten percent of [the small business lending] market over the coming years – to truly make people sit up, take notice and invest in that segment in a way that perhaps Revolut and Monzo did in consumer in years gone by.”
While he is coy over a shift onto the public markets and talk of grand growth plans, he says Allica is off the “capital raising treadmill” and will now ramp up building products for the market it serves.
A raft of new initiatives are already in the works, including a new growth finance product, and new capabilities around its current accounts and payments.
Rolling those out is the priority, Davies says: “Then the other stuff almost takes care of itself.”