There was a time when Wonga was arguably a true business success story.
The payday lender’s 2008 launch promised instant decisions to online borrowers seeking short-term credit. Backed heavily by private equity, the company grew quickly, and was hailed as one of a new breed of digital innovators in the finance industry.
When faced with criticism of its 5,883 per cent APR, the company responded by saying the short-term nature of its loans made the figure irrelevant.
The business grew. Profit tripled in 2011 to £45.8 million on revenues of £185 million as the company made 2.5 million loans. Circa 2013, the company had a revered algorithm, some of the best brains in tech, and a business model with designs on international expansion.
When it came to morals, you could say the payday lender helped more than it harmed. Its default rate on wholly unsecured personal loans was just 7.5 per cent, making the claims that its practices plunge people into poverty by design look a little silly.
It was also, believe it or not, wholly transparent as a service, with a homepage clearly displaying the cost of its loans over a given period of time that put the transparency of bank charges in the shade. Proponents of the model would, of course, argue that nobody forced people to borrow from them.
And then it went wrong.
The beginning of the end
It started with a 2013 regulatory shake up as the Office for Fair Trading ordered short-term lenders to clean up their act, with the Financial Conduct Authority announcing a cap on the total cost of a loan.
Errol Damelin, the chief executive and co-founder, quit that year. A new chairman promised to improve business practices, but with this came shrinking profits. In 2014, the company was banned from using a TV advert that failed to tell consumers of its 5,853 per cent annual interest rate.
Then there were reported losses of £80 million in 2015 and £66 million in 2016. Wonga’s maximum interest rate was capped at 1,509 per cent, but for a 14-day term.
Claims management firms that targeted payday lenders set off a renewed torrent of complaints. Figures from the Financial Ombudsman showed complaints about Wonga jumping to 2,347 in the second half of 2017, from just 269 two years earlier.
Then, customer compensation claims linked to loans Wonga made before 2014 added to the firm’s woes. In August, the company finally collapsed into administration with an estimated 200,000 customers still owing more than £400 million, and administrators expected to sell the firm’s loan book for someone else to chase debts.
Citizens Advice says the number of payday loan problems have reduced significantly since the days before the cap on interest and charges. But the organisation also says that people still come to them after being sold loans they cannot pay back because rules on affordability are simply not good enough.
Short term lenders beware
It’s all a cautionary tale for today’s players in the short-term lending space. Wonga’s story certainly demonstrates the perils of greed in a loosely-regulated market.
But this spirit of greed was doused when the Financial Conduct Authority (FCA) introduced new rules for short-term lenders in January 2015. Interest rates are capped at 0.8 per cent per day, and customers can never repay more than twice the amount borrowed.
The perceived moral perameters were set, and it was a chance for a new start for the industry; a dawn of fairer and more responsible credit providers, with reasonable APRs, less legal pressure on debtors, and more responsibility towards vulnerable people in society.
Today, the industry is seeing new ideas and innovations arising. Operators where money is lent for three to 12 months are on the rise, with the omnipresent hook being a fast online or mobile application process, and money in your account quickly.
“There must be continued controls to ensure the short-term loans market doesn’t run into new crises”
Some players claim to be willing to lend to those on benefits or with CCJs, while there are also companies that reportedly offer ‘ethical loans’ with lower APRs, as well as social enterprises that present themselves as caring institutions with a palpable social conscience.
But despite the evidence suggesting the industry is moving towards a more ethical and sustainable model, there must be continued controls to ensure the short-term loans market doesn’t run into new crises.
In 2013, the leader of Unite the Union Len McCluskey said Wonga is an example of ‘vulture capital, picking wallets and purses clean’.
In this brave new world for short-term lending, finance providers must ensure that their processes are more scrupulous and their reputations are preserved – or risk being picked clean themselves to a skeleton of bad faith and bad debts.