It has the making of a Hollywood movie — a British Wolf of Wall Street, perhaps. An unconventional, self-assured lending company skyrockets to success with its wholly digital loan process and seemingly omnipresent marketing, turning growing profits year-on-year. Then revelations of nasty collection tactics and negligent lending practices surface, strengthening the calls from the company’s many and often high-profile detractors for tighter legislation. The company’s unsustainable model catches up with it, and it begins to crumble. Compensation pay outs, debt write offs and tumbling numbers of customers bring the company to its knees. In 2018, it goes into administration.
Wonga’s story beggars belief, and its impact on the British financial industry is astonishing. It went from being an over-night sensation to the poster child of “vulture capitalism” and has produced a tangible effect that we might call “Wonga PTSD”.
The immediate casualties to “Wonga PTSD” are the customers who were driven deeper into debt and stand to receive a meagre compensatory sum for their suffering. Yet there are other groups that took a beating for their involvement with the pay-day lender: there are the ex-employees, many having removed Wonga from their LinkedIn profiles out of shame. Some have left Finance altogether, afraid of history repeating itself and of the more acute sense of stigma that has become entangled with working in the sector, and gone on to work in charities or as teachers in an effort to atone for their time with a company that did so many people wrong.
Then there are the Investors, for whom Wonga seems to have served as a cautionary tale. Funding for alternative lenders dropped in the wake of Wonga’s fall from grace: it’s bad enough to be tied to a financial pariah, let alone one that haemorrhaged millions of pounds. There has been some improvement in the rate of investment, as the case of microlender Branch demonstrates, but enthusiasm from investors has certainly been tempered (as the recent investments of one of Wonga’s former backers arguably evidences).
And finally, there are the regulating bodies, particularly the FCA, which took over from the OFT around the time that Wonga got into hot water. Having had the finger of blame pointed its way for Wonga’s conduct, the FCA introduced the most significant changes in decades. This not a bad thing — they were perfectly right to impose restrictions that protect borrowers and guarantee that no other company can lend so irresponsibly. Yet regulators have arguably become overly cautious in their approach to alternative lenders: whilst their determination to prevent another Wonga is understandable, some measures have made it difficult for consumers to access small loans and some lenders to innovate and bring better products to the sector.
Wonga will be remembered by most as a “legal loan shark” that got what it deserved; but is there any small speck of light that might ever-so-slightly soften the lender’s damning legacy?
In this post, I’m going to look back at Wonga’s relatively short but thoroughly dramatic run to understand how it reached such dizzying heights before coming crashing down. What did Wonga do to become so successful and — more controversially — is there anything about the lender that we can admire?
Launched in 2007, Wonga was the brainchild of South African entrepreneurs Errol Damelin and Jonty Hurwitz. The duo asserted that they were out to shake up the financial sector: “Wonga is a platform for the future of financial services, the digital revolution has not yet begun in financial services,” stated Damelin back in 2012.
The company offered up to £400 for up to 30 days and customers applied exclusively through the Wonga website and, later, app. This made getting a loan not only simple, but unbelievably fast — customers could find the money in their accounts within 15 minutes of making an application. With a reputation for speedy and easy money, Wonga’s popularity grew rapidly; in 2012, it had granted almost 4 million loans to 1 million customers.
Wonga became a hit: lauded for its innovative lending process, it and CEO Damelin, won several awards. The company quickly found itself a household name, in no small part because of its distinctive adverts featuring three eccentric (and, I would say, slightly creepy) puppet pensioners. But since its birth, Wonga was met with suspicion: the company was slammed for its high APR, which eventually climbed to an eye-watering 5,853%, with campaigners and public figures protesting that such rates exploited the vulnerable and exacerbated rather than relieved their situations.
Alongside criticism regarding its APR were questions about the company’s sustainability and statistics. Neither criticism nor scrutiny seemed to bother Wonga’s bosses, however, who pointed to customer satisfaction and ever-increasing profit margins as evidence that the company was a bona fide triumph. And with an estimated worth of £15 billion (which would have made it the first UK Fintech Unicorn by far), it was hard to argue with them.
Wonga’s demise in the UK was brought about by several occurrences. The company’s credibility took a knock when it was chastised for promoting itself as a better alternative to a student loan. The knock became a bump when its ads were pulled by the ASA for being “misleading” in April 2014. Two months later, the bump became a KO: revelations that the company had sent some of its customers fake letters from fictitious law firms (and even charged some of them for admin costs) emerged in June 2014. With this came scathing criticism, a police referral and a £2.6 million compensation pay out.
If Wonga thought it couldn’t get worse, then they were very much mistaken: not long after the letter scandal, the FCA ordered Wonga to write off the £220 million debt of 330,000 customers who had been granted loans without effective affordability checks. Next came what the company deemed an “administrative error” which saw 45,000 customers charged too much or too little for their loans: those overcharged were repaid and those undercharged had their outstanding debts written off.
All the while, customers were turning their backs on Wonga: the company’s members almost halved from one million to 575,000 in a matter of two years. The FCA launched the most dramatic crackdown in recent times, introducing a cap on daily interest and default charges, and restrictions on the number of loan rollovers. Wonga’s profits sank, with losses of £65 million, and the company went into administration in 2018.
How did it go so wrong(a)?
Many have acknowledged that Wonga was the maker of its own downfall. The shocking letter scandal and increasing APR certainly tarnished its reputation, but the company’s death came from inside. The bosses became over-confident and developed tunnel vision for bigger profits and market domination — they lost sight of the fundamental necessity of a sustainable and feasible business model, and of the duty to provide an alternative credit source in a responsible way. The drive to bump up numbers led to reckless lending: the lack of affordability checks meant that customers were easily able to lie on their applications (including some teenagers claiming to be over 18) and receive high-cost short-term loans that they had no chance of ever being able to repay. This practice made losses inevitable: worst of all, it drove vulnerable people deeper into debt.
Wonga’s very public profile helped speed its demise along. The company had never been shy about promoting itself, spending around £16 million to commandeer the capital’s double-deckers and have its logo on the jerseys of three different football teams during its lifetime (much to the chagrin of fans). The dominance and brazenness of its advertising soured reception to Wonga: like a spoilt, obnoxious younger cousin, it touted itself as being better, faster and richer than the stuffy, antiquated financial institutions.
Whilst Wonga didn’t care who thought what about their advertising methods, they didn’t consider how its prevalence would open it up to greater scrutiny: invoked by campaigners as the epitome of everything wrong with the sector, the pressure on regulators to tackle Wonga became impossible to ignore. The FCA came down hard on the lending sector, implementing a daily interest cap of 0.8%, reducing rollovers to twice per loan and lowering the default charge to £15. These changes made Wonga’s chances of recovering the money they had carelessly dished out, paid in compensation, or lost through debt write offs non-existent.
The change in legislation may have “broke[n] Wonga’s business model”, but the recklessness, short-sightedness and shady behaviour of the company had already made it untenable. The FCA’s crackdown may have been the final nail in the Wonga coffin, but the casket was already being lowered into the ground.
If we peel Wonga away from its condemning context, we can see that the company had something going for it. It had digitised the process of applying for an overdraft and made it more transparent (APR and fees) than all the mainstream banks. This was a revelation to customers — it gave them an avenue to supplement their short-term debit balances without having to spend time traveling to a bank and waiting around only to be turned down. Furthermore, some borrowers found that applying online softened the stigma of applying for credit, and, as Damelin put across, the lack of a face-to-face encounter meant that loans decisions were (at least in theory) made on the basis of ability to repay, and not by any personal prejudices or biases.
Reluctant as we may be to admit it, Wonga did, at a time, provide a service that worked for many consumers: with (initial) interest rates lower than most overdrafts, it offered some customers a better deal than their bank did. With its fast application process and money in minutes, Wonga did provide a credit lifeline that some couldn’t get anywhere else.
Damelin and Hurwitz recognised a demand and created a product which, for a time, met it. They introduced a technological model (including the famous “slider”) which continues to be replicated by digital lenders to this day. Wonga had the seeds of a viable, convenient and efficient alternative to the mainstream lenders that are out of reach to millions across the UK and beyond, and that are too far removed from the emerging needs of middle class consumers and millennials to understand how to deal with them. Perhaps Wonga’s bosses underestimated the formidably well-established opponent they were attacking: an opponent with political clout on its side that could underwrite in excess of £25 billion in PPI claims without losing its reputation, and that is yet to see full regulation of one of its most powerful money-earning tools — the unauthorised overdraft. Such an oversight, coupled with the fact that its founders were newcomers in a still highly conservative, cliquey City of London, likely contributed to what ended up being a catastrophe for hundreds of thousands of borrowers, many investors and the regulatory bodies.
Few will miss Wonga, and even fewer will forget it. And for the sake of financial inclusion, we must ensure that all the mistakes and misconduct surrounding it remain a memory. It’s encouraging to see that many of the fintech lenders of today, which use the technology introduced by Wonga, have learnt from its mistakes: microlenders like Branch have developed credit-building loans that are increasingly taking the place of the high-cost, short-term loan, and are helping consumers around the world to improve their financial lives. Therefore, for all the horror rightly attached to the lender that once was, its existence helped create a climate where alternative providers (such as the NeoBanks that have been springing up in recent years) can deliver change and disrupt the dominance of established retail banking.
Written by Dominic Midaskane. The views expressed in this post do not necessarily represent those held by Oakam Ltd.