This company has made its two founders £50 million between them and has grown to a value of £384 million in just five years. Sounds great doesn’t it? Errol Damelin and Jonty Hurwitz do not sell drugs or arms, yet their company, totally legal, is one of the most pernicious imaginable.
Wonga is a payday lender, offering loans at 11,913% and its astonishing growth is mostly due to giving short-term cash loans to struggling families at exorbitant interest rates. Backed by a huge advertising campaign, fronted by loveable and non-threatening, white-haired grannies, Wonga has quickly become a household name.
The company says it serves people who need the flexibility of borrowing short-term and who can afford to pay the money back. But its critics say Wonga targets desperate unemployed families, tempting them with the promise of a cash injection into their bank account within 15 minutes. By default, they target people in financial difficulty and make those difficulties worse.
The company has just said it is going to expand overseas and, God help British industry, start helping small firms who have been let down by banks and the government.
Wonga is essentially a ‘legal loan shark’; its advertised APR rate is 4,124%, but this can be ramped up enormously; a 30-day extension on your loan can whack it up to 11,913%. Even at the standard APR, £100 borrowed from Wonga would stack up to £7 million over three years. Wonga stresses that no-one would pay that rate, as interest is capped after 60 days.
Wonga makes a killing by re-investing its capital at enormous returns; even if everyone repaid within 24 hours, Wonga would still make one percent on its loans, plus fees; lending hundreds of millions each year earns its owners their millions. However, it’s not quite that simple.
There is the default rate to take into account, plus call centres to maintain, but Wonga is making money hand over fist and it is rumoured their advertising agency had to hand much of its ad budget back because they had been given more than they could spend.
Wonga is not just a loan shark, it is a very technical savvy loan shark. Its web technology is extremely clever – it can deliver and receive instant payments and its smart algorithms give it an unrivalled credit scoring operation. Money lending is a high risk sector, but Wonga only has a default rate similar to that of a typical bank, at around seven per cent.
Okay, so Wonga has been a great success, but why did we allow it to thrive in the UK? What is wrong with us?
Well, the regulatory environment was obviously welcoming, but Britain’s banks created a huge vacuum of reliable customers, shut out of the banking system and ripe for exploitation by Wonga. It says its ideal customer is a young professional, looking for speed and convenience and many in this target group do have limited access to credit cards and overdrafts because of being credit blacklisted at college. Wonga realised these people were a decent risk.
Wonga apparently has a huge rejection rate, around 62%, but there are many stories that show the hardship caused by these high-interest loans and even reports of borrowers’ suicides.
You can see that there was a systemic failure in the UK high street banking market, because so many of the best UK startups are finance based; Zoppa, Funding Circle, MarketInvoice, Kickstarter, Go Cardless, Seedrs and Crowdcube, to name a few. The sad lesson Wonga has for other financial startups, is that the UK market is so badly served by its existing banks that consumers will put up with anything if you are reasonably competent.
Wonga is the UK’s leading financial tech startup and it is something we and our banks should be deeply ashamed of. But other markets should beware; Wonga plans to travel abroad, opening its services to cash-strapped customers in South Africa, Canada, Poland and Spain. The UK was its incubator testing market and Wonga is set to become a global brand, making profit from misery wherever it can. In fact, Wonga will become a British flag carrier, heaping shame on us and penury on others wherever it goes. Is this company really the best that Britain has to offer the world?