Wonga is in the headlines again for the wrong reasons. Regulators and claims management firms have ganged up against the payday lender, a move which if successful could see the firm wind down. This has happened just when things seemed to get better for Wonga.
It has emerged that the lender’s investors had to part with a £10m rescue package dubbed capital injection just recently. The emergency fundraising happens just 6 years after Wonga was set for a flotation which valued the lender at more than £770m ($1bn). Today, the lender is worth a mere $30m.
Wonga launched in July 2008 with the promise of offering instant-decision short term loans to online borrowers. The lender grew exponentially aided by private equity investors to become a dominant player in the online short-term lending industry. Wonga defended its high annual interest rates amounting to over 5,000% by claiming it offered loans for days/weeks, not for a year.
Wonga’s downfall began when stories started emerging of vulnerable borrowers struggling to repay their loans. These stories marked the onset of political pressure. Although Wonga claimed its clientele was composed of web-savvy individuals who didn’t like using traditional banks, the Guardian found some conflicting evidence suggesting Wonga was serving hard-pressed borrowers who couldn’t access credit elsewhere.
In 2011, the lender issued 2.5 million loans and posted a massive £45.8m profit against revenues of £185m. This represented a 300% increase in profits from the previous year. In 2013, Wonga was hit by a regulatory clampdown when the Office for Fair Trading launched an exercise to start cleaning up the payday loans industry. The FCA followed suit with an interest rate cap putting an end to the exponential profits lenders like Wonga were making.
The co-founder and C.E.O. Errol Damelin quit in November 2013. His replacement, Andy Haste, a former chief executive of insurer RSA joined shortly after as the Chairman pledging to improve business practices which started a cycle of lower profits for Wonga.
Haste started by drafting a new management team led by Tara Kneafsey which didn’t perform as expected since Wonga’s profits decreased and “jumped into the red” in subsequent years. Wonga reported record losses in 2015 and 2016 (£80m and £66m respectively). This was despite the fact that the lender was hoping to return to profitability in 2017.
Wonga has been faced with an unexpected increase in customer compensation claims relating to loans dating back to 2013. In 2013, the lender was forced to write off loans amounting to £220m and interest income for 330,000 customers.
Claims management firms targeting payday loans have triggered a new wave of complaints. According to the Financial Ombudsman, complaints about Wonga increased from 269 (in 2015) to 2,347 in the 2nd half of 2017. Back in April 2017, only 10% of payday lender claims were made via claims management companies. One year later, the figure has increased to 66%. The Financial Ombudsman has also extended the time for borrowers to file cases increasing pressure for Wonga to the extent of threatening the lender’s survival.
According to the managing director of Fairer Finance, James Daley, it isn’t surprising that Wonga is in the current position because they exploited a loosely regulated market. Daley states that Wonga was in the forefront of offering people fast access to credit but didn’t treat its customers fairly.
Claims management companies are targeting payday loan lenders as potential payment protection insurance payouts start to reduce. PPI customer have one year to launch complaints before the regulators (FCA’s) deadline. Daley claims that Wonga is reaping what they sowed in their earlier years stating they are handing back all the money they made unfairly.
The lender received emergency funds from Accel Partners, Balderton Capital and 83 North, investors who had backed the lender early on. Meanwhile, Damelin has become one of the leading technology startup investors in the UK with notable investments like Purple Bricks, an online estate agent.
According to industry campaigners, the UK payday industry has reformed significantly since regulators intervened; however, lenders under strain resulting from austerity measures are vulnerable now, more than ever.
According to Citizens Advice C.E.O. Gillian Guy, the number of payday related problems has decreased by 50% compared to the days before the payday loan interest and charges cap. This is a testament that regulation works according to Guy. Although many problems including Wonga’s current problems date back to 2014, people still go to Citizens Advice when they are faced with loan repayment problems since loan affordability is still an issue.