Chasing a quick buck instead of being fair: where it all went wrong for Wonga
With the exception of its venture capital investors, who earlier this month pumped £10m into the company in an attempt to keep it afloat, there won’t be many tears shed over the demise of payday lender Wonga – should it go into administration.
Established in 2006 by Errol Damelin, who served as its chief executive until 2014, and Jonty Hurwitz, Wonga styled itself in its early days as a tech disrupter in the traditional financial services space. A company that would “break the oligopoly” of the incumbent banks to serve customers better.
Back in 2013, Damelin attacked the “bad guys” in the banking world for making it difficult for others to innovate. “Wonga happens to be a poster child,” he said. “We want better regulation. We don’t want no regulation, as we want to keep the bad guys out.” At its height, some suggested the company could be worth £1.5bn as it eyed a stock market flotation.
Since then, Wonga has been embroiled in a number of scandals, forcing it to pay millions of pounds in compensation to customers and write off debts that would, realistically, never be repaid. It seems Wonga was, in fact, one of the bad guys after all.
The extent of the lender’s problems emerged in the summer of 2014 when, having lost two chief executives in the space of less than 12 months, the Financial Conduct Authority, which regulates banks, told Wonga to repay £2.6m to 45,000 customers for a series of historic actions. What the documents detailing the litany of errors revealed was that, behind the endearing elderly puppets of Wonga’s well-known television advertisements, was a company in the business of targeting the poorest in society through impossibly high rates of interest, incorrect charges and threatening letters.
Between October 2008 and November 2010, Wonga sent letters to customers from a pair of non-existent law firms to put pressure on late payers – and charged them £9 for each letter received. It also admitted that, in 2014, it had discovered “unintentional system errors” that led to loan balances being miscalculated.
These errors coincided with new regulation that capped the fees and rates lenders could charge on payday loans, following lobbying from MPS, consumer groups and the Church of England. This put further financial pressure on Wonga, which sometimes charged an annualised percentage rate of as much as 5,853pc, causing revenues from its consumer lending arm to collapse. To be fair to Wonga, the company has worked hard to rebuild itself – and its image – since then. It has a new management team that wrote off £220m-worth of debt belonging to some 330,000 customers after admitting making loans to people who could not afford to repay them.
It has slashed costs by closing overseas offices and axing staff. Wonga has shed several hundreds of thousands of customers that it should probably not have been servicing. It has also focused on its core business of payday lending by shutting down its business loans arm and shelving plans for expansion into areas such as money wiring and mortgages. In 2015, its losses narrowed to £64.9m from £80.2m a year earlier, while sales increased by 18pc.
This time last year, its chief executive, Tara Kneafsey, said the business had been “transformed” as it was coming to the end of its three-year overhaul and that it was hoping to make a profit in 2017.
The trouble is the number of compensation claims being lodged with the lender has soared since then, costing it millions of pounds to put right. Wonga has pointed out that they all relate to loans taken out before the new management team joined in 2014.
Wonga said it was looking at all options regarding the future of the firm, but speculation that it has enlisted the likes of Grant Thornton to help with an administration process, should it come to that, suggests the £10m cash injection from tech venture capital funds Accel Partners and Balderton Capital a few weeks ago was not enough to sort out its problems.
In short, the situation at Wonga might be worse than we think. Like its customers, it seems Wonga now badly needs a loan to get itself out of this mess. The question is, will anyone lend it the money? And, if so, how much interest will they charge?
‘Behind the endearing puppets was a company in the business of targeting the poorest in society’