Rising stars beware: fairness comes before chasing profits
It was exploiting the power of the internet to find new ways of doing business. It was disrupting the established giants of the finance industry. It was expanding rapidly, moving into foreign markets, and heading for a stock market flotation that would value it at £1bn or more. Rewind a few years and Wonga was one of the UK’S brightest, fastest-growing tech companies – a unicorn before the term was even invented.
And now? The firm is reported to be on the brink of calling in the administrators as it struggles to cope with the mounting cost of compensation payments. Not many people will be sad to see it go. In its short life, it acquired a reputation for fleecing its customers on an epic scale.
But it is also important that other tech unicorns, especially in the booming fintech industry, learn the lessons of its demise.
It turns out that reputation matters, and that treating your customers fairly always has to come before short-term profits. Wonga forgot that, and has paid the price. Shareholders in other fast-rising tech firms need to make sure they don’t go the same way.
Few businesses have had as rapid a rise and fall as the cheekily named payday lender. Founded by the South African tech entrepreneur Errol Damelin, it was in many ways the first of the radically disruptive fintech companies using the web to change the way money was lent. It was smart and savvy, allowing people to take out short-term loans with a minimum of bother and fuss, and with marketing that was a world away from the stuffy adverts of most lenders. Backed enthusiastically by the venture capital funds, its expansion was breathtaking.
Within only a few years, it was one of the best-known brands in the country. By 2013, only a few years after it was founded, it had revenues of £300m and more than 500 staff.
It sponsored two Premier League teams, Blackpool and Newcastle. By 2012, it was raking in profits of more than £60m a year, and had embarked on an ambitious round of expansion, pushing into South Africa and Poland, as well as expanding into business loans. Damelin was collecting award after award for his brilliant entrepreneurship, and the company was being touted for an IPO which, if they had managed to get it away, could easily have propelled Wonga into the FTSE 100. For a time, it looked to be one of the most exciting new companies in Britain.
As we now know, it all went horribly wrong after that. Wonga’s business was all about short-term loans, but the rates it charged for the money were eye-watering. It started to come in for ferocious criticism, with everyone from the Archbishop of Canterbury downwards criticising its sky-high charges.
In 2014, the Financial Conduct Authority found its debt collection practices were unfair and ordered it to pay £2.6m in compensation to customers, and it has been steadily downhill ever since. Sure, it tried to change its business practices, especially after Damelin was replaced as chief executive. But it looks as if too much damage was done in its first few years for that to be possible.
When most businesses go into administration, from Woolworths to House of Fraser, most of us are a bit sad to see them go under. If that is what happens to Wonga, it is unlikely that anyone will mind very much. It became synonymous with rapacious, predatory lending.
What is important, however, is that other fast-rising tech companies learn the lessons of its rise and fall. After all, the UK has an impressive number of fast-growing fintech companies. Funding Circle has an estimated value of $1bn (£776m), Monzo is worth a similar amount, Transferwise is worth an estimated $1.6bn, and Revolut has a value of $1.7bn. These are all important companies with potentially a bright future – so long as they can avoid blowing themselves up. So what should they and their backers take from Wonga’s demise? There are two main lessons.
First, reputation matters. As it started to expand, horror stories began to emerge of the way Wonga loans were sold and the methods used to collect repayments. It turned out the company was using a couple of fake law firms to bully people into repayments. It tried to run adverts on TV playing down the astronomical annualised percentage rates on its loans. It was frivolous in its response as stories started to emerge that it was lending to people who were very unlikely to ever be able to repay what they owed.
You can’t be a serious company when you are doing stuff like that. Wonga was arrogant and out of touch almost from day one, and quickly found it had no friends once it started to face a barrage of criticism. That turned out to be an expensive mistake.
Next, it should have put the customer before short-term profits. Its interest charges quickly became absurd even for loans that lasted only a few weeks. When you worked out the annual rate, it turned out to be charging over 5,000pc, and that was at a time when official interest rates had been slashed to just 0.5pc. It is hard to believe the margins really needed to be that generous even if the default rates were high. What was wrong with 1,000pc, or even 500pc? It made a lot of money in the short term, but the price was a high one. The terms were so unfair that in the end it was always going to be regulated out of business.
If it had charged more modestly, it would have made less money in 2013 and 2014. But it might well be a FTSE company today, instead of potentially readying the administrators.
The sad thing about Wonga is that underneath all the hype and sharp practice, there was actually the kernel of a good idea. The web did allow new ways of credit scoring that old-school lenders had missed. And mainstream lending came with piles of paperwork that could easily be stripped away without anyone being worse off.
After all, finance is a very traditional industry, with high costs and often poor levels of customer service. It was ripe for disruption, and in many ways it still is. If Wonga had focused on that, it could have built a substantial business by now.
Instead, it tried to make lots of easy money very quickly. The other fast-emerging tech companies, in finance but also in other industries, need to make sure they preserve their reputation. And they need to make sure they behave responsibly, even if it means that profits won’t necessarily be as high as they could be this year and next. If they do that, there is no reason why they shouldn’t have a brilliant future – but if they don’t they will end up in the same sorry state as Wonga.
‘If it charged more modestly, it would have made less money but it might well be a FTSE company today’