Smart boys be­hind pay­day loans

The Jewish Chronicle - - COMMENT - Alex Brummer

THE GREAT fi­nan­cial cri­sis (200709) sparked all man­ner of new lenders as the high street banks cut back their lend­ing. We have seen the birth and ex­pan­sion of peer-to-peer or­gan­i­sa­tions which match de­pos­i­tors and lenders on the web; crowd­fund­ing where like-minded in­vestors club to­gether to fund small brew­eries or films, and most con­tentiously the pay­day lender.

In the Great Re­ces­sion, pay­day lenders, who help the less well-off make ends meet be­fore the ar­rival of the next pay cheque, sprang up on the na­tion’s high street. They sat along­side dis­count re­tail­ers like Pound­land and B&M — a new take on the aus­ter­ity econ­omy. Ar­guably the pay­day lend­ing shop, de­spite the pun­ish­ing in­ter­est rates charged, re­moved the money­len­ders from the back streets, where they were backed up by brutes wield­ing base­ball bats.

Much dis­par­aged pay­day lender Wonga, founder by two South Africans, Er­rol Damelin and Jonty Hur­witz, took mat­ters a step fur­ther. Damelin, a sin­gle-minded for­mer Is­raeli para­trooper, brought ground­break­ing dig­i­tal skills to an an­cient busi­ness ac­tiv­ity. Pay­day lend­ing was com­bined with cut­ting-edge Is­raeli know-how and tech­nol­ogy to pro­vide a dif­fer­ent kind of in­stant mon­eylend­ing.

One would be hard put to un­der­stand this from some of the re­cent me­dia cov­er­age that has painted Wonga as the devil in­car­nate fol­low­ing a find­ing by the reg­u­la­tor, the Fi­nan­cial Con­duct Author­ity, that be­tween 2008 and 2010 it sent out 45,000 letters in the names of non-ex­is­tent lawyers de­mand­ing pay­ment of ar­rears.

Clearly, the use of fake le­gal cre­den­tials was stupid and un­ac­cept­able. The le­gal pro­fes­sion is in high dud­geon and the City of Lon­don po­lice have been per­suaded to re-open an in­ves­ti­ga­tion that pre­vi­ously had closed.

Once a witch­hunt is un­der­way, it is hard to stop, even though most of us are sub­jected to such faux le­gal pres­sure on a reg­u­lar ba­sis in our ev­ery­day lives, whether we are pay­ing park­ing fines or util­ity bills.

Damelin, who stepped down from Wonga be­fore the storm over “le­gal letters” broke late last month, is a highly fo­cused fig­ure. When I joined him for lunch as Wonga was mov­ing into take-off mode, he per­suaded a re­luc­tant chef at one of Lon­don’s most fash­ion­able eater­ies to whip him up a large bowl of Is­raeli salad, with­out the dress­ing, be­cause he didn’t fancy any­thing else on the menu.

What he ex­plained was that Wonga’s model was dif­fer­ent in sev­eral vi­tal re­spects to other pay­day lenders. Firstly, it would only lend to people who al­ready had cur­rent ac­counts at banks and had signed up for elec­tronic bank­ing. This cuts out the least well-to-do who do not have con­ven­tional bank ac­counts.

Sec­ondly, his cus­tomers needed to be cy­ber­savvy and own mo­bile de­vices such as smart phones and tablets so that they could ac­cess Wonga’s web­site and apps elec­tron­i­cally.

These two re­quire­ments meant that Wonga, un­like the other pay­day firms and back street money lenders, were not prey­ing on the poor­est of the poor. The point be­ing that un­like other pay­day lenders Wonga is not draw­ing upon the most vul­ner­a­ble groups in so­ci­ety. It is pro­vid­ing an in­stant cash ser­vice to people who need money quickly.

The re­al­ity is that if Wonga cus­tomers re­pay their loans rapidly the cost is cheaper than that of an un­se­cured over­draft at the bank where the charges rise ex­po­nen­tially. It is only when loans are not re­paid on time and the in­ter­est charges start to ratchet up that they rise to the ghastly 2,689 per cent APR seen in some head­lines.

That is ter­ri­ble but not worse than well-es­tab­lished play­ers like Prov­i­dent Fi­nan­cial (a pub­licly quoted com­pany).

Much of this will make the Jewish com­mu­nity un­com­fort­able even though most pub­li­ca­tions iden­tify Wonga’s founders as South African rather than any­thing else. The Bi­ble is ex­traor­di­nar­ily tough on usury, and ad­vo­cates debt for­give­ness. And Jews in Bri­tain have suf­fered, down the ages, from the stereo­types of­fered by Shake­speare and Dick­ens, two of the na­tion’s most li­onised lit­er­ary fig­ures.

It is highly un­for­tu­nate that Wonga is now be­ing tainted as an al­leged crim­i­nal or­gan­i­sa­tion be­cause of the le­gal letters. Bet­ter per­haps if Damelin and friends had cho­sen to use their bril­liance with com­puter code in a less con­tro­ver­sial area. We must be alert to de­mon­i­sa­tion, drift­ing into an­tisemitism.

Wonga is not draw­ing on the most vul­ner­a­ble

Alex Brummer is City Edi­tor of the Daily Mail. His book ‘Bad Banks’ will be pub­lished by Ran­dom House on July 17.

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