Wonga: what went wrong?

31 Aug 2018

Notorious payday lender, Wonga, has gone into administration. Since 2013, the company’s revenue has plummeted from just over £300m to less than £80m in 2017. What went wrong and what was it that made the Wonga giant topple over?

Bank-rolling

Wonga was founded in 2007, but its popularity peaked during the recession – particularly when bank loans became more difficult to obtain. Wonga offered short term loans and an easy application process that allowed applicants access to money in just a matter of hours. It seemed like a dream to those people who were finding it tough to get credit via traditional methods.

More than 100,000 loans were taken out during the first year alone and by September 2012, profits had hit £45.8m – an increase from a £12.4m profit just 18 months earlier.

What went Wonga?

The bubble burst after the company faced a number of criticisms. The Financial Conduct Authority (FCA) ruled Wonga’s interest payment terms and debt collection practices were unfair and subsequently launched an investigation.

The FCA discovered a number of letters sent to customers on behalf of Wonga, from fake law firms, demanding customers to pay their balances owed. This was clearly done to pressurise customers into repaying their loans – some of which should likely never have been approved in the first place.

Further criticism came in the loan repayment structure itself. Interest payments were calculated at around 4000% at the beginning. When the FCA stepped in, they capped the cost of payday loans at 0.8% of the borrowed amount and limited default charges to £15. The FCA also ruled that from January 2015, there must be stricter lending criteria – which actually lead to the closure of a number of payday lending firms there and then.

Wonga’s demise

The knock on effect of the FCA’s ruling sent Wonga spiralling. The FCA commanded Wonga to write off debts of around £220m for 330,000 customers. It caused annual losses of more than £37m for 2014, which doubled in 2015 to more than £80m. The FCA also ordered Wonga to pay £2.6m in compensation to 45,000 customers.

Despite Wonga’s refocus to longer-term loans and improved affordability checks, the company still lost £65m in 2016. Customer numbers quickly dwindled to 220,000 by September 2017 – compared to more than a million in 2010. All the while, the legacy of complaints and debt write-offs continued causing collateral damage, and all of this ultimately led to Wonga’s demise.

Wonga’s story will feel like a vindication to many: a company deliberately set up to prey on those who can least afford it in the guise of the knight in shining armour coming to the rescue.

It is also a salutory tale of how a regulatory change or ruling can quickly turn a promising business model into a basket case by either not anticipating such change or failing to adapt quickly enough to it with a viable plan B.

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