Wonga’s Collapse: The ‘Platform for the Future of Financial Services’ Ceases to Exist

The issue of short-term lending and its connection to the post-Crisis era has been discussed on a number of occasions here in Financial Regulation Matters, most notably here and here. We discussed how the growth in this particular market was borne out of a desperation experienced by citizens who were, for the most part, struggling to make ends meet. One of the largest players in that field was Wonga, set up in 2006 just before the Crisis hit the Western world. In this post, we will look at Wonga’s recent collapse and discuss what its collapse may mean, both for consumers and the marketplace moreover.

In a previous post we discussed how, in June 2017 the Financial Ombudsman revealed that consumer complaints against Wonga and other similar lenders had exploded by 227%. That increased rate of complaints has subsequently been cited as being one of the core reasons behind Wonga’s recent collapse. The Guardian notes how the company ‘collapsed into administration after it was brought down by a welter of compensation claims’, with the newspaper also reporting that, as we stand after the company failed to save itself, there are still an estimated 200,000 customers who still owe upwards of £400 million in short-term loans. A worrying development is that as Wonga became renowned for targeting vulnerable people with their lending practices, those still in debt with Wonga have been instructed to continue making their payments whilst a buyer if found for Wonga’s loan book. One wonders whether the news of Wonga’s collapse will lead to an increased rate of delinquencies and/or non-payments, which will simply further place these already vulnerable borrowers into financially unhealthy predicaments.

Nevertheless, Wonga’s collapse is significant for a number of reasons. The company had survived a stinging PR campaign against it, from the Church of England amongst many others, but what is perhaps at the heart of its collapse is the positive potential of financial regulation. Between 2014 and 2015, the Financial Conduct Authority (FCA) had flexed its regulatory muscles and had enforced new rules that mandated that payday lenders needed to increase their checks on the affordability of its products (and also whether borrowers could afford repayments). Most tellingly, the FCA brought in new rules in 2015 that capped the rate of interest that payday lenders could charge, and this cap was a significant reduction in comparison to the rates that they were charging borrowers before the new rules were established. The article in The Guardian cited earlier states that ‘once lined up for a stock market floatation with a price tag approaching £1bn, Wonga was laid low by a cap on interest rates that ruined its business model’. It is worth pausing here to deconstruct that sentiment, as in the news media it is often passed over. Consumers were subjected to extraordinarily high interest rates before the cap was imposed, with rates as high as 5,833% being cited in some sources. Though the cap has been installed at 0.8% of the amount borrowed per day, the fact that charging incredibly high rates of interest and targeting vulnerable people who the company knew were unable to repay is nothing short of despicable. One would possibly imagine that people who had devised such a business strategy would be facing criminal charges, not administration and insolvency, but in reality what they were doing was not, in effect, illegal. Of course targeting vulnerable people with high-interest loans can and should result in sanctions, but criminal prosecution is, regrettably, not even a consideration in the world we inhabit. What is does do, however, is allow us to single out the people who were responsible.

In 2012, the company’s founder Errol Damelin stated that (in relation to the company’s creation) ‘we have dared to ask some hard questions, like how can we make loans instant, how can we get money to people 24 hours a day, seven days a week, how can we be totally transparent?’. It has been discussed in the media recently that Demalin’s proposed foundation for the future of financial services was to create an almost fully automated process that removed the stigma from borrowing and appealed to a number of different demographics. However, as discussed in econsultancy, the altering of lending variables from traditional indicators of creditworthiness to more fluid variables has not, and will not change fundamental components of the lending/borrowing cycle – the money given by the lender must be repaid. This was, in essence, Wonga’s business model: charge extortionately high rates of interest to ensure that the initial payment if repaid, whilst leaving anything else paid as pure profit. Their argument would be that such high rates of interest are required in order to lend to people who did not meet traditional standards of creditworthiness, but this is a poor argument. Whilst there are isolated cases of people benefitting from using companies like Wonga, the reality is that Wonga were exceptionally vicious in its marketing to vulnerable consumers and hiked their interest rates up to reflect the fact that they were lending to people that they should not have been lending to; this is further demonstrated by fines of £2.6 million (to be paid in compensation) and a write-off of £220 million’s worth of debt after admitting that the company had targeted people who it knew could not afford to repay.

Ultimately, Wonga should not be missed. Whilst one author presenting an opinion in The Guardian paints a picture of Wonga providing a useful service to society, this to miss the point entirely. The author describes how he would utilise Wonga to supplement his £20,000 annual salary, but the reality is that the majority of those affected by Wonga had no such foundation upon which to fall back on. Furthermore, the company actively targeted those in much lower brackets in the knowledge that the economic cycle in the post-Crisis era was ripe for exploitation. Such companies cannot prosper in boom periods, so it is not a stretch to label Wonga, and the many companies like it, as parasitic. There is a lot that can be said of Wonga, with the vast majority of it negative, but its existence is a direct indicator of a much broader and deep-rooted problem. That so many consumers required the services of Wonga is a testament to the financial quagmire that the Crisis plunged the West into. What is also telling is that it took regulators 4, 5, or even 6 years to even begin to consider putting a stop to such clearly exploitative practices. The sentiment that presents is that this exploitative post-Crisis process is almost expected, and potentially worse is fundamental to the development of economic cycles in the modern era of capitalism. It would be satisfying to see the executives of Wonga publically castigated and held accountable, but that will not happen. The reality of the situation is that many were happy to look the other way, as at the same time Wonga were raising its interest rates and targeting the vulnerable, the Government was pumping money into financial institutions at an unprecedented rate, whilst also slashing public budgets and obliterating the welfare system that defines the U.K. and acts as the ultimate safeguard against citizens being pushed into the waiting arms of the venal. With that in mind, perhaps Wonga was a necessary evil, but the truth is that we really should never have need for such a company to exist.

Keywords – Wonga, payday lenders, loans, administration, politics, capitalism, @finregmatters