So, Wonga is being wound up. But, as consumer groups champion its downfall, is the lender really such a bad guy and what should risk managers take on board from this now sunk ship?
Wonga grew too quickly and had too many customers who would later complain, resulting in unsustainable compensation claims. It has been revealed that this August, investors had to shore up the business with a £10 million capital injection, even though at its height, it was valued at well over £700 million.
Wonga, which launched in 2006, was one of the first FinTech lenders to gain both traction and later notoriety. Though its interest rates were high, it argued that they were short-term meaning this was less of an issue, since the intention was for loans to be repaid quickly. It also argued it was fulfilling a need – customers were supposedly cash-strapped people working who were waiting to be paid. And many of these struggled to borrow elsewhere, so at least they had an option they could call on.
But regulatory and political pressure soon came to bear and Wonga’s profits were hit when the FCA insisted on a cap in November 2014. This reduced the cost of borrowing, cut default fees and stopped debts escalating through ensuring borrowers never had to pay back more in fees than the amount originally taken out.
Wonga restructured and became smaller, taking on new leadership who promised to act with greater focus on treating customers fairly. Yet the times were changing and it is understood that Wonga also suffered a decline in borrowers as wages had begun to rise and employment levels continued to grow. There was also more competition from other lenders, while some chose attractive credit card transfer deals as an alternate way of parking their debts.
And even though Wonga said it had shaped up and was ready move on, it was then hit by a swathe of compensation claims, linked to loans made before 2014. The company was forced to write off £220 million in debts and interest for 330,000 customers. Financial Ombudsman figures show complaints about Wonga leapt to 2,347 in the second half of 2017, from just 269 two years earlier.
Indeed, claims management firms have been actively targeting the payday loans sector, since the number of PPI claimants is now falling off as a result of the forthcoming deadline for these claims next August.
It is known that firms handling PPI claims would ask customers if they’d ever had a payday loan, while others target this sector directly. Not everyone is eligible for compensation, but a sum may be payable if a customer is able to show that their finances worsened because of the payday loan. This shows the lending was irresponsible and interest and fees can be claimed back.
Details of Wonga’s winding up will come out in due course from Grant Thornton and this will be a difficult time for the firm’s 500 employees – it remains uncertain if parts of the business will be sold off or if the book of remaining loans will be sold on to other lenders. If this is the case, borrowers will have some protection in that they will be required to make the same repayments as before.
What remains to be seen is whether other payday lenders will also be driven out of business. Even though the business model has many detractors, loan sharks are more dangerous and continue to prey on those who need to borrow money. While credit unions are put forward as the ethical alternative, they cannot service all who need to borrow. Wonga’s downfall may have pleased its critics but those who need to borrow have one less port of call.