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Why Wonga Will Wrestle With Regulators

I’ve talked a few times about Wonga and Pay Day Loan firms:

The last point picks up on the continual debate about such firms and their exorbitant interest rates charged to customers.  These sites vary from 1500% to 4000% interest rates per annum.

The Pay Day firms always contest that these loans are not meant to be ‘per annum’ but ‘per diem’, for every day.

Pay Day is exactly that: the bridge for someone between the end of month before their pay cheque arrives and their pay day, where some bills or issues arise and they need emergency funding to tide them over.

Unfortunately, this can lead to some people doing this every month and, before they know it, they are paying those 1000% interest rates.

This is because many of those who are the neediest are the most ignorant when it comes to money matters and can be easily ripped off therefore.

This is illustrated well by a report from the University of Massachusetts on low-income families who use costly check-cashing services because they lack the knowledge of banks and what banks can do for them.

Anyways, back to Pay Day loans and the originator of this service in the UK, Wonga.

Wonga featured in a spread in Wired Magazine last month: Could Wonga transform personal finance? with this wonderful picture of CEO Errol Damelin, on the right, looking a bit evil if you ask me:

Wonga less 03.5

Anyways, there are several amusing notes in the interview, with the one that made me laugh out loud being the mention that Wonga’s first defaulter after launch was a man who worked for a bank.

More concerning are some other numbers in the article.  For example: “within a year, Wonga had issued 100,000 loans, worth £20 million, earning about £15 million by charging interest at an eyewatering headline rate.”

That’s 75% AER on their investment.  Try to find those sort of rates of return anywhere else.

Dammelin refutes any issues about their work by pointing to customer satisfaction raets of over 90%, but I would contend that if someone is desperate and in a corner with the landlord knocking on the door for the rent and I could get £200 for three days at a cost of £50 then yes, I’d proably be happy that someone could sub me my rent money, even if they stiffed me in the process.

Another line in the article is venture capitalist Robin Klein, who provided the seed capital to get Wonga started: “Robin Klein admits to being initially cautious about the ethics of short-term loans. But as he learned about the business model, he became reassured that it wasn't based on exploiting the needs of the desperate. It was about meeting the expectations of a generation that had long expected flexibility and speed.”

Again, I would say that this is exploiting the needs of the desperate, but the desperate and Wonga won’t see it that way as the desperate are happy to get money wherever and whenever they can if it means they don’t get their legs broken.

Anyway you can read the whole article yourselves and make your own minds up.

On the positive side, Wonga is an incredibly innovative technology start-up.  This I don’t deny.  But I am seriously not happy with how such firms operate, particuarly when I read a letter in this month’s Wired Magazine  in response to the article.

Here’s the letter.

It starts by picking up on the paragrpaphs in the article that talk about customer service:

“In the basement, the five-strong customerservice team deals with queries and collections. They're supported by the 15-strong team in South Africa. The system is not yet fully automated: each day, a handful of applications have to scan documents for verification. On one phone line a couple who have filled in their bank details incorrectly are trying to borrow £50 for seven days. They whoop when the loan is approved.

“Sitting at a computer, customer-care executive Tarik Abdellah deals directly with clients. There are, inevitably, casualties. A man who borrowed £1,000 before Christmas has stopped repayments. He has been too scared to talk to Wonga. Abdellah calms him: he tells him that he has frozen the repayments and deducted £200 from his account, bringing the debt down to £1,500. ‘Right. How much can you afford to pay each month?’ he asks.

“By the end of the conversation the customer appears almost grateful. At no time has he been threatened with court or chided. ‘I appreciate that,’ he tells Abdellah. Although he has paid hundreds for a £1,000 loan, there is no anger or bitterness in his voice.

“But many borrowers appear to prefer not to talk to a representative. They are more likely to express concerns on the site's forums or its Facebook page. There, a customer writes: ‘5 emails and countless times on hold with wonga today and no answer? Can you give me information on how to contact help desk?’

OK. 

Here’s the letter that the print version of Wired lead with this month, and is also the main comment on the online version:

“’People prefer not to speak to our representatives’ and then it’s followed by a statement about someone who had emailed and phoned without response. Does this sound like a person who doesn’t want to speak to anyone? When I could no longer repay a Wonga loan, it took 50 days of ringing and emailing to get through – an £800 loan became a £1,700 repayment. It was only after I emailed the media officer did I get any response.”  Steve Perry

Hmmmm … sounds like a great way to get a 75%+ yearly return on investment if you ask me. 

Meanwhile, I fully expect Wonga and the payday firms to find themselves under severe regulatory scrutiny in the very near future.

 

About Chris M Skinner

Chris M Skinner
Chris Skinner is best known as an independent commentator on the financial markets through his blog, the Finanser.com, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal’s Financial News. To learn more click here...

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Financial services of the future will be open sourced and real-time

I recently  presented in Miami and BBVA were kind enough to summarise what I said …

  • I’d like to make a few points in response if I may, or rather counter some assumptions, which form the basis of this post.
    I’ll talk about APR first. APR is perhaps the biggest red herring when it comes to discussing short-term credit – and the assumptions made about this sector, some of the lenders involved and the customers who use services such as ours. So can please we get one thing straight – we do not ‘charge’ thousands of percent in interest.
    Wonga.com set out to provide a better alternative to both traditional payday loan products and high street credit products, which may advertise low cost head line rates, but make most revenue when customers remain in debt or make mistakes.
    We are completely transparent about what we charge – in terms of a clear total cost of repayment, provided up-front. This is the information our customers really value and it is calculated on the basis we charge a little under 1% per day for the cash we provide (in minutes and around the clock). A standard loan is in the order of £150 over a fortnight, so our charge for that is around 14%, or £1.50 per day, with no-catch early repayment available at any time.
    The European APR calculation assumes both an annual term and daily compounding, taking a loan example with interest of something like 10-20% (straight) interest and turning into something unrecognisable and, quite frankly, unhelpful. It is impossible for someone to pay us interest for anything like a year (including in arrears situations) but, even if we launched a year-long loan product tomorrow, at exactly the same rate of charge we use now, the APR would instantly reduce to around 360% – as there would be no hypothetical compounding involved!
    So talking about lenders actual charging thousands of percent in interest on balances is both misleading and unhelpful to the debate. The APRs are in the thousands, true, but they are completely unrelated to what people actually pay.
    The second point I’d like to make is that you shouldn’t believe everything you read and we have not yet provided any financial numbers in public. Talk of our ‘earnings’ is speculation and I can assure you that our margins are within completely normal business parameters. It’s true we’re growing fast and seeing widespread demand, but we are building a sustainable, responsible business.
    This is mainstream demand we are servicing, from a generation of consumers who have lost faith in traditional credit products and demand the speed, convenience, flexibility and transparency we provide. Our customers are quite aware there are cheaper options, depending on the circumstances, which most of them have access to, but they are using credit in a new, short-term and occasional way.
    One number that is correct, is the reference to high customer satisfaction ratings. And I can see your point on desperation. It’s a solid thesis – IF there was also some data to back up the assumption customers are desperate. We may receive applications from desperate people, like any lender, but we are highly selective, using our proven technology, and our ultra low arrears rates are testament to that success. We use the same approach to check and decision any returning customers.
    The survey work we also do – to understand who our customers are, what they like and don’t like, plus why they are using the service – is both independent and comprehensive. We analyse the responses from tens of thousands of customers on a regular basis and don’t merely ask them if they’re happy with the service.
    We work with Populus to understand every side of the story and every piece of feedback. Our customers – on the whole – are not only highly satisfied with the service, but they have choices of credit provider and access to bank overdrafts, loans and credit cards.
    They also feel well informed and in control whilst using the service and appreciate the speed and convenience provided. Having also spent countless hours listening to customers more directly, this is not the feedback of desperate people, but the feedback of customers who were disenchanted with a sector lacking innovation and customer focus and have now found an alternative they trust.
    Finally, where individual and sometimes extreme customer case studies are concerned, we are the first to admit we aren’t perfect. After providing more than 1.5 million loans there are of course people we should not have accepted or examples of poor customer service, where we have let someone down. In those cases, we always try to put things right as fast as we can.
    We’re a young, fast-growing business, but our aim is always to make the right decisions and provide industry-leading customer service. Again, with such volumes it’s important to look at the bigger picture too and our specific customer service satisfaction ratings are 80+% across our customers – a rare thing in web services, never mind financial services.
    In summary, we expect to be challenged and questioned and we probably share some of the wider concerns of our critics about both the short-term and traditional credit industries. Debate is completely healthy and we’re keen to be part of that, so thanks for the opportunity to respond here. We’re always happy to listen to criticism too, we just don’t like assumptions.

  • Chris Skinner

    John assumes a lot too, and is not aware that I know Errol and Wonga well – Errol spoke at Finovate Europe which I chaired, and was originally introduced to me in early 2009.
    I also know APR, the customer profile of Wonga (see http://www.americanprogress.org/issues/2009/03/payday_lending.html) and more, so we shall see what John tells me as we will meet face-to-face.
    My aim is to make sure the word “assume” does not make an “ass” of “u” and “me”.
    Update to follow.
    Meanwhile, John tells me that “an average loan is indeed around £150 over a fortnight and our arrears rates are comfortably in single digits. Loan extensions are very low and far more, roughly a quarter in a typical month, of customers repay their loan early. Because we’re so selective our customers aren’t always the payday norm and 75% have never used an equivalent service before.”
    I’d pay back early at these sorts of interest rates.
    Chris

  • Chris Skinner

    John assumes a lot too, and is not aware that I know Errol and Wonga well – Errol spoke at Finovate Europe which I chaired, and was originally introduced to me in early 2009.
    I also know APR, the customer profile of Wonga (see http://www.americanprogress.org/issues/2009/03/payday_lending.html) and more, so we shall see what John tells me as we will meet face-to-face.
    My aim is to make sure the word “assume” does not make an “ass” of “u” and “me”.
    Update to follow.
    Meanwhile, John tells me that “an average loan is indeed around £150 over a fortnight and our arrears rates are comfortably in single digits. Loan extensions are very low and far more, roughly a quarter in a typical month, of customers repay their loan early. Because we’re so selective our customers aren’t always the payday norm and 75% have never used an equivalent service before.”
    I’d pay back early at these sorts of interest rates.
    Chris

  • Bravo Chris 🙂 must dash out but shall be back to read much more of what you have written on these pests! You impress me more and more.

  • Bravo Chris 🙂 must dash out but shall be back to read much more of what you have written on these pests! You impress me more and more.