Why Wonga Will Wrestle With Regulators

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

• Wonga: another web disruption for loans, February 2009
• Need money fast? May 2010 
• An explosion of payday loan firms, February 2011
• Poor are #1 prey for financial predators, June 2011

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:

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.