Errol Damelin, who says he understands why the lender inspires so much wrath, aims to improve children’s financial literacy
Wonga, the controversial high-cost, short-term lender, is planning to offer a wider range of financial services, including savings, this year.
Errol Damelin, co-founder of the company, said banks performed an important role in providing a safe place to deposit money and carry out transactions, but added: “We want to innovate around the edges of that and add value. We think we can. We think there are some places where technology can be used to deliver much better service.”
And, in a move that may alarm parents, Wonga is intending to get involved with improving financial literacy for children this year, doing something “innovative and educational” in a digital capacity, says Damelin.
“Kids need to know what all the credit alternatives are and equally they should know about saving.”
Wonga launched just over four years ago with one product – a short-term loan for consumers which could be approved within 15 minutes and delivered into the applicant’s bank account within half an hour. It has since advanced 4m loans, worth £1bn, and launched into the small-business loans market earlier this week.
Damelin likens the company’s development to that of Amazon, which “started with books, but it’s not just selling books now. The end point for us is being a really meaningful, relevant business in financial services. It’s being the Amazon of financial services.”
However, Damelin would not reveal what new services he has planned and a sticking point could be that the company does not have the banking licence which it would need to take deposits. The Financial Services Authority says it takes nine months on average to approve applications.
Wonga has attracted considerable criticism for the high cost of its consumer loans, for which it charges 4,214% annual representative rate (APR). The risk-based interest rates on its small-business loans range from 16.6% equivalent annual rate (EAR) to 109% EAR, substantially higher than the rates charged on small-business loans provided by banks or peer-to-peer lenders.
However, Damelin claims critics are wrong to focus on cost, and that for small-business owners, speed, availability and complexity are often more important. Likewise for retail consumers, price often isn’t the main determinant: “You don’t always buy the cheapest [cooking] oil, or the cheapest shoes.”
He even blames the “obsession” with pricing as one of the causes of the credit crunch, saying “there has been a nuclear arms race to the bottom on pricing”. This has been to the detriment of cash-strapped consumers, who have ended up subsidising current account banking for wealthier customers.
Damelin appears quite calm when asked if he understands why Wonga is so vilified, and inspires so much wrath among Guardian readers in particular for making money out of people on low incomes. “I understand the concerns that people have with credit providers in general. One of the reasons I started the business was because I share many of the concerns that people have.
“But we do, as a society, want access to credit delivered in a responsible way … There’s real demand from people – and businesses – for help in spreading the costs that they incur. Without that ability, then you might not have the opportunity for anybody who isn’t very wealthy to get access to things like education, fixing a car that breaks down or entertainment.”
He says he does “have issues” with how a lot of companies in the short-term lending industry, which includes pawnbrokers, payday and doorstep lenders, lend money. These include a lack of transparency on costs and terms, the rolling over of loans, resulting in the borrower owing huge amounts, and keeping people in permanent debt.
He’s not the only one – the 200 firms which comprise the short-term, high-cost lending industry are now the subject of an ongoing investigation by the Office of Fair Trading.
Damelin believes the quality of short-term lending could immediately be improved if lenders provided the main credit reference agencies, Experian, Equifax and Callcredit, with details of loans and customers. This would enable the lenders to share data and immediately identify if someone was borrowing beyond their ability to repay. Wonga turns down two-thirds of applicants after its computer systems have analysed around 8,000 pieces of data to assess their ability to repay.
Wonga advertises prolifically, spending an estimated £16m in 2011. It sponsors all three CSI series and The Mentalist on Channel 5, using the Rawhide theme tune for its commercial radio ads, and plastering buses throughout London. Damelin denies that the pensioner puppets used for its TV promotions are helping to sanitise an industry that has been described by one MP as “legal loan sharking”.
The company sponsors Blackpool and Heart of Midlothian football teams and advertises on football clubs’ websites, leading one Northampton Town fan to start a campaign for its ads to be removed.
It has earned opprobrium from parents for running its adverts during children’s programmes. One Guardian reader wrote: “Amid the ads for children’s toys was a totally cynical ad aimed at hard-pressed parents for the loan company Wonga.com. [Its APR] is the kind of figure likely to propel the most disadvantaged families into the arms of the debt collectors, and perhaps even into homelessness. I suppose it is legal for them to advertise this on children’s TV, but I’m sure it shouldn’t be.”
Damelin pointed out that children could not apply for loans, but added: “It’s important that kids get educated about credit. I think they are hiding people from the reality that credit is a really important part of society … It’s just naive in this day and age to think that people don’t need to know about credit.
Wonga claims, probably quite correctly, that many consumers are confused over the pricing of credit and savings interest, having little or no understanding of annual percentage rates (APR) or equivalent annual rates, while some of the most expensive forms of borrowing including overdrafts need not display these measures at all.
Damelin believes APR and EARs should be scrapped and a single measure introduced allowing borrowers to compare products on a like for like basis, rather like the unit prices used in supermarkets to describe how much 100ml of olive oil or 100g of chocolate cost.
He points to the company’s net promoter score — a measure of customer satisfaction developed by Harvard Business School. This asks how likely are you to recommend this service to a friend or family, allowing a company track its own performance over time and to compare itself against peers. Damelin said: “Most of the banks in the UK are negative. The Co-op has a score in the 20s while First Direct has one in the 40s — that’s a good number. Wonga, at 73%, is in Google and Apple territory, and most of the time we’re ahead of these guys.”