The payday lender that makes a point of its selectivity has nonetheless seen write-offs rise to 41% of revenues
A visit to Wonga.com, the website of the fast-growing online payday lender, is a seductive experience. “We know you just searched for payday loans – you might be glad you found us! We are different …” With Wonga, the borrower is saved the indignity of queuing at a high street store such as Money Shop or Cash Converters, or the intrusion of a doorstep lender calling at their home. “Wonga is super fast, convenient and flexible too – unlike most payday loans. You can apply online in minutes and usually get a decision promptly – no faxing, no meetings and no hanging on the phone listening to cheesy lift music … once approved we will send your money within 15 minutes.”
In some respects, however, Wonga is all too similar to other lenders targeting high-interest loans at financially stretched borrowers. In 2011 it was forced to write off almost £77m of bad loans – despite claims to be a responsible and “truly selective” lender.
Founder and chief executive Errol Damelin portrays the typical Wonga customer as a creditworthy borrower seeking speed and convenience – perhaps like Kweku Adoboli, the rogue trader who almost destroyed UBS, who, it has emerged, turned to Wonga.com to cover spread-betting losses – rather than someone at the limits of conventional sources of short-term credit such as bank overdrafts and credit cards.
On the Wonga website, Damelin tells prospective borrowers: “Part of responsible lending for us is being truly selective and making sure … we are using all the data we can possibly get to help us make the best decision as to whether you can afford the credit and whether it’s really good for you at the moment.
“So we are very, very selective – much more selective than credit cards or banks in terms of who do we work with. It’s really based on: ‘Is this good for the customer or isn’t it good for the customer?’ We take that very, very seriously.”
But Wonga’s latest accounts show the firm wrote off £76.8m during 2011 because thousands of loans proved to be “uncollectable”. The bad debt bill is equivalent to 41% of Wonga’s £185m revenues for the year and is almost four times the figure for 2010. Filings at Companies House spell out that an associated accounting impairment was “mainly related to customers who are in unexpectedly difficult economic situations”.
A spotlight on the legion of financially distressed Wonga borrowers comes at a sensitive time for the booming payday loans industry. The company recorded pretax profits up £45.5m to £62.4m for 2011, and last summer Damelin was reported to have held talks with bankers about a US flotation that could have valued Wonga at more than £1bn.
But critics have grown increasingly uncomfortable at the combination of huge profits and few consumer safeguards. More than 40,000 people signed a petition in the autumn for a cap on the cost of payday loans and in November, former Treasury minister Lord Sassoon gave the strongest hint to date that government was growing sympathetic. Sassoon said: “We need to ensure that the FCA [planned new regulator the Financial Conduct Authority] grasps the nettle when it comes to payday lending and has specific powers to impose a cap on the cost of credit and to ensure that the loan cannot be rolled over indefinitely should it decide, having considered the evidence, that this is the right solution.”
Wonga loans are made at a “representative” annual percentage rate of 4,214%, though the company argues this measure – which customers must be informed of by law – is unhelpful for short-term borrowers and exaggerates the cost of credit. Wonga has put its float plans on hold.
Last year a Guardian investigation sought to highlight the gap between Damelin’s public portrayal of a typical Wonga customer – “young professionals who are web-savvy, fully banked, have access to mainstream credit and a regular income” – and the views of some borrowers and consumer credit campaigners. Wonga responded by suggesting cases highlighted by the Guardian had been regrettable, but rare, examples of unhappy customers: “It is clearly possible to find some people who are unhappy, in distress or we shouldn’t have approved.” And it added: “The reality is out of sync with the frequent media view that we prey on vulnerable or low-income families in hard times.”
Asked about its latest bad debt write-off, Wonga told the Observer: “We are a provider of short-term unsecured finance, a financial sector which due to its nature has always been traditionally riskier than other forms of finance. Despite this, Wonga’s industry-leading credit-checking technology keeps bad debts to within single-digit percentages of the total amount we lend. Our bad debt provisions have increased in the past two years in line with the growth of the business.”
Damelin has claimed that Wonga, which will take over from Virgin Money as shirt sponsors of Newcastle United football club next season, had an “industry-leading” arrears rate and is more cautious about who it lends to than high street banks or credit card providers. In contrast to traditional doorstep lenders, Wonga says, it turns down almost two out of three first-time loan applicants and runs up to 8,000 high-speed, online credit checks before advancing loans in just 15 minutes.
Britain’s biggest doorstep lender, the home credit division of FTSE 250 firm Provident Financial, booked impairments of £224m for 2011. The sum is equivalent to 32% of Provident’s £697m doorstep lending revenues for the year. Provident makes no secret of the fact it caters largely to low-income customers, many of whom struggle to get the credit they need from banks.
Last year Damelin claimed that Wonga’s arrears rate was about 7%. A source close to the company suggested the figure may in fact be slightly higher, but insisted it was still in single figures. Wonga provided 2.46m short-term loans during the year, with the average advance being £255 and an average repayment period of 16 days.
With Wonga’s plans to list on the stock market on ice, the company is reportedly looking to raise capital through a more discreet bond issue. It remains to be seen whether investors will prove to be as “selective” as Wonga claims to be.