Alternative Finances

Why Wonga Finally Called It Quits

U.K. payday lending startup Wonga has come to the end of the road, having filed for administration (similar in concept to bankruptcy in the U.S.) in the closing days of last week. The firm has confirmed that it has appointed Grant Thornton as administrators who will handle the details for four of Wonga’s business units: Wonga Group Limited, WDFC UK Limited, Wonga Worldwide Limited and WDFC Services Limited.

The news came after a long run of bad luck for the firm that had, earlier in the same week, closed its doors to new loan applications. At the same time, it entered into emergency talks with Britain’s Financial Conduct Authority (FCA). Earlier this month the firm received a £10m emergency cash injection from its previous investors in an effort to keep the business afloat. Instead, it seems those funds have been diverted to defend and pay off the latest slug of compensation claims filed against the firm. Each complaint to the Financial Ombudsman Service costs Wonga £550 in fees — more than Wonga’s average loan size — even before any compensation payout.

According to the Financial Times, complaints against Wonga’s lending practices, logged with regulators, were up 80 percent since that emergency injection. The FCA noted that its will continue to work with Wonga as it goes through this process.

“The FCA will continue to supervise Wonga once it is in administration and is in close contact with the proposed administrators with regard to the fair treatment of customers,” the regulator said.

A Long Walk

Though Wonga officially hit the end of the road last week, its troubles have escalated since 2014, when the FCA really began taking a hardline on short-term, small dollar lending in Britain. That was the same year that the regulator officially moved to cap payday loan interest rates and ban rollover loans. That action — and the subsequent crackdown — was an inflection point in the U.K.’s short-term lending market, and many payday lenders simply ceased to exist.

Wonga — launched in the wake of the 2008 financial crisis — had its own series of run-ins with the FCA. Backed by big names in investing like Accel and Balderton Capital, Wonga specialized in offering short-term loans that were advertised as kinder, friendlier and more honest than the typical payday loan. Critics complained that the reality didn’t match the marketing and cited evidence that Wonga loans — and the 5,800 percent interest rates that came with them — may not have been all that kind or friendly.

In Wonga’s defense, it is a short term lender, with loan spans calculated in weeks, not years. A Wonga customer who borrowed £150 for 18 days would pay £33.50 for that loan. However, when Wonga made an ad that explained that, in that way, it found itself running afoul of a different regulator — the Advertising Standards Authority, which found that loan to be misleading for consumers.

“Whilst we acknowledged that viewers taking out and repaying the loan within the stated time period would not repay 5,853% of the loan, we were nevertheless concerned that viewers would be left without a clear understanding of how the information in the on-screen text could be applied to a Wonga loan, given the ad’s assertion that the representative APR was not indicative of the cost of the loan,” the Advertising Standards Authority said.

It was one of many Wonga ads that were banned for various reasons and netted a full stable of complaints. In 2014, it killed the puppet-based line of advertising entirely.

“We, at first, believed Wonga was at the better end of the spectrum,” one former regulator told PYMNTs. “But [after taking] a closer look at its models for lending we changed our minds. [It was] lending to anyone because [its] model relied on it.”

That “anyone” included claims that Wonga was loaning money to a lot of people that couldn’t pay it back. Further deepening the FCA’s ire, the firm was also dinged for reportedly sending fake letters from lawyers to customers during 2013 – 2014.  It was required to pay £2.6 million to settle those claims.

At the time, Daniel Waterhouse of Balderton Capital said that Wonga had a large loan portfolio and in working through it, had made some mistakes. Waterhouse also said that the lender had  offered “a great product to market,” with an eye for learning from the past and “moving forward.”

But Wonga faced difficulties adapting to the new world order in small dollar, short-term lending. The firm reported losses of £146 million in revenue between 2015 and 2016, the most recent years for which data is available, with operating losses of £64 million. Roughly half of those losses stemmed from settling claims from actions brought by the FCA.

To add insult to injury, Wonga was also hit with a data breach in 2017 that impacted roughly 270,000 of its customers — more than 240,000 in the U.K. and another 25,000 in Poland. The breach, according to reports, went undiscovered for several days before the firm realized that customer information had been exposed.

Wonga’s lending platform began to shrink, and though earlier growth had been fueled largely by reinvesting the proceeds of its loans, when its revenues began falling, the firm began taking on debt to pay the bills.

In the end, it just ran out of money, and an infusion of more from its investors only sped up the bleeding and Wonga was hit with costly complaints.

What’s Next

Wonga was required by the FCA to appoint an administrator, but according to most reports, final authority on the decision was left to the Wonga board. The goal now is to make sure that business carries on in an orderly way, and that customers are treated fairly, no matter what happens next.

“Customers should continue to make any outstanding payments in the normal way. All existing agreements remain in place and will not be affected by the proposed administration,” the FCA said last Thursday (Aug. 29).

As for customers who had outstanding claims against Wonga, open at the time it went into administration, experts say they will go on the list with the other creditors, but they are unlikely to get any kind of compensation.

Wonga, however, will carry on. Its overseas businesses in Poland, South Africa and Spain are not part of the administration, and will continue to offer loans to customers.

——————————–

LATEST INSIGHTS:

Our data and analytics team has developed a number of creative methodologies and frameworks that measure and benchmark the innovation that’s reshaping the payments and commerce ecosystem. Check out the latest PYMNTS Credit Union Innovation Index

TRENDING RIGHT NOW

To Top