Few tears were shed recently when Wonga collapsed under a mountain of compensation claims. In this post I explore the causes and impact of the fall of the poster boy for Britain’s payday lending industry.
When Errol Damelin set up Wonga, London’s first major fintech company, in 2006, he used technology to transform the sclerotic personal lending market. The software worked brilliantly. What didn’t was Damelin’s limited grasp of its deeper implications. In the dash for new customers he focused too much on marketing and too little on ethics. Stretching the firm’s reach far beyond its core market of young professionals who understood the deal on payday loans, he began tapping people whose wages couldn’t cover the extortionate repayments.
In the wake of the credit crunch, high street banks had nothing to offer the suddenly strapped-for-cash personal customer, and the alternative was to seek out shady loan sharks whose terms were even worse. The new breed of lenders who stepped into that gap conducted their business in daylight, online and via television advertising, making their terms explicit even if they were exploitative.
The company was too greedy and at times crossed the ethical line, charging some desperate cash-seekers annual interest rates of more than 5,000%. But the demise of Wonga doesn’t spell the end of the high-cost, short-term credit industry. The conditions that gave rise to the emergence of Wonga and many other such lenders over the past decade or so are still very much with us. There are more than two million people in this country earning the minimum wage today, with another 4.8 million people are self-employed. That adds up to a lot of people living from hand to mouth, for whom it takes only a small Mit to be in financial jeopardy. For these people, Wonga and its competitors have often been the best option available.
The reality is that Wonga was ruthlessly exploiting the needy and the naive alike for its own rapacious ends.
Short of miraculously banishing poverty, or transforming human nature, how can we stop its rivals ensnaring others in the high-cost credit trap? One answer is tighter regulations. In 2015, new rules were introduced, stopping payday lenders from charging more than 0.8% a day in interest and fees. As a result, the number of people contacting Citizens Advice about runaway payday loan debts halved within a year. But we also need to better educate consumers about the risks of borrowing.
Hundreds of its trailblazers went on to work in other fintech businesses. Damelin is now viewed reverentially
in the venture capital scene having become an angel investor in successful online outfits Purplebricks and TransferWise. Some may be appalled by that. They shouldn’t be. If anyone has learned the importance of ethics in fintech, it is the Wonga alumni. Maybe the morality tale has served its purpose.
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