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Where did it all go wrong for Wonga?

Where did it all go wrong for Wonga?

They were in the vanguard of giving people quick access to credit with high prices and high fees and they didn’t treat their customers well

Just when things were meant to be getting better for Wonga, it emerged at the weekend that the payday lender’s investors had to rescue it with a ?10m capital injection.

The emergency fundraising is the latest episode in Wonga’s rapid rise and fall. Just six years after the company was touted for a flotation that would have valued it at more than $1bn (?770m), it is reported to be worth just $30m.

It was 10 years ago last month that Wonga launched, promising instant decisions to online borrowers seeking short-term credit – at high prices. The company grew quickly, backed by private equity investors, and was feted as one of a new breed of digital innovators in the finance industry. It defended annual interest rates of more than 5,000% by saying loans were for days or weeks rather than a year.

But political pressure started to build against payday lenders as stories emerged of vulnerable customers struggling to repay. Though Wonga claimed its customers were web-savvy people who chose not to use big banks, the Guardian found hard-pressed borrowers unable to gain credit elsewhere.

Wonga’s profit tripled in 2011 to ?45.8m on revenues of ?185m as the company made 2.5m loans. But then, in 2013, came a regulatory clampdown as the Office for Fair Trading ordered payday lenders to clean up their businesses and the Financial Conduct Authority announced a cap on the total cost of a loan.

Chief executive and co-founder Errol Damelin quit in and left the company seven months later. Andy Haste, the former chief executive of FTSE 100 insurer RSA, joined as chair and pledged to improve business practices, while making Wonga smaller and less profitable.

Haste drafted in a new management team, led by chief executive Tara Kneafsey, to rebuild the company. Wonga reported losses of ?80m in 2015 and ?66m in 2016 but was aiming to return to profit in 2017. With its accounts due to appear in the next couple of months, that goal now looks highly unlikely.

Wonga has been hit by an unexpected surge in customer compensation claims linked to loans it made before 2014. That year, an FCA crackdown prompted Haste to write off ?220m in debts and interest for 330,000 customers.

But claims management firms that are targeting payday lenders have set off a renewed torrent of complaints. Figures from the Financial Ombudsman show complaints about Wonga leaping to 2,347 in the second half of 2017, from just 269 two years earlier.

In , about 10% of claims against payday lenders were made through claims management companies, but a year later the figure was close to two-thirds.

The ombudsman is also reportedly giving borrowers more time to bring cases, putting further pressure on Wonga. The result is a big enough jump in provisions for customer compensation to threaten the company’s survival.

James Daley, managing director of campaign group Fairer Finance, said: “It’s not surprising that Wonga are in this position because they exploited a market that was loosely regulated. ”

Actor Michael Sheen launched a scheme to end high interest lenders like Wonga earlier this year. Photograph: Teri Pengilley/The Guardian

Claims management companies have targeted payday lenders as potential payouts from payment protection insurance start to dwindle. PPI customers have a year left to make complaints before the FCA’s deadline. Wonga received almost 1,000 more claims in the second half of 2017 than in the first half.

Damelin has moved on to become one of the UK’s leading investors in technology startups, including Purple Bricks, the online estate agent.

“As I understand it, they’ve done their best to clean their act up, but they are reaping what they sowed in those early years,” said Daley. “When Wonga was in the market they were making money and now they are handing it all back again.”

Balderton Capital, Accel Partners and 83 North, who stumped up cash in the emergency fundraising, were among the investors that backed it early on

Wonga’s maximum interest rate is now 1,509%, though that is for a 14-day loan, meaning a customer would pay ? to borrow ?150. Campaigners say the industry has reformed since regulators intervened but that households under strain from austerity measures remain vulnerable.

Gillian Guy, chief executive of Citizens Advice, said: “We now see half the number of payday loan problems that we did in the dark days before the cap on interest and charges, so we know this type of regulation works. While many of these problems are from before 2015, people still come to us after being sold loans they cannot pay back because rules on payday loan debt lawyer Hillsboro affordability are simply not good enough.”

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