If you were born before the year 2000, odds are you’ll almost certainly recognize the brand Wonga. It is a cautionary tale of opportunity, innovation – and how quickly things can go south in an emerging sector without proper regulation.
In the Beginning
Back in 2006, the UK lending market looked somewhat different. Smartphone penetration was just starting to gain serious momentum among young professionals aged 18 to 35 and they were comfortable using the web for most of their needs.
The Wonga co-founders (Errol Damelin and Jonty Hurwitz) saw the potential of this market gap and launched an online short-term loan platform, offering fast approval times and ultimate convenience as you could apply for credit from your sofa with the swipe of a finger.
In those days, there wasn’t anything quite like the Wonga service, and the business proliferated quickly while the competition was scrambling to materialize. With infamous puppets advertising the service and even sponsorship from a premier league football team (not to mention investment from the Church of England) Wonga turned from a modest fintech start-up to a massive global firm approaching a billion-pound valuation in just six short years.
However, this level of success wasn’t without controversy. The relative lack of regulation in the online credit industry, and high-interest rates, began to attract scrutiny, with increasingly loud clamors coming from the media for greater legislation to be imposed on payday lenders in order to prevent dangerous lending from becoming the norm.
This means new rules that would help protect customers from gaining access to credit that they should never have been loaned in the first place as the customer has no realistic way of paying back both the loaned credit and the additional interest payments too.
What Happened Next?
As with any great business idea, news spread fast. Within the first seven years of operating, Wonga became a giant, closely followed by over 100 competitors who had jumped on the trend after seeing the public appetite for fast online lending explode.
As with any under-regulated industry the more companies offering the service the more likely it is that some will be less scrupulous than others to gain a competitive advantage.
In the context of the payday loan market, this means a number of things, the most dangerous of which is ‘lowering the bar of application’ which essentially means people with poor credit scores being considered for credit they can’t repay.
The Financial Conduct Authority (FCA), the financial regulatory body in the UK, took notice of the growing momentum (and rising number of customers who couldn’t repay their credit) and decided it was high time they responded to the calls for action.
The FCA started by introducing maximum limits on loans and legally capping interest rates at 0.8 percent per day. In 2014, the situation escalated with the new FCA rulings impacting Wonga UK with over 45,000 compensation claims rolling in as the FCA rules were now applicable retroactively to credit that was loaned before the rules were actually written and put in place. The fallout from this was Wonga writing off the interest owed on over 330,000 loans.
The Bail Out attempt
The surge in claims cost Wonga dearly. The interest write-offs came with a £220 million price tag, and every compensation claim accompanied a £550 cost to manage – a massive body blow for any business.
While Wonga was able to stave off immediate collapse with a bailout of £10 million in capital funds when the regulations started changing, it wasn’t nearly enough to regain momentum, and in 2018 Wonga UK officially entered administration. The collapse of a giant made media headlines, and many of the smaller payday loan offerings across the UK were also quick to fold amid the fallout from the new FCA conditions.
Some of the more notable names to also enter administration include Sunny Loans, QuickQuid, Piggy Bank, WageDayAdvance, and 247 Money Box. Albeit some of these lenders actually survived long enough for the wake of the pandemic to be the final nail in their proverbial coffins.
What about Wonga internationally?
While we’ve looked at the difficulties that befell the British incarnation of Wonga, it is interesting to note that the fate of the brand on the other side of the globe has been very different; Wonga South Africa is very much alive and well.
One needs to first understand that the South African version of the brand is an entirely separate company unaffected by the fate of the UK outfit (a very important legal detail amongst administration proceedings). However, what is so interesting is exactly how did Wonga South Africa survive, and indeed thrive, where other payday lenders failed so fantastically?
The core difference is that the Cape Town-based company has pivoted, changing the whole value prospect they offer to better address an evolving consumer market, and it is doing it very well. Contemporary credit options offered by Wonga.co.za in 2021 are unrecognizable to the payday loan of the past and include:
- Installment loans over three months for new customers.
- The same loan type, but over six months for pre-existing clients.
- Lower interest rates and capped maximum interest generated from any single loan.
- Caps on the amount of late repayment fee from any single loan.
- Enhanced eligibility checks to ensure applicants can afford the borrowing they are applying for.
This structure hits the mark and is in high demand across South Africa, creating a well-known, respected brand that serves a consumer need that isn’t going away any time soon.
With massive investments in financial advice publications, digital security, and customer education, it is clear that their focus on ethical lending, secure policies, and information-sharing is a model built to last.
A future revival for Wonga in the United Kingdom?
The success of Wonga in South Africa has established a precedent that, with contemporary lending practices prioritizing consumer safety, the short-term loan industry is still a viable business model. With this in mind, it has recently come to light that Wonga intends to begin lending again in the UK over the next year or so.
The information came to light when another UK lender tried to buy the brand during administration proceedings back in May 2019 and was told the brand would ‘never be for sale as within 18 months Wonga would emerge from the administration process ready to lend again.
We are now in the late summer of 2021 (more than 24 months after this update came to light) and we’ve still to see a sign of life from wonga.com.
Has the plan changed? It is safe to say the chaos of the pandemic has, at the very least, slowed down the process of rolling out the ‘newly revived’ Wonga brand to the UK public. After all, a series of lockdowns across the United Kingdom and long-lasting travel restrictions have resulted in the average consumer having significantly more cash saved than they normally would.
However, it remains to be seen just how long the attractive savings situation will last as that extra cash will undeniably be burning some blistering holes in the pockets of the more excitable among us.
So who knows, Wonga could be back in time for the New Year or it could be an endless wait for a return that never arrives.
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