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Wonga: wrong tree, right tree

The news that Wonga has increased its pre-tax profits by a third to £84m (Wonga shrugs off church critics as profits jump – will doubtless be met with much hand-wringing in some quarters, with the inevitable charge being that they are making money from vulnerable people, and something ought to be done about it. On the face of it, it’s a difficult argument to counter, which would explain the on-going bad press and slightly whiffy smell that has surrounded the company since it first appeared on the radar.

My own view of Wonga is that they’re working within the legal and regulatory framework that is presented to them, which Government has shown no inclination to change despite a concerted and impressive campaign from the Labour MP for Walthamstow, Stella Creasy; and that £309m in revenues shows that they have a market which is considerably larger than one comprising only vulnerable people.  On that basis, I would say that much of the fire that comes their way is simply from people jealous of the fact that they have built an extraordinary business, and good luck to them for what they have managed to create.

But that is not the same as saying (indeed, it’s a long way from it) that there should not be better protections for the vulnerable end of their market. What I find interesting in this debate is that there has not been a successful compromise which allows them to address the sizeable portion of people who genuinely fall into the category of customer that their advertising purports to target – those who simply (and for convenience) want a short-term loan which they really can afford, and are prepared to pay for – at the same time as addressing the fact that a section of their customers are being, if we are frank, exploited.

Why has no such compromise been reached? As so often, the reason, in my view, is because juicy headlines make for bad argument, and the irresistible urge of opponents and most of the media to focus on that stunning but also completely meaningless 5700% APR makes it as easy as pie to knock down the opponents and make the Wonga case to Government. If I borrow £100 on a Friday 29th because I fancy a night on the tiles, and on Monday 1st pay back it and a £20 fee for the privilege, I don’t know, and don’t care, what my APR is. Having someone tell me neither bothers me nor changes my decision to take a loan.

What bothers people about Wonga is not this type of business, but the part that cannot be afforded; and so it seems to me that the number that matters is the default rate. At an on-the-face-of-it-far-less-sexy 7.4% (up from 6.7%), the default rate immediately signals that loans are being made to large numbers of people who are unable to pay back – the exact category that concerns people.

To give that number some context, in the world of peer-to-peer lending, default rates are under 0.5%. Peer-to-peer is currently nothing like as profitable an industry, of course, and despite growing very quickly by most business comparables, has not exploded in quite the same way as pay-day lending in the last three years. But then, isn’t that precisely the point?

In other words, legislation that caps the APR is a total red-herring, which is why it has quite rightly been thrown out as a concept by anyone who has addressed the issue behind the headline. In contrast, requiring the operator itself to manage its default rate down to a lower number would make it more conscious of who it is lending to, and why. Which, it seems to me, is exactly what those concerned about pay-day loans are looking to achieve.


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Continuing the Discussion

  1. Wonga are winning | A view from Barnes village linked to this post on October 14, 2013

    […] is not to say, as I have discussed in a previous blog, that there aren’t things Wonga can do, or should be made to do. But the people who are going […]

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