Wonga.com

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Wonga.com
Type Private
Industry Technology finance
Founded 2006
Founder(s) Errol Damelin,
Jonty Hurwitz
Headquarters London, United Kingdom
Key people Errol Damelin (Chairman)
Niall Wass (CEO)
Products Short-term credit
Employees 300
Website www.wonga.com

Wonga.com (a trading name of WDFC UK Limited) is a British payday loan company offering "short-term, high-cost credit".[1] The interest charged by the lender, which can equate to an annual percentage rate of more than 5000%,[2] has been widely criticised. Wonga have said that they believe that APR is a poor measure of the true cost of short-term loans. As of November 2013, a loan of £100 over thirty days required £137.15 to repay.[3]

The company was founded in 2006 by Errol Damelin and Jonty Hurwitz.[4] Damelin is the Chairman and Niall Wass is the Chief Executive.[5] The firm operates in the UK, South Africa, Canada and Poland and was the first company to use fully automated risk processing technology[6] to provide short-term, unsecured personal loans online, including via tablet and mobile app. The initial product was launched in October 2007[7] and the firm was also the first to provide an instant lending application on the iPhone.[8]

Development and funding

Wonga was founded by Errol Damelin and Jonty Hurwitz in October 2006.[4] Both founders had previous start-up experience; neither had any experience of retail banking.[9] When they first started looking for funding, potential investors saw the short-term, small-loans business as an unprofitable, risky backwater.[10] After being denied funding by UK banks, they secured venture capital through Balderton Capital.[11] The first place of business was in a shared office space in St. John's Wood, London.[12] After a year of development a beta website was launched in 2007.[13] In interviews, Damelin has said that the goal was to disrupt the short-term credit industry by providing transparency, exact control of amount and payment date, immediate access to funds, and no faxing or emailing documents.[10] The business model of lending only to those who could pay back reliably, as opposed to the much wider catchment practice of payday loans required an algorithm that could fully determine risk in an automated manner - something they had difficulty developing in the early stages. In order to get funds directly to customer's bank accounts as quickly as possible, cooperation from leading banks was required. Banks were reportedly dismissive of Wonga's plan saying they would not be totally satisfied with customer identity without physical documentation.[10]

Within five minutes of launch, the first loan application was processed, and within a week the first loan default occurred.[10] The subsequent months of operation showed increased demand, but traditional methods of credit risk assessment proved inadequate[citation needed] and the company experienced default rates of around 50%.[6] The company used this period to gather data on customer behaviour and began developing their own proprietary risk technology.[citation needed] The full market launch of Wonga.com was July 2008 and 100,000 loans were reached by June 2009.[14] Through the experience of processing these loans, the company developed technologies which began to dramatically reduce the percentage of defaults.[citation needed] In July 2009 Wonga raised a further £13.9m of funding in a Round B led by Accel Partners, Greylock Partners and Dawn Capital[15] which improved the technology[citation needed] and the launch in December 2009 of the first end-to-end iPhone credit app.[8] In 2009 the company was already profitable and default rates were below 10%, less than the average for credit cards.[15] A third round of funding was completed in 2011, for £73m led by Oak Investment Partners including additional investors Meritech Capital Partners and the Wellcome Trust.[16] By the end of 2011, Wonga's technology could reliably reject two thirds of applications and predict to 93% accuracy the ability of a customer to repay a loan.[17] In May 2012, they opened a business in South Africa offering consumer loans.[18][19] The Daily Telegraph reported in November 2012 that Wonga were also testing their technology in Canada.[20]

Corporate structure, tax avoidance

Wonga is a trading name of WDFC UK Limited. Also incorporated is Wonga.com Limited and Wonga Group Limited. All are companies incorporated in the United Kingdom but not quoted on the stock market. Also associated with the group is a Swiss registered firm, WDFC SA (formerly known as Wonga International AG), which processes credit applications on behalf of Wonga and owns the trademark to the Wonga name.

By 2011, Wonga had refined its business model to such an extent that it started to make significant profits and in September 2012 it reported profits of £45.8m for 2011 from revenue of £185m, up from a profit of £12.4m in 2010.[21] The involvement of the Swiss company and the transfer of the trademark to it in 2012 have been seen by Corporate Watch as part of a scheme by the firm designed to avoid tax. According to Accountancy Age, in 2012, a net amount of £35 million was paid to WDFC SA, the profit on which will only be taxed in Switzerland.[22][23] Several Wonga executives, including Niall Wass, are now believed to be based in Geneva in connection with the business of WDFC SA.[24]

In 2013, Wonga Technology Limited, a company incorporated in the Republic of Ireland,[25] patented "user authentication software", telling Corporate Watch that "It is common practice for international groups to consolidate their IP holdings in a location where the substantial activity relating to the IP is performed." Richard Murphy from Tax Research UK commented that "The transfer of key business processes - especially those that are technology based and that can be protected by patents and copyrights - is a classic way in which companies try to move their profits between countries."[23][26] Other associated companies incorporated in Ireland include Wonga Limited and Wonga Decisions Limited.[27] It is likely that other companies have been incorporated by Wonga in the different countries in which the group operates.

Ownership

The company is owned by the founders and other backers, with Errol Damelin owning 16.8m shares through Castle Bridge Ventures, an offshore trust based in the British Virgin Islands, while Jonty Hurwitz owns 12.6m shares through a company also based in BVI.[28]

Customer profile

Wonga claims that its customers are "tech-savvy young professionals who previously used the banks to borrow money".[29] It accepts that its APR is "not cheap" but claims that its typical customer is on a mid-level salary and is temporarily short of cash because of an unexpected bill, for example to buy a new central heating boiler or tickets to a music festival.[30]

Dr Gathergood of the University of Nottingham described payday loan users as falling into two groups, those who have had a financial shock but can repay the money and those who were unable to control their expenditure, though he said lenders preferentially associated their clients with the first group.[31] The committee also looked at credit unions.[31] Mark Lyonette of Association of British Credit Unions said that although credit unions now provided 90 million loans in the United States, they were not able to match the "sophisticated automation and credit scoring behind the scenes" of the "high-tech, payday-lending Wonga model" though he welcomed the possibility of using Post Offices as a vehicle to expand the Credit Union market in the UK.[31]

Wonga has said that most applicants are not credit-worthy enough to obtain a loan from the firm and it only lends to those with a good credit record. Some commentators, however, have warned that taking a loan from a payday lender actually damages someones credit record and their ability to obtain a mortgage, even where the loan was paid off years ago. Ray Boulger of John Charcol, for instance, told BBC Newsnight that "Our experience is that mortgage lenders will often turn down requests for people who have had a payday loan...",[32] and Robert Sinclair, Chief Executive of the Association of Mortgage Intermediaries, said "From a consumer perspective, anybody who takes out a payday loan is clearly showing some financial distress and existing lenders will think these consumers may be maxed out."[33]

APR and the cost of a Wonga loan

Screenshot from Wonga.com showing the cost of borrowing £100 for 30 days as at 17 Nov 2013.

The firm claims its loans are often cheaper than unauthorised bank charges[34] and although APR disclosure is mandatory, it is a poor comparison measure for short term loans.[29] The Business, Innovation and Skills Committee heard evidence from consumer money expert Martin Lewis that the total cost of a payday loan was more useful than APR.[31] Lewis calculated in his blog that at a compounding interest rate of 4,212%, a £100 loan that is not repaid would in seven years amount to more than the USA's entire national debt, however, he explained that his calculation "bears little resemblance to reality", because Wonga does not charge compound interest. He also explained that he had performed this calculation purely to raise awareness of the risks of payday loans and concluded by expressing the hope that his example would make people "think twice before getting payday borrowing".[35] Wonga have stated that they stop charging interest altogether once a loan becomes more than 60 days overdue.[36]

Defaults and renewal of loans

Screenshot from Wonga.com, 3 February 2014, showing the costs of a loan.

Wonga states that if the money is not available on the day a customer has nominated to pay it back, a £30 fee will be charged and interest will accrue for a maximum of 60 days and does not allow automatic "rolling over" of loans, limiting to specific requests and to a maximum of three instances in accordance with the Finance and Leasing Association lending code.[37][38]

On 28 November 2012, following concerns that small loans, intended to be short-term, could become prohibitively expensive, the government announced it would give the Financial Conduct Authority powers to prevent indefinite rolling over of loans and effectively limit charges.[39]

Debt collection practices

In May 2012 the company was informed by the Office of Fair Trading that it must improve its debt collection practices, after it emerged it had sent letters to customers in 2010 accusing them of committing fraud. Wonga has appealed the decision and said it believes it had grounds for suspecting dishonest conduct by the specific customers to whom letters were sent, that they were sent on isolated occasions more than 18 months previously and had not been sent since. It stated that it had put in place procedures to make sure similar problems did not occur in future, and that it now referred cases of suspected fraud to an in-house team to investigate. The phone scripts had not been used since January 2010, it said.[40]

Religious criticism

Justin Welby has been critical of Wonga.

In May 2012, Justin Welby called Wonga.com's high interest rates "shocking" and "usurious". Wonga declined to comment.[41] Welby was the Bishop of Durham and had been an oil company treasurer.[42] In 1992 he had published a booklet, Can Companies Sin? 'Whether', 'How' and 'Who' in Company Accountability.[43]

By July 2013, Welby was Archbishop of Canterbury and had been a member of the Parliamentary Commission on Banking Standards. He announced that he had had a "good conversation" with Errol Damelin and told him that he wanted to see competition, not legislation, put Wonga out of business.[44] According to the BBC the church would help credit unions by providing premises and expertise.[44] However Welby was reported to be furious when the Financial Times pointed out that, despite denying involvement in payday lending, the Church Pension fund invested in venture capitalists Accel Partners which raised funds for Wonga in 2009.[45]

In a November 2013 interview for ITV, Niall Wass defended the firm's practices and challenged critics to "go use the service, see if you think it is fair and transparent, take out £30 for ten days, pay it back after a week, look at the price, tell me if that is fair and transparent."[2]

Political criticism

An All-party Early Day Motion tabled in November 2011 highlighted Wonga's "high APR" and seeks to restrict the level of interest that can be charged on all loans by financial institutions.[46] MP Stella Creasy has also proposed legislation for interest rate caps.[47] A Policis report on proposed interest rate capping said it would cause an exit from the market and those with access to the credit mainstream would be diverted to products such as overdrafts and revolving credit that could be higher cost than high APR products and those without access to credit would be diverted to the black credit market.[48] The Times said capping will further limit the availability of credit to people from regulated entities.[49]

In June 2013, the consumer minister called payday lenders to a summit to discuss "widespread irresponsible lending."[50] The article quoted the APR of Wonga -the largest lender as 5835%.[50] Wonga's pre-tax profits were quoted as £62.4m.[51]

In November 2013, Labour Party leader Ed Miliband criticised payday lenders for creating a "Wonga economy" and "a quiet crisis of thousands of families trapped in unpayable debt."[52] He also called for Wonga's cartoon-type ads aired during children's programmes to be banned, and promised to introduce legislation to that effect. He accused Wonga and other payday lenders of 'targeting children'.[53]

Sponsorship and public relations

Footballer Papiss Cisse of Newcastle United in a Wonga sponsored shirt.

Wonga sponsored free travel on the London Underground on New Year's Eve in 2010, and posters were put up on the network advertising the website with the slogan "sometimes you need some extra cash". A member of the London Assembly said that it was 'shameful' that the Mayor of London had allowed such sponsorship at a time of year when people are most vulnerable financially.[54] Media Week noted that the deal was "highly criticised" and that Transport for London later banned payday loan companies from sponsoring their services.[55]

In August 2012 the company launched OpenWonga, an online "digital platform that aims to 'inform the debate' around the brand".[56]

In October 2012 Wonga announced that they were sponsoring the football team Newcastle United for £8m a year.[57][58] Several MPs spoke out against the deal and the leader of Newcastle City Council told The Guardian he was "appalled and sickened" that the club had signed a deal with "a legal loan shark"[59] and in July 2013 Papiss Cissé refused to wear the kit,[60] citing religious reasons as a practising Muslim despite "pictures ..of him gambling in a casino".[61] In 2012, Wonga.com sponsored ITV's Red or Black, which received wide criticism.[citation needed]

The Guardian reported, in November 2012, that a computer in the Wonga offices appeared to have been used to remove from the company's Wikipedia page a reference to controversy over its sponsorship of Newcastle United Football Club and to delete the category of "usury" under the See Also section.[62]

Stella Creasy

On 20 November 2012, British MP Stella Creasy demanded an apology from the company after The Guardian reported that abusive tweets were sent to her by Wonga employees. Further investigation of the Creasy case showed that computers registered to Wonga.com's London office were used to abuse Creasy over Twitter, and delete criticism, as well as the reference to "usury" from Wikipedia's Wonga.com page. Wonga.com admitted that a "junior employee" may have sent the tweets and defended what it regards as its right to correct "inaccurate" Wikipedia articles, though Wikipedia policy on conflict of interest says such edits are "strongly discouraged."[63] Wonga.com later apologised to Creasy and condemned the Twitter comments, saying they were posted without the knowledge of the company and disciplinary action would be taken.[64]

Awards

  • Fastest Growing Company - Media Momentum Awards 2012[65]
  • Number 1 in The Sunday Times Tech Track 100 2011 [66][67]
  • Winner The Guardian Digital Innovation Digital Entrepreneur Award 2011[68]
  • Credit Excellence Award in Consumer Credit Management 2010[69]
  • UK Customer Experience of the Year, Financial Services 2010[70]
  • Alternative Lender of the Year - Credit Today Magazine 2010[71]

See also

References

  1. ↑ Simon Read (10 October 2012). "Simon Read: Need cash? Need an APR of 4,214 per cent? Welcome to Newcastle's new sponsor Wonga". The Independent. Retrieved 4 December 2012. 
  2. ↑ 2.0 2.1 Archbishop of Canterbury 'should try Wonga', boss urges. Interview with Niall Wass by Laura Kuenssberg, ITV, 4 November 2013. Archived here.
  3. ↑ Wonga.com, 17 November 2013. Retrieved 17 November 2013.
  4. ↑ 4.0 4.1 Basheera Khan. "Wonga.com to expand globally following $22m financing round". Retrieved 7 December 2011. "Founded by Errol Damelin and Jonty Hurwitz, Wonga provides cash advances to UK consumers" 
  5. ↑ "Wonga founder in the hot seat" by Toby Green, London Evening Standard, 12 November 2013, p. 46.
  6. ↑ 6.0 6.1 Lewis, Tim (16 October 2011). "Your prosperity could count on an algorithm". The Observer. Retrieved 17 March 2012. 
  7. ↑ wonga.com. "About Wonga". Retrieved 7 December 2011. 
  8. ↑ 8.0 8.1 Alan O'Sullivan (15 January 2010). "iPhone app that gives you a 2,700% loan". This is Money. Retrieved 21 November 2012. 
  9. ↑ "Errol Damelin, founder and CEO, Wonga". Guardian. 1 May 2011. Retrieved 19 March 2012. 
  10. ↑ 10.0 10.1 10.2 10.3 Shaw, William (5 May 2011). "Cash machine: Could Wonga transform personal finance". Wired. Retrieved 19 March 2012. 
  11. ↑ Kaplan, Dan. "Wonga, the fastest personal loan you can get". Venture Beat. Retrieved 29 March 2012. 
  12. ↑ O'Sullivan, Alan. "Wonga, best of a bad bunch". This is Money. Retrieved 18 March 2012. 
  13. ↑ Quinn, James (10 April 2011). "Wonga sees opportunity for growth in Ireland". The Telegraph. Retrieved 19 March 2012. 
  14. ↑ Palmer, Maija (24 May 2009). "Wonga pushes web loan innovation". The Financial Times. Retrieved 17 March 2012. 
  15. ↑ 15.0 15.1 Maija Palmer (2009-06-09). "Wonga secures $22.25m of new finance". The Financial Times. 
  16. ↑ Moules, Jonathan (16 February 2011). "Wonga raises £73m to feed loan appetite". Financial Times. Retrieved 19 March 2012. 
  17. ↑ Krieger, Candice (9 February 2012). "We want to be as big as Apple, says Wonga chief". The Jewish Chronicle. Retrieved 17 March 2012. 
  18. ↑ "Wonga returns to its African roots". Beyondbrics blog at The Financial Times. 2012-05-16. Retrieved 2012-11-24. 
  19. ↑ "Wonga to open in Africa". The Independent. 2012-05-16. Retrieved 2012-11-24. 
  20. ↑ Quinn, James (25 November 2012). "Wonga in talks with banks to boost SME loans arm". The Telegraph. 
  21. ↑ "Wonga profits triple on strong loan demand". BBC. 17 September 2012. 
  22. ↑ Calum Fuller (14 October 2013). "Wonga in tax avoidance strategy, claims Corporate Watch". Accountancy Age. 
  23. ↑ 23.0 23.1 Wonga’s Swiss Wangle: payday lender moving money to tax haven Corporate Watch, 10 October 2013. Retrieved 9 November 2013. Archived here.
  24. ↑ Wonga shifts part of business to tax haven Switzerland despite not offering loans there Nick Sommerlad, mirror.co.uk, 10 October 2013.
  25. ↑ Wonga Technology Limited solocheck.ie, 9 November 2013. Archived here.
  26. ↑ Wonga denies tax avoidance as head of HMRC is to be recalled to Parliament over failure to collect £4.7bn from UK businesses by Matt West, thisismoney.co.uk, 12 October 2013. Retrieved 9 November 2013. Archived here.
  27. ↑ Companies Registration Office 9 November 2013.
  28. ↑ "Wonga sets £1.2bn target" by Simon Duke in The Sunday Times, Business section, 10 November 2013, p. 2.
  29. ↑ 29.0 29.1 Murray-West, Rosie (19 November 2011). "Wonga's interest rate of 4,200pc? It's not an automatic red card". The Daily Telegraph. Retrieved 16 March 2012. 
  30. ↑ Simon Bowers (13 May 2011). "Wonga boss fights back against critics". Guardian newspapers. Retrieved 7 December 2011. 
  31. ↑ 31.0 31.1 31.2 31.3 "BIS Select Committee Debt Management". Business, Innovation and Skills Committee for Parliament. Retrieved 17 March 2012. 
  32. ↑ Wonga boss answers Newsbeat listeners' questions BBC Radio 1 Newsbeat, 5 November 2013. Retrieved 7 November 2013.
  33. ↑ Payday loans spell trouble for mortgage applications by Devraj Ray in moneymarketing.co.uk, 17 November 2013. Retrieved 23 November 2013. Archived here.
  34. ↑ Murray-West, Rosie (19 September 2011). "Wonga's interest rate of 4,200pc? It's not an automatic red card". The Daily Telegraph. Retrieved 17 March 2012. "The company's loans of up to £400 are available for one day to a month, and interest is charged at 1pc a day." 
  35. ↑ Fact: borrowing £100 at Wonga’s APR costs more than the US national debt (over $14 trillion) after 7 years! Martin Lewis, moneysavingexpert.com, 21 September 2011. Retrieved 23 November 2013. Archived here.
  36. ↑ Wonga - APR Explained - 5,853% - A little film about a big number. by Wonga.com, YouTube.com, 2013. Retrieved 23 November 2013.
  37. ↑ "Lending Code 2012". Finance and Leasing Association. Retrieved 18 March 2012. 
  38. ↑ Read, Simon (30 January 2012). "Roll Over Curbs Agreed by WOnga". The Independent. Retrieved 18 March 2012. "Britain's biggest payday loan company, Wonga, has signed up to a new code of practice being introduced on Wednesday that will restrict the number of times a loan can be extended." 
  39. ↑ "Payday loan rates 'to be limited'". BBC news. 28 November 2012. Retrieved 28 November 2012. 
  40. ↑ Hilary Osbourne (22 May 2012). OFT criticises Wonga debt collection practices "OFT criticises Wonga debt collection practices". The Guardian. Retrieved 30 June 2013. 
  41. ↑ Insley, Jill (15 May 2012). "Payday loans: bishop hits out at 'sinful' interest rates". Guardian. Retrieved 21 November 2012. 
  42. ↑ About Justin Welby archbishopofcanterbury.org, 2013. Retrieved 24 November 2013. Archived here.
  43. ↑ Grove Books, Cambridge, 1992. ISBN 1851742069
  44. ↑ 44.0 44.1 "Church plans to 'compete' Wonga out of business". BBC news. 25 July 2013. Retrieved 25 July 2013. 
  45. ↑ "Archbishop of Canterbury 'furious over' Church investment in Wonga". BBC news. 25 July 2013. Retrieved 25 July 2013. 
  46. ↑ "Early day motion 2448 - LEVEL OF INTEREST RATES ON LOANS". Retrieved 7 December 2011. 
  47. ↑ Creasey, Stella. "Consumer Credit (Regulation and Advice) Bill 2010-12". UK Parliament. Retrieved 18 March 2012. 
  48. ↑ "Briefing note on the potential impact of price caps on low income credit users" (PDF). Policis. Retrieved 18 March 2012. "Some of those who lose access to credit will be diverted to the black credit market, where costs and risks will be significantly higher and outcomes more damaging" 
  49. ↑ King, Ian (24 January 2012). "Lending in the Public Interest". The Times. Retrieved 18 March 2012. "The upshot of placing restrictions on the terms at which payday loan companies do business will further limit the availability of credit to people from regulated entities. Such customers will then, likely as not, head to unregulated lenders whose complaints management procedure involves not the Financial Services Authority but baseball bats and snarling dogs." 
  50. ↑ 50.0 50.1 Hilary Osbourne (25 June 2013). "Payday lenders summoned to government summit". The Guardian. Retrieved 30 June 2013. 
  51. ↑ Hilary Osbourne (27 June 2013). "Payday loans – the industry in numbers-Choice stats from the payday loans industry, from the average consumer debt to Wonga's multimillion-pound profits". The Guardian. Retrieved 30 June 2013. 
  52. ↑ Ed Miliband Takes On The 'Wonga Economy' Sky News, 5 November 2013. Retrieved 7 November 2013. Archived here.
  53. ↑ http://www.bbc.co.uk/news/uk-politics-24886804
  54. ↑ "London Mayor's loan firm Tube deal branded 'shameful'". BBC News. 2010-12-21. Retrieved 2012-11-24. 
  55. ↑ Maisie McCabe (2012-01-09). "TfL excludes payday loan companies from big money sponsorships". Media Week. Retrieved 2012-11-24. 
  56. ↑ Alex Brownsell (2012-08-02). "Wonga counters 'hyperbole' with online debate platform". Marketing Magazine. Retrieved 2012-11-24. 
  57. ↑ Newcastle United (9 October 2012). "Newcastle United sponsorship deal with Wonga will see St James' Park reinstated as stadium name". Telegraph. Retrieved 21 November 2012. 
  58. ↑ "Wonga shirt sponsorship dilemma for Newcastle Utd". BBC News. 9 October 2012. Retrieved 21 November 2012. 
  59. ↑ David Conn (9 October 2012). "MPs attack Newcastle's Wonga deal, dubbing company 'legal loan shark'". The Guardian. Retrieved 21 November 2012. 
  60. ↑ http://www.guardian.co.uk/football/2013/jul/17/papiss-cisse-newcastle-wonga-shirt
  61. ↑ Luke Edwards (30 Jul 2013). "Newcastle United striker Papiss Demba Cisse dons Wonga-sponsored shirt for first time". Daily Telegraph. Retrieved 28 September 2013. 
  62. ↑ "Wonga apologises over abusive messages to Stella Creasy". The Guardian. 2012-11-21. Retrieved 2013-07-30. 
  63. ↑ MP demands apology after abusive tweets are traced to Wonga employee | Business | guardian.co.uk
  64. ↑ Wonga apologises to Stella Creasy over abusive Twitter messages, The Guardian (retrieved 21 November 2012)
  65. ↑ "Media Momentum Awards". 
  66. ↑ techtrack. "Sunday Times TechTrack 100". Fastrack & Sunday TImes. Retrieved 16 March 2012. 
  67. ↑ "Toast of the Tech Champs". The Sunday Times. Retrieved 16 March 2012. 
  68. ↑ "Guardian Digital Innovation Awards Winners 2011". The Guardian. 24 March 2011. Retrieved 16 March 2012. 
  69. ↑ "Credit Excellence Awards". Credit, Collections & Risk Magazine. Retrieved 16 March 2012. 
  70. ↑ "UK Customer Experience Awards 2012". UK Customer Experience Awards. Retrieved 16 March 2012. 
  71. ↑ "Credit Today Awards". Credit Today Magazine. Retrieved 16 March 2012. 

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