Wonga crashes and I’m sorry, not sorry.

August 30, 2018
Company Culture

Some 600 people lost their jobs today as the UK’s highest-profile payday lender, Wonga, went into administration. I feel sorry for almost all of those employees – most of them decent people working in HR, marketing, technology and service, trying to do a good job while dealing with their own personal struggles in life. But the truth is, Wonga was a grubby little business.

I first felt real discomfort about Wonga on a winter’s morning back in 2011. I was waiting for a colleague at Cecconi’s restaurant in Mayfair. It’s a favourite breakfast haunt for investor-types, many of whom work close by and, as usual, the place was packed. While I waited for my friend, I couldn’t help but overhear the loud conversation from two financiers at the table next to me. One was explaining to the other the “absolutely incredible” opportunity of investing in Wonga. I remember snippets of what he said: “massive margins… literally printing money… can’t lose… totally unregulated… complete no-brainer… interest rates are fantastic, you can’t believe people will pay them…

The ethical risks in Wonga’s model were obvious to anyone looking

I’d known about Wonga for a while by then, and it was blindingly obvious to anyone that this was a business that preyed on the most desperate in society. The people who pay those interest rates have no other choice. The typical Wonga customer is borrowing just a few hundred pounds for a couple of weeks and pays through the nose – APR interest rates were more than 5,000 per cent in those days (dropped to a bargain 1,509 per cent at the time of the company’s collapse due to a rate cap implemented by the FSA).

“Not once in that conversation did either of these two sharp-suited money men say a single word about the customer, the ethics of what the company was doing or the human impact of the business being conducted.”

But the human cost was obvious and visible. The highest-profile case is that of Kane Sparham-Price, a young guy from Ashton-under-Lyne in Greater Manchester.

Kane had spent most of his life in local authority foster care and took out loans through Wonga when he turned 18. In 2015, an inquest into his death by suicide found that he had had “numerous problems, including those connected with his mental health”.

Kane Sparham-Price

Kane killed himself on the same day that Wonga took payments for his debts straight from his bank account, leaving him penniless. It was the day after he’d started looking for a new flat so he could be closer to college. Wonga had not acted unlawfully, but the coroner’s report called for changes to the way payday loans are regulated and run to prevent more deaths.

Wonga was the polished leader of a disreputable industry

Wonga preyed on the most disadvantaged in society by charging obscene interest rates and pursuing ruthless business practices. As the de facto leader of a nasty industry, they masqueraded as a responsible, blue-chip corporation while falsely accusing defaulting customers of fraud and threatening them with police action – tactics that were condemned in a 2012 investigation by the Office of Fair Trading. They peddled the idea they were a “pioneering FinTech company”, not a payday lender, and spent millions on TV advertising and football sponsorship to win over new clients and present a polished, corporate image.

The rise, decline and fall of Wonga is quite something. Founded in 2006, the company promised instant decisions to savvy online borrowers looking for short-term loans. It claimed its advanced technology made decisions easy, quick and safer than ever, and even won various awards, including The Guardian’s Digital Entrepreneur Award for Digital Innovation in 2011, as well as Alternative Lender of the Year in Credit magazine that same year.

The company grew quickly, generating huge profits from its vast fees – profits tripled to £45 million in 2011. By 2011, it was number one in the Sunday Times Tech Track 100 index – the fastest growing “technology” company in the whole of the UK. The same year people were talking about it listing on the stock exchange at a $1 billion valuation – a beautiful, bold, British unicorn.

Finally floored not by bad debt, but by bad-practice and mis-selling

But the fall came almost as quickly as the rise. Political pressure built as the human tragedies mounted. Wonga’s claims that its customers were web-savvy shoppers were shown to be untrue. By 2013, the payday lending industry was regulated, the Office of Fair Trading told the industry to clean up its act, and the Financial Conduct Authority imposed a profit-reducing cap on the total cost of loans.

The real downfall for Wonga, though, was the weight of customer claims for malpractice brought on the company’s loans operation in the years up to 2014. That was the year the FCA found that the organisation had been mis-selling loans and failing to conduct proper affordability tests – they forced the company to write off £220 million in debts and interest for over 300,000 customers. In the same year, the organisation was ordered to pay compensation of £2.6 million to borrowers for illegal debt collection practices, including sending and charging for letters purporting to be from law firms – which did not, in fact, exist.

Since then, claims management companies have been helping Wonga’s victims to take the company to task and claim compensation for the mis-selling. The effect has been devastating for the company. Financial Ombudsman figures show that complaints about Wonga jumped nearly tenfold from 269 in 2015 to 2,347 in 2017. With the cost of processing, each claim cost Wonga a reported £500, regardless of whether it was upheld or not – the sheer admin costs plus the compensation is what has brought the company to its knees.

So it was bad practice, not bad debts, that brought Wonga to collapse today. And it’s important to recognise that – this was not a company that failed because it lent money to people who couldn’t pay it back, it was a company that failed because it acted shoddily – and, at times, illegally – and eventually it felt the brutal weight of the law and the regulator on itself.

Over the years, investors including Accel, Oak and Balderton Capital pumped some £120 million into Wonga, plus another £10 million just last week in a desperate attempt to keep it afloat. They will lose most, if not all, of that money – which at least has something of a just payback to it.

The shadow economic secretary to the Treasury, Jonathan Reynolds, got it right today when he said he personally would not mourn the demise of Wonga.

“Its business model was exploitative and immoral. Wonga had become a testament to so much that is wrong with our economy – too many people stuck in insecure employment reliant on short-term debt just to keep their heads above water… We need urgent action from the government to change this broken model and review the way lending is regulated.”

So, like I said – I’m sorry for the people who lost their jobs today. But I’m not sorry that the Wonga story ended in this way, and I hope the government sees it as an opportunity to further regulate this industry to protect our most vulnerable colleagues, neighbours, family and friends.

This is an updated version of the original published article with additional editing by Rebecca Hastings.

 

 

Glenn Elliott is a technology entrepreneur, investor and advisor, MBA drop-out and recovering CEO with 20 years of experience. His bestselling book Build it: The Rebel Playbook for Employee Engagement is published by Wiley. He writes about people, culture, leadership, technology and the future of work weekly at www.glennelliott.me. 

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© 2018 Glenn Elliott.

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