Wonga

What did it do?

Wonga was a London-based company offering short-term, unsecured, high-cost personal loans applied for online and through a mobile app. It developed technology that assessed credit risk entirely automatically and operated in the UK as well as countries such as Spain, Poland and South Africa. Its annual percentage rate, calculated at 1,509 per cent, put it at the centre of the debate over predatory lending.

Why did it shut down?

In 2014 the UK's financial regulator, the FCA, found the company's debt collection practices unfair, ordered compensation for customers and introduced new controls across the sector. As the rules tightened, the company's customer base in Britain shrank sharply, and the annual pre-tax loss announced at the end of 2015 rose to £80.2 million. A data breach in 2017 and the end of its sponsorship deals made matters worse. A surge in compensation claims over past loans left even the £10 million emergency injection from shareholders in August 2018 insufficient. The company went into administration on 30 August 2018.

The story

1,509 per cent. That figure, calculated as Wonga's annual percentage rate, sums up both the company's rise and its end. A £100 loan taken out for 17 days cost £113.60 to repay; because the term was short the sum looked small, but the rate it produced when annualised made the company the symbol of the predatory lending debate in the UK.

Errol Damelin and Jonty Hurwitz founded Wonga in October 2006. Both had experience as internet entrepreneurs but no background in banking; when British banks refused to fund them, they found venture capital from Balderton Capital. In the first months traditional credit assessment methods failed and default rates climbed to around 50 per cent. In response the company built a risk system that assessed applications entirely automatically. In the year after its full launch in July 2008 it made around 100,000 loans. A £13.9 million round with Accel Partners and Greylock Partners followed in 2009, and a £73 million round led by Oak Investment Partners in 2011. In 2011 the company made a £45.8 million profit on £185 million of revenue, and in 2012 it became Newcastle United's sponsor.

The break came from the regulator. In 2014 the FCA found that between 2008 and 2010 Wonga had sent borrowers letters that appeared to come from non-existent law firms, and ordered compensation for affected customers. New rules introduced across the sector that year shrank the company's customer base in Britain sharply. The annual pre-tax loss announced at the end of 2015 reached £80.2 million. In 2017 a data breach affected around 245,000 customers.

The final blow was compensation claims over loans made in the past. In August 2018 shareholders put in £10 million of emergency capital, but it was not enough: Wonga went into administration on 30 August 2018 and Grant Thornton was appointed to wind the company down. The number of claims quadrupled after the collapse; claimants recovered only 4.3 per cent of what they were owed.

Wonga showed that a technologically advanced product cannot keep alive a business model that harms its customers. When the rules changed, every loan that had once been profitable turned into a retrospective liability.

Lessons for founders

• For credit products that directly affect consumers, build your model around the stance the regulator may take tomorrow, not the one it takes today.
• Heavy-handed or misleading collection methods may make money in the short term, but they come back many times over as retrospective compensation.
• Automated credit scoring is a powerful advantage, but make not lending to people who cannot repay an explicit goal of the model.

Sources

1. Wonga.com (Wikipedia)
2. Wonga collapses into administration (The Guardian, 2018-08-30)
3. Wonga raises £73m to feed loan appetite (Financial Times, 2011-02-16)

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