You may have heard the news that Wonga, the loans provider, has gone into administration. This is despite only six years ago, the founder of Wonga describing the payday lender as a “platform for the future of financial services”. However, clearly, it does seem that the future did not work out as the had wished it to.
But what actually went wrong? We have previously written about what Wonga going into administration means for payday loans, but in this guide, we are going to be discussing where Wonga went so wrong to result in administration.
In August 2018, Wonga held emergency talks with the Financial Conduct Authority (FCA) to do with the impact of its collapse. They stated that they would be “considering all options” when it came to their existing customers.
The FCA ruled four years ago that Wonga’s debt collection practices were unfair. As per, they ordered them to pay out a whopping £2.6m in compensation overall to 45,000 of their customers. Since this time, stricter rules and price caps have hit profits for payday loan providers and this has been a seemingly fatal impact on Wonga’s business model.
In 2007, Wonga was founded in order to offer loan for a period of less than 30 days to consumers who could avoid going through a lengthy application process.
They aimed to make the short-term loans instant, getting the money to people within 24 hours and on a seven day a week basis. It was built as a solution around both convenience and speed. This was actually revolutionary, but there was a catch.
The catch was that this made the interest very high for customers. The interest rates were in some cases more the 4,000%, which meant a lot of customers found it especially hard to pay the money back.
According to the BBC, a customer spoke to them about the £300 loan she took out with Wonga, which resulted in £2,000 worth of debt.
In 2012, Wonga faced a backlash after an advertisement was released which encouraged students to borrow money from them for the activities which they may not be able to afford because of their educational status, such as holidays.
In the same year, fans of certain football clubs requested that the ads for Wonga were removed from the football club’s websites.
Come 2013, prominent figures criticised the morality of the conduct of Wonga loans. It is important to note that they were not objecting to payday loans as a concept, rather Wonga loans specifically. An example of this was Justin Webley, the Archbishop of Canterbury, saying that he wanted firms like Wonga “out of business”.
Fighting back to this, Wonga claimed that its business practices were fair and were being misrepresented. They also presented the figure that 99% of their UK customers were satisfied with their services and treatment.
What happened to Wonga after the FCA take over?
The FCA issued a general crackdown which prompted the firm to write off debts of £220 m for 330,000 customers after they put new affordability checks in place for all lenders to adhere to.
The Financial Conduct Authority’s crackdown on the payday loan industry since its takeover in 2014 has helped to dramatically increase the public’s awareness regarding their consumer rights.
This sent Wonga into the red, reporting a loss of more than £37 m per year as of 2014. This was a huge reversal considering the profit it made in 2012 was £84 m. This was not as bad as it got for Wonga, as the losses were doubled in 2015 to just over £80 m. Wonga continued to lose out on £65 m in 2016 and finally admitted it had “lost its way”.