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    The Loan Danger

    Friday 26th July 2013, 1:23pm

    Polonius Advises

    My hunch is that it isn’t particularly fashionable to defend Wonga, the loans company, at the moment.

    But a few things have been bugging me, so I wanted to share them.

    This week, Archbishop of Canterbury Justin Welby told Wonga founder Errol Damelin;

    “We’re not in the business of trying to legislate you out of existence; we’re trying to compete you out of existence”.

    He is not the first to take a dim view, although to be fair, he says that he was taking aim at the wider array of ‘pay-day lenders’ and believes Wonga to be a “professionally managed company”.

    More widely, it seems that the easy thing to do, is to damn the company.

    Before doing so, a few questions have been playing on my mind.

    I should say that I think that Justin Welby comes across as an incredibly likeable, articulate and thoughtful man.  Also, that I know Errol, CEO of Wonga.  He is a formidably ambitious entrepreneur and is also likeable, fun and engaging.

    Before I rush to conclusions,  here are a few thoughts.

    Firstly, this is a serious subject.  Debt ruins lives.

    So does junk food, if consumed to extremes.

    And alcohol.  I don’t wish to see either banned, although I’m happy that they each come with certain warnings.

    If we’re going to sort this out, we’ll need to trace the problem back to its roots.  The lack of financial education in our schools is startling.  Although this is starting to change, the idea that generations of children learned about Pythagoras and not about interest rates, is staggering.  I’m not suggesting that all young people are leaving school without knowing how many beans make five.  I’m just not convinced that they have a wide enough understanding about simple concepts connected with money.  That’s a big problem.

    A deeper problem perhaps is that, for too long, we’ve been spending beyond our means.  Buying things we don’t need and can’t afford.  A credit card looks remarkably like a debit card after all.

    These two things, financial education and buying what we don’t need may have to wait for another day’s reflection.

    For now, let’s stick to Wonga.

    The first question I would ask, is whether you’re against the idea of borrowing money.

    On this, you may side with Polonius (“neither a borrower nor a lender be”), however most people seem comfortable with it.  In principle.

    If we’re not against lending, then are we against the concept of interest?  I suspect that the answer from most will be that it depends, how much.

    This is one of the main things which winds people up about Wonga; Its interest rate.

    Calculated over the course of a whole year, which they have to for legal reasons,  it seems astronomical. Except that they are not in the business of lending money for a year.  They are all about short-term loans. You can’t borrow more than £400 and you can’t borrow for longer than 45 days. The average customers borrows for 17 days.  The average loan is  for £257 and the average first-time loan is £180.  And broadly speaking, the customers seem happy, because 90% of them would recommend Wonga to a friend.

    Here’s an example of how Wonga works.  It’s Friday today.  Imagine I get paid on the last day of the month.  That’s next Wednesday.  I have run out of money.  I would like to go out this weekend.  Or perhaps, more importantly, I absolutely have to pay a bill today.  I’m after £100, which, I calculate, I’ll be able to repay in a week, after I get paid.

    According to the handy calculator on their website, Wonga will (if I am approved) lend me £100 for the princely sum of £12.89.  And for a very large number of people, that is a deal which they are prepared to do.  The other major benefit is that it’s quick.  As quick as five minutes after my application is approved, the money can be in my bank account.

    I don’t condemn the customer for accepting the deal, and I don’t (at this point) condemn Wonga for offering it.  I am, however, aware that these are choppy waters because despite the clean, easy-to-use interface, people are using these sites and running into financial difficulties.

    Seen over the course of a year, the interest rate is several thousand percent, which is the source of a great deal of anger and concern.

    Personally, I’m less angered, and here’s why;

    An analogy; Imagine I was looking to get a new car.  And imagine I chose, as my preferred method of transport, a London cab, complete with my own driver.  You might well call me an idiot.  Or inspired, depending on whether you were under the impression that I was a millionaire.

    Money and cars are not the same, but there is a connection here isn’t there? Cabs are for short-term journeys, Wonga is for short-term loans.  Extended, they would both ‘cost a fortune’.  I’m happy to pay a tenner for a  ten minute cab ride from time to time, but I would get pretty wound up if I used one for an entire day, with the meter running. And a year?  Forget it.  It would be extortionate.  I’d be better off going to Avis.  And Wonga will argue, that if you want more money, for longer, you will be better off going to a bank.

    For some people, that £13 to borrow £100 for a week may seem like sheer idiocy. For others, it’s a price they are willing to pay. In the same way, some will say that ten pounds for a ten minute taxi ride is lunacy.  Couldn’t you set off earlier and walk?  Or take the bus for less than half the price?

    I’m quite surprised that in the media coverage of companies like Wonga, we rarely hear from the people who use actually them.  Is that because there is a stigma attached to borrowing money?  Or because they think that they will be portrayed in a bad light?  Or are the media simply too lazy to seek them out and have a normal conversation?

    I ask because a loan is a transaction involving two parties, isn’t it?  When we condemn Wonga, do we condemn their customers too?  Or do we feel sorry for them.  And isn’t that a bit patronising if we do?

    Or are we suggesting that the customers are being tricked? Well, last year the company surveyed over 30,000 people, asking them if they felt “well informed” when using Wonga.  96% said yes.

    One final thought on the ‘extortionate’  interest rate.  Given that the company is explicitly clear about how much any given loan costs, are we, generally, against things being very expensive?  Mulberry sells handbags for over a thousand pounds.  Primark sells them for under a tenner.  Are both in the wrong?  Or are we just uncomfortable with high margins?

    The most basic point seems to be that Wonga’s customers choose to use its services.  They are not forced to do so.

    And this leads to the second main objection, because that depends, some will say, on how you define “forced”.  It’s difficult.

    I’m more comfortable, rightly or wrongly, with the idea that someone pays ‘over the odds’ to borrow £100 for a few nights out, than to borrow £100 because they cannot afford to eat.

    Somehow my sense is that if the money is going on things you don’t really ‘need’, then the high interest is a tax on your impatience.

    The idea that someone is forced to get further into debt at a time of considerable personal stress is extremely upsetting.  But where does the logical conclusion lead, if we head in the opposite direction.  That we only lend to people to buy things they don’t need?

    We need to talk about needs, and about when offering something means exploiting someone.  Not easy questions.

    Easy Money

    None of us likes the idea of the weak being exploited.  I don’t like the idea of the addicted smoker being advertised to by Benson and Hedges.  I don’t like the thought of someone being confronted by yet another WHSmith’s counter filled with chocolate bars, just when they are trying to lose weight.

    Unsurprisingly, I don’t have the answers either.

    I just worry that, in jumping to condemn Wonga, we haven’t stopped to think about what it is that we really dislike.

    Is it lending money? Is it the concept of interest? Is it the point at which interest becomes ‘usury’ and is thought to be exorbitant?

    Perhaps it’s the idea of preying on some of the most vulnerable people in society.  In which case, do we condemn all of those who offer people things which, in excess, may be extremely bad for them?  And if so, do we call for them to be banned, or do we crack down on how they promote themselves and who they decide who to engage with?

    Could you argue that, other than an age check, there is no sensible barrier in place to decide whether that bottle of Jack Daniels is likely to kill you?  By contrast, could digital lenders emerge to be some of the more responsible companies of our time?

    This is a sensitive subject and almost certainly easier to steer clear of.  That’s why I admire Justin Welby for having a view, and sharing it publicly.

    Wouldn’t it be great if more people from more walks of life sat down and had proper conversations about money, about business and about politics.  Rather than trading insults or one-liners.

    I’m hopeful.  We have an Archbishop who used to be an oil executive at a time when our Minister of State for Trade and Investment (Stephen Green) is an ordained priest.  For good measure, he also happens to be a former banker.

    Slamming individual companies is easy.  Especially if their name has two syllables and seems a little too ‘brash’ for our liking.

    Having complicated conversations which will inevitably involve disagreements is difficult.

    Seeing those conversations through to genuine breakthroughs is exciting.

    I am confident that the results will generate a high level of  interest – of the kind which everyone can support.

     

     

    15 Responses to “The Loan Danger”

    1. Matthew Taylor says:

      Very thoughtful and rather brave post Oli. I think I would pose Wonga or any other provoder three questions before backing your more sympathetic view. 1. Do they make absolutely clear on promoting their product that it should be seen as a very specific device for a very specific circumstance not a generally good way to borrow. 2. Do they invest at least some of their profit in projects which address some of te underlying issues of financial literacy and poverty to which you refer 3. Do they provide appropriate advice and signposting for those who are clearly in deep debt trouble?

    2. Eben Halford says:

      Good thoughtful post Oli. By way of adding another tangent to the thinking you have provided:

      Taxi’s are a luxury that you don’t have to take if you can’t afford them because there are busses, tubes and bicycles or even walking.

      I presume some people who use pay day lenders do so as they have no other viable alternative. Same goes for luxury goods – you don’t have to have them. If you use pay day loans to fund your Gucci habit then more fool you. I don’t think these are the group that causes concern.

      If you are on minimum wage and have to borrow from Wonga et al every month to pay your council tax, feed your kids etc then this is a bad thing for society as a whole.

      Some of us have choices – some don’t and end in a bad place thanks to high rates of interest.

      Micro loans are a good example – banks in Asia make a fortune out of micro lending with extortionate rates attached – keeping their clients in stasis and effectively providing life long income streams to the banks. Of course this is their ‘business’ and they are not in the business of helping people out of poverty, merely making money.

      http://www.kiva.org/ is a much better option if you wan’t a micro loan and want to work your way out of poverty.

      Wonga is there to make money for it’s investors – £50m last year – they are not there to help people out of poverty or provide a lifeline of cheap cash, and if their users get addicted to the cash because they can’t save and pay back the high rates at the same time, what do they care – it’s not their business to care – but perhaps it should be.

      There will always be people who make money out of those who are less able to cope, be it management consultants or pay day lenders.

      What we need is to provide some choices that won’t keep poorer people in a cycle of borrowing addiction.

      There is a reason it’s called the ‘Poverty Trap’

    3. John Dodds says:

      Well said Oli. I think people are conflating two different issues.

      It seems to me that financial literacy in this context is actually nothing less than numeracy. We’re not dealing with bond yields and Black Scholes here. It’s simple mathematics that we all should have been taught by our early teens at the latest.

      The fact that so many people lack numeracy is a condemnation of our education system that produces a populace that are widely innumerate and (in the case of the more educated innumerates) weirdly proud of the fact.

      I doubt that many of my friends and yours could actually explain what an annualised interest rate of 5853% actually means or, indeed, what the interest rate on their credit card is. Fortunately for them, their ignorance doesn’t damage them greatly because they’re luckier in other regards.

      What I think people are really concerned about is what they perceive to be the exploitation of people – but we need to think further than just attacking the likes of Wonga. If Wonga wasn’t there, their customers still would be and would need to find a lender – be that the arguably unsustainable business model offering lower interest rates as envisoned by the Archbishop or the horrors of illegal loan sharks.

      It’s ok not to like Wonga, but we need to accept why it is there, what would happen if it weren’t and then come up with real-world alternatives rather than headline hyperbole.

    4. Russ Shaw says:

      Oli, this is another great piece from you…A difficult subject, and you have articulated the points well!

    5. Iqbal Wahhab says:

      Hi Oli
      Matthew makes a good suggestion about putting part of their profits into financial iteracy programmes. I wrote this a while back suggesting these companies get taxed at higher levels. http://www.iqbalwahhab.com/payday-loan-sharks/
      The Archbish credit union plan should carry on and he shouldn’t let the embarassment get in his way.
      Iqbal

    6. Ruth Dale says:

      Great article but on their latest advert I think it says you can borrow up to £1000 which makes matters worse.

    7. Paddy Briggs says:

      Wonga and their like would not have a business if there were not poor and vulnerable people to exploit. These people go to Wonga because they are the lender of last resort. Those of us who do not need to use these companies also sometimes take out short term loans. We call them overdrafts on our bank accounts, or we choose not to pay off our credit card in full one month. For this we pay interest of perhaps 20% APR maximum. That rate is the cost of short term credit – when financial institutions can borrow at say 3% it provides them with a decent return. The borrow/lend margin covers the lenders risk and provides them income.

      But the Wonga target market can’t get overdrafts and they don’t have credit cards. They live hand to mouth and they struggle. Can you imagine what this must be like? Can you imagine what it is like in the 21st Century in one of the richest nations on the planet not to have enough money to feed your children? Most of us would react with compassion to these people. Not Wonga. They see a profit opportunity and know that the offer of a short term loan will be jumped at by some and that they can charge what they like – and they do. So they have finance available on the markets at say 3% and they lend the money at rates a thousand times more. Yes a thousand times more. That it is for a short term is completely irrelevant. Tens of thousands of poor borrowers all paying 5000% interest generate millions of windfall returns for the lender. It’s not usury – it’s fraud on a massive scale.

      There is of course an alternative as the Archbishop has pointed out. It can be done. Loans made at a fair rate (Say 20%) with a premium for risk and the higher admin costs (say 10%) would be perfectly viable. It is for Government to act. That is what Government is for in a civilised society – to protect the vulnerable and help them. Instead we have a Government which sits on its hands. I hope Mr Welby shames them into action and that Wonga and their like become a grubby footnote in our history.

    8. Derek says:

      These loans are explicitly targeted at those who don’t work during the day. Never seen an ad outside of daytime tv.

      They use a high margin in place of sensible lending checks.

    9. Richard says:

      I could be missing something – Wonga was founded a couple of years after I left the UK – but isn’t the issue more what happens with non- or late-payment? That is, it’s not the person who borrows £100 and pays back £113 a week later, it’s the person who borrows £100, fails to pay it back a week later – for good reasons or bad – and finds they owe £150 instead, then £200…

      The instinctive feeling is that a high proportion – whatever Wonga would like people to think – of borrowers from these services are high-risk, and often vulnerable. Let’s face it – if you could borrow £100 from friends or family, or put something on a credit card, you’d generally choose to do that, which implies that at least some borrowers don’t have access to other simple forms of credit.

      To put it more simply… I’d like to know what proportion of Wonga’s loans are repaid according to the agreed schedule and amount, and what proportion of their revenue/profit comes from fees and extra interest on ‘defaults’.

    10. James says:

      Fantastic article, and as a regular taxi user it certainly made me think a bit differently about the company!

      I just read this line from Paddy “Wonga and their like would not have a business if there were not poor and vulnerable people to exploit.” and it made me think.

      “Their like” definitely isn’t knew – should we also be looking to ban or regulate “catalogue” companies that sell inflated goods on long term payment plans, just so the customer can walk away from the shop with it in their hands? Littlewoods, Very, IsMe… Brighthouse is one of the fastest growing high street stores right now. Its the same concept as Wonga, just a different take on it. I don’t see any church or MP up in arms about those guys…

    11. Pete says:

      “I’m more comfortable, rightly or wrongly, with the idea that someone pays ‘over the odds’ to borrow £100 for a few nights out, than to borrow £100 because they cannot afford to eat.”

      Fair point but there’s a (sadly) old-fashioned viewpoint that the state should provide for those who cannot afford to eat. Instate that and then let Wonga make what it can from the greedy or impatient remainder. I suspect they would still make a profit but a much reduced one. Preying on the needy is not big or clever and Welby is right to speak out on this issue.

    12. Paul H says:

      Much of this article sounds suspiciously like Wonga’s own PR. The London cab analogy is practically word-for-word from their own web site.

      Most other countries have laws governing the maximum interest and charges that companies can charge. Even the USA. In fact, many American firms have set up in Britain specifically because there are no restrictions on what they can charge here.

      Wonga and the rest of the payday loan industry *claim* that they’re all about short-term loans, and when you look at an example where somebody borrows £100 for a week and pays back £110, they really don’t seem so bad, but I think this is a deliberate lie. Their business model is to trap people into an endless cycle of rolling over debts from which they can never escape.

      Unfortunately, nothing will ever be done about it, because the backers of Wonga have contributed enormous sums of money to the Conservative party. Every time somebody puts forward legislation that would restrict how payday lenders operate, the tories vote it down. That’s not a coincidence.

    13. Good perspective on a complex issue.
      Like the taxi analogy; for those in work who use Wonga and the like, and who pay back their £113 in time, surely no great public outcry. But what of the defaulters?
      Justin Welby himself makes the point, based upon a Joseph Rowntree Foundation report, that you need an APR of 80% to 90% just to break even on the pay day loan business model, given the default rates.
      Separating the default cohort; how many receive a regular income, how many are really borrowing to buy basic necessities and how many of this latter group are in work? This last group need to be helped in a different way (other than Wonga), be it through a combination of advice and finance – surely this is the role of the welfare state.
      This latter group should be screened out and rejected by pay day loan companies. Separate this group and the break even APR will come tumbling down for those who seek small (£100) ‘bridging’ credit amounts and have a regular income but who have poor credit rating – local credit unions could then be candidates to compete Wonga out of existence.

    14. Anon says:

      Oli

      A good kick off to a topic.

      Unfortunately your taxi example, and any example based on paying a premium for convenience doesn’t hold up for most to be. The simple reason is short term borrowing is much cheaper via credit card. And as much as Wonga’s rhetoric is people choose them because they don’t want to open up a credit card, the simple truth is these are people who either can’t get credit cards or are maxed out. From their data on openwonga I would suggest it is the former.

      I personally don’t like the transfer of wealth from so many with little money to so few with lots of money- to pay for Wonga’s lovely Regent’s Park offices and Errol’s flash cars. It’s not personal to Wonga. I think the same of Brighthouse and Provident. Call me self righteous but I just don’t like it and think it’s wrong. It’s the bad side of capitalism and exactly what regulation is for.

      Wonga has executed their business very well and created a market defining position. With new entrants such as the US company Sunny (Intelligence Finance) capping their profits at 20% as per US regulation I am hoping we will benefit from US regulation indirectly while our regulators take their slow and cumbersome approach to the same.

      Lastly, I apologise for being anonymous. I am close to the industry. I appreciate this is why you like the Archbishop and will be disappointed by me.

      Anon

    15. Peter says:

      Really interesting article Oli.

      I am a manager in a call centre where we employ a high proportion of 18-24 year olds and the use of Wonga and its competitors is rife. It seems just another example of the short term thinking and spend now pay later attitudes that a more and more prevalent with each generation (I’m only in my 30s myself). In order to try and curb this trend we ran several workshops on financial responsibility and the outcome of poor decision making but a large number of them just didn’t care! They know they’re being ripped off and putting themselves in potential financial trouble but, until its too late, don’t want to hear it. They don’t understand the concept that if you need an extra £100 this month it will cost you £200 next month to live in the same way!

      I feel the Wonga market is far more driven by careless spending than scraping by (based on nothing more than experience) and would be cut down if it were more difficult to get the money. As said in the article, it is an easy user interface and can be in your bank in 5 minutes! I believe if it took longer and was a more laborious process many people wouldn’t bother as they often don’t need the money at all, it’s just so easy to get they take it on the smallest whim.

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