The infamous payday lending outfit Wongaannounced today that profits have fallen by more than half. The company blamed “remediation costs” for this dive in profitability, in other words money that it has been forced to repay to wronged customers. The company is dealing with a number of regulatory constraints. It expects to be “smaller and less profitable” going forward due to new moves by the FCA. The regulatory body has taken steps to prevent Wonga from advertising on British television. Since July 2014, all payday loan companies have had to agree to new loan rollover limits – and have also had to increase affordability checks. As of January 2015, all payday loan charges will be capped.
While payday lending companies are feeling the squeeze, government and regulator alike are taking every opportunity to prop up the buzzing peer-to-peer lending sector. The FCA’s regulation of peer-to-peer lending has if anything served as a stamp of legitimacy for the industry. The government has already given its blessing to the peer-to-peer ISA, the mandatory bank referral scheme, and has in general pledged itself to cementing London’s position as the global centre of financial innovation.
It’s easy to understand why the guys at Wonga might want to exist within the world described in the latter paragraph, as opposed to continue struggling on under water-tight regulation and the poor opinion of the public.
WDFC, the firm behind Wonga, launched a peer-to-peer lending platform called Invest and Borrow back in May. The platform is essentially a P2P equivalent of payday lending – offering a handsome fixed AER of 7.23% to its investors, and charging borrowers an APR of 75%. Whilst that borrowing rate is uncommonly high within the peer-to-peer space, it’s a far cry from the four-figure rates often incurred by payday loan borrowers.
Tim Weller, Wong’s acting Chief Executive, made this statement today:
"Investment in people, processes and our international businesses were key factors in the decline in Wonga's 2013 profits, and we will continue to build a sustainable business.”
Could Invest and Borrow be an instrumental part of that “sustainable business”? Perhaps. Whilst nowhere near as lucrative in terms of its fees, the peer-to-peer lending business model is widely lauded as a highly ethical one – and it wouldn’t be a surprise to see Wonga ramp up its efforts to jump on the bandwagon.