Paul Crayston, who worked for the Money Advice Trust from 2010 to 2014, weighs in on the collapse of payday pioneer Wonga.
Last week Wonga, a company many had happily forgotten, has collapsed. It will not be missed.
But it’s worth remembering that as the financial crisis ripped through the UK’s banks a decade ago, Wonga was being heralded as a solution to the malaise. A business leveraging the opportunities in new technology for consumer-facing financial services.
Wonga was the UK’s first fintech darling.
The tale of Wonga teaches us that when technology is presented as the saviour of one thing or another, it can be easy to fall for the simplicity of the idea that new tech is the solution to old problems.
As a long-time supporter of technology-led innovation in financial services, I wanted badly for Wonga to be a good solution to a genuine problem. It wasn’t.
From 2010 to 2014 I found myself in a fight I hadn’t anticipated, a fight with the UK’s first fintech darling.
I was working at the Money Advice Trust, a charity with a mission to help people tackle their debts. One of the services the charity runs is National Debtline, an online and telephone advice service for people struggling with debt. Following the financial crisis National Debtline saw a huge increase in people getting in touch for help with outstanding payday loans.
Thus began the fight.
Let’s rewind back to 2010. Wonga was being feted as an innovator within the financial services industry. Using a completely new tech stack, credit scoring built from new datasets, and automated decision making, Wonga was able to approve relatively small, short-term loans quickly and at low cost.
To venture capitalists and investors Wonga was the start of a world where banking inefficiencies and bureaucracy would be replaced with smart technology. As banks became burdened with the regulatory hangover of the financial crisis, and their return on equity dipped alarmingly, it was only natural for investors to start thinking about a new breed of financial services, where efficient technology meant healthy margins could still be made from the old-fashioned business of lending money.
In February 2011 Wonga announced it had closed its Series C round of venture funding, raising over £70m from investors including the Wellcome Trust (yes, that really happened) and Accel.
As National Debtline began to work closely with individuals owing money to the likes of Wonga, we started lobbying the Government to protect vulnerable, indebted individuals from their worst practices. We released regular statistical updates from our services showing how the number of people with problem debt owed to payday lenders was sky-rocketing. We told stories about individuals’ experiences and heard back from others that they’d witnessed the same patterns of behaviour.
Most importantly, we began to learn how companies like Wonga operated.
Given the significant media and parliamentary interest in our campaign against payday lenders, I was invited by many of the lenders to meet with various senior people within their businesses to talk through their risk models, safeguards and so on*.
Much of the innovation was genuinely impressive. Using new data to help more accurately predict credit-worthiness was a good thing. Using automated decisioning was, in theory, a good thing.
But all this smart technology was not the reason for their success.
The core thinking behind Wonga was:
1. Better data and better technology could enable them to be confident in lending to high risk borrowers.
2. Better technology meant they could process this lending at sufficiently low cost to make a reasonable profit from lending small sums for small periods of time.
Once we got under the hood of companies like Wonga, we realised that the technology wasn’t the real reason for their rapid commercial success.
First off, the obvious complaint levelled at Wonga is around the pricing of their loans. An individual loan of £200 at 4,000 per cent APR to cover you for the next month would cost around £75 in interest, expensive stuff.
The high price meant Wonga could turn a profit more easily from its lending. As much as cutting bureaucracy with technology made the company more capital efficient, the price was the real driver of good unit economics.
Seeing loans at 4,000 per cent APR was shocking and made for great headlines. But it’s no use lending to someone at crazy high rates if they’re never going to be able to repay anyway.
Wonga needed a way to be sure borrowers could repay the loans. Again, technology was presented as the answer, but that was only a small part of the story.
Unfortunately, you’re now going to have to get your head around something called Continuous Payment Authority (CPA).
Sound boring? Well it certainly sounded boring to the hundreds of thousands of people that thought nothing of signing a loan contract with CPA built in, the vast majority of whom had no idea what it meant.
When Wonga took CPA over a customer’s bank account, that meant it could attempt to withdraw money owed to Wonga straight from the borrowers’ account without asking. That might sound like standard practice for a lender, but it isn’t.
When you take out a traditional loan you’ll usually set up a Direct Debit for repayments, which means you’re in control of the date at which the money is taken from your account, and ultimately you can cancel the Direct Debit should you wish.
With CPA, the lender is in control and can attempt to take money from your account many times a day, every day, meaning that the lender gets their repayment quickly after any income hits your account, often before essential repayments like rent or energy bills are paid. With a CPA in place, Wonga could be confident taking at least some repayments from high-risk borrowers.
In time the campaign to protect vulnerable people from payday lenders was successful in restricting pricing and the use of CPAs. Wonga’s struggles for growth and profit since shows that its earlier successes were not a product of tech innovation, but instead of gaps in regulation.
The lesson for those (like me) cheering, supporting, and investing in the UK’s fintech scene today is to be cautious. Sometimes it can look like new technology is solving a real problem when, underneath it all, a product is exploiting quirks and gaps in regulation, or worse, just plain exploiting people.
In Wonga’s case its initial burst of positive publicity (led by praise from tech media), combined with a series of aggressive marketing campaigns, put Wonga firmly in the public consciousness. In time this meant it became a poster child for usury lending and was seen as being more damaging than arguably more exploitative lending models such as door-step lending and log book loans.
Technology applied to financial services has incredible potential to change lives for the better and to build great businesses, but the UK’s very first fintech darling showed we can’t always trust that technology is the difference maker.
* Payday lenders like Wonga also began donating money to the Money Advice Trust in 2013.