Today’s news in Britain is all about payday lenders once more due to a grilling of Wonga in front of a Parliamentary Committee yesterday.
It’s amazing the emotions such lenders activities ignite.
They make politicians and the media angry because they charge high interest rates … and yet they make their customers happy by providing short-term loans at completely transparent pricing rates.
This is the battle and, if you ask customers do you understand these interest rates, the answer is probably yes for Wonga and no for banks.
- Do you understand how APR is calculated?
- Do you understand the charges for overdraft fees?
- Do you understand how this credit facility works?
The answer, when you take out bank loans, accounts and cards, is often ‘no’ because the bank wraps up all such fees in the small print. The T’s and C’s that no-one reads. It is only when the customer is hit with these charges that they see them, and they don’t see them coming so they scream and shout in pain, anger and frustration.
With Wonga and their brethren, it does not work that way.
As you open ‘an account’, the home page screams at you: YOU WILL BE CHARGED HIGH INTEREST FOR THIS.
But then their customers appreciate this transparency.
And it’s not surprising when you realise that they do not feel they are getting roped into something that they cannot pay back.
Most of them anyway.
A bit like using prepaid cards online to avoid fraudulent access to your main bank account, the savvy consumer uses Wonga to cover short-term emergency funding to avoid being stitched up by a bank overdraft fee or borrowing from friends.
In fact, most consumers think that borrowing from Wonga is a bit like borrowing from a friend. Just without the embarrassment. If you were borrowing from a friend, you may say that you’re borrowing £100 and will payback in a week with an extra tenner in it for your friend. That’s how Wonga likes to portray itself.
To add to this impression of friendliness, fairness and transparency, the firm have just produced an interesting film called 12 Portraits.
The film is meant to show how Wonga fits in with everyday life in Britain today, and that is exactly their argument.
It is not Wonga’s model that is wrong but, if their role is wrong, it is due to a government and society that has created the need for it.
Britain would not need payday lending if Britain had a fair distribution of wealth, an easy way to source funding when needed, or a bank system that was totally transparent and easy to understand.
That’s Wonga’s argument anyway.
On the other hand, there are good reasons to challenge a business that makes millions in profit from fees and late payment charges.
Source: Wonga's 2012 annual review
Wonga generated revenues of £309.3 million against £1.2 billion lent in 2012, or an income of over 25 percent.
That equates to a £1 of income generated from every £4 lent through fees and charges.
Kindof puts it into perspective as that’s one helluva whack of charges (365 percent interest rates on a simple annualised basis, or 1 percent interest per day plus transaction charges of typically £5.50 per loan).
Wonga also makes most of its money from those who cannot payback, with 20 percent of borrowers ending up in default. That soon steers people into trouble, as I blogged about before.
This is again not necessarily Wonga’s fault, as they are totally transparent about what happens if you don’t payback, and is more a result of people’s attitudes to money. For example, an Ipsos-Mori survey, commissioned by the Government’s Department for Business Innovation & Skills that was published last month, found that people had a completely different view if they looked at Wonga from a “customer” versus a “citizen” view. As a customer, borrowers are grateful for the financial lifeline; as a citizen, people were worried that those in desperate need were being left vulnerable and exploited.
This is the nature of money, life and Britain today, as demonstrated by Wonga, 12 Portraits and the two surveys from Populus and Ipsos-Mori.
Meanwhile, we have the headline grabbers like Ed Miliband (leader of the Labour Party) saying that:
“Payday lenders don't speak for the silent majority. They are responsible for a quiet crisis of thousands of families trapped in unpayable debt”;
“The Wonga economy is one of the worst symbols of this cost of living crisis”; and that
this is “a company where in one year alone their bad debts reached £120 million. An industry in which seven out of 10 customers said they regretted taking out a loan. With half saying they couldn't pay it back.”
Wonga would retort that their £1.2 billion lent is from their own cash reserves. They are taking the risk here. The £120 million of bad debt is their potential loss.
The politicians didn’t agree of course and, in a ding-dong discussion in Parliament yesterday, the payday lenders met the government to try to work out the issues.
So, we can expect a real battle in the future, with many calling for caps on interest rates charged and better management of late payers.
I am sure that will happen but tend to fall into the middle ground here, accepting that Wonga and payday lending is a reflection of life in Modern Britain and more a fault of the government and banking system of finance than the fault of the company who exploit the issue.
For more background on payday lending and Wonga, I’ve written quite a lot:
- Wonga: another web disruption for loans, February 2009
- Need money fast? May 2010
- An explosion of payday loan firms, February 2011
- Poor are #1 prey for financial predators, June 2011
- Why Wonga Will Wrestle With Regulators, July 2011
- The real rip-off culture ... is not Wonga?, August 2011
- Whatever you think, Wonga is doing well, July 2013