ENTE3533_1920_520 Developing Business
Assignment 1: Report on Business Failure
Case Study: Wonga.com – “Straight talking money”.
Andrew Hill
Introduction
Wonga Group Limited and subsidiaries operating Wonga.com (referred to as Wonga throughout, a payday loans business) appointed administrators on 31st August 2018 (Wonga.com, n.d.) to wind down the company as a result of numerous failings.
In the 10 years preceding 2013, the payday loans sector experienced exponential growth with the number of payday loans granted to customers grew from 0.3m in 2006 to 8.2m in 2012 (House of Commons, 2013) and as the number of new loans grew, so did the number of complaints to regulators and the number of people seeking help from debt charities like StepChange (Makortoff, 2019).
The Payday Loans sector in the UK is worth an estimated £220m in 2018, down from £2b at the end of 2012 (Taylor, 2017) a far cry from the $90b market valuation in the United States (Tempkin & Maloney, 2019). Is this significant fall in market valuation going to spell troubling times ahead for other payday lenders?
This report discusses the key events leading up to the failure of the company and what they could have done differently to succeed whilst gaining an understanding of what Wonga did well and what lessons may be taken away from Wonga’s failure. It looks at Wonga’s aggressive (and criminal) business practices which lead to large compensation orders being made to customers, their irresponsible lending policies which resulted in regulatory crackdowns, as well as their failed attempts to innovate and win more customers and how all of this fits together to result in Wonga’s failure.
Case Study
Wonga provided customers with access to short-term finance via their online platform “in as little as fifteen minutes” (Wonga.com, 2012) with repayments falling due within 30 days, otherwise known as “Payday Loans”.
The business was launched in 2008 but after strong growth, by 2011 they were enveloped in negative publicity being branded “legal loan sharks” by MPs as calls were made to cap the cost of borrowing, as well as regulatory changes and compensation orders being made against Wonga for aggressive business practices (Osbourne, 2015) before administrators decided to pull the plug after failed attempts to restructure and sustain the organisation (Wonga.com, n.d.).
With Labour MPs called for caps to be placed on rates of borrowing in a bid to ease the financial risk defaulting on payday loans presented to customers that had been “shut out” of mainstream lending (Walker, 2011), Wonga was placed in the spotlight. The calls were sparked after it was revealed that more than a million people were accepted for payday loans in 2010 and criticisms were raised over APRs of up to 2500% (Streeter, 2010) without mention of annual rates being incompatible with payday loans by the nature of short-term lending; the regulations demanding representative APRs be published (FCA, n.d.), rather than actual percentage rates or fixed fees (these are covered under consumer protection regulations) were created before payday loans became available (Consumer Credit Act 1974).
The following year, Wonga was in the hot seat over advertising their loans as being more flexible than student finance (Hall, 2012) which resulted in the Office of Fair Trading investigating payday lenders (including Wonga) as to whether they were preying on vulnerable consumers. The investigation found Wonga were accusing innocent customers of fraud (Osbourne, 2015) using a legal firm that didn’t exist (Hyde, 2015) and the PR officer for Wonga served to damage their image further with repetitive, robotic responses (Channel 4 News, 2014). Things were exacerbated further when, in the same year, a Wonga employee was found to have sent abusive tweets to the Labour MP calling for a cap on the cost of borrowing payday loans (Smith & King, 2012).
By January 2013, cracks had started to show as it emerged Wonga wrote off £77m of bad debt (Bowers, 2013) and later wrote off another £220m in 2014 (Kollewe & Bachelor, 2014) and whilst they did experience a growth in profits between 2012 and 2014, the question remains as to whether they were already beyond salvation (Farrel, 2018; Blanchard, 2018).
In November 2013, the final nails were lining up as George Osbourne announced a cap on the cost of borrowing which came into effect in 2014 (Wintour, 2013; Osbourne, 2015) – this meant Wonga could no longer increase revenues through price increases shortly before the FCA ordered Wonga to pay £2.3m to customers compensating them for the fake letter scandal (Rushton, 2014) which lead to quarterly reports indicating profits halves by the end of the third quarter.
In the first quarter of 2015, Wonga announced they’d be cutting a third of their workforce and, whilst attempts to diversify and expand their customer base were made, it was too little too late.
By August 2018, administrators were appointed to restructure and refinance the organisation or find a buyer but after these attempts failed, the decision was made to start the wind-down process – confirming the abject failure of the UK based operations of Wonga.com.
Key Findings
The above case study highlights numerous key findings that led to the demise of Wonga, one of which is highlighted early in Wonga’s history – the use of fraudulent business activities, namely using a fake legal firm to “scare” customers by sending debt collection letters (Knowles, 2015), often to customers who were fully up to date on their account (Jones, 2014). In doing so, they caused damage to their reputational when it was revealed later after the practice had ceased. Wonga further damaged their reputation by employing the services of a non-empathetical, robotic PR professional who did little to show reformation and gave an impression to consumers that the company is absolved from fault because they no longer engage in this practice at the time it was brought to media attention; this was not a sentiment shared by the FCA who ordered large amounts of compensation be paid to affected customers – a huge knockback for Wonga that halved their profits, the decision was made after “Wonga [took] advantage of people in dire financial circumstances… knowingly [lending] money to people who will never be able to afford to repay… they have been forced to write off these loans,” (Slater & Ridley, 2014).
As strict new regulations were announced, and Wonga’s public image in tatters, the number of customers fell from 1million to 575’000 (Peachey, 2018) and Wonga realised the need to diversify, extending loan terms but it wouldn’t be until two and a half years after the compensation order was made that Wonga would introduce a new loan product, the 3month Flexi Loan (Appendix E), evident by comparing Appendices D and E. The lack of innovation in this new product meant it was too similar to a payday loan to really entice new customers (Wang, 2019) and therefore was trying to attract the same customers who had now turned against them (Megaw & Binham, 2018) or were ineligible to borrow due to affordability and lending restrictions (Competitions and Markets Authority, 2014) instead of attracting new audiences (NIBUSINESSINFO.CO.UK, n.d.).
Because Wonga focused on short-term lending, they failed to diversify their products and it took two years to introduce the Flexi-loan (likely to circumvent rollover limits in favour of interest revenue and to avoid the rules directly applying to Pay Day loans that are less than 3 months, rather than in a bid to develop innovative new products), Wonga had few unaffected customers to fall back on to cushion the impact and sustain the business in light of increasing regulation, including the cap on the cost of borrowing and restricting the number of times customers could extend a loan meaning they couldn’t increase the cost of borrowing or continue incrementally increasing revenue earned from individual customers who extend their loans multiple times (incurring rollover fees) to offset the immediate impact of the compensation order (Moore, 2018); their revenue alone wasn’t enough to fill a void caused by the compensation awards as well as paying other liabilities putting Wonga at risk of insolvency (Cumbo, 2018) and it was only after a funding round that raised £10m were they able to avert that risk (Kleinman, 2018).
With the exception of refusing to innovate, the factors so far discussed are external, however Wonga did have ultimate control over their advertising strategy and it was their advertising strategy pre-2015 that raised concerns from regulators (including the FCA and ASA) over how responsible Wonga were with their advertising, primarily in relation to the gamification and over-simplification of video adverts, using puppets portraying elderly people (who stereotypically are not tech-savvy) demonstrating how easy it was to apply and be approved for a loan and how fast the money could be in your account. Critics called for this practice to be banned as they appear to prey on the vulnerable in society with Google already leading the charge by banning payday loan ads (Degun, 2016) – the criticism worked because Wonga dropped the puppet characters in 2015 and committed to not advertising on children’s TV, since the desired effect of advertising is more likely to occur amongst children than adults (Lapierre et al, 2017; American Psychological Association, n.d.; DiFranza, Coleman and St. Cyr, 1999) who may be easily influenced by the puppet characters. On another advert before trying to reform, Wonga left out prescribed information about their APR rates in one advert (Osbourne, 2014) which could inadvertently lead to customers being misled into applying for loans they can’t afford which is highly unethical, especially when customers commit suicide and point at payday loan debt as the driving factor (Cusack, 2015). It was evident vulnerable people were the target market through the use of keyword terms on their website including “No Credit Check Loans” and “Bad Credit Loans” (Appendix A) which would naturally entice those with poor credit who wouldn’t usually be able to obtain credit if a credit check was completed – Wonga also focused on trusting the customer to tell the truth which naturally wouldn’t be the case for customers in desperate need (Mattindebt, 2011) where the propensity to lie is higher in times of desperation (Kornet, 1997) meaning those who wouldn’t meet affordability criteria for mainstream lending products could easily mislead payday lenders into giving them a loan, forcing themselves into a spiral of debt.
These aggressive, unethical advertising practices didn’t go unnoticed as regulators opened investigations into complaints from customers about loans being missold (Anderson, 2019) or otherwise not fully understanding or being made fully aware of the risks of short-term lending, leading to the compensation order already discussed that commenced the series of events that led to Wonga’s administration in August 2018.
What they could have done differently
Wonga could have operated very differently to avoid the catastrophes they faced in short succession that lead to their failure. By volunteering to demonstrate a high regard for ethics, regulators wouldn’t have needed to step in as they did; if Wonga hadn’t sent fraudulent letters to customers, for example, FCA wouldn’t have had to impose compensation orders. Inertia is damaging to businesses in regulated sectors (including finance) as overtime, it forces regulators to act proactively to protect customer interests (Francis & Seidel, 2019; Hodges, n.d.) – this has been seen in numerous markets, especially amongst new entrants, a prevalent example is the increased popularity of collective investment schemes in the property sector which were repurposed as “mini–bonds” to circumvent FCA regulation, more recently, the FCA banned these mini–bonds being marketed to retail investors because of the complex, high–risk nature of the product (FCA, 2019).
Another benefit of adopting more ethical business practices by not lying to customers, engaging in fraudulent activity to harass and intimidate customers is that their reputation and customer image will improve as a result. Wonga’s slogan, “Straight Talking Money” wasn’t so straight–talking for those defaulting on loans and forced into destitution (Gentleman, 2012) due to numerous factors, including their own poor budgeting skills but largely exacerbated by Wonga’s aggressive debt recovery practices and irresponsible lending. Wonga were found to be lending to customers who would not be able to secure alternative lending products due to affordability or credit history, however with so few verification processes in place (Financial Ombudsman Service, 2014), there was no safeguard to prevent desperate customers from lying about their income, employment and personal circumstances to get a loan. By not engaging in the practices so far discussed, Wonga would have the public image of a responsible lender – instead, they chose to become the letting agents of the financial sector in terms of trustworthiness (Port, 2019), as far as customer perception is concerned. Customer perception is important because, without a good customer perception, customers will simply use competing organisations with a higher customer perception (VHT, n.d.), this is evident in the impact (though short–lived) of large companies not paying their taxes – Starbucks experienced a decline in sales in the wake of news breaking that they weren’t paying a ‘fair amount’ tax in the UK (Spanier, 2014) but strong customer loyalty soon enabled them to recover from this dip (Baker, 2012) – unfortunately, Wonga doesn’t have this same customer loyalty because the financial sector is less relatable to customers than the retail coffee and snacks sector (Neij & Mårtensson, 2013). Wonga would have been more likely to get away with a poor customer perception if they operated a monopoly in the sector (CCW, n.d.).
Wonga should have avoided the use of gamification in advertising. By adding an element of “fun” to applying to loans (Appendix B), as well as using cartoon characters (or similar, including puppets (Appendix C)) in advertising it also appeals to children and “grooms” them into being the next generation of borrowers (Read, 2013) which is irresponsible (The Children’s Society, n.d.). Ofcom allowed 3% of all Payday Loan adverts to be shown during children’s television programs (Sweney, 2013) and this provided Wonga with authority to continue the practice until they voluntarily ended it in 2014 (Poulter, 2014) as mounting pressures grew to ban these adverts from being shown before 9 PM, these campaigns were rejected by government (O’Reilly, 2014) which arguably provides ‘consent’ to payday lenders to continue the practice by virtue of the government not taking action – it implies there isn’t really a problem.
By advertising “No Credit Check Loans” and “Bad Credit Loans” (Appendix A), Wonga are targeting those with poor credit history, on a low income, unemployed, bankruptees and other customers who are at a high risk of defaulting on loans which is seen as irresponsible lending – PiggyBank, another payday lender, has recently been banned from offering payday loans because they are using these keywords on their site (Borland, 2019) amid other payday lenders like QuickQuid et al crashing into administration for much the same reasons as Wonga – failure to diversify, innovate and adapt. By targeting customers with poor financial histories who can’t obtain credit elsewhere, Wonga is seen as throwing these customers a lifeline, but the expensive rates and default fees mean these products typically leave the lowest–income earning customers much worse off than if they’d defaulted on a traditional lending product. Implementing more thorough vetting processes to ensure customers can afford their loans would have resulted in a decrease in customer-efficiency but it would have resulted in fewer debt write-offs, an increased public perception and potentially, it could have saved Wonga from administration even after caps were put on the cost of borrowing these products or, at least, considering the debt write-offs halved Wonga’s profits, sustained them for another 4 years (because it took 4 years between the debt write-off and entering administration) which could have been time to turn the business around.
Wonga should have also diversified their product offerings enabling access to new markets and developing new ways to attract different customer profiles, who use different lending products and have much healthier credit histories. In doing so, Wonga could have minimised the impacts of the regulatory onslaught payday lenders faced in 2014 (FCA, 2014), as well as minimising the impact of the compensation orders that were made for Wonga’s earlier poor business practices by allowing Wonga to fall back on unaffected customers’ (where no compensation orders had been made) revenue whilst paying out the compensation to affected customers. When these compensation orders and regulatory changes were made, Wonga had already seen the light and started to adapt and by 2018, Wonga had removed all mention of payday loans from the above-the-fold content of their website (Appendix F) and tried to exhibit responsibility with regard to who they lend to (Appendix G) but it was too little too late, the writing was on the wall for Wonga as they struggled to climb out of the black hole the compensation order and regulatory crackdown left them in.
Conclusion
Wonga’s not so “straight talking money” broke the trust of their customers and Wonga failed to win it back. Coupled with regulatory changes designed to limit the negative impact payday lenders had on retail markets, especially those with low incomes and limited affordability, Wonga found themselves fighting an uphill battle, as all payday lenders currently are.
Wonga may have been able to keep afloat under the weight of new rules applied by regulatory bodies including the Financial Conduct Authority, Ofcom and the Advertising Standards Authority had they diversified their products earlier and quit advertising to vulnerable people. Their ultimate demise stemmed from historic activities (referring to the fraudulent, made-up legal firm) and continued disregard for the negative impacts payday lenders have on communities made up of low-income households.
In conclusion, it’s important to look at the landscape of payday lending in general to understand the future of short-term loans and it’s bleak. With lenders falling into administration across the board, apparently even pawn shops aren’t safe; Payday UK, The Money Shop, TXT-Loans, FundingSecure and Albemarle & Bond Pawnbrokers have all failed within three years of one another – all of them offer short-term loans as their core product (whether it’s offered as an unsecured loan or buy-back/cheque cashing service) and, whilst they’ve been replaced by new entrants, questions still remain over the long-term viability of short-term lending products.
The criticisms of payday loans, and particularly Wonga, were that they targeted individuals in low–income brackets and other vulnerable people and that they made access finance too easy – coupled with high–interest rates and unaffordable default fees, customers found themselves spiralling into debt and this spurred the regulators into action. Wonga enabled easy, short-term finance and, for those able to make repayments in time, the concept is great – they showed great innovation by digitalising loan operations provided by pawnbrokers and cash shops but a series of events starting in 2013, including increases in bad debt and new FCA rules, through to compensation orders and debt write-offs leading to job cuts, Wonga fell into administration in August 2018 with all intentions indicating the company and all UK subsidiaries will be wound down. If Wonga had higher regard for their customers and put more effort into self-regulation, perhaps the failure could have been avoided. Alas, it will be up to new entrants to demonstrate whether this could have been the case.
There is a silver lining for Wonga, however, in that their overseas operations haven’t been impacted and they operate very successfully in South Africa which, as an emerging market, leads academics to believe it’s not the last we will hear of Wonga.com.
Appendix
Appendix A – Advertising “Bad Credit” and “No Credit Check” loans:
Source: 20th September 2018, Archive.org capture accessible via: http://web.archive.org/web/20180920103120/https://www.wonga.com/
Appendix B: Gamification of application
Source: 30th August 2018, Archive.org screen capture available at: http://web.archive.org/web/20180830113507/https://www.wonga.com/short-term-loan
Appendix C: Video advertising appealing to vulnerable and older incomes
Source: YouTube – “Wonga advert Earls Filthy Drum and Bass advert!!”
Available at: https://www.youtube.com/watch?v=ueA8ToV4S6Y
Appendix D: Wonga.com homepage (January 2015)
Source: http://web.archive.org/web/20150110102522/https://wonga.com/
Appendix E: Wonga.com homepage (January 2017)
Source: http://web.archive.org/web/20170215090455/https://www.wonga.com/
Appendix F: Wonga (August 2018)
Appendix G: Wonga (February 2019)
Source: http://web.archive.org/web/20180222041031/http:/about.wonga.com/wonga-changing/
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